The Economy – Economics
for a changing world
Summary
,Table of Contents
Chapter 1 - The Capitalist Revolution ..................................................................................................... 2
Chapter 2 - Technology, Population, and Growth ................................................................................... 5
Chapter 3 - Scarcity, Work, and Choice .................................................................................................. 8
Chapter 4 - Social Interactions .............................................................................................................. 11
Chapter 5 - Property and Power: Mutual Gains and Conflict................................................................ 14
Chapter 6 - The Firm: Owners, Managers, and Employees .................................................................. 17
Chapter 7 - The Firm and its Customers ............................................................................................... 21
Chapter 8 - Supply and Demand: Price-Taking and Competitive Markets ........................................... 24
Chapter 9 – The Labour Market: Wages, Profits, and Unemployment ................................................. 27
Chapter 10 – Banks, Money, and the Credit Market ............................................................................. 32
Chapter 11 – Rent-Seeking, Price-Setting, and Market Dynamics ....................................................... 36
Chapter 12 – Markets, Efficiency, and Public Policy............................................................................ 40
Chapter 13 – Economic Fluctuations and Unemployment .................................................................... 45
Chapter 14 – Unemployment and Fiscal Policy .................................................................................... 50
Chapter 15 – Inflation, Unemployment, and Monetary Policy ............................................................. 55
Chapter 16 – Technological Progress, Employment, and Living Standards in the Long Run .............. 60
Chapter 17 – Capstone: The Great Depression, Golden Age, and Global Financial Crisis .................. 66
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,Chapter 1 - The Capitalist Revolution
Gross Domestic Product (GDP): The total value of goods and services in a country produced in a
given period such as a year. It measures the output of the economy in a given period.
- Nominal GDP: Total income without the adjustment of inflations
- Real GDP (also called GDP at constant prices): Total income with the adjustment of inflations
Income inequality: The uneven distributed income among the population.
Disposable income: Income available after paying taxes and receiving transfers from the government.
This is ought to be a good measurement of living standards, but it leaves out:
- Quality of our social and physical environment such as friendship and clean air
- Amount of free time we have to relax or spend time with friends and family
- Goods and services that we do not buy, such as good education and healthcare
- Goods and services that are produced within the household, such as meals
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 may fail
to reflect how well off a group is by comparison to some other group.
GDP also includes the goods and services produced by the government, such as schooling and national
defence. Contribute to wellbeing, but are not included in disposable income, which makes GDP per
capita a better measurement of living standards in this way. However, those are hard to value because
those goods and services are not sold.
Constant prices: Prices corrected for inflation or deflation so that a unit of currency represents the
same buying power in different periods of time.
Purchasing power parity (PPP): A statistical correction allowing comparisons of the number of
goods people can buy in different countries that have different currencies.
Growth rate = (new-old)/old*100%
For a very long time, living standards did not grow in any sustained way. When they occurred, it
began at different times in different countries, leading to vast differences in living standards around
the world.
Adam Smith (1723-1790):
- Considered by many to be the founder of the modern economics
- An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Industrial Revolution: A wave of technological advances and organizational changes starting in
Britain in the 18th century, which transformed an agrarian and craft-based economy into a commercial
and industrial economy.
Technology: Process taking a set of materials and other inputs, including the work of people and
machines, to produce an output.
Technological progress: Change in technology that reduces the number of resources required to
produce a given amount of the output. By reducing the amount of worktime, it takes to produce the
things we need, these changes allowed significant increases in living standards.
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, From global climate change to local resource exhaustion, these effects are results of both the
expansion of the economy and the way the economy is organized. The permanent technological
revolution brought us lighter for less heat, which conserved natural resources.
Economic system: The institutions that organize the production and distribution of goods and services
in an entire economy.
Institution: Laws and social customs governing the way people interact in society
Capital goods: Equipment, buildings and other durable inputs used in producing goods and services,
including where applicable any patents or other intellectual property that is used. Raw materials used
in production are referred to as in intermediate inputs.
Firm: Way of organizing production
- One or more individuals own a set of capital goods that are used in production
- They pay wages and salaries to employees
- Direct the employees in the production of goods and services
- Goods and services are the property of the owners
- Owners sell the goods and services on markets
Labour market: Employers offer wages to individuals who may agree to work under their direction.
The employers are on the demand side (offering money in return for goods and services), the
employees on the supply side (offerings goods and services in return for money).
Capitalism: It is defined as an economic system combining three institutions which play an important
role.
- Private property: Self-sufficient family-based production, people’s ownings, is not secure.
- Markets: Market economy with family-based production, where goods can be bought and
sold, are not competitive.
- Firms: Capitalist economic system, are owned and managed by people who survive because
their connections to government or their privileged birth.
Two major changes accompanied the emergence of capitalism, both which enhanced the productivity
of individual workers:
- Technology
- Specialization: Division of labour
Ownership: Right to use and exclude others from the use of something, and the right to sell the thing
that is owned.
Economies of scale: increasing returns to scale
Causality: A direction from cause to effect, establishing that a change in one variable produces a
change in another. We want to make causal statements in economics to understand why things happen,
or to devise ways of changing something so that the economy works better.
Natural experiment: Situation in which there are differences in something of interest.
Development state: Government that takes a leading role in promoting the process of economic
development.
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