What is it about?

This study shows not all sources of economic growth are beneficial for generation of increases to GDP Per Capita (GDP per unit of Population). Importantly, entrepreneurship that only substitutes for jobs, as such that does not consist in attempts at actualization of new technologies (technical change) is shown to induce decreases to GDP Per Capita. The only reason countries within which such entrepreneurship is prevalent do not experience decreases to GDP Per Capita resides in yearly injection of new funds into such economies via fiscal budgets. For concreteness, in such countries, just about all economic growth is tied to activities of government. If growth is premised on innovation, that is, technical change, it necessarily results in increases to GDP Per Capita. There exists, however, two important caveats. First, suppose there exist 20 professions in an economy and that the 20th profession is the most technologically sophisticated, and the 1st profession the least technologically sophisticated. If technical change always occurs in context of professions 1 through 19, while such change produces increases to GDP Per Capita, resulting increases strictly are bounded above, that is, cannot exceed some threshold. If, however, technical change always occurs in context of the 20th profession, increase to GDP Per Capita does not have any upper bound. GDP Per Capita, as such can increase ad infinitum, that is, forever. Second, if increases to GDP Per Capita are premised on technical change that occurs within only one sector of an economy, regardless of such increase, purchasing power of the median agent in such a country still can experience deterioration. While then increase to real GDP Per Capita is a necessary condition for economic development - improvements to purchasing power of economic agents; equivalently, improvements to welfare of economic agents - in presence of increase to real GDP Per Capita, there remains feasibility of deterioration to economic development. Highlighted formal theoretical result demonstrates that evidence for dichotomy of GDP Per Capita from Economic Development in Sen (1997) and Fitoussi, Sen, and Stiglitz (2010) is not a one-off occurrence, rather is characteristic of general equilibrium (in layman's terms, 'is truth'). Essence then of general equilibrium? While increase to GDP Per Capita is necessary condition for economic development, in of itself, such increases can be accompanied by deterioration to economic development. The remedy? Formal theoretical predictions show that innovation that facilitates each of increase to real GDP Per Capita and Economic Development satisfy the two conditions enumerated in the preceding and simultaneously attenuate preceding realizations for 'relative country inequality' - a new metric for economic development that arises out of the formal theoretical model. The 'relative country inequality' metric can have interpretation as a metric that ranks countries with respect to shortness of the distance between prices for bundles of goods that typically are afforded by the median agent and prices for bundles of goods that typically are consumed. For concreteness, suppose a country is ranked 2nd with respect to real GDP Per Capita and 2nd with respect to income inequality in comity of nations. Refer to stated scenario as the, (2,2) scenario. Suppose the country's ranking on GDP Per Capita improves from 2nd to 1st, but its ranking on income inequality remains at 2nd. Refer to stated alternate scenario as the (2,1) scenario. Study findings show, regardless of the improvement to real GDP Per Capita, that the country has experienced deterioration to economic development, equivalently deterioration to relative income inequality. Suppose, on the contrary, that the country's ranking on GDP Per Capita remains 2nd, but its ranking on income inequality improves to 1st. Refer to this new alternate scenario as the (1,2) scenario. Study findings show that the (1,2) scenario is to be preferred to the (2,1) scenario. The reasoning is as follows, while the (1,2) scenario can, simply via new investments progress to a (1,1) scenario - a scenario that clearly must be preferred to a (2,2) scenario - a (2,1) scenario feasibly progresses to a (1,1) scenario only if new investments satisfy the two conditions that govern investments in innovation, and simultaneously satisfy the condition that entrepreneurship is premised on actualization of investments in innovation. In aggregate, study findings show effects of investments on income inequality are of significantly greater importance for economic development than effects of investments on GDP Per Capita. Both factors remain important, however, for generation of economic development.

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Why is it important?

Study findings constitute the first general equilibrium model for parameterization of mechanics of economic development. The litmus test that any robust model for economic development must pass is, nesting of a model for economic growth, but yet dichotomy of economic growth from economic development. This study achieves stated objective. For concreteness, it explicitly is the case in the study, to wit, the assumption that all of economic growth is premised on technical change produces an economy within which, always economic growth coincides with economic development. Given the model parameterizes conditions, in context of which growth is not premised only on technical change, it resolves the mathematical puzzle that Nobel Laureates Lucas and Romer acknowledge was their goal in Romer (1986, 1987) and Lucas (1988), but which they simultaneously acknowledge turned out unsuccessful. The reasoning for dichotomy of outcomes is as follows, namely whereas Romer (1986, 1987) and Lucas (1988) attempt to upscale a model for economic growth to encompass economic development, this study builds a model of economic development that nests economic growth. Robustness of the structure and outcome is evident in the fact that the model parameterizes all feasible sources of economic growth (innovation, fiscal budgets, population etc.) and impact of growth on relative country inequality.


The study yields the important insight that, if a Capitalist economy, such as that of the USA is to outperform a Welfare State economy, such as that of Norway, it must arrive at: (i) Relative to a Welfare State, a more rigorous, that is, more challenging educational system (ii) Quality of health care that is not conditioned on incomes of economic agents - an objective that only can be facilitated by a health care system that has government as insurer of all economic agents - as such payments for health care that are proportional to incomes earned via some slight increase to taxes that is accompanied by elimination of private insurance, surely to result in a net increase to incomes; and private firms as implementers of the health care system It is straightforward that, currently the USA is failing with respect to the two scientifically obtained conditions for outperforming of Welfare Economies. Not surprisingly, with focus on real incomes, Norway, a Welfare State, is richer than the USA.

Dr Oghenovo A Obrimah
Fisk University

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This page is a summary of: Income Inequality and Per Capita Income: Equilibrium of Interactions, SSRN Electronic Journal, January 2020, Elsevier,
DOI: 10.2139/ssrn.3551909.
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