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Economics for Political Scientists Lecture Notes
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Economics for Political ScientistsM. Di Giuseppe – Leiden University
Introduction Part I
Incentives > sentiment in Australian prisoner scenario: Instead of paying for each prisoner that
boarded a ship to Australia (where a third would sometimes die), the UK started paying for each
prisoner that arrived alive in Australia -> Money benefits worked better than drafting a law or public
shaming.
-> Other example: Waiters in Amsterdam work worse than f.i. in NYC because they don’t get paid per
costumer -> Incentives matter.
-> How incentives shape our behaviour rather than emotions
The Hockey Stick of human prosperity: A diagram that shows rapid, sustained growth in average
living standards since 1700
-> How did this happen? How did living standards improve and poverty reduce? - A question
economics tries to answer
Economics doesn’t tell us what is just/fair; it doesn’t make moral judgements. Those topics can
motivate the topics that are studied within economics but it cannot influence the conclusions that
they draw. It is a social science and science seeks to understand the world as it is, not as we hope it
to be.
Introduction Part II – Growth and Inequality
Key concepts
Nominal GDP (or GDP growth)
• Gross domestic product measured in current currency amount ($USD)
• Does not account for inflation or differences in purchasing power across countries
• Simply refers to the “sticker price”
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 type of price measure
o Movie ticket sales
o Stock market prices
, Purchasing power parity
• Important for measuring changes across different countries & time
• Growth adjusted for differences in currencies and what those currencies can purchase
• Generally we translate local economic activity into its equivalent in $US dollars of a
particular year
• Consumer Price Index (CPI)
Nominal: Which movies have made the most money (and are therefore the best). If you look at the
list of nominal numbers, they’re all pretty new movies -> Inflation over time – Nominal GDP doesn’t
take that into account.
If you look at the list based on constant, you see older movies. This is because the constant/real GDP
looks as what these dollars would’ve been worth in the past.
Economic Growth
• How do we measure economic growth?
• It is easier said than done...
• An imperfect measure we rely on is Gross Domestic Product (GDP)
• We use this to compare the size of economies
• Across time (GDP Growth)
• Across countries (level of development)
Where does Economic Growth Come From?
Long term causes – Increases in:
• Natural resource discovery
• Physical capital of infrastructure (easier trade & transport)
• Population (more people engaging in economy)
• Human Capital (the more you invest in education, the more people can produce with the
same brains -> Humans have become smarter about development.)
• Technology (produce more with the same amount of basic resources)
• Law
Short term causes:
• External shocks
-> e.g. Covid, trade war, Brexit
• Government monetary or fiscal policy
• Consumer/business sentiment
,What does GDP measure?
• GDP measures the market value* of all finished goods produced within a country (usually
measured yearly)
- Finished good: goods that will not be sold again as part of another good (the final
consumer product)
Example: An iPhone
- Intermediate goods: goods that will be used to make something else that will be sold
Example: The camera of an iPhone
- Capital goods: finished goods that are used to produce other goods but not a part of other
goods
Example: Machinery in factories???/Tractor
The same product can be multiple of these forms of goods. An egg can for instance be a
finished good if you bake it, but it can also be an intermediate good if you use it to bake a
cake.
• Measured by government statisticians
• GDP Does Not include things that are imported from other countries.
- Stuff made in another country and sent here
• But it does include things exported to other countries.
- Stuff made in a country and sent out of the country.
Market value = The price that’s paid at the current market rate, whatever you sell something for at
the current moment.
Key point: GDP includes domestic goods and a country’s exports, but leaves out imports.
-> It includes the production, not the consumption.
A slightly more technical definition
Y = C + I + G + (X – M)
Y = GDP (National Income)
C = Consumer Spending (on finished goods)
I = Investment (in capital goods) = consumption
G = Government spending (on finished goods)
X = exports
M = imports
(x-m) – often seen as ”NX” or “net exports”
GDP per capita
• We are interested in how big an economy is (what GDP tells us)
• But we are also often interested in how wealthy a country is.
- We can use GDP to tell us this to by dividing GDP by a country’s total population
• GDP/Population (divided by)∶ This gives us what we call GDP per capita.
China GDP (2017) = 12 Trillion
Netherlands GDP = 826 Billion
China GDP per capita (2017) = $8,826 (per citizen)
Netherlands GDP per capita = $48,223 (per citizen) -> Shows actual living standards
, Calculate Economic Growth
Just like we calculate growth of anything else:
t= year
t-1= previous year
Wealth and Health of Nations:
“...BUT GDP only measures material values, I care about development” - “I don’t care about how
wealthy a country is, but about how things are going in a qualitative sense”
-> Can GDP tell us this? Not directly because it does only calculate material outcomes and
consumption/production.
But on the other hand, it is a good indicator of “development” because it is correlated with many
things we care about:
• Health
• Happiness
• Education etc.
Most of the things we care about are highly correlated with GDP
Visit: https://www.gapminder.org/tools/#$chart-type=bubbles
See how the things you care about correlate with GDP
Conclusion: We’ve established what GDP and growth is
What A Great Time to be Alive - Economic Growth Over Time
GDP tells us a great story (hockey stick): Things have never been as good as they are today.
However, GDP does have one (or more) major fault(s):
• It doesn’t tell us about Inequality - the distribution of income within a country. (Extremely
rich people throw off the ‘average’ income calculation)
• However, historically GDP growth usually does correlate with growth in everyone’s income...
Things are getting better for most of us.
Differences between the rich and the poor are huge within every country. There are also huge
differences in income between countries.
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