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Summary economics 114 chapter 1 - 4
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in detail summary of chapter 1 -4 for economics 114 at Stellenbosch university
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UNIT 1THE CAPITALIST REVOLUTION
Since the 1700s wages have increased due to the emergence of capitalism which allowed for
private markets, private property and firms which ultimately played a major role in this
increase in wages.
Advances in technology and specialization increase output dramatically
Income inequality
In the past the world was economically flat as there was little variation in income
GDP: Gross Domestic Product is the total value of everything produced within a
country in a given time period
Current price x current quantity real, fixed price (always use the old price and the
new quantity)
GDP per capita: average annual income, it is a measure of living standards in a
country – (average may be misleading and result in incorrect analysis)
Disposable income – a measure of a persons living standards
average income of richest 10 %
average income of poorest 10 %
The richest 10% are indicated on graphs as skyscrapers; the richest people on the
graph however are not necessarily the wealthiest people are the income in split
between family members and thus some peoples’ income in lower on the graph than
what it is in reality
Two types of inequality:
o 1. Within countries
o 2. Between countries
,Measuring income and living standards
GDP per capita measure of living standards
Countr y ' stotal GDP
Countr y ' spopulation
Disposable income wage + profit + interest + rent – taxes measures the
maximum a person can buy without going into debt
Income is a major influence on wellbeing because it allows people to purchase what
they enjoy but it is insufficient because it leaves out things that one cannot buy
Living standards are measure by:
o Quality of social and physical environment
o Amount of free time one has
o Healthcare and education facilities
o Goods and services produced in households
Absolute income matters for wellbeing but people care about relative position in income
distribution too average income of the same amount may arise from different
distributions of income and therefor may fail to show wellbeing in comparison between
groups
Valuing government goods/ services
GDP includes groups and services produced by government (E.g schools,
healthcare, however they are hard to value as they are not sold and thus the only
value we have for them is the cost of production)
Disposable income does not include government goods and services THUS GDP is
a better measure
GDP per capita shows the difference in availability of goods and services however
should be used cautiously to measure wellbeing in countries
, Hockey stick theory
Growth rate of income or any other quantity (e.g the growth of population - we
mean the rate of change
change∈income
Growth rate of income
originallevel of income
change∈GDP
Economic growth rate
originalGDP
When a ratio scale is used, a series that grows at a constant rate will have a straight
line and a series that grows at a greater rate will have a steeper line
From the hockey stick model:
1. For a long time, living standards did not grow in any way
2. When growth occurred it began at different times leading to vast differences in living
standards
Countries that experienced growth early are now rich in some economies
substantial improvements in living standards did not occur until they gained
independence from colonial power
Permanent technological revolution
Technology process that uses a set of inputs, including materials, machinery and
labour to produce an output
Industrial revolution introduction of important new technology advances in
textiles, energy and transformation as well as transportation
o NEW TECHNOLOGY = PRODUCTION DECREASE AND LABOUR REQUIRED
DECREASING WHICH LED TO LIVING STANDARDS INCREASING
Technological change in lighting: the amount of light produced with one hour of
work has increased exponentially
o Fire
o Candle - all replaced with modern LED lights
o Oil lamp
Technological change on information transmission:
o Emails
o Birds - replaced with new technology that moves at the speed of light
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