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