ec 101 - chapter 1

EC 101 - Chapter 1

Burak Alparslan Eroglu

October 13, 2016

Burak Alparslan Eroglu EC 101 - Chapter 1

Outline

Introduction to New Course Module

Introduction to Unit 1

”Hockey Stick” Growth

Capitalism

Inequality

Economics and Economy


Introduction

Blended course with high online orientation

Core Econ: http://www.core-econ.org/ −→ Register!

Monitor Blackboard regularly for assignments and announcements!


http://www.core-econ.org/

http://learn.bilgi.edu.tr

Unit 1: Introduction I

Economics is the study of how people interact with each other and withtheir natural surroundings in producing their livelihoods, and how thischanges over time

Historical facts about well-beings of people:Ibn’ Battuta (Maroccan Traveler): India had plentiful provisions in 14thcentury.Jean Baptiste Tavernier (French Diamond merchant): Many goods can beprocured in abundance 17th century.In time of Battuta, India was not much richer or poorer than rest of theworld.Well-being differences were coming from social status: Feudal lords or serfs,royalty or their subjects.

Today: Location matters by means of well-being.

Indians are much more richer than their ancestors in 14th century.

Indians are poorer than many world countries today.

How to measure well-being?


Unit 1: Introduction II


Unit 1: Introduction III

Summary of Figure 1.1a

World was flat for 8 centuries from 1000.

Income differences are small until 18th century.

Some countries deviate faster than other countries.

Some exhibit slower progress.


Unit 1: Hockey Stick Growth

Scale vs Ratio scales: Level of GDP per capita vs Growth rate of GDP percapita

Growth rate = Change in GDPOriginal GDP level

For a long time living standards did not grow in any sustained way.

When sustained growth occurred it happened at different times in differentcountries


Measuring Income and Living Standards

GDP is a measure of the total output of the economy in a given period

As value of output we use prices

GDP is not same as Disposable Income

Disposable Income is individual measure of well-being, but omitsimportant aspects of well-being

It includes:Wages and salaries, profit, rent, interest and other transfer payments (gifts,unemployment compensation) minus tax and transfers to other parties.

It does not includeQuality of social life and physical environmentFree goods and services from governmentHousehold production

GDP includes government spending, thus it is a better measure ofwell-being


Permanent Technological Revolution

Important scientific and technological advances occurred almost at thesame time as the upward kink in the hockey stick

Its cumulative character led to it being called the Industrial Revolution

The new era made old ideas and old tools obsolete by bringing new ideas,new discoveries, new methods and new machines

Technology :Everyday usage =⇒ machinery, equipment and devices developed usingscientific knowledgeIn Economics =⇒ a process that takes a set of materials and other inputsand creates an output

Until the Industrial Revolution, the economy’s technology was advancingvery slowly and passing from generation to generation

As technological progress revolutionized production, this accelerate theprogress


Technological changes in lighting


Summary of Technological (Industrial) Revolution

Technological innovations give a particularly strong impact on growth inliving standards because they change the way large parts of the economywork.

By reducing the amount of work time it takes to produce the things weneed, technological changes allowed significant increases in living standards

David Landes calls Technological revolution as ”an interrelated successionof technological changes


Diffusion Speed of Information

Permanent technological changes has created a connected world =⇒GlobalizationThe speed of information provides more evidence of the novelty of thepermanent technological revolution


Population Growth due to Technological Change

For most of the last 12,000 years the population of the world grew slowly

Increases in good years followed by declines in response to climaticadversity and other disasters.

Rapid world’s population growth in the 20th century with the developmentand spread of improved sewerage, clean water, and other public healthmeasures.

