Summary ECONOMY P, ISBN: 9780198810247 GEO1-2255 Principles of Economics
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Course
GEO1-2255 Principles of Economics
Institution
Universiteit Utrecht (UU)
Book
The Economy
A summary about the book The Economy for Principles of Economics, where theories behind economics are explained. This is the first part of the summary.
Chapter 1: The capitalist revolution
Since 1700: increasing living standards (economic life) - capitalism (private property,
markets, firms) - advances in technology and specialization in products → c apitalist
revolution → g
rowing threats to our natural environment and unprecedented global
economic inequalities.
GDP per capita (Gross Domestic Products): total value of everything produced in a given
period (FEX year) → average annual income → measure of total goods and services produced
in a country, divided by country’s population.
Paragraph 1: Income inequality
average income of richest 10%
Measure of inequality in a country = 9 0/10 ratio: average income of poorest 10% .
→ income of the 90th percentile divided by that of the 10th percentile.
Countries that took off economically before 1900 (UK, Japan, Italy) are now rich → countries
that took off recently or not are poor → explains differences in income between countries.
Paragraph 2: Measuring income and living standards
What goods and services should be included in GDP per capita? How give things a value?
→ solution: using their prices.
Disposable income = amount of wages/salaries, profit, rent, interest and transfer payments
from the government (FEX unemployment) or others (FEX gifts) received over a g iven period
(FEX year), minus any t ransfers individuals made to others (including taxes to government).
→ measure of living standards → max amount of food, household, clothing, etc a person can
buy without having to borrow it.
Disposable income leaves out:
- Quality of social and physical environment, such as friendship, clean air.
- Amount of free time to relax or spend time with friends and family.
- Goods and services we don’t buy, such as healthcare and education (government).
- Goods and services produced within household, such as meals or childcare.
Absolute income matters for wellbeing and may result in different distributions of income
between rich and poor → a verage income fails to reflect how well a group of people is in
comparison to other groups.
→ GDP includes the government (contribute to wellbeing) → better measure of living standards
than disposable income.
Nominal GDP: (price) x (quantity) for all goods and services.
→ i n general: nominal GDP = ∑ pi q i → pi = price of good i, qi = quality, ∑ = sum of p and q.
i
Real GDP: selecting best year → define nominal GDP of that year and the following year →
multiplying quantities second year by prices first year → a
t constant prices.
Purchasing Power Parity prices ( PPP): GDP per capita in common set of prices → achieve
parity (quality) in the real purchasing power.
Paragraph 3: History’s hockey stick: growth in income
change in income
Growth rate = original level of income .
Ratio scale: makes it possible to compare growth across countries and at different periods.
In some economies substantial improvement was only achievable after gaining
independence from colonial ruling or interference.
- For a long time, living standards did not grow in a sustained way.
, - when sustained growth occurred, it began at different times in different countries →
leading to vast differences in living standards around the world.
Adam Smith: the invisible hand drives the businessman to gain his own hands → led by
invisible hand to promote an end that is no part of intention.
→ people not entirely guided by s elf-interest → market system had some failures.
→ government should protect its nation from external enemies and ensure justice through the
police and the c ourt system.
→ prosperity rises from pursuit of self-interest under free market conditions.
→ an u pward-sloping straight line on a r atio scale graph: the growth rate of GDP per capita is
constant → an upward-sloping convex curve on a l inear scale graph: GDP per capita increases
by greater and greater amount in absolute terms over time, consistent with a positive constant
growth rate.
Paragraph 4: The permanent technological revolution
Important new technologies were introduced in textiles, energy and transportation.
→ led to industrial revolution: new ideas, discoveries, methods and machines → interrelated
succession of technological change → transformed society in which these changes take place.
Technology (economics) = process of a set of materials and other inputs to create outputs.
Technological process = time required for production.
→ speed at which info travels provides more evidence of the novelty of a permanent
technological revolution.
