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Economics Research Institute Study Paper




Utah State University Department of Economics

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The issue studied in this paper is whether globalization affects income inequality within countries. Using the newly created Kearney (2002, 2003, 2004) data and the principal component analysis (PCA), we create two globalization indices. The Gini coefficient of a country is regressed on the indices respectively. One of the globalization indices is the equally weighted index. The other is derived from PCA. Sixty countries were involved in this study, including both developed and developing countries. The main conclusions obtained from the analysis can be summarized as follows: there is a negative relationship between the globalization index and the Gini coefficient for all 60 countries in the study and the relationship is robust. Therefore, there is evidence supporting the claim that globalization help reduce income distribution inequality within a country. Previous studies suggest that education and urbanization are two major factors affecting income distribution within a country. In this analysis, increasing the educational level significantly reduces income inequality within a country, especially for developed countries. However, urbanization shows little explanatory power in the regression models.