The Economy

The Economy (Imagination)

Something natural, bounded and subject to political management. Could be imagined to grow or fluctuate.

GDP (Gross Domestic Product)

The total value of everything produced in a given period such as a year. It is the market value of final goods and services produced in an economy during a given period.

GDP per Capita

GDP divided by the population size. Measures average economic output per person.

Nominal GDP

GDP measured in current-year prices.

Real GDP

GDP measured in base-year prices. Adjusts for inflation to allow comparisons over time.

GDP Deflator

A measure of the price level calculated as (Nominal GDP / Real GDP) × 100. Used to convert nominal GDP to real GDP.

GNI (Gross National Income)

The market value of goods and services produced by labor and property of nationals of a country (regardless of where production occurs).

SNA (System of National Accounts)

Standardized system established for measuring economic activity.

HDI (Human Development Index) Measures three dimensions:

A long and healthy life (life expectancy), Access to education (expected and mean years of schooling), A decent standard of living (GNI per capita adjusted for price level)

Purchasing Power Parity (PPP)

Exchange rates that correct for relative price differences between countries. Reflects prices of both tradable and non-tradable goods and services.

Capitalism (CORE Definition)

An economic system in which the main form of economic organization is the firm, in which private owners of capital goods hire labor to produce goods and services for sale on markets with the intent of making a profit.

Capital Goods

Any durable construction or human capital used to produce other commodities or services.

Economic Growth

The increase in the amount of goods and services an economy produces over time.

Model

A representation involving simplification, abstraction, and idealization.

Endogenous (in models)

Factors explained within the economic mechanism itself.

Exogenous (in models)

Factors coming from outside the economic mechanism.

Partial Equilibrium

Analyzes a single market in isolation, examining how decisions are made without considering feedback effects on other markets.

General Equilibrium

Examines how all markets in the economy interact simultaneously

Value Added

The additional value created at each stage of production.

Intermediate Goods

Goods used in the production of final goods.

Final Goods

Goods sold to end consumers. These are counted in GDP.

What does GDP measure? Does it measure inequality?

GDP tracks total output, not quality of life - it misses inequality and things money can't buy.

What is the main driver of economic growth according to CORE?

Technological progress/innovation under capitalist institutions is the main long-run driver of growth in living standards.

How is the economy embedded within the environment?

We use natural resources in production, which may affect the environment we live in and its capacity to support future production.

What are the limits of GDP as a welfare measure?

GDP only counts market production - it misses inequality, environmental damage, unpaid work, and quality of life.

Why did the Industrial Revolution start in the 18th century?

Wages relative to the cost of energy and capital goods rose in the 18th century in Britain compared with earlier historical periods.

Why did the Industrial Revolution first occur in Britain?

Wages relative to the cost of energy and capital goods were higher in Britain during the 18th century than elsewhere.

What is THE economy vs AN economy?

THE economy = A universal, abstract economic system with general laws

AN economy = A specific real-world economy with unique institutions and context

What are the three approaches to measuring GDP?

• Production approach: Count total output as it's produced (sum of value added)

• Expenditure approach: Count total spending (C + I + G + X - M)

• Income approach: Count total income earned (wages + profits + taxes - subsidies + depreciation)

Why is agricultural land more useful than total land area?

Agricultural land represents the economically productive portion that can sustain populations and support economic activity.

What is the difference between GDP and GNI?

GDP is the value of goods and services produced by labor and property LOCATED in a country. GNI is the value produced by labor and property of NATIONALS of a country (wherever they work).

How does CORE differ from Samuelson's approach?

CORE: Broader, employs real-world perspective, highlights limited rationality, fairness, norms, incomplete information, strategic interaction, institutions, history, power, instability and dynamism

Samuelson: Narrower, more closely follows traditional economic subjects and theories, mathematical formalization and universal principles

What is "the economy" based on both (CORE and Samuelsons) approaches?

An economy is society's system for producing and distributing goods through markets, governments, and other institutions.

What makes a model a good model?

• Clarity

• Accurate predictions

• Improves communication

• Usefulness

When does capitalism improve living standards?

When it continually generates broad-based productivity growth under inclusive and well-regulated institutions.

When does capitalism fail to improve living standards?

When institutional and social supports are absent, when ecological constraints are breached, or when:

• Private property rights are not secure

• Markets are not competitive

• Firms are owned by people who survive due to government connections or privileged birth

What negative outcomes can result from capitalism?

Income inequality (within and between countries), Exploitative use of natural resources ,Pollution ,Climate change

What is modeling as a method of inquiry?

A tool of investigation.

What should models include?

Representation through simplification, abstraction, and idealization. Leave out what is not relevant (but deciding what and how is key). Made for certain purposes.

When did government become part of the economy (in national accounts)?

Keynes added G (government spending) to the national income equation: Y = C + I + G + (X - M)

Endogenous vs Exogenous in business cycles

Endogenous: Caused by the mechanism itself

Exogenous: Caused by shocks from outside the mechanism