Policy Choices and Economic Indicators’ Impacts on Income Inequality in G8 Countries

Scientific Study from the year 2018 in the subject Economics – Economic Cycle and Growth, Gadja Mada University (Faculty of Economics and Business), language: English, abstract: This study examines the relationship between governmental policies, economic growth, and income inequality in the G8 countries via an econometric analysis of panel data. The issue of income inequality is one of the main problems arising from the modern trend toward globalization. Many countries are still struggling with unequal wealth distribution. In an extreme example, the Gini index for South Africa was 63.1 in 2011. In contrast, the G8 countries had an average Gini index of only 35.3 for the same year. Five independent variables were examined: real GDP per capita, net investment in non-financial assets, unemployment rate, tax revenue, inflation rate and two control variables, TO (ratio of export and import to GDP), and consumer price index. This analysis was applied to data collected from The World Bank DataBank 2004 – 2015. The results confirm that inflation rate and the openness of an economy significantly affect the income gap. In practical terms, these results suggest that specific policy changes have the potential reduce income inequality, namely imposition of a contractionary monetary policy and encouragement of international trade.