This document encompasses the entire class of Micro economics taught in the bridging program of the master of business administration of KU Leuven at the Brussels campus.
Gross Domestic Product (GDP): A measure of total income and output of the economy in a given
period.
• Usually expressed in per-capita terms (as an average income)
• GDP per capita ≠ Disposable income
Disposable income = Total income – taxes + government transfers
• Disposable income looks like a good indicator for living standards
• Good measure for living standards as it is the maximum amount of food, housing, clothing
and other goods and services that a person can buy
Both are imperfect measures of well-being as important components of well-being are not
included:
• Quality of social and physical environment such as friendships and clean air
• Amount of free time to relax
o Higher living standards with 60 hours work per week or lower living standards with
40 hours work
• Goods and services that we do not buy such as healthcare and education
o Included in GDP per capita but not in disposable income
• Goods and services that are produced within the household, such as meals or childcare
Moreover, average well-being does not say anything about distribution, while this can be an im-
portant aspect of well-being
Hockey stick growth: Rapid, sustained growth in average
living standards since 1700.
How did this happen?
Late 1800s the growth rate of the GDP was around 2-3%
per year as a result of the industrial revolution. It began in
Brittain around 1650 but really took off at the end of the
18th century. This was however different across different
countries.
By reducing the amount of work-time it takes to produce the things we need, technological
changes allowed significant increases in living standards
,Labor productivity is the engine of long-run economic growth
Number of hours worked per employed person and the share number of persons employed in the
total population are bounded
Labor productivity measures how much can be produced by one unit of labor
• Economy-wide: value added per hour worked
Only component that can keep on growing is labor productivity
Growth through:
Technological progress
Division of labor and specialisation
A Connected World: Technological progress also greatly improved the speed at which information
travels, making the world more connected.
Future growth
Robert Gordon postulates in his book “The Rise and Fall of American Growth” that the high economic
growth of the past 250 years is exceptional and will flatten off
Growth related to one-off large innovations (electricity, internal combustion engine, running
water, … ) which are difficult to repeat.
Capitalism
Institutions are the laws and social customs governing the production and distribution of goods and
services.
Capitalism = an economic system where the main institutions are private property, markets, and
firms
Key concepts of capitalism
,Private property: ownership rights over possessions
An important type of private property is capital goods = the non-labour inputs used in
production.
Does not include some essentials, e.g. air, knowledge
Markets: a way for people to exchange products and services for their mutual benefit.
Unlike other types of exchange, markets
are reciprocated transfers. Compare f.e. with gifts or thefts
are voluntary
Exchange must be beneficial for both parties
are usually characterized by competition
If a seller charges a high price, buyers will go to competing seller
Firms: business organization that uses inputs to produce outputs, and sets prices to at least cover
production costs.
• Inputs and outputs are private property
• Firms use markets to sell outputs
• The aim is usually to make profit
A striking characteristic of firms, distinguishing them from families and governments, is how
quickly they can be born, expand, contract and die.
Capitalism led to growth in living standards because of:
Impact on technology: firms competing in markets had strong incentives to adopt and develop new
technologies reap the benefits of technological revolution
Specialization: the growth of firms and the expansion of markets linking the entire world allowed
historically unprecedented specialization in tasks and production
Specialization increases productivity of labour because we become better at producing things when
we each focus on a limited range of activities
• Learning by doing: learn how to produce in a better way by gaining experience
• Difference in ability: some people are better at producing some things than others
• Economies of scale: producing a large number of units of some good is more costeffective than
producing a smaller number
People can only specialize if they have a way to acquire the other goods they need. In a capitalist
society, this is done via markets
Adam Smith: Wealth of Nations Division of labor and specialization leads to large improvements in
labor productivity. Firms can employ thousands of workers where each specializes in a specific task.
, Comparative advantage: Means that the cost of producing a good relative to the cost of producing
another good is lower than another person’s relative cost to produce the good
David Ricardo, The Principles of Political Economy & Taxation
Concept of comparative advantage introduced by David Ricardo (On the Principles of Political
Economy and Taxation, 1817)
Shows with an example that all countries gain with trade; even the country with absolute
advantages in the production of all the products
Feasible frontier: Are combination possibilities in production of two products that can be traded
between those two countries
The opportunity cost: Is how someone loses in the other option by choosing the other one.
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