Basic Problems Studied in Macroeconomics - Income Inequality

By Bharat Choudhary -


Income inequality is one of four major problems studies in Macroeconomics. These four major problems are:
  • Unemployment
  • Inflation
  • Economic Growth
  • Distribution of Income (Tax & Inequalities)




Here we will study Income Inequality. Uneven distribution or allocation of resources generates issues related to Income Inequality. Reasons behind it are following:
  • Ownership of Key Resources - some people own resources that are in high demand. Examples include oil.
  • Inheritance - some people are given profitable businesses or more capital to start up.
  • Education and Training - enable people to get paid more for their labour.

As a result, the free market does not necessarily allocate resources fairly. We thus distinguish between:
  • Equity of distribution - It means that all people should be able to have a chance at reaching a high income. (a 'fair chance')
  • Equality of distribution - It refers to the idea that all resources should be shared out equally (not 'fairly')

Methods to help redistribute income more fairly include following:
  • Taxation (Direct Tax & Indirect Tax)
  • Transfer Benefits
  • Provision of merit/public goods
  • Subsidies

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