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Summary Economics for Political Scientists
Summary of all the lectures of Economics for Political Scientists year 1.
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LECTURE ONE; 2 November 2022Key concepts:
1) Nominal GDP (or GDP growth)
- Gross domestic product measured in current currency amount
- Does not account for inflation or differences in purchasing power across
countries
- Simply refers to the “sticker price”
2) Real GDP (GDP growth, in constant prices):
- Important for measuring changes over time
- Growth adjusted for changes in inflation
- We translate current nominal prices to a consistent baseline
- Applies to any type of price measure
- movie ticket sales
- stock market prices
3) Purchasing power parity
- Important for measuring changes across countries & time
- Growth adjusted for differences in currencies and what those currencies
purchase
- Generally we translate local economic activity in to its equivalent US dollars of
a particular year
- Consumer Price Index (CPI)
Nominal vs. constant (real)
top 5 movies based on nominal (money)
-> depends on which year the dollar was worth how much currency somewhere else.
Therefore not possible to really say which movie made the most money.
Economic Growth
How do we measure economic growth?
● It is easier said than done…
● An imperfect measure we rely on is Gross Domestic Product (GDP)
● We use this to compare the size of economies
● Across time (GDP Growth)
● Across countries (level of development)
Where does Economic Growth come from?
increases in:
● Natural resource discovery
● physical capital or infrastructure
● population
● human capital (?)
● technology
● law
short term causes:
, ● positive shocks
- (trade agreements, war)
● negative external shocks
- (covid-19, trade war (brexit))
● government monetary or fiscal policy
● consumer/business sentiment
What does GDP measure?
“GDP measures the market value of all finished goods produced within a country (usually
measured yearly)” -> measured by government statisticians
Finished goods = goods that will not be sold again as part of another good
Intermediate goods = goods that will be used to make something else that will be
sold
Capital goods = goods that are used to produce other goods but not a part of other
goods
Does not include things that are imported from other countries
Does include things exported to other countries
A slightly more technical definition
Y = C + I + G + (X – M)
Y = GDP (National Income)
C = Consumer Spending (on finished goods)
I = Investment (in capital goods)
G = Government spending (on finished goods)
X = exports
M = imports
(x-m) – often seen as ”NX” or “net exports”
This doesn’t mean imports (m) decrease growth!!!
It is only an accounting device. To adjust consumer and government spending
GDP per capita
a) we are interested in how big an economy is
b) but we are also often interested in how wealthy a country is
GDP/population: this gives us what we call GDP per capite!
Calculate Economic Growth
Just like how u calculate growth of anything else!
(nieuw - oud) /oud x100 = verandering in process
Wealth and Health of Nations:
“but GDP only measures material values, I care about development”
,But is a good indicator of “development” because it is correlated with many things we care
about:
- healt
- happines
GDP does have one (ore more) major fault(s):
1. it does’t tell us about inequality, the distribution of income within a country
2. hower, historically GDP growth correlates with growth in everyone’s income
Local and Global Inequality
why are some countries rich, while others are poor?
why are some people in a country rich, while others in the same country are poor?
=> part of the answer is economic (technology and capitalism), part of the answer is political
(democracy and property rights)
Economic Systems
● The explosion in growth rates correlates with adoption development of different
economic systems.
Namely, the development of more capitalist economic systems… •
Other types of systems:
● Feudal
● Communist
● Mercantilist (Statist)
We should keep in mind…
a) There are no pure economic systems.
b) In reality, most economic systems are a mix with more or less of different
components of each.
c) Creating labels makes it easier to talk about.
The increase in economic growth likely starts with capitalism…
Capitalism: An economic system in which private property, markets, and firms play an
important role. (from your book) -> not the best definition
Ok, but what does this mean???
Basically, an economic system based on individualism and economic incentives.
3 Elements of Capitalism
1. Private property
People can keep the gains of their labor and are protected from
- The government
- But also others trying to confiscate it (not everyone in “capitalist economies”
have the same protections).
They can also own capital goods.
2. Markets
, The allocation of goods and services are determined by buying and selling, not
government
3. Firms (privately run & organized)
A business organization which pays wages and salaries to employ people, and
purchases inputs, to produce and market goods and services with the intention of
making a profit.
wage = salary, payment
So what does capitalism give us?
➢ Division of labor
➢ Specialization
➢ Entrepreneurial innovators.
➢ New technology
Incentives and economic organization
If you keep the gains of your labor, what will you choose to do?
Remember: Incentives Matter!
Work in a job in which you are mediocre or poor at? (poorly compensated!) •
Or work doing something your quite good at? (well compensated!)
=> This leads to specialization and the division of labor.
LECTURE TWO; 4 November 2022
Self-sufficiency is the road to poverty
- No one is likely to be good at everything
- At every step of the way, there was someone specializing in a particular element
-> for u to eat eggs, u need a farmer, a store owner, etc.
When we separate what people do, we can create more things, and we simple have more
money => trade
specialization:
➔ This takes place when an individual, country or some other entity produces a more
narrow range of goods and services than it consumes, acquiring the goods and
services that it does not produce by trade.
division of labor:
➔ The specialization of producers to carry out different tasks in the production process.
The gains of specialization and division of labor are increased when individuals are
incentivized to do what they’re best at doing.
Technological innovation
Technological innovation is clearly tied to improving economies and improving living
standards
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