Question

Both Krugman’s and Lucas’ papers explored inequality. Krugman discussed individual workers while Lucas discussed inequality among nations. Compare the two. How are their arguments alike? How are they different? Do you have confidence that eventually Lucas’ prediction will come true? If so, would that give you confidence that inequality among individuals will also eventually become less? (In answering, remember why Krugman thinks there is an increase in inequality.)

Answer 1

Check the explanation

Step-by-step explanation:

Kingman view of inequality is based on individual worker. His concept of inequality can be described as follows:

He believes that individual' s productivity differs from individuals to individuals There may be individuals that are highly productive and can make best possible use of the available resource as compared to other. This constitutes one of the main reasons for huge inequality.

He also described inequality based on luck There may be individuals with same productive capacity It is just the matter of luck to be on right place at right time to grab the jackpot.

He also described inequality based on powers in this he described that executives in big corporations set their own compensation and there may be financial dealers getting richer by taking fees from the investors that are new in the market.

Lucas view of inequality can be described as follows:

Lucas view of inequality is variant of Solow model describing different countries growing at different period of times the one that kick start first will grow but nation starting to prosper later will grow more because of favorable environment created by the earlier growing nations.

Thus Lucas model indicates that different countries having different growth rates and will fail to converge and there forms the concept of inequality among nations.

The similarities in the view point of inequality between Kingman and Lucas is on the topic of human capital development.

Keynesian was of the viewpoint that fiscal policy will put the economy out from the situation of liquidity trap Thus there are some stimulus that are a must but however Lucas was monetarist and believes that final stimulus will not work if there is no printing of money.

Lucas prediction if true then money supply in economy will increase because of printing of more number of money. Rise in money supply will create the situation inflation because too much of money will be chasing too few goods which will lead to rise in price further and thus there will be no significant changes in the income inequality.