Capitalism Flashcards
Why GDP grew from 1700’s (hockey stick growth)
Economic inequality and divergence
The role of technology for growth
importance of capitalism
role of governments in capitalist economics
90/10 ratio
average income of richest 10% divided by average income of poorest 10%
measure of within-country inequality
GDP
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
Disposable income
total income - taxes + government transfers (disability benefits etc)
Disposable income - good measure of living standards?
excludes quality of physical and social environments
excludes leisure time
excludes healthcare, education, quality of roads
excludes goods and services produced in household
Nominal GDP
calculating GDP using price x quantity of that year
Real GDP
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
Why it might be difficult to compare living standards across years
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
GDP deflator
Nominal GDP/Real GDP x100
Technology’s effect on economical growth
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
Institutions
Social customs governing production and distribution of goods and services
Capitalism
system where the main institutions are private property, markets and firms
3 types of economic systems
self-sufficient family-based production
market economy with family-based production (bring produce to market)
capitalist economic system - firms
Capitalism - Private property
have rights over your possessions
capital goods important - type of property (ie machinery producing output)
knowledge and other essentials not included
Capitalism - Markets
Mechanism for people to exchange goods etc for mutual benefit
reciprocated transfers
voluntary participation
there is competition
Capitalism - Firms
organisations that use inputs to produce outputs
set prices to make a profit
use markets to sell outputs
inputs and outputs are private property
What distinguishes firms from families and governments
firms are born, contract, expand and die quickly
Why did capitalism lead to a growth in living standards
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
Gains from specialisation
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
Division of Labour in Firms
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
Comparative advantage
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