Balanced Economy

How can we measure Growth, Poverty & Inequality?

2009-01-30T22:59:00.000-08:00

How can we measure these first level components of the strategy? We need tangible measurements so we can ensure the strategy works towards the intended goals, and make adjustments as and when necessary.

Growth is measured as change in Real GDP(Gross Domestic Product), and is necessary to create more wealth for an increasing population. Real GDP is basically GDP adjusted for inflation (or what is known as Nominal GDP)

Poverty is measured as a threshold income level, in terms of GDP per Capita. The GDP per capita (or GDP per head) is adjusted for purchasing power parity, and based on Real GDP. The Poverty Rate is the percentage of individuals below this threshold.

Figure below shows a sample Real GDP growth rate and poverty rate of a specific country. It can be seen that growth in the early years correspond to a reduction in poverty rate, while in the middle years the poverty rate was relatively flat despite growth. In the latter years, a GDP crash corresponds to increasing poverty rate.

Inequality is measured as a difference in income ranges - by dividing incomes of all inviduals into 5 or 10 different ranges (quintiles or deciles, respectively), and looking at the gaps to determine what is called as Gini Coefficient or plots called Lorenz curves.

The Lorenz curve plots the cumulative percentages of income recipients relative to the corresponding cumulative percentage of total income received by those recipients. A diagonal straight line represents perfect equality, where X% of the income recipients receive exactly X% share of total income. The closer the curve to the straight line, the lower the inequality. In the sample Lorenz curves shown below, we can see that the curves have moved farther from the perfect equality straight line each year, indicating an increase in inequality over the year.

The Gini Coefficient is a number between 0 and 1, where 0 is perfect equality and 1 is a perfect inequality. It is measured by dividing the area between perfect equality line and the Lorenz curve by the total area to the right of the perfect equality line - the higher the value, the higher the inequality. For the sample curves shown above, the Gini coefficient for the years 1991, 1994 and 1998 were 0.471, 0.491 and 0.534, respectively.

How can we create a Balanced Economy?

2009-01-18T23:39:00.000-08:00

At a first level, the strategy to accomplish the mission of creating a Balanced Economy should address all three of the following:

Growth: The economy's output must grow, so it creates more wealth (or income) in order to feed an increasing population. Without growth, it becomes a problem of redistribution of existing wealth (or income).
Poverty: The minimum income per individual or family that can bring the basic amenities for a reasonable living.
Inequality: Refers to the unequal distribution of income levels among individuals in a given society. Growth is like a rising tide, but that doesn't automatically lift all boats, so policies are necessary to make an equitable distribution happen.

What is a Balanced Economy?

2009-01-18T22:58:00.000-08:00

Amartya Sen, in his book "Development as Freedom" talks about the need for Freedom, Sustenance and Self esteem as end goals of an economy, beyond just economic growth. This provides a good basis for a definition.

A Balanced Economy can be defined as one that seeks to provide it's constituents with economic well being, by ensuring the following:

Wide availability to basic life sustaining amenities
Freedom to pick from wide variety of social and economic choices
Higher standard of living - better self esteem and more opportunities

It is more like a mission statement.

Welcome to the Balanced Economy blog

2009-01-18T01:06:00.000-08:00

Welcome! What an ideal time to start blogging about Balanced Economy? With the world's number one economy in deep recession, people are questioning all kinds of economic principles such as free market capitalism, communism, socialism or globalization. Most of these principles have good and bad about them - the key however, is to strike the right balance. This blog will explore ideas on creating and managing balanced economies.