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
2
, 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
3
, 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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