CORE Unit1 The capitalist revolution ✏
1.1 Income inequality
A measure of inequality in a country: the 90/10 ratio - the average income of the richest 10% divided by the average income of the poorest 10%
1.2 Measuring income and living standards
GDP per capita: a measure of the total goods and services produced in a country (gross domestic product, GDP), which is then divided by the country's population
Benefits
Limitations
GDP doesn't count unpaid works
GDP doesn't account for quality of goods
GDP makes comparisons between countries available
GDP doesn't show the disparity between the rich and the poor
Green GDP (environmental value)
GDP is rather easy to calculate
GDP is an important measurement for making policies
Disposable income: thought to be a good measure of living standards
The amount of all incomes (including salaries, interest, unemployment benefits, gifts) received over a period, minus any transfers the individual made to others (including taxes)
The maximum amount of goods and services a person can buy without having to borrow
It is not necessarily a good measure of wellbeing
The quality of social and physical environment
The amount of free time
Goods and services that we do not buy, e.g. health care, education
Goods and services that are produced within the household, e.g. meals, childcare
Doesn't show the relative position in the income distribution
GDP per capita is a better measure of living standards than disposable income
GDP includes the goods and services produced by the government (schooling, national defence, and law enforcement), which contribute to wellbeing but are not included in disposable income
Nominal GDP: ∑𝑝𝑞 / real GDP
Purchasing power parity (PPP) 🚩
Constant prices: Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time
A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies
1.3 Growth in income
Growth rate = change in income / original level of income
1.4 The permanent technological revolution
In economics, technology is a process that takes a set of materials and other inputs—including the work of people and machines—and creates an output
Technological progress: a change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output
1.5 The economy and the environment
Economy -> Society -> Biosphere -> Physical environment
We use natural resources in production, which may in turn affect the environment we live in and its capacity to support future production
The permanent technological revolution—which brought about dependence on fossil fuels—may also be part of the solution to today’s environmental problems, e.g. more light for less heat
Advances in technology today may allow greater reliance on wind, solar and other renewable sources of energy
1.6 Capitalism defined: private property, markets, and firms
Key economic institutions (the laws and social customs governing the way people interact in society) of capitalism
In a capitalist economy, private property includes equipment, buildings, raw materials, and other inputs used in producing goods and services, which are called capital goods
Private property
enjoy your possessions in a way that you choose
exclude others from their use if you wish
dispose of them by gift or sale to someone else who becomes their owner
Makets
Reciprocated (雙向的): by exchanging goods and services
Voluntary: a way of connecting people who may mutually benefit
In most markets there is competition: through a process of buying and selling
Including auction-based markets, resale markets and illegal markets
A worker's skills are not private properties, in general they are not disposable to others for them to become the owners
Firms
1.7 Capitalism as an economic system
One or more individuals own a set of capital goods that are used in production
They pay wages and salaries to employees -> labour market
They direct the employees (through the managers they also employ) in the production of goods and services
The goods and services are the property of the owners
The owners sell the goods and services on markets with the intention of making a profit
Are able to hire additional employees on the labour market
Are able to attract funds to finance the purchase of the the capital goods they need to expand production
Families and governments are limited in their capacity of expansion and are usually protected from failure
Markets and private property are essential parts of how firms function
Inputs and outputs are private property
Firms use markets to sell outputs
The private ownership of capital goods that are organised for use in firms
Combines centralisation with decentralisation
It concentrates power in the hands of owners and managers of firms
It limits the powers of owners and of other individuals because they face competition to buy and sell in markets
Growth in living standards
Specialisation (the division of labour): growth of firms -> expansion of markets
Technology: firms competing with each other in markets had strong incentives
1.8 The gains from specialisation
We become better at producing things when we each focus on a limited range of activities
Learning by doing
Difference in ability
Economies of scale (more cost-effective)
Markets contribute to increasing the productivity of labour
1.9 Capitalism, causation and history's hockey stick
1.10 Varieties of capitalism: institutions, government, and the economy
Developmental state: A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies
A dynamic economy is an economy bringing sustained growth in living standards
Economic
Political
Markets are not competitive
Firms are owned and managed by people who survive because of their connections to government or their privileged birth
Private property is not secure
Markets, private property and firms are all regulated by laws and policies
Provides essential goods and services such as physical infrastructure, education and national defence
Combination
Firms led by those with proven ability to produce goods at low cost
Public policy supporting these conditions
Private incentives for cost-reducing innovation
A stable society, biophysical environment and resource base
1.11 Economics and the economy