Unit 1 - The Capitalist Revolution Flashcards
Economics
the study of how people interact with each other, and with the natural environment, producing their livelihoods
GDP
- total value of everything produced in a given period of time
- the measure of the total goods and services produced in a country
- it can be used as a unit of measure for living standards
GDP measures the market value of the output of final goods and services in the economy in a given - hockey stick is the general shape of the GDP grwoth in the last centuries
GDP per Capita
- can correspond to average annual income
Income Inequality
- Income inequality is represented by the ratio between the average annual income of the poorest 10% of the population and the richest 10% of the population.
Disposable income
- the amount of wages or salaries, profit, rent, interest and transfer payments from the government or from others, received over a given period of time, minus any transfers the individual made to others (taxes)
- entails what you can actually buy with the money you receive - calculated by looking at ‘the basket of goods’
- good measure of living standard
What does the disposable income not represent?
- The quality of social and physical environment
- The amount of free time available
- Goods and services which are not bought - such as education and healthcare
Nominal GDP
SUM of (price x quantity for all goods and services)
Real GDP
- taking account of price changes over time (inflation)
- Real GDP = nominal GDP/inflation rate
- Real GDP is used because the Nominal GDP does not - - take into account the change in prices that occur because of inflation/deflation
- Increase in Real GDP = economic growth
The invisible hand
the workings of the market mechanism in coordinating the economic actors
Why did division of labor actually happen?
prosperity is the result of division of labour or specialization - rise in efficiency
Technology
the process that takes a set of materials and other inputs, including the work of people and machines, and creates an output
There has been an upward growth
–> Capitalism
- GDP per capita
- Productivity of labour
- Connectivity of the various parts of the world
- Impact of the economy on the global environment
Capitalism
- firms, markets and private property –> combined with the government and institutions
- an economic system characterised by a particular combination of institutions, or in other words the different laws and social customs regulating production and distribution in different ways in families, private, business and government bodies
Capital Goods
private property - equipment, building and other durable inputs used in producing goods and services
Firms
- way of organising production
- one or more individuals own a set of capital goods that are used in production
The expanded role of firms created a boom in the labour market
Employers - demand side of the labour market
Workers - supply side of the labour market
Markets
- a means of transferring goods or services from one person to another
- they are reciprocated, transfer for transfer
Important features of the capitalistic economy
- combines centralization with decentralization. It concentrates power in the hands of owners and managers of firms who are then able to secure the cooperation of large numbers of employees in the production process.
- it limits the powers of owners and of other individuals, because they face competition to buy and sell in markets.
How could capitalism lead to growth in living standards?
Two major changes enhanced the productivity of workers
1. Technology - the competition between firms incentivizes the development of new and more productive technologies - and the investment in capital goods
- Specialization - unprecedented specialization due to the growth of firms and large number of workers
Economies of Scale
producing large numbers of units of some good is often more cost-effective than producing a smaller number
Adam Smith on division of labour
- Learning by doing: we acquire skills as we produce things
- Difference in ability: for reasons of skill, or natural surroundings such as the quality of soil, some people are better at producing some things than others
- Economies of scale: producing large numbers of units of some good is often more cost-effective than producing a smaller number
- Capitalism enhanced our opportunities for specialisation by expanding the economic importance of both markets and firms
–> The division of labour in firms allows for specialised procedures - resulting in increased productivity
What creates a comparative advantage
the fact that specialization in the production of a single good increases the total amount of each good produced
Natural Experiment
situation in which there are differences in something of interest, a change in institutions for example, that are not associated with differences in other possible causes
Developmental State
when the state has a leading role in its economic take-off
Why are some economies behind even if they are capitalist?
Two sets of conditions contribute to the dynamism of the capitalist economic system. One set is economic; the other is political, and it concerns the government and the way it functions
Economic:
- Private property is not secure
- Firms are owned and managed by people who survive because of their connections to government or their privileged birth
Political:
- There must be a well-functioned legal system
- Monopolies are often supported by governments as they are ‘too big to fail’
- Capitalism can function when it combines private incentive for cost-reducing innovation, firms led by those with proven ability to produce goods at low cost, public policy supporting these conditions and a stable society