Hockey-stick trajectory:
- GDP per capita and l abour productivity grows slowly or not at all in economies
prior to industrialization, whereupon it begins to grow at an ever-increasing rate.
- The g rowth in atmospheric CO2 began from the mid-19th century as consequence
of burning fossil fuels as the tech introduced in the industrial revolution spread.
Paragraph 5: The economy and its environment
Humans have always relied on its e nvironment f or the resources to live and produce their
livelihood: physical environment and biosphere → collection of all forms of life on earth,
provide essentials for life such as air, water and food.
→ CO₂ emissions from fossil fuel consumption have risen dramatically since 1800.
→ since 1900 average temperatures have risen by increasing high levels of greenhouse gas.
→ g lobal climate change and l ocal resource exhaustion caused by: (1) expansion of economy and
(2) the way economy is organized.
→ advances in tech may result in greater r eliance on wind, solar and other renewable sources.
Paragraph 6: Capitalism defined: private property, markets and firms
Capitalist revolution = emergence in 18th century and globalization of organizing economy.
Capitalism = economic system characterized by a particular combination of i nstitutions.
→ e conomic system = way of organizing production and distribution of goods and services in
an entire economy.
→ i nstitutions = different sets of laws and social customs regulating production and
distribution in different ways in families, private businesses, and government bodies → in
some economies, key institutions = p rivate property, markets and families → some societies,
government controls production and distribution → c entrally planned economic system.
➢ Important pp: e quipment, buildings and other durable inputs used in producing goods
and services → c apital goods → may be owned by individuals, a family, business or
other entity other than government.
, ➢ Markets: means of transferring goods and services from one person to another. 3
respects of difference: (1) r eciprocated: transfer in second direction (exchange/money) -
(2) voluntary: exchanged things are pp - (3) c ompetition.
3 examples of markets:
○ Auction-based market: pricing mechanisms works through bidding as
opposed to a negotiated or listed price.
○ Resale market: goods have already been sold once before.
○ Illegal market: market in the economic sense.
Firms: making up capitalist economy → way of organizing production: (1) one or more
individuals own a set of capital goods used in production. (2) they pay wages/salaries to
employees. (3) they d irect employees in production of goods and services. (4) goods and
services are property of owners. (5) owners sell goods and services on markets to make profit.
→ if firm takes unpaid student interns, it is still a firm.
→ stimulate labour market → employers are demand side, workers are supply side.
→ can grow fast because they can hire employees on labour market and attract funds to
finance the purchase of capital goods.
→ can die in few years too → no profit = no money.
Paragraph 7: Capitalism as an economic system
Markets + private property essential parts of how firms function
for 2 reasons:
- Inputs and outputs are private property: The firm’s
buildings, equipment, patents, and other inputs into
production and resulting outputs, belong to the owners.
- Firms use markets to sell outputs: The owners’
profits depend on markets in which customers willingly
purchase the products at a price that will more than cover production costs.
→ PP essential condition for operation of markets: private o wnership of capital goods.
Capitalism combines centralization w ith d
ecentralization: power owners, but limited.
2 major changes accompanied emergence of capitalism → enhanced productivity individual workers:
1. Technology: technological revolution → transition firms as predominant means of
organizing production → competitiveness.
2. Specialization: growth of firms with lots of workers → expansion global markets.
The growth rate of an economy’s G DP per capita can be inferred from the steepness of its
curve when plotted on a ratio scale graph → s lope is greater = faster growth rate.
Paragraph 8: The gains from specialization
Better at producing when focusing on limited range of activities, because:
1. Learning by doing: acquire skills while producing things.
2. Difference in ability: some people better at producing some things than others.
3. Economies of scale: producing large number of units more cost-effective than
smaller number.
Specialization = division of labour → exists within governments and families → f ocus: division
of labour in firms and markets.
Distinguish who is better at producing in absolute advantage a nd c omparative advantage.
Absolute advantage = producing more of any crop than someone else.
Comparative advantage = although one is better, another can be least disadvantaged in
producing a product.
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