The economic cake: What size will the slice be?
We have identified that inequality is harmful for economic growth and if we cannot alter this inequality the well-being of the next generation may well be affected.
You will recall in week 1 that we introduced the economic cake analogy (representing GDP), living standards and the concept of labour productivity.
So what is the size of the slice we’ll get from this economic cake, to secure our well-being?
In saying that inequality is harmful for economic growth, we are saying that it reduces our ability to create a bigger economic cake. Put simply, dividing up the cake into more unequal shares can actually make it more difficult to increase the size of the cake for everyone. This implies that more inequality hurts the improvement in living standards.
In terms of our equation: , labour productivity (Y/L) is lower which implies lower output per capita (Y/N), that is, each person on average gets a smaller slice of economic cake.
What does this mean for our next generation? We may be passing on a smaller slice of cake to them than we thought.
In the next step, we will see what gets passed down through the generations and whether the next generation is empowered to change the inequality they are handed.
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