Why Kuznet's curve follows inverted U shape? - A thought provoking question in Macroeconimcs exam

    First of all, let us understand what is Kuznet's curve. Simple google search results that Kuznets curve is a hypothetical curve that graphs economic inequality against income per capita over the course of economic development. According to this hypothesis, as an economy develops, market forces first increase and then decrease economic inequality.

Kuznet Curve- 

                                                               (reference - Wikipedia)

Frankly, I never thought about reasoning/explanation of this curve. But one day, this question was asked in Macroeconomics course exam. Though I was only auditing this course, but multiple conversations with my friends intrigued me to think about this phenomenon.

Original Question -  Income inequality in growing nations is very high but it goes down once the nation is developed. Income inequality seems to be low when the nation is poor and also when the nation is developed. If we draw a graph with income level on the x-axis and income inequality in the y-axis we get an inverted U curve. None of the growth theories explain this behavior of income inequality. Come up with your own theory where this behavior is explained. Your theory should not only explain this behavior but growth shouldn't be possible in your theory without income inequality becoming high.

Here was my answer - A neoclassical model of Kuznet Curve using Schumpeterian entrepreneurship 

Note: This answer was developed based on ideas initiated by Christopher Olk (my course-mate).

Indian Petrol Prices vs Demand

On 5th May 2021, Indian government hiked excise duty on petrol by ₹10 and on diesel by ₹13. Many of you argued that hiking petrol prices would be senseless under the current situation as this will further reduce the demand and effectively taxes. But when I was searching past literature regarding the same, look what I found!!

Price elasticity of demand for a product is defined as a percentage change in demand when you increase or decrease the price of a product by 1% (Economics 101). If this value is less than 1% (absolute) then that means your demand is inelastic, relatively insensitive towards price changes.

The literature says that Indian crude oil has elasticity of -0.43%, that means 1% increase in global oil prices would reduce import by 0.43%. Also, various studies have found that elasticity of diesel price stood at -0.5% and that of petrol is -1.1%. This also indicates a higher dependence on oil rather than alternative renewable resources in India.

References - [1], [2]

Will India see drop in petrol and diesel prices? – WTI oil crash and its impacts

Ever wondered, who decides the petrol prices in India?
 

My next article will certainly be going to answer this question in simplest possible way. It will also talk about WTI crash happened on 20th April and its effects on India petrol prices. Do read, like it and share it. If you have any questions/opinions about the topic, please feel free to share them in the comment section.

Click here - Impact of WTI oil crash on Indian petrol prices

Consumption Tax vs Income Tax: Which one is better?

    Article describes fundamental difference between consumption tax and income tax and why some of the economists support consumption tax over income tax. This post is in reference to today's post by Finshots on consumption tax vs income tax. 

Click here - Consumption Tax vs Income Tax

Econophysics -Where Physics meets Economics

      Writing this article was most exciting part of this journey for Deovrat Mehendale and me. We both went through some intense discussions, debates, and profound experimental analysis. Econophysics is an interdisciplinary field where techniques originally developed in physics are used to understand economic phenomenon. This time, we have included simulations and visualizations for better understanding. I hope this article will help you to develop a new angle to look at traditional economics.

Click here - Where Physics meets Economics

 

50 Years of Friedman’s Maximizing Shareholder Value Principle

 50 years ago, Dr. Milton Friedman, a renowned economist wrote one of the most influential articles of all time. He argued – “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.”

On the eve of 50th anniversary of this prestigious article, I have tried to reassess Dr. Friedman’s views in current circumstances. I have also tried to cover opinions of various modern economists.

 Click here - Visit to Friedman's Principal of Shareholder Value Maximization