Unit 1: The Capitalist Revolution

Gross Domestic Product (GDP)

all the goods and services produced in an economy over a given year, a measure of production (or supply), measure of total income and output of the economy in a given period, expressed per-capita (av. income), imperfect measure of wellbeing, sum up the good/service times their prices

aggregate expenditure

all the purchases made in the economy, measure of expenditure (or demand)

gross income

all the income received in the economy

disposable income

income household or individual can spend, =total income - taxes + government transfers, imperfect measure of wellbeing

Cons of using GDP to measure well-being

doesn’t account for quality of physical & social environment, free time/ leisure time, publicly available services, goods/services produced at home

price level

the average of all prices across the economy

inflation

the average increase in prices

Real GDP

the amount of goods and services produced in a given year, same as real income

Real Income

real purchasing power of households across the economy

nominal GDP =

Real GDP X Price Level, implies that growth rate of Nominal GDP (%) = Growth rate of Real GDP (%) + Inflation

Purchasing Power Parity

used to compare purchasing power across different countries

hockey-stick growth

represents sustained rapid growth in GDP per capita experienced by countries worldwide

growth rate =

change in income / original level of income

first country to experience sustained economic growth

Britain around 1650

Technology

a process that uses inputs to produce an output, big tech changes allow for big increases in living standards, these tech changes happened around same time of Britain’s hockey stick growth in mid 18C

Industrial Revolution

wave of technological advances, began in Britain (18 C), also made world made connected, and climate change (locally and globally)

environmental consequences come from

expansion of economy, and how economy is organized (what is valued and conserved), but also tech rev may be good bc now using less resources to produce more output (so more efficient)

Institutions

the laws and customs governing production and distribution of goods and services

capitalism

economic system where the main institutions are private property, markets, and firms; = private property + markets + firms

private property

ownership rights over possessions, one type is capital goods (non-labor inputs used in production), doesn’t include essentials like air or knowledge

markets

way for ppl to exchange products and services for their mutual benefit, voluntary/ competition/ reciprocated transfers

firms

business organization that uses inputs to produce outputs, and sets prices to at least cover production costs. 1) inputs & outputs are private property 2) firms use markets to sell outputs 3) aim is profit

5 firm characteristics

1) 1 or more individuals own capital goods that are used in production 2) pay wages & salaries to employees 3) direct employees in production of g&s 4) g&s are property of the owners 5) owners sell g&s on markets to make profit

Capitalism led to growth in living standards because of:

1) impact on technology (strong incentive to develop new) 2) specialization (linked world and growth of firms allowed for specialization in tasks & production); this increased worker productivity

specialization

increases productivity by limiting activities; 1) learning by doing 2) take advantage of differences 3) economies of scale; Adam Smith

Comparative Advantage

when the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods. (ask what you are least disadvantage in)

absolute advantage

when the inputs used to produce this good are less than in some other person or country.

reasons for divergences in growth of capitalist countries

1) economic conditions: firms, private property, or markets may fail 2) political conditions: capitalist institutions are regulated by the government 3) gov also provides essential goods and services (infrastructure, education)

political system

determines how governments will be selected and how those govs will make and implement decisions, capitalism usually co-exists with democracy

3 reasons why capitalism can be bad

1) private property is not secure 2) markets are not competitive 3) firms are owned

economics

study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time

how inequality changed over time

income inequality has increased