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Economics for Political Scientists Lectures Notes - GRADE 9
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Summary for the final exam (2022) material for Economics for Political Scientists. INCLUDES all lecture notes.
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Notes – Economics for Political Science 2022Lecture 01: 02/11/2022
Economic Growth & Inequality
Study of Economics
- Like other social sciences, it centres on the study of human behaviour
- Focus on: economic incentives & outcomes
- The study of individual incentives is referred to as microeconomics
- The study of aggregated outcomes is referred to as macroeconomics
What economics does not tell us
- It does not tell what is just or fair (no moral judgments)
- Economic questions cannot influence the conclusions we draw (social science)
- Science seeks to understand the world as it is, not as we hope it to be.
Growth and Inequality
Nominal GDP
- Gross domestic product measured in a current currency amount
- It does not account for inflation or differences in purchasing power across countries
- Refers to the "sticker price" -> 1 Pound is 1 Pound -> value change not in nominal GDP
- It is used to compare things in the same time frame, as it does not account for inflation, etc.
Real GDP (GDP growth) (in constant prices)
- Important for measuring changes over time
- Growth adjusted for changes in inflation
- We translate current nominal prices to a consistent baseline
- Applies to any price measure (stock market prices, movie ticket sales)
Purchasing power parity
- Important for measuring changes across countries & time
- Growth adjusted for differences in currencies and what those currencies purchase
- Generally, we translate local economic activity into its equivalent in US$ for a particular year
- Consumer Price Index (CPI) -> what does a currency buy us in different places?
Economic Growth
- Measured by the (real) GDP
- Comparing the size of economies: across time (GDP growth) and countries (level of development)
- Economic growth comes from the process of learning to produce more with the same stuff
- Increases in natural resource discovery, technologies, population, human capital, etc.
- Short-term causes of economic growth
- Positive shocks: Trade agreements, rainfall, war
- Negative external shocks: Covid-19, trade war, Brexit, war
- Government or fiscal policy
- Consumer/ business sentiment (fear, …)
,Notes – Economics for Political Science 2022
What does GDP measure?
- GDP measures the market value of all finished goods produced within a country (usually yearly)
- Finished goods: goods that will not be sold again as part of another good
- Intermediate goods: goods that will be used to make something else that will be sold
- Capital goods: goods that are used to produce other goods but not a part of other goods
- GDP is a good indicator of development because it is correlated with many essential things (health)
- Does not include things that are imported from other countries (because not produced domestically)
- Does include things exported to other countries (because produced domestically)
- Does not tell us about the income inequality within a country
Calculating GDP
𝑌 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
Y = GDP (National Income)
C = Consumer Spending (on finished goods)
I = Investment (in capital goods)
G = Government spending (on finished goods)
X = Exports
M = Imports
(x-m) often seen as NX or net exports
- Imports (M) do not decrease growth -> only an accounting device to adjust consumer and government
spending
GDP per capita
- We are interested in how big an economy is (GDP tells us)
- We are also often interested in how wealthy a country is (GDP per capita)
𝐺𝐷𝑃
= 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎
𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
Economic growth
The (real) GDP growth rate is the percentage change in GDP from one year to the next.
National statistics agencies usually publish annual real GDP data, an estimated real GDP measured at the end
of every year. Using this data, we can calculate the annual growth rate of real GDP in year t (𝑔𝑡 ) as:
𝐺𝐷𝑃𝑡 − 𝐺𝐷𝑃𝑡−1
𝑔𝑡 (𝑖𝑛 %) = ∗ 100
𝐺𝐷𝑃𝑡−1
𝐺𝐷𝑃𝑝𝑐𝑡 − 𝐺𝐷𝑃𝑝𝑐𝑡−1
𝑔𝑡 (𝑖𝑛 %) 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 = ∗ 100
𝐺𝐷𝑃𝑝𝑐𝑡−1
,Notes – Economics for Political Science 2022
Example: If real GDP at the end of this year was $3 billion, and real GDP at the end of last year was $2.8 billion,
then the annual growth rate of real GDP this year is:
3 − 2.8
𝑔𝑡 (𝑖𝑛 %) = ∗ 100 = 7.14 %
2.8
Growth percentages are used to compare countries because an increase of one billion in one country is not the
same as in another (USA vs Nigeria).
A ratio scale is used to compare countries' growth rates (the scale is doubled at each step (1, 2, 4, 8)). With a
ratio scale, a straight line means a constant growth rate, whereas a steeper line means a faster growth rate.
Economic Systems
- Economic growth is not given in economic history. However, the explosion in growth rates (hockey
stick) correlates with the development of different economic systems (mostly capitalism).
- An economic system organises the production and distribution of goods and services in an entire
economy.
- Institutions are different sets of laws and social customs regulating production and distribution
differently.
Capitalism
- An economic system based on individualism and economic incentives.
- Capitalism gives us: division of labour, specialisation, entrepreneurial innovators, new technology
A capitalist economy combines three institutions (private property, markets, and firms).
- A private property describes the right over a product by an individual, enterprise, ….
- Markets are reciprocated (trade) and voluntary; in most markets, there is competition.
- Firms are the predominant organisations to produce goods and services.
Capitalism can be contrasted with centrally planned economies where the government owns (nearly) all capital
goods and is the critical institution controlling production and deciding how and to whom goods and services
should be distributed.
The first adopter of new technology in a capitalist economy is an entrepreneur (willing to try out new
technologies and start new businesses).
Incentives and economic organisations
- Specialisation and the division of labour bring the most money and are increased when individuals are
incentivised to do what they are best (or most efficient) at doing.
- Specialisations occur when an individual, country, or some other entity produces a narrower range of
goods and services than it consumes and acquires the goods and services it does not produce.
- Division of Labour describes the specialisation of producers to carry out different tasks in the
production process.
- Self-sufficiency is the road to poverty; trade is essential in an economy
, Notes – Economics for Political Science 2022
Technological innovation
- Technological innovation is tied to improving economies and improving living standards
- Innovations are done because of incentives like more profits
- The rapid expansion of growth is in large part due to innovations (creating more with the same stuff)
- Emerged with the Industrial Revolution
- Innovation produces winners and losers, and inequalities within countries
- When we try to protect the "losers", innovation lags
Many places that are referred to as capitalist are not capitalist, as they might lack:
- Secure property rights (secured through political institutions)
- Competitive markets (government intervention, market failures)
- Firms are organised by non-market factors (nepotism, patronage)
Natural experiments
To answer questions like: was the growing affluence caused by institutions, culture, both, or something else?
Natural experiments are used, and two groups are identified:
- A treatment group: This group changes.
- A control group: This group was like the treatment group before the experiment, and the treatment
did not occur in this group.
Example: West- and East Germany after WW2
Primitive Communism
Imagination:
Before private property was known, food went to those in need, and everyone was cared for. Then agriculture
arose and, with it, ownership over land, labour, and wild resources. Finally, the organic community splintered
under the weight of competition.
Reality:
Tribes that get their food from hunting (hunter-gatherers) have different relationships with food distribution.
However, most hunter-gatherer societies recognised private ownership over land or trees. Many different
tribes around the world were punishing theft.
Explanation:
Primitive communism mostly came with interdependence. When people are locked in networks of
interdependence, they become invested in each other's welfare. Hunter-gatherers shared because they had
to, but once that need dissipated, even friends could become disposable.
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