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Summary Partial Exam Macroeconomics I
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Full summary of all topics for the second partial exam Macroeconomics 1.
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Unit 1 – The capitalist revolution1.1 – Income inequality
The rich/poor ratio gives an indication about income inequality within a country and gives an
inequality comparison between different countries.
1.2 – Measuring income and living standards
A way to measure living standards is GDP per capita, the total goods and services produced in a
country (gross domestic product or GDP), which is then divided by the country’s population. The
disposable income is the income of households after paying taxes and receiving transfers form the
government. Disposable income is thought to be a good measure 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. Income is a major influence on wellbeing because it allows us to buy the
goods and services that we need or enjoy. But it is insufficient, because many aspects of our
wellbeing are not related to what we can buy. For example, disposable income leaves out:
a. The quality of our social and physical environment such as friendships and clean air.
b. The amount of free time we have to relax or spend time with friends and family.
c. Goods and services that we do not buy, such as healthcare and education, if they are
provided by a government.
d. Goods and services that are produced within the household, such as meals or childcare.
Absolute income matters for wellbeing, but we also know from research that people care about their
relative position in the income distribution. They report lower wellbeing if they find they earn less
than others in their group. Since income distribution affects wellbeing and because the same
average income may result from very different distributions of income between rich and poor within
a group, average income fails to reflect how well off a group is by comparison to some other group.
1.3 – History’s hockey stick: Growth in income
change∈income
growthrate=
original level of income
When a ratio scale is used, a series that grows at a constant rate looks like a straight line. This is
because the percentage is constant. A steeper line in the ratio scale chart means a faster growth
rate.
1.4 – The permanent technological revolution
In everyday usage, technology refers to machinery, equipment and devices developed using
scientific knowledge. In economics, technology is a process that takes a set of materials and other
inputs and creates an output. By reducing the amount of work-time it takes to produce the things
we need, technological changes allowed significant increases in living standards. The permanent
technological revolution has produced a connected world.
1.6 – Capitalism defined: Private property, markets and firms
Capitalism is an economic system in which the main form of economic organization is the firm, in
which the private owners of capital goods hire labour to produce goods and services for sale on
markets with the intent of making a profit. The main economic institutions in a capitalist economic
system are private property, markets and firms. An economic system is a way of organizing the
production and distribution of goods and services in an entire economy. By institutions, we mean
the different sets of laws and social customs regulating production and distribution in different ways
in families, private businesses and government bodies. In a capitalist economy, an important type of
, private property is the equipment, buildings and other durable inputs used in producing goods and
services. These are called capital goods. Markets are a means of transferring goods or services from
one person to another. Market have some characteristics:
a. reciprocated: unlike gifts and theft, one person’s transfer of a good or service to another is
directly reciprocated by a transfer in the other direction.
b. voluntary: both transfers are voluntary because the things being exchanged are private
property. So the exchange must be beneficial in the opinion of both parties. In this, markets
differ from theft and from the transfers of goods and services in a centrally planned
economy.
c. Competition: seller charging a high price will find that buyers prefer to buy from other
competing sellers.
But private property and markets alone do not define capitalism. In many places they were
important institutions long before capitalism. The most recent of the three components making up
the capitalist economy is the firm. Firms play an important role in the labour market. Firm owners
offer jobs at wages or salaries that are high enough to attract people who are looking for work. In
economic language, the employers are the demand side of the labour market, while the workers are
the supply side, offering to work under the direction of the owners who hire them. Government
bodies also tend to be more limited in their capacity to expand if successful and are usually
protected from failure if they perform poorly.
1.7 – Capitalism as an economic system
Markets and private property are essential parts of how firms function for two reasons:
1. Inputs and outputs are private property
2. Firms use markets to sell outputs
A distinctive aspect of the definition of capitalism as an economic system is that under it most
production takes place using privately owned capital goods that are operated by workers who are
paid wages. This contrasts with government ownership of capital goods in a centrally planned
economy, where private firms and markets are relatively unimportant. Capitalism is an economic
system that combines centralization with decentralization. It concentrates power in the hands of
owners and managers of firms who are then able to secure the cooperation of large numbers of
employees in the production process. But it limits the powers of owners and of other individuals,
because they face competition to buy and sell in markets. Capitalism could lead to growth in living
standards due to two major changes, technology and specialization.
1.8 – The gains from specialization
We become better at producing things when we each focus on a limited range of activities. This is
true for three reasons: (1) learning by doing, (2) difference in ability and (3) economies of scale.
Specialization exists within governments, firms and also in families. Economists distinguish who is
better at producing what in two ways: absolute advantage and comparative advantage. A person or
country has an absolute advantage in the production of a good if the inputs it uses to produce this
good are less than in some other person or country. A person or country has comparative advantage
in the production of a particular good, if 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.
1.10 – Varieties of capitalism: Institutions, government and the economy
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