1 - The capitalist revolution Flashcards
How did economic distribution look 1000 years ago?
Flat
How have income distributions changed since 1980?
Rich/poor ratios have increased.
What was a driving force as to why some countries are doing well?
Countries that took off economically prior to 1900.
What is the measure for total goods and services produced in a country?
GDP per capita.
What does GDP measure?
The market value of the output of final goods and services in the economy.
What is disposable income?
The amount of wages, salaries, profit, rent, interest and transfer payments from the government.
Is disposable income a good measure of our wellbeing?
No.
Many aspects of our wellbeing are not related to what we can buy.
How does relative position in the income distribution / absolute income affect wellbeing?
Absolute matters for wellbeing.
Relative position also matters. If lower, people report lower wellbeing regardless of their absolute position.
GDP per capita is a better measure of living standards than disposable income? T/F
True.
What is the equation for nominal GDP?
∑piqi
p is price, q is quantity
How can you take account of price changes over time?
Use real GDP, rather than nominal.
How can you compare price differences across countries, and why do we use this?
Use PPP to achieve parity in the real purchasing power of a currency.
What is the equation for growth rate?
Change in income / original level of income
Why do we use a ratio scale on the y-axis for showing growth?
Growth is expressed as a percentage, rather than in absolute terms.
What is the common ratio scale for growth rate graphs?
2x.
i.e. 250 -> 500 -> 1000 -> 2000 etc.
What do growth stick diagrams show?
- Living standards did not improve in any sustained way.
- When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards around the world.
What has followed a similar upward trend to the hockey stick graph?
- GDP per capita
- Productivity of labour
- Atmospheric CO2
What are the institutions that are fundamental for capitalism to function?
- Private property
- Markets
- Firms
What are markets?
A way of connecting people who may mutually benefit, by exchanging goods and services through a process of buying and selling.
What are the characteristics of a firm?
- One or more individuals that own capital to be used in production
- Wages / salary paid to employees
- Owners / managers direct the employees in the production of goods and services
- Goods and services are property of the owners
- The owners sell goods and services on the market FOR PROFIT
What did the expanded role of firms cause in a different market?
Caused the labour market to boom.
Why are markets and private property essential to how firms function?
- Inputs and outputs are private property
- Firms use markets to sell outputs
How could capitalism lead to a growth in living standards?
- Technology
- Specialisation
How does technology improve growth in living standards?
Competition in capitalism gives firms incentives to adopt and develop new technologies to be more competitive. As a result, productivity increased, therefore causing improvements in living standards.
Why do we get better at producing things when we specialise?
- Learning by doing
- Difference in ability
- Economies of scale
How does the division of labour pose a problem to society?
Question of how goods and services can be distributed from the producer to the final user.
How do economists distinguish who is better at producing what?
Absolute advantage
Comparative advantage
Let A be able to produce 1250 of Z and 50 of Y, and B be able to produce 1000 of Z and 20 of Y.
Who holds absolute advantage and comparative advantage?
A holds absolute advantage over both.
A has comparative advantage over good Y, B has comparative advantage over good Z.
Who has comparative advantage here?
Brazil has comp. advantage over boats, France has comp. advantage over trains.
3(12) = 36 > 4(6) = 24
Why did South Korea, Japan and China do so well after the war?
Their governments set up developmental states.
Why does capitalism not always work?
- Economic conditions
- Political conditions
How do economic conditions prevent capitalism from working effectively?
- If private property is not secure
- Markets are not sufficiently competitive
- Hereditary economic control
How can political conditions prevent capitalism from working effectively?
- Competition is not sustained
- Legal system is not sufficiently powerful
- Property rights are not sufficiently protected
How can capitalism be a dynamic economic system?
- Private incentives for cost-reducing innovation
- Firms led by those with proven ability to produce goods at low cost
- Public policy supporting these conditions
- A stable society, biophysical environment and resource base
