Economics capitalist revolution Notes PDF

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What is economics? What is the capitalist revolution?...

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What is Economics? It is the study of how people interact with each other and their natural surroundings in producing their livelihoods and how this changes overtime Economic growth is the measure id the change of GDP from one year to the next How has there been an increased growth in average standard of living? Inequality has increased throughout the years as there is a higher difference in average income between countries more than before For a while living standards didn’t grow in a sustained way And when growth began it occurred at different times in different places The countries such as Japan, UK, Italy that took off economically a century or more ago are now rich whereas countries that didn’t take off that recently are in the flatlands (think of the hockey stick diagram) Inequality  Differences in average income between countries are much larger today  Growth started at different times and different places Unit 1 The capitalist Revolution    

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There has been an increase in average living standards since the 1700’s This growth was associated with the emergence of a new economic system which is called capitalism This new way of organising the economy, and the advances in technology and specialisation in products and tasks has allowed for more being able to be produced in a day’s work. The capitalist revolution (the process above) as well as bringing benefits has created threats to our natural environment and has led to an increase in inequality Ibn Battuta concluded that back in the 14 th century where you were born mattered less than it does now When he went to India was in a stable condition- India wasn’t richer nor poorer than other parts of the world Now India is far better off than seven centuries ago if we think of their access to food, medicine, shelter etc however by the worlds standards they are mostly poor. This is because the standard of living in other countries is higher. They started economic growth faster.

Measuring income and living standards  GDP (gross domestic product) is used to compare the living standards in each country  It is a measure of total income and output of the economy in a given period of time usually per capita  Transfer pricing affects GDP -it is the monetary value of all goods and services produced within a country or region in a specific time period.

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People get incomes by producing and selling goods and services GDP is the total value of everything produced in a given period, thus GDP corresponds to an average annual income People in Britain are 6 times better off than those in India using GDP measure Japanese and British are just as well off as each other but Americans have advanced passed us and Norwegians are still in the lead The hockey stick diagram is able to demonstrate Economic growth due to Angus Maddison who dedicated his life to find the scare data needed in order to make comparisons of how people lived across a thousand years Data like this is the starting point of all economics, we need this data and facts to understand and explain what is going on and find solutions and make proper comparisons and learn from the data It can help us tackle inequality

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Disposable income=total income - tax + government transfer GDP is not equal to Disposable income However, both are imperfect measures of well being

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Measuring GDP  Production- the value of final outputs produced in an economy less the value of inputs used in production, this is important as it helps prevent double counting  Expenditure- the expenditure on final goods and services in an economy by households/corporations and governments  Income- the income earned by individuals and businesses from the production of goods and services in the economy ALL THESE SHOULD BE THE SAME Why are they imperfect?  GDP can increase but doesn’t necessarily mean the standard of living has increased  Transfer pricing can impact GDP  All measures of the economy have drawbacks- they are all a best estimate that are measured with uncertainty  Nonmarket activity it excludes is important when considering impact on well being  Some of the benefits we get from goods and services referred to as consumer surplus is not counted.  GDP values goods and services at the price they are sold for but what if what they provided was more valuable to me or you e.g. free mapping system  Doesn’t tell us what is happening with environmental sustainability  Doesn’t include things we personally value such as care for a family member Production boundary (what is and what is not included in GDP)  It includes all goods and services that are exchanged  Includes all goods that are not exchanged (using own resources for food)  Excludes services that are not exchanged (food prep, home education)

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Includes services from housing services consumed by owner-occupiers (imputed rent)

Why is measuring GDP important  Key driver of living standards- can help determine how much we can consumer as a country such as healthcare, education, pensions  Tells us about sustainability of public finances, taxes are based on a marketbased transaction. Employment= income tax and NI contributions. Buying goods= VAT. To plan public finances and ensure their sustainability measuring GDP makes it useful  Helps manage the economy- when setting the monetary policy decisions makers will often take into account what is going on with GDP. This is because economic policies such as interest rate impact on GDP, thus can impact inflation and employment as it impacts people’s standards of living. Understanding GDP helps us manage the economy helping us avoid booms and bursts  Mismeasurement of GDP can lead to costs in terms of economic policy. If it is measure wrong, it can increase the chances of poor economic policy making decisions be made. Comparisons over time  We need to adjust for inflation in order to make a valid comparison  Count an average basket of goods per household- this is done by Office for National Stats in the UK  For average GDP, a GDP deflator is used to measure domestic price movements, it reflects the price of domestic value overall  Adjust price change for each component

Hockey Stick Growth  Hockey stick curve demonstrates the sustained rapid growth in GDP per capita experienced by countries worldwide  Countries all kickstarted growth at different times

Cross country comparisons To compare prices across countries we use  Exchange rate -relatively easy to find, just adjust currency through conversion rate as this should not give you profit short term only long term if the pound fluctuated

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Power purchasing parity (ppp) - this is the rate of currency of one country would have to be converted into that of another to buy the same amount of goofs and services. -at what rate can we buy the same product in 2 different countries e.g. a BigMac -basically used to show how basket of goods can be bought- compare how much can be bought in one country to anothers -it is harder to calculate this as in order to get a good estimate a wide range of goods and services have to be considered

Technological Revolution  Technology is a process that uses inputs to produce an output  Technological changes over time have allowed for an increase in living standards  This helps explain growth throughout the years- drives economic advance  Technology allows for less input to be required to produce more output; think about the production of a book Industrial Revolution  The industrial revolution was a wave of technological advances that started around the 18th century  It transformed an agrarian and craft based economy into a commercial and industrial economy think about the production of light Labour productivity  To calculate labour productivity you divide the output by the labour input  Output here tends to be GDP  During financial crisis’s productivity declines  Increased productivity and population impacts the environment globally and locally  Environmental effects can be seen in the expansion of the economy and the way the economy is organised  Permanent technological revolution can help me a solution – enable us to produce more output while using less resources

Capitalism Institutions = the laws and social customs governing the production and distribution of goods/services Capitalism = an economic system where the main institutions are private property/markets/firms People used to be very self-sufficient and produce what they needed for their consumption

Then markets came along where people could buy and sell (trade) We now live in a generation where there is a strong capitalist economic system, we sell our labour combine it with input to produce an output and then we get a wage to buy what we need. Private property - ownership rights over possessions, such as capital goods like machinery etc Markets – a way for people to exchange goods on the market for mutual benefit Firms – business organisations that use inputs to produce outputs and set prices to atleast cover production costs

Capitalist revolution  this led to an increase in standard of living  encouraged companies to adapt and develop technology  led to specialisation of tasks  increased worker productivity specialisation can ; -increase productivity -economies of scale -take advantage of skills and talent In order to specialise, it is important to make sure you can acquire other needs elsewhere on the market Absolute vs Comparative advantage Absolute Can produce more in less time of both goods

Comparative looks at the opportunity cost of producing a good If a business has the lowest opportunity cost

Opportunity cost = highest value of the best next choice Producers can benefit by specialising in what they are least disadvantaged by

Did capitalism cause hockey stick growth? Used the spilt in Germany as an experiment - the east and west

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