Week 4 Flashcards
(35 cards)
What did David Ricardo agree with Malthus and Smith about?
On the tendency for wages to fall to a subsistence level
What was Ricardo and Smiths view on capitalists affect on profit?
That the strong urge for profits and to leave one business for another more profitable one has the effect of equalising the rate of profit for all.
What was Ricardos analysis of trade late reformulated to?
Theory of Comparative Advantage
What does comparative advantage show?
That mutual gains from trade are possible despite one country having an absolute advantage in the production of both goods.
What is the law of comparative advantage?
That countries should specialise in good and services they can produce at a lower opportunity cost compared to another country.
Only then should they trade with another nation.
For example:
2 countries, same factors of production, making computers and cotton
Country A specialises in Computers, country B in cotton
‘It only makes sense for country A to sell a computer to country B if they get more cotton in return than they could have produced themselves using the resources they used to make the computer’
What is Ricardos take on Turgot’s idea of diminishing returns?
He applied this theory to land, stating that people farm the best land first, so as land under agriculture grows the additional land farmed will be less productive than earlier plots.
In the below scenario, what is the maximum rent someone with type 2 land will pay for type 1 land?
Type 1 land is more fertile, producing more corn
Type 2 land is slightly less fertile, producng less corn
The difference in the lands productivity,,,,i.e the amount of corn produced given the same factors of production.
THIS IS RENT
What assumptions are made with Ricardos theory of rent?
- land is fixed in supply and has no alternative uses.
- the other input into production is a composite input (labour +
capital: think worker + shovel). - There is an equalised available rate of profit in the economy as a
whole (the “average profit”). - Wages are fixed at subsistence rate (w*).
What is the final equilibrium position in Ricardos model?
-Where wages are paid at subsistence rate
-All the surplus above that wage cost is rent
-Profits are squeezed
Need to study PDF and diagrams for rest of Ricardo
What did Ricardo propose following his theory?
TO reduce rents through reducing trade barriers, such as import tariffs, which would in turn lower price of grain and reduce rents and the share of national income going to landlords.
If on a diagram we have an expression for Marginal Product, and we know the going wage rate, how can we solve for surplus rent?
The area of the triangle above the wage rate
What school of thought did Karl Marx belong to? Who else was in this school?
Classical Economicsts:
Marx, Adam Smith and David Ricardo
What was the Labour Theory of Value?
The LTV argued that only labour can add value - i.e raw materials are inanimate and it takes humans to manipulate and combine them to create additional value.
What is the ASNLT concept?
Average Socially Necessary Labour Time
The price of a good or service in the market is determined by the amount of labour typically required to produce it.
What is the process of labour in the economy as proposed by Marx?
1st) Workers sell labour power (LP) as a commodity in the labour market
2nd) Workers receive money (M) in the form of wages in return for their labour
3rd) Capitalists buy the LP and combine it with raw materials and technology/machines -> creating goods they sell for money
According to Marx, where does the value come from for the following:
1) Raw materials / machinery
2) Goods produced
3) Labour power
1) Comes from the labour it takes to extract them
2) Comes from the labour it takes to produce them
3) The value of the goods and services needed to keep that worker selling their labour
What is the differencce between living labour and embodied labour according to Marx?
Living labour = The time a worker is employed for; the work being performed in real time.
Marx saw living labour as a source of new value
Embodied labour = This represents labour that has already been performed and the value of which is ‘crystallized’ in commodities, machinery or other means.
-These ‘dead’ labour products contribute to the current production process, but they don’t add new value; they simply transfer their existing value into the new goods
According to Marx, if the labour that went into the tools, raw materials etc used to produce a shovel where 8, and the amount of hours necessary to pay the worker in order for them to continue returing to work was 8, what is the value output of the shovel?
Trick question, even though the employer paid the worker 8 hours, the worker could have added 12 hours of value, therefore resulting in a greater value output.
According to marx, where does the surplus value come from?
Surplus value is the profit an employer makes, it comes from the difference between the labour paid to the worker and the value that they add
According to Marx, from what two conditions does Surplus Value arise?
Surplus Value arises because:
-There is a labour market
- The value paid to a worker is less than the value they add
What term does Marx use to refer to the ‘taking of surplus value by the employer’?
Exploitation
How is the rate of exploitation calculated?
S/V
S = paid living wage
V = Unpaid living Labour (surplus value)
According to Marx, what does C, V and S mean?
C = Constant Capital; embodied labour
V = Variable capital; Paid Living Labour
S = Surplus Value; Unpaid Living Labour
