INVERTED U HYPOTHESIS

Q. 2017 NOVE II
The conjecture that inequalities of income first increase with development and then decrease with further development also known as ‘Inverted U’ hypothesis has been :
A. Supported by all empirical studies
B. Supported mainly by cross-section studies and not by time-series studies
C. Supported by time series and not by cross-section studies
D. Generally repudiated by empirical studies
ANS: (B) The concept of Inverted U Hypothesis was introduced by Simon Kuznets in 1955. According to Kuznets income inequality in nations has an inverted U shape. When the per capita income of people increases, income inequality shows an increasing trend. After reaching a particular point, with further increase in per capita income the income inequality tends to decrease which forms an “inverted U” shaped curve of income inequality with respect to per capita income. Like Kuznets, others have also generally used cross-section data of countries with a mixture of developed and developing countries to test Kuznets’ inverted U-hypothesis. By cross-sectional data, it means to setoff observations taken at a single point in time.