Economics • Economic BasicsHard
Analyze the implications of the 'Kuznets Curve' hypothesis regarding income inequality during economic development. What does the inverted U-shaped curve suggest?
A. Income inequality decreases continuously as a nation transitions from an agrarian to an industrial economy.
B. Income inequality first increases and then decreases as per capita income rises during industrialization.✓ Correct Answer
C. Income inequality remains entirely constant regardless of the stage of economic growth achieved.
D. Income inequality increases exponentially in advanced post-industrial service economies due to skill-biased technological change.
💡 Solution & Explanation
The Kuznets curve proposes that as an economy develops, market forces first increase and then decrease economic inequality. During early industrialization, rural workers migrating to cities create wage disparities, but government welfare programs and education eventually reduce inequality in advanced stages. Simon Kuznets formulated this empirical observation using cross-sectional data across countries in the mid-twentieth century.
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