Unit 1 - The Capitalist Revolution

Question 1

Economics

Answer 1

the study of how people interact with each other, and with the natural environment, producing their livelihoods

Question 2

GDP

Answer 2

• 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

Question 3

GDP per Capita

Answer 3

• can correspond to average annual income

Question 4

Income Inequality

Answer 4

• 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.

Question 5

Disposable income

Answer 5

• 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

Question 6

What does the disposable income not represent?

Answer 6

• 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

Question 7

Nominal GDP

Answer 7

SUM of (price x quantity for all goods and services)

Question 8

Real GDP

Answer 8

• 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

Question 9

The invisible hand

Answer 9

the workings of the market mechanism in coordinating the economic actors

Question 10

Why did division of labor actually happen?

Answer 10

prosperity is the result of division of labour or specialization - rise in efficiency

Question 11

Technology

Answer 11

the process that takes a set of materials and other inputs, including the work of people and machines, and creates an output

Question 12

There has been an upward growth

Answer 12

–> Capitalism

• GDP per capita
• Productivity of labour
• Connectivity of the various parts of the world
• Impact of the economy on the global environment

Question 13

Capitalism

Answer 13

• 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

Question 14

Capital Goods

Answer 14

private property - equipment, building and other durable inputs used in producing goods and services

Question 15

Firms

Answer 15

• 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

Question 16

Markets

Answer 16

• a means of transferring goods or services from one person to another
• they are reciprocated, transfer for transfer

Question 17

Important features of the capitalistic economy

Answer 17

• 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.

Question 18

How could capitalism lead to growth in living standards?

Answer 18

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

2. Specialization - unprecedented specialization due to the growth of firms and large number of workers

Question 19

Economies of Scale

Answer 19

producing large numbers of units of some good is often more cost-effective than producing a smaller number

Question 20

Adam Smith on division of labour

Answer 20

• 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

Question 21

What creates a comparative advantage

Answer 21

the fact that specialization in the production of a single good increases the total amount of each good produced

Question 22

Natural Experiment

Answer 22

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

Question 23

Developmental State

Answer 23

when the state has a leading role in its economic take-off

Question 24

Why are some economies behind even if they are capitalist?

Answer 24

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