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In economics, income distribution covers how a country's total GDP is distributed amongst its population. [1] Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes economic inequality which is a concern in almost all countries around the world. [2] [3]
It has been used as an input for testing theories explaining the distribution of income, for example human capital theory and the theory of economic discrimination (Becker, 1993, 1971). In welfare economics , a level of feasible output possibilities is commonly distinguished from the distribution of income for those output possibilities.
The initial distribution of income determines whether an economy converges to a low-education, low-income steady-state equilibrium, or high-income, high education steady-state equilibrium. In particular, the model predicts that inequality have an adverse effect on human capital formation and economic growth in all but the very poor economies.
Income distribution has always been a central concern of economic theory and economic policy. Classical economists such as Adam Smith, Thomas Malthus and David Ricardo were mainly concerned with factor income distribution, that is, the distribution of income between the main factors of production, land, labour and capital.
Ricardian economics are the economic theories of David Ricardo, an English political economist born in 1772 who made a fortune as a stockbroker and loan broker. [ 1 ] [ 2 ] At the age of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and was energised by the theories of economics.
As applied to income, the Pareto principle is sometimes stated in popular expositions by saying q=20% of the population has p=80% of the income. In fact, Pareto's data on British income taxes in his Cours d'économie politique indicates that about 20% of the population had about 80% of the income. [dubious – discuss].
Optimal taxation theory attempts to derive the system of taxation that will achieve the desired revenue and income distribution with the least inefficiency—that is, that interferes least with market participants making Pareto optimal exchanges—economic transactions that make both parties better off. [7]
Until A Theory of Consumption Function, the Keynesian absolute income hypothesis and interpretation of the consumption function were the most advanced and sophisticated. [2] [3] In its post-war synthesis, the Keynesian perspective was responsible for pioneering many innovations in recession management, economic history, and macroeconomics.