A new approach to inequality

Maintaining moderate level of income inequality is required for the sake of sustainable economic growth. The question that needs to be addressed is how to accurately measure income inequality. We modify the traditional Gini coefficient by using purchasing power parity (PPP). Usually, the PPP exchange rate is used to make comparisons of standards of living between countries at a certain point in time and over time. We adopt these techniques in order to undertake comparisons between income groups within a given country. Instead of simply measuring nominal dollar income inequalities, we recalibrate it and turn it into a more accurate measure of real income inequality. Our empirical findings show that the true income inequality within Israel is larger than the official numbers published by the CBSI, and that may underlie social and political instability as well as the sustainability of economic growth. Policy makers should therefore take our revised measure into account when setting appropriate social policies.