Expert reviewed • 22 November 2024 • 8 minute read
The distribution of income and wealth in an economy refers to how well income and wealth are spread amongst the population. Economies across the globe range from highly equitable to not equitable at all. As a result, disparities in distribution can impact social stability, economic sustainability, and the overall health of an economy.
Income distribution refers to how the total income generated in an economy is divided among its population. Alternatively, wealth distribution describes the disparity in the ownership of assets, such as property, financial investments, and savings.
Income distribution measures how a nation's total GDP is spread among its population. Equitable distribution tends to support sustained economic growth, while significant inequalities can hinder it. This is because high income inequality can reduce aggregate demand. This occurs as a smaller proportion of the population with a higher income may spend less proportionally than a large middle class. As consumption , is a factor of aggregate demand , we can see that a reduction in consumption will cause aggregate demand, and by extension economic growth, to also decrease.
Additionally, evidence suggests that the relationship between inequality and economic growth is not linear. A study by the International Monetary Fund (IMF) found that while some inequality can result in growth, excessive inequality can be detrimental. The study showed that a 1 percentage point increase in the income share of the top 20% of the population reduced GDP growth by 0.08 percentage points over five years. Furthermore, a similar increase in the income share of the bottom 20% boosted growth by 0.38 percentage points. If you wish to find out more about this study, visit the IMF's website: IMF Inequality Study
Wealth distribution refers to the way total wealth is spread across a society. More equitable wealth distribution is usually correlated with more significant economic development outcomes, such as better health, education and lower crime rates. For example, in Australia, which is ranked 5th most equitable country by measure of HDI, wealth is more evenly distributed. As a result, people in the economy enjoy high levels of social welfare, education and health.
Furthermore, an unequal distribution of income and wealth can hinder economic development by perpetuating poverty, limiting access to education and healthcare, and reducing social cohesion. Poverty within an economy can create a vicious cycle, where individuals from disadvantaged backgrounds are unable to acquire the skills and resources necessary to improve their economic prospects. This, in turn, can lead to the underutilisation of human potential and lower productivity levels.
Moreover, high levels of inequality can lead to social and political instability. This comes as a result of feelings of resentment towards the economic system, specifically from marginalised groups. This can manifest in various forms, such as crime, civil unrest, and political populism, which can hinder economic development and as a result, limit growth. For example, Zimbabwe, which is one of the world's most unequal countries, has contributed to high levels of poverty, unemployment, and social tensions. Despite being an upper-middle-income country, Zimbabwe's Human Development Index (HDI) score of 0.593 in 2024 was lower than the average for countries in the same income group, reflecting the challenges posed by inequality.