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Income Inequality Matters For Global Trade And Growth
by Ava Thomas Content CreatorYou must know that income distribution within an economy has various macroeconomic consequences, but did you know that the rising inequality (income concentration) in certain circumstances can make society more prosperous? On the other hand, rising inequality can also make everyone and everything worse off. Let’s look at a few ways the recent trade conflict caused by class conflicts within particular societies caused the revenues of the rich to be lifted at the expense of everyone else.
Globally, everything that’s produced is either invested in future production or consumed. This means that even when the global economy might be running at full capacity, there’s a trade-off needed between the consumption today versus the consumption tomorrow. In such circumstances, it’s necessary to cut current consumption to increase investment further. When there are investment projects that are worthwhile but not happening, the living standards for most people worldwide would rather improve, especially with lessened current consumption. One of the easiest and most practical ways to achieve this is to boost inequality. Studies from several countries show that almost everyone spends about 90% to 100% of what they’ve earned. This means they consume 90% to 100% of what they’re producing.
People at the upper bar of the income distribution can save over 45% to 50% of whatever they earn. Since most organizations generally put any incremental profit gains towards cash accumulation, capital spending, investments, or distributions rather than higher pay for employees, it means a shift in this income distribution away from employees towards higher income, and corporate profits for the super-rich will reduce consumption. It can lead to a higher investment capability for productive enterprises, proving to be good for everyone.
The world witnessed this strange scenario even during the industrial revolution of Britain, where the urban workers didn’t experience any real wage increment for decades, even when the rising mechanization and productivity lifted the overall economic output. The profits accrued to the factory owners, who then invested in additional factories and useful machines.
However, there’s a flip side to all this. When the global economy isn’t running at its full capacity, the income concentration can be bad for growth as there wouldn’t be any investment projects deprived of funding. In such situations, restraining consumption can’t enable any additional investment that leads to a rise in people’s standard of living. It simply stifles the demands and ends up idling the existing production capacity. This means that the rising inequality makes the entire society poorer.
Trade enables nations to produce more or less than their domestic investment and consumption requirements so that the surplus can be exported to other nations with deficits. Trade flows can be beneficial for making the society develop different worthwhile investment projects. However, it’s crucial to correspond to trade surpluses elsewhere while ensuring that the ROI in deficit societies is high enough to justify the deficit economy’s under-consumption. Problems only arise when the trade deficits compensate for failing domestic production or funding wasteful investments, as it can lead to trade conflicts among nations.
Ultimately, these trade conflicts have their roots embedded in the changes in income distribution. The expanding income concentration leads to shrinking deficits or increasing trade surpluses by discouraging domestic investment and constraining domestic consumption. A society with income equality will tend to end up in quite the opposite situation, as consumers will have more money than they’ll spend on commodities. While you may think that China’s household registration system or Germany’s inheritance taxation system has nothing to do with the states’ trade positions internationally, the truth is, these domestic policies often have several profound global implications.
About The Author
The author is an economist who holds a degree in International Relations and political sciences. She has extensive experience writing for various publications and teaches at a reputable educational institution. She writes opinion pieces and articles about research surrounding global growth, trade, and income inequalities.
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About Ava Thomas 
Content Creator
2 connections, 0 recommendations, 23 honor points.Joined APSense since, May 21st, 2021, From New York, United States.
Created on Jan 3rd 2022 04:08. Viewed 268 times.
