The Classical Model of Economic Growth Flashcards
What is the definition of economic growth
The rate of change in real GDP per capita over a long period of time
Why do we measure growth in real GDP per capita and what are the usual time periods
Real GDP because it measures the quantity of goods and services rather than monetary value
Per capita to make sure that population doesn’t have an unfair bearing
Growth is usually measured over 7-10 years and must be measured from the same point between business cycles
What does the chart of economic growth look like for the UK
Until the 18th century there was no growth and only in the last half of the 18th century was growth over 1% - after this there has been rapid growth
Who created the classical model of economic growth and what were his three pre-requisites
Adam Smith created the approach and his pre-requisites are: Security of property, control of primogeniture (allows gentry to keep large estates) and infrastructure to be provided by the state
How does the Division of labour lead to growth according to Adam Smith
It will increase output through as
- dexterity of the workforce will improve with practice
- time can be saved moving between tasks
-machinery can be employed optimally
How does the growth process work according to Adam Smith
Division of labour leads to higher productivity and increased output and capital accumulation
In turn this leads to wages rising and population increasing which creates more demand
This gives rise to further division of labour and higher productivity - cyclical
What is the main problem with Smiths view
He assumed that extra population from economic growth would lead to more output but this may not actually generate more output per head
India has twice the GDP of Sweden but 80x the population
What was Malthus’ theory of population
Population rises using a geometric progression but food rises in an arithmetic progression meaning that unless population growth is controlled the population will outgrow its supply of food
How did Ricardo split up capital produced
Profit - capitalists
Rent - landlords
Wages - workers
Profit is what is leftover after subtracting rent and wages
What was Ricardo’s argument about land usage
As population grows then less fertile land will be used to feed the growing population which will increase rent thus squeezing profit
What does Ricardo’s model highlight the need for
Imports
What is the key difference between Smith and Ricardo/Marx
Smith assumed all classes working harmoniously while the other did not
What was the background of Marx’s writing
What is Frederick Engels quote
Rapid growth of industry in cities had led to bad living conditions and child labour
Fredrick Engels - “thieving and prostitution are the main sources of income for these people”
How did Marx explain where profit (exploitation) comes from
Capitalists buy labour at the cost of workers subsistence and anything extra worked provides profit
If a worker works for 12 hours and it only takes 4 to provide his subsistence then 8 hours of unpaid labour have been provided
What is the organic component of capital
The ratio of fixed capital (machinery) to working capital (wages)
