List of Important Curves In Economics :
Lorenz Curve
- Lorenz Curve is a graphical distribution of wealth. It shows the proportion of income earned by any given percentage of the population.
- It was developed by Max Lorenz in 1905.
- The cumulative percentage of income is measured on the Y axis and the cumulative percentage of people is measured on the X axis.
- In the figure diagonal is the line of equality while the curve line is the Lorenz curve.
- The given figure shows that 20% of people earns only 5% of income.
Gini Coefficient
- The Gini Coefficient, which is derived from the Lorenz Curve, can be used as an indicator of economic development in a country.
- The Gini Coefficient measures the degree of income equality in a population.
- Its value varies anywhere from zero to 1, zero indicating perfect equality and one indicating the perfect inequality.
- A Gini figure below 0.40 is generally considered to be within tolerable limits by economic experts.
- There are many ways to measure it. Two popular ways are those based on pre-tax (or market) income and disposable income.
- The latter considers taxes as well as social spend before arriving at the figure.
- The difference between the two kinds of measures indicates the efficacy of a country’s fiscal policy in reducing the rich-poor divide through taxation and social spends.
Why is the Gini coefficient significant?
- A general rise in Gini Coefficient indicates that government policies are not inclusive and may be benefiting the rich as much as (or even more than) the poor.
- For instance, a subsidy on passenger train tickets may entail a big budget outlay and may be targeted at the poor,but its benefit could actually be derived by the non-poor.
- It is important that rich-poor divide is kept in check to ensure that a larger section of society reaps benefits from economic growth.
- A higher Gini Coefficient also could mean temptation for an incumbent government to splurge more on welfare schemes and tax the rich more.
Kuznets Curve
- It is used to demonstrate the hypothesis that economic growth initially leads to greater inequality followed later by the reduction of inequality.
- The idea was first proposed by American economist Simon Kuznets.
Laffer Curve
Laffer curve explains the relationship between tax rate and tax revenue. It states that at lower as well as higher rate of tax, the tax revenue is low but tax revenue is high at optimal rate of tax. According to Laffer curve, if tax rates are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from working, also there is high tax evasion.
- Laffer curve starts from the premise that if tax rates are 0% – then the government gets zero revenue.
- Equally, if tax rates are 100% – then the government would also get zero revenue – because there is no point in working.
- If tax rates are very high, and then they are cut, it can create an incentive for business to expand and people to work longer.
- The importance of the theory is that it provides an economic justification for the politically popular policy of cutting tax rates.
Philips Curve
- The Phillips curve is an economic concept developed by A. W. Phillips.
- It states that inflation and unemployment have a stable and inverse relationship.
- The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.
- However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.
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