Measuring income and living standards

Measuring Income and Living Standards

• Gross Domestic Product (GDP) measures the total output of goods and services in an economy during a specific period.
• GDP combines all production by firms, non-profits, and government within a territory into a single number, avoiding double counting.
• Household production is included in GDP if it is sold.
• GDP is measured monthly, quarterly, and annually.
• The GDP per capita is calculated by dividing GDP by the total population, used to measure average income or 'living standards'.
• Formula: GDP per capita = Total GDP / Total Population
• Disposable income represents the amount available to spend or save after taxes and government transfers.
• Formula: Disposable income = Total income - Taxes + Government transfers
• GDP is not always a satisfactory measure of living standards due to omitting important aspects of daily life, failing to account for differences between people, and not considering environmental resource depletion.
• The Human Development Index (HDI) includes life expectancy, education, and income as measures of well-being.
• Subjective well-being considers life satisfaction, happiness, and leisure.
• The probability distribution function describes the likelihood of different outcomes in a random experiment, assigning probabilities to values of a random variable.
• Growth rate can be described with the formula:

Growth rate change in GDP original level of GDP У2001 - У2000 У2000

• The mode is the most frequently occurring value in a dataset, which can have none, one, or multiple modes.
• The median is the middle value of an ordered dataset.
• The arithmetic mean is the sum of all values divided by the total number of values.

Continuous Technological Revolution

• Significant new technologies were introduced in textiles, energy, and transportation.
• In 1800, traditional craft-based techniques still dominated most production.
• The new era introduced new ideas, discoveries, methods, and machines, while old ones became obsolete.
• The Industrial Revolution is a period of cumulative innovation which began in Britain in the eighteenth century, transforming it from an agricultural and craft-based economy into a commercial and industrial economy.
• Technology is a process using materials and other inputs, like labor and machines, to produce an output.
• Until the Industrial Revolution, recipes and skills were updated slowly.
• Technological process refers to changes that reduce the resources needed to produce a given output.
• Malthus' model is a simple model where food production relies only on labor and land.
• Labor and land are referred to as: factors of production, or inputs.
• The production function expresses the relationship between inputs and output, for example: Y = f (X), where X = labor + land.
• Malthus theorized: in agriculture diminishing average product of labor means that with a fixed quantity of land, output per worker decreases as more workers are added. average product of labour total output total number of farmers
• Malthusian theory of diminishing returns includes the following:
  • 1. Fixed Land: the amount of cultivable land that is limited or fixed.
  • 2. Diminishing Average Product of Labor: additional workers add less to total output, decreasing labor per worker average.
  • 3. Impact on Agriculture: adding more laborers to a fixed plot of land does not proportionally raise food production due to overcrowding and inefficiency.
• Diminishing returns: adding more of one input (like labor) to a fixed amount of another (like land) results in smaller increases in output.
• Total Output = Land + Labor + Technology
• A production function is a description of the relationship between quantities of inputs and output.
• Malthus's Model key idea: population rises if living standards increase.
• population expands if living standards increase
  • Average output per farmer rises → Population rises → Less land per farmer → Average output per farmer falls ←
  • Living standards are low and technology improves. Population is larger but living standards are back to the original level
• The subsistence level is the level of living standards below which the population will decline.
• Suppose the subsistence level is 500 kg of grain and there lies an equilibrium point @ 1,500 farmers. The population neither grows nor falls: it remains constant

Capitalism

• Capitalism is an economic system in which firms are the main form of economic organization; where private owners of capital goods hire labor to produce goods and services for profit.
• The main economic institutions in capitalism are private property, markets, and firms.
• An Economic system described as a way of organizing the economy by basic institutions.
  • Including: central economic planning, feudalism, slave economy, and capitalism.
• An Institution is a set of laws and rules that regulate social interactions among people, and between people and the biosphere.
• Private property gives the right to use, control, and transfer your possessions.
• Markets are where buyers and sellers interact for mutually beneficial exchange.
• Firms organize production with private capital goods, hire labor, and have owners/managers.
• Capitalism is defined by the combination of institutions: private property, markets, and firms. * Institutions create a dynamic economic system.
• The emergence of capitalism coincided with the continuous technological revolution.
• Capitalism provides incentives for firms to innovate in order to reduce costs and increase profits. * Old technologies are replaced by new ones.
• Capitalism is associated with a shift from an agricultural-based economy to one dominated by firms.
• The expansion of free speech and democracy caused the expansion of enlightenment during the stick but culture, political systems and government policies also contributing to a country's economic performance.
• Adam Smith said individual self-interest can serve the public good, often referred to as "invisible hand". * When individuals pursue their own gain, they are often "led by an invisible hand to promote an end which was no part of his intention".
• correlation vs causation
  • Correlation means that two things happen together, but it does not necessarily mean that one causes the other.
  • Causation requires a mechanism showing that a change in one factor leads to a change in another.
• Economists rely on natural experiments. * They occur when history or geography creates conditions for comparison.
• Development state is a government that promotes economic development through public investments, subsidies, education, and policies. * This occurs in South Korea, Japan, and China.
• Capitalism is dynamic when it leads to sustained growth in living standards. This requires economic and political conditions.
• Economic success depends on secure property, competitive markets, and merit-based firms.
• Political success depends on laws, protecting property, preventing unfair practices, infrastructure, and education.

