Answer to Question #315301 in Macroeconomics for Michael

Question

I have came across a number of articles that test on the Kuznets curve. They are using GDP and log squared GDP as independent variables for their research. I just don't get it why they have to create a brand new independent variable that is the "log squared GDP". What is the purpose of this? Why cant I interpret from the GDP value itself. For example: GDP coefficient is negative, I would just interpret it as a negative relationship between inequality and GDP. Why just why the addition of log squared GDP??? Does it have anything to do with Kuznets curve or what?

Answer 1

Because the Kuznets curve is a hypothetical curve that graphs economic inequality against income per capita over the course of economic development (which was presumed to correlate with time). Even Simon Kuznets, the Belarusian economist who practically invented GDP, had doubts about his creation. He did not like the fact that it counted armaments and financial speculation as positive outputs. Above all, he said, GDP should never be confused with well-being. Kuznets' is a warning we have ignored.