1 - The capitalist revolution

Question 1

How did economic distribution look 1000 years ago?

Answer 1

Flat

Question 2

How have income distributions changed since 1980?

Answer 2

Rich/poor ratios have increased.

Question 3

What was a driving force as to why some countries are doing well?

Answer 3

Countries that took off economically prior to 1900.

Question 4

What is the measure for total goods and services produced in a country?

Answer 4

GDP per capita.

Question 5

What does GDP measure?

Answer 5

The market value of the output of final goods and services in the economy.

Question 6

What is disposable income?

Answer 6

The amount of wages, salaries, profit, rent, interest and transfer payments from the government.

Question 7

Is disposable income a good measure of our wellbeing?

Answer 7

No.
Many aspects of our wellbeing are not related to what we can buy.

Question 8

How does relative position in the income distribution / absolute income affect wellbeing?

Answer 8

Absolute matters for wellbeing.
Relative position also matters. If lower, people report lower wellbeing regardless of their absolute position.

Question 9

GDP per capita is a better measure of living standards than disposable income? T/F

Answer 9

True.

Question 10

What is the equation for nominal GDP?

Answer 10

∑p_iq_i

p is price, q is quantity

Question 11

How can you take account of price changes over time?

Answer 11

Use real GDP, rather than nominal.

Question 12

How can you compare price differences across countries, and why do we use this?

Answer 12

Use PPP to achieve parity in the real purchasing power of a currency.

Question 13

What is the equation for growth rate?

Answer 13

Change in income / original level of income

Question 14

Why do we use a ratio scale on the y-axis for showing growth?

Answer 14

Growth is expressed as a percentage, rather than in absolute terms.

Question 15

What is the common ratio scale for growth rate graphs?

Answer 15

2x.

i.e. 250 -> 500 -> 1000 -> 2000 etc.

Question 16

What do growth stick diagrams show?

Answer 16

• Living standards did not improve in any sustained way.
• When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards around the world.

Question 17

What has followed a similar upward trend to the hockey stick graph?

Answer 17

• GDP per capita
• Productivity of labour
• Atmospheric CO₂

Question 18

What are the institutions that are fundamental for capitalism to function?

Answer 18

• Private property
• Markets
• Firms

Question 19

What are markets?

Answer 19

A way of connecting people who may mutually benefit, by exchanging goods and services through a process of buying and selling.

Question 20

What are the characteristics of a firm?

Answer 20

• One or more individuals that own capital to be used in production
• Wages / salary paid to employees
• Owners / managers direct the employees in the production of goods and services
• Goods and services are property of the owners
• The owners sell goods and services on the market FOR PROFIT

Question 21

What did the expanded role of firms cause in a different market?

Answer 21

Caused the labour market to boom.

Question 22

Why are markets and private property essential to how firms function?

Answer 22

• Inputs and outputs are private property
• Firms use markets to sell outputs

Question 23

How could capitalism lead to a growth in living standards?

Answer 23

• Technology
• Specialisation

Question 24

How does technology improve growth in living standards?

Answer 24

Competition in capitalism gives firms incentives to adopt and develop new technologies to be more competitive. As a result, productivity increased, therefore causing improvements in living standards.

Question 25

Why do we get better at producing things when we specialise?

Answer 25

* Learning by doing * Difference in ability * Economies of scale

Question 26

How does the division of labour pose a problem to society?

Answer 26

Question of how goods and services can be distributed from the producer to the final user.

Question 27

How do economists distinguish who is better at producing what?

Answer 27

Absolute advantage Comparative advantage

Question 28

Let A be able to produce 1250 of Z and 50 of Y, and B be able to produce 1000 of Z and 20 of Y. Who holds absolute advantage and comparative advantage?

Answer 28

A holds absolute advantage over both. A has comparative advantage over good Y, B has comparative advantage over good Z.

Question 29

Who has comparative advantage here?

Answer 29

Brazil has comp. advantage over boats, France has comp. advantage over trains. 3(12) = 36 > 4(6) = 24

Question 30

Why did South Korea, Japan and China do so well after the war?

Answer 30

Their governments set up developmental states.

Question 31

Why does capitalism not always work?

Answer 31

* Economic conditions * Political conditions

Question 32

How do economic conditions prevent capitalism from working effectively?

Answer 32

* If private property is not secure * Markets are not sufficiently competitive * Hereditary economic control

Question 33

How can political conditions prevent capitalism from working effectively?

Answer 33

* Competition is not sustained * Legal system is not sufficiently powerful * Property rights are not sufficiently protected

Question 34

How can capitalism be a dynamic economic system?

Answer 34

* Private incentives for cost-reducing innovation * Firms led by those with proven ability to produce goods at low cost * Public policy supporting these conditions * A stable society, biophysical environment and resource base