Economic Decisions

• What happens in the economy is a result of decisions by individuals/ firms and governments.
• Need to understand how people make decisions, and the factors they take into account when they choose what action to take.
• Economic model of your behavior: Identify main factors, specify the decision rule, and predicts the outcome.
• Opportunity cost is what you lose when you choose one action rather than the next best alternative. * The value of that next best alternative is forgone when making a choice
• Reservation option: it is the next best alternative option, when choosing
• Economic cost: the direct costs of an action + the opportunity cost
• Economic rent = net benefit - the opportunity cost = overall gain when choosing the best option over the next best one

Comparative Advantage, Specialization and Market

• Specialization increase in production due to focuses on specific tasks rather than everything themselves.
  • Learning by doing
  • Differences in ability
  • Economies of scale
• Comparative advantage: how even if one producer is more efficient making multiple goods, specialization and trade can still benefit all participants.
• Absolute advantage: refers to being more productive, while comparative advantage means having a lower cost. In Summary, absolute advantage = who can produce more comparative advantage : who can produce at low cost
• imagine 2 people, Greta and Carlos.
  • Greta more productive than Carlos, Greta has all absoulute advantage.
  • Carlos has comparative advantage , apple producing, disadvantageis less in apples than wheat.
  • Oportunity cost is used to measure relative cost in this example.
• Self-sufficiency refers to where individuals or entities can produce all goods and services, without relying on relying on trade. * Producing all the goods
• "Specilization" concentration on a limited range, relying on trade to obtain.
  • can occur with single firm, a society, or even globally
  • Self sufficiency is contrasted with capitalist system, markets and play significant roles.

Modeling A Dynamic Economy: Technology and Cost

• Industrial revolution offered new choices, possibility of adopting technologies that raise labour producitivity
• Choosing among five technologies, firm valuting differeant to producing 100 meters of cloth; Compare the required inputs and labor/coak
  • Step 1: eliminating inferior technologies: "dominated" by others meaning they require inputs
  • Step 2: Comapring cost-efficincy: firms consider relative input prices -Total Cost = (Wage × Workers) + (Coal Price × Tons of Coal)
  • IF coal cheap relative to labor? --Choose Tech A
  • the labour to Coal -- Choose Tech E
  • Both import moderately priced? Choose tech B.
  • Depends on economic conditions & Input cost, firms adjust tech choices based on market factors.
• innovation: determines a firm's profitability, lowering costs, improves efficency and differerentes from competitiors.
• Achieve innovation Rent: meaning they earn profit bove the opportunity cost of capital to their competitive advantage.
• Joseph Shumpeter: known for creative distruction. Innovation is central to driving economic growth transforming into new industries. * Emphasised that entrepreneurs introduce new products/processes and market, leading to replace the update and firms. Argued that innovation occurs in cycles, here, eary adopters gain innovation rent.
• Indistricial Revolution in Britain
  • Marked tech and economics. Transformation shifted from agriculture and craft from Industrial and Mechanical
  • Several Factors: particular incentive that encouraged firms to adopt and develop new technologies
    • High Wages and cheap energy: In 18th Britan wages were high, coal cheap and abundant.
    • Expansion of markets: Brish dominant posistion global provide steady demand

Economic Models: How to See More by Looking at Less, and How Models Are Used in Economics

• Help simplify, by forucssing on the elements. Outcomes on millions between individuals. good model: ISOLATE key factors and influence economics deciosn intentional: Simpliciation helps reveals and underlying mechanism. modles: Math equaitons graphics, phyiscal modles, process using: 1) defining a clear questions. 2) Capture the elements. 3) the economics to demonstarte how forces