Economic growth and the problem of balancing consumption between rich and poor æ

As an economy experiences high growth rates, some sections of the population enjoy a more than proportionate rise in income. This leads to an increased allocation of resources towards the production of luxury goods. Since the production of luxury goods often requires more resources than the production of necessary goods, it may reduce not only the production of necessary goods, but also total production. This paper considers Houthakkerùs Indirect Addilog Utility Model and constructs a theoretical model to present this particular problem of growth. As an illustrative example, the model considers rice, where the land requirement for the production of aromatic rice is greater than that of ordinary rice. As income levels of the rich increases, the demand for aromatic rice increases and hence there is a shift in land devoted from the production of ordinary rice to high quality rice. Consequently, the total production of rice may decline. The model identifies factors that determine this possibility. The paper also looks at the relevant policy issues in this regard.