Capitalism

Question 1

Why GDP grew from 1700’s (hockey stick growth)

Answer 1

Economic inequality and divergence

The role of technology for growth

importance of capitalism

role of governments in capitalist economics

Question 2

90/10 ratio

Answer 2

average income of richest 10% divided by average income of poorest 10%

measure of within-country inequality

Question 3

GDP

Answer 3

Gross domestic product

market value of total goods and services produced in an economy in a given period (price x quantity)

living standards measured in GDP per capita

Question 4

Disposable income

Answer 4

total income - taxes + government transfers (disability benefits etc)

Question 5

Disposable income - good measure of living standards?

Answer 5

excludes quality of physical and social environments

excludes leisure time

excludes healthcare, education, quality of roads

excludes goods and services produced in household

Question 6

Nominal GDP

Answer 6

calculating GDP using price x quantity of that year

Question 7

Real GDP

Answer 7

uses a base year in order to calculate it

uses the base years prices to calculate it

ie for real GDP in 2020 with 2019 as base prices

= quantity of 2020 x prices of 2019

comparing output across years can measure living standards

Question 8

Why it might be difficult to compare living standards across years

Answer 8

GDP calculated as sum of value of output in an economy

but across years both prices and outputs change

Nominal GDP - both prices and output changes

Real GDP - only output changes between years

Question 9

GDP deflator

Answer 9

Nominal GDP/Real GDP x100

Question 10

Technology’s effect on economical growth

Answer 10

uses input to produce output

reduces amount of work-time/materials/inputs to produce an output

allows for increase in living standards

less resources to produce output

capitalism explains this hockey stick growth in income, productivity and technology

Question 11

Institutions

Answer 11

Social customs governing production and distribution of goods and services

Question 12

Capitalism

Answer 12

system where the main institutions are private property, markets and firms

Question 13

3 types of economic systems

Answer 13

self-sufficient family-based production

market economy with family-based production (bring produce to market)

capitalist economic system - firms

Question 14

Capitalism - Private property

Answer 14

have rights over your possessions

capital goods important - type of property (ie machinery producing output)

knowledge and other essentials not included

Question 15

Capitalism - Markets

Answer 15

Mechanism for people to exchange goods etc for mutual benefit

reciprocated transfers

voluntary participation

there is competition

Question 16

Capitalism - Firms

Answer 16

organisations that use inputs to produce outputs

set prices to make a profit

use markets to sell outputs

inputs and outputs are private property

Question 17

What distinguishes firms from families and governments

Answer 17

firms are born, contract, expand and die quickly

Question 18

Why did capitalism lead to a growth in living standards

Answer 18

Competition - firms competing in markets have strong incentive to adopt new technologies

Specialisation - firm growth and market expansion has allowed for unprecedented specialisation in tasks and production

• increases worker productivity

Question 19

Gains from specialisation

Answer 19

Increases productivity of labour

workers get better at producing things when they focus on a limited range of activities

learning by doing

natural differences in skill and talent

economies of scale

peoples can only specialise if they can get the other goods they need

in capitalist societies you can get the other goods through markets

Question 20

Division of Labour in Firms

Answer 20

stresses the hierarchical nature of the firm

stress how of workers each distinct in skill and capacity contributes to a common outcome - the product

firms facilitate cooperators among specialised producers

this increases productivity

Question 21

Comparative advantage

Answer 21

what you do best while giving up the least

If a country has a lower opportunity cost of producing a good than another country, it has a comparative advantage

Opportunity cost is the gradient of a production frontier of two goods (output of producing only one good/output only producing the other)

Having an absolute advantage means that a firm can produce a good more efficiently than another