Study Guide Core Economics (EVERYTHING INCLUDED)

Study Guide Core Economics


Capitalism, Inequality, and the Study of Economics

The Capitalist Revolution
The Capitalist Revolution
 Increase in average living conditions 1700’s
 Advances in technology and specialization in products and tasks raised efficiency
 Accompanied by growing threats to the environment and economic inequalities
 GDP
 Gross Domestic Product
 The total value of everything produced in a given period
 Also referred to as gross domestic income
INCOME INEQUALITY
 The rich have much more than the poor
 Rich/poor ratio

,MEASURING INCOME AND LIVING STANDARDS
 GDP per capita – a measure of the total goods and services produced in a country
divided by the country’s population
 Disposable income
 The amount of wages or salaries, profit, rent, interest and transfer
payments from the government or from other received over a given period,
minus any transfers the individual made to others (taxes etc)
 Good measurement of living standards because it is the maximum amount
of food, housing, clothing and other goods and services that the person can
buy without having to borrow
 Insufficient in measuring wellbeing because it leaves out:
o Quality of social and physical environment
o The amount of free time one has
o Goods and services we do not buy (eg those provided by the
government)
o Goods and services that are produced within the households (eg
childcare)
 People have lower wellbeing when they earn less than others in their group,
even if average income of the group is high
 Average disposable income may not be a good measure of well being
because the income distribution may not be even
 Government goods and services
 Hard to vale, because they are not typically sold, and thus the only measure
is the cost of production
 Nominal GDP - The value of output in the economy using the prices at which
goods and services are sold in the market
 Sum of price times quantity
 Real GDP
 Uses nominal GDP per year
 For example, calculates GDP for 2010 and 2011, then multiplying the 2011
quantities by 2010 prices and seeing how the real GDP changes
 Accounts for price changes over time
 Comparing across countries
 Requires use of purchasing power parity (PPP) prices, which represents the
real purchasing power in all countries



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, o 1 dollar worth of one currency may get you more in one country than 1
dollar in another currency in another country
B. HISTORY’S HOCKEY STICK
 Growth rate measure the rate of change
change∈income
 Growth rate=
Original level of income
 In a ratio scale, a constant growth rate looks like a straight line, a steeper
line means a faster growth rate d
 In history, living standards did not grow in any sustained way for a long time
 When sustained growth occurred, it started at different times for different countries,
leadings to differences in living standards
PERMANENT TECHNOLOGICAL REVOLUTION
 The Industrial Revolution
 Important technologies introduced at the same time as the upward kink of
the hockey stick
 Technology is a process that takes a set of materials and other inputs and
creates an output
 Reduced production time
 Permanent technological revolution because the amount of time required to
produce products keeps decreasing
ECONOMY AND ENVIRONMENT
 Increase in production led to increased use of natural resources and degradation of
natural environment -> climate change
 Global climate change and local resource exhaustion are results of the expansion of
the economy
 Advances in technology may be beneficial to reduce issues
CAPITALISM
 Capitalism is an economic system characterized by a particular combination of
institutions
 Economic system : a way of organizing the production and distribution of
goods and services in an entire economy
 Institutions : different sets of laws and social customs regulating production
and distribution in different ways in families, private businesses and
government bodies




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,  Private property, markets, and firms
 Capital goods
 An important type of private property is the equipment, buildings and other
durable inputs used in producing goods and services
 Markets
 A means of transferring goods or services from one person to another
 Reciprocated transfers
 Voluntary transfers
 Must be beneficial in the eyes of both parties
 Most markets have competition
 The firms
 A way of organizing production with the following characteristics
o One or more individuals own a set of capital goods that are used in
production
o They pay wages and salaries to employees
o They direct the employees in the production of goods and services
o The goods and services are the property of the owners
o The owners sell the goods and services on markets with the intention of
making a profit
 Created a boom in the labor market
o Offer salaries or wages high enough to attract workers
o Employers are demand side of the labor marker and workers are the
supply side



SPECIALIZATION
 Learning by doing: we acquire skills as we produce things
 Difference in ability: for reasons of skills, or natural surroundings such as the quality
of the soil, some people are better at producing some things than others
 Economies of scale: producing a large number of units of some good is often more
cost-effective than producing a smaller number


 Division of labor




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