unit 1 Flashcards
define GDP
- market value of the output of final goods AND services in the economy in a given period. (output of intermediate goods that are inputs to final production excluded)
- expressed in ‘per capita’
- also referred to as gross domestic income
define disposable income
- wages or salaries, profit, rent, interest and transfer payments from the government/others minus any transfers the individual made to others (including taxes paid to the government).
- good measure of living standards because it is the maximum amount of necessary services that the person can buy without having to borrow
disposable income does not consider…
- quality of social and physical environment
- leisure time
- goods and services that we do not buy (healthcare, education) if they are provided by a government.
- household labour (mostly women)
is average income a good measure of wellbeing?
- no, because people’s (perception of ) disposable income in comparison to other’s in a group affects wellbeing.
- if half of the people live in poverty, but the average income is still high, average wellbeing isn’t high
is GDP per capita a better measure of living standard than disposable income?
- yes, because it includes government services that improve wellbeing that are not included in disposable income.
define nominal GDP
GDP in CURRENT prices
nominal GDP=∑𝑝𝑖𝑞𝑖
Where pi is the price of good i, qi is the quantity of good i
difference between nominal and real GDP
nominal measures GDP in CURRENT prices
real measures GDP in CONSTANT prices
real GDP used to see the actual growth rate of an economy by not including price increases.
eg. If we compare the economy in two different years, and if all the quantities stay the same but the prices increase by, say, 2% from one year to the next, then nominal GDP rises by 2%, but real GDP is unchanged. The economy has not grown.
purchasing power parity (PPP)
- statistical correction
- allows comparisons of the amount of goods people can buy in different countries that have different currencies.
growth rate formula
growth rate =
(change in income) / (original level of income)
define industrial revolution
- technological advances/organizational changes
- eighteenth century Britain
- agrarian and craft-based -> commercial/industrial economy.
technology as defined in economics
process using a set of materials and other inputs, including the work of people and machines, to produce an output.
define capitalism
- economic system
- three main institutions
1) firms
2) private property
3) markets - main form of economic organization is the firm
- private owners of capital goods hire labour to produce goods and services to sell on markets with intention to make profit
define economic system
A way of organizing the economy that is distinctive in its basic institutions (eg. capitalism)
define institution
The laws and informal rules that regulate social interactions among:
- people and people
- people and biosphere
“rules of the game”
define centrally planned economic system
government is the institution controlling production, deciding what goods will be distributed and to whom
define “capital goods”
- durable and costly NON-LABOUR inputs used in production (eg. machinery, buildings)
- not including some essential inputs that are used in production at zero cost to the user
(e.g. air, water, knowledge)
define “market”, benefits
a means of transferring goods or services from one person to another.
key characteristics:
- reciprocal
- voluntary
- competitive
accomplishes unintended cooperation on a global scale, allowing for specialization
define “firm”
A way of organizing production though:
- 1+ individuals own capital goods used in production
- they pay wages/salaries to employees
- they direct the employees in the production of goods and services.
- goods and services are property of the owners.
- owners sell the goods and services on markets with the intention of making a profit.
Key: quickly born, expand, contact, die
define labour market
employers offer wages to individuals who may agree to work for them
employers = demand side
employees = supply side
how do markets and private property support firms?
PRIVATE PROPERTY
- firm’s inputs and outputs are private property
MARKETS
- firms use markets to sell outputs
- profits depend on markets
how does private property influence the success of a market?
buyers will not want to pay for goods unless they can have the right to own them
Two major changes that accompanied the emergence of capitalism
1) TECHNOLOGY
- coincided with firms to better organize production
2) SPECIALIZATION
define economies of scale
- cost advantages that firms obtain due to their scale of operation
- increase in production efficiency lowers costs
on specialization: why do we become better at producing things when we each focus on a limited range of activities?
1) learning by doing
2) difference in ability
3) economies of scale
