Important Economic Curves
[Link] Curve Comparison
1 Kuznets curve Economic inequality and per capita income
cumulative share of income and sections of the
2 Lorenz curve
population
3 Philips curve inflation and unemployment
Environmental Kuznets
4 Environmental degradation and per capita income
curve
5 J Curve Trade deficit and currency depriciation
6 Laffer curve Tax rate and tax revenue
7 Engel curve Income level vs expenditure on commodities
8 Beveridge curve Unemployment rate and job vacancy
9 Rahn curve Government expenditure and growth rate
10 Economy recovery curves Time and GDP
1. Kuznets Curve
It shows the relationship between economic
growth and inequality.
It is inverted U shaped meaning that as
initially economic growth leads to greater
inequality,
followed later by the reduction of inequality.
The idea was first proposed by American
economist Simon Kuznets.
2. Lorenz curve
The Lorenz curve is a way of showing the
distribution of income (or wealth) within an
economy.
It was developed by Max O. Lorenz in 1905 for
representing wealth distribution.
The Lorenz curve shows the cumulative share of
income from different sections of the
population.
If there was perfect equality i.e., if everyone
had the same salary then the poorest 20% of
the population would gain 20% of the total
income. The poorest 60% of the population
would get 60% of the income.
Gini-coefficient
The Gini-coefficient is a statistical measure
of inequality that describes how equal or
unequal income or wealth is distributed
mong the population of a country. It was
developed by the Italian statistician
Corrado Gini in 1912.
The coefficient ranges from 0 (or 0%) to 1
(or 100%), with 0 representing perfect
equality and 1 representing perfect
inequality.
Values over 1 are theoretically possible
due to negative income or wealth.
3. Philips curve
The Phillips curve is an economic concept
developed by A. W. Phillips stating that inflation
and unemployment have a stable and inverse
relationship.
The theory claims that with economic growth
comes inflation, which in turn should lead to
more jobs and less unemployment.
However, the original concept has been some
what disproven empirically due to the occurren
ce of stagflation in the 1970s, when there were
high levels of both inflation and unemployment.
4. Environmental Kuznets curve
It shows the relationship between
economic progress and environmenta
l degradation through time as an
economy progresses.
As countries develop initially, pollution
increases, but later, with further
development pollution begins to come
down.
Thus, it is an inverted U-shaped curve.
5. J Curve
The J Curve is an economic theory that says
the trade deficit will initially worsen after
currency depreciation.
The nominal trade deficit initially grows
after a devaluation, as prices of exports rise
before quantities can adjust.
Then the response to the curve, which is to
an increase in imports as exports remain
static, is a rebound, forming a “J” shape.
The J Curve theory can be applied to other
areas besides trade deficits, including in
private equity, the medical field, and politics.
6. Laffer curve
The Laffer Curve states that if tax rates are
increased above a certain level, then tax
revenues can actually fall because higher
tax rates discourage people from working.
The Curve was developed by economist
Arthur Laffer to show the relationship
between tax rates and the amount of tax
revenue collected by governments.
The curve is used to illustrate Laffer’s
argument that sometimes cutting tax rates
can increase total tax revenue.
7. Engel curve
The Engel curve describes how the spending on a
certain good varies with household income.
The shape of an Engel curve is impacted by
demographic variables, such as age, gender, and educ
ational level, as well as other consumer characteristic
s. The Engel curve also varies for different types of
goods.
With income level as the x-axis and expenditures as
the y-axis, the Engel curves show upward slopes for
normal goods, which have a positive income elasticity
of demand.
Inferior goods, with negative income elasticity,
assume negative slopes for their Engel curves.
In the case of food, the Engel curve is concave
downward with a positive but decreasing slope.
8. Beveridge curve
This refers to a graphical representation that shows the
relationship between the unemployment rate (on the
horizontal axis) and the job vacancy rate (on the vertical
axis) in an economy. It is named after British economist
William Beveridge.
The Beveridge curve usually slopes downwards because
times when there is high job vacancy in an economy are
also marked by relatively low unemployment since
companies may actually be actively looking to hire new
people.
9. Rahn curve
The Rahn Curve suggests that there is an optimal level of
government spending which maximises the rate of
economic growth. Initially, higher government spending
helps to improve economic performance. But, after
exceeding a certain amount of government spending,
government taxes and intervention diminishes economic
performance and growth rates.