Increased Labour productivity =⇒ less farmer required =⇒ People leftfarming and pursue new occupation =⇒ immigration to big cities


Environmental Degradation

Increased production =⇒ Increased natural source usage =⇒ naturalenvironment degradation

Changes in environment is much more radical than ever

Extreme use of coal, oil and gasoline =⇒ increasing emissions of carbondioxide =⇒ Climate change (Global Warming)

In the last century, average temperatures have risen in response toincreasingly high levels of greenhouse gas concentrations

Local environmental impact affect cities and rural areas differently


The Economy

People interact with each other and with also nature in producing theirlivelihood


Capitalist Revolution

Hockey stick shaped pattern inGross domestic product per capitaProductivity of labor (light per hour of work)Connectivity of the various parts of the world (the speed at which newstravels)World populationImpact of the economy on the global environment (Carbon emissions,atmospheric CO2 and climate change)

The world we live drastically changed and continue to change.

The change from a world in which living conditions fluctuated if there was

an epidemic or a warCapatalist revolution−−−−−−−−−−−→ most of the time each generation is

noticeably, and predictably, better off than the previous one


Capitalism Defined

Economic system: a way of organising the production and distribution ofgoods and services in an entire economy

Institutions: sets of laws and social customs regulating production anddistribution in different ways in families, private businesses, andgovernment bodies

Capitalist revolution introduced a new economic system called capitalismcharacterized by a new combination of institutions:

Private propertyMarketFirms

Examples of previous systems:Private property + markets + family =⇒ Family farmsPrivate property + markets + Government =⇒ Centralized plannedeconomic system


Private Property

Private property has following features:Owners enjoy their possessions in a way that they chooseOwners can exclude others from their use if they wishOwners can dispose of them by gift or sale to someone else who becomestheir owner

Examples of private property:Personal ornaments and clothingCrops and animalsLandOther human (sad but true!!!)Capital goods

Capital goods are fuel of the Capitalism as they can be listed asThe equipmentBuildingsRaw materialspatents and other intellectual propertyand other inputsused in producing goods and services

Capital goods does not include air, knowledge, skill

Private property may be owned by an individual, a family, a business, orsome entity other than the government.


Markets

Market is a way of connecting people who mutually benefit by exchanginggoods and services through a process of buying and selling

In market structure people are:reciprocated: First, unlike gifts and theft, in a market one person’s transferof a good or service to another is directly reciprocated by a transfer in theother directionvoluntary: The exchange should be beneficial for both parties


Firms

Firms are most recent institution in Capitalism

Example of firms: restaurants, banks, large farms that pay others to workthere, industrial establishments, supermarkets, internet service providers,and many more

Non firm entities: Family businesses, non-profit organizations,employee-owned cooperatives, government-owned entities...etc.

Firms can be characterized by:One or more individuals own a set of capital goodsOwners of the firms (Employers) pay wages and salaries to employees(related to Labor market)Employers direct the employees (through the managers they also employ) inthe production of goods and servicesThe goods and services are the property of the ownersOwners sell them on markets with the intention of making a profit


Summary of Capitalist institutions

Capitalism decentralizes: It limits the powers of governments and of otherindividuals in the process of owning, buying and selling.

Capitalism centralizes: It concentrates power in the hands of owners andmanagers of firms who are then able to secure the cooperation of largenumbers of employees in the production process.


Dynamism of Capitalism

Capitalism can be a dynamic economic system when it combines:Private incentives for cost reducing innovation deriving from marketcompetition and secure private property.Firms led by those with proven ability to produce goods at low cost.Public policy supporting these conditions, and supplying other essentialgoods and services.

Economic and political environment impacts dynamism of capitalism


Varieties of Capitalism - Divergence Among Latecomers

Not every capitalist country is the kind of economic success story

The differences in the quality of countries institutions — the extent ofcorruption and misdirection of government funds, for example — may helpexplain their contrasting trajectories.


Measuring Economic Inequality

Gini coefficient indicates how much disparity there is in income, or anyother measure, across the population

If everyone has the same income, so there is no inequality, the Ginicoefficient takes a value of 0

If a single person has all of the income the Gini coefficient takes a value of1

The Gini coefficient is based on a statistical construct called the Lorenzcurve

The Lorenz curve shows the entire population lined up along thehorizontal axis from the poorest to the richest

The height of the curve at any point on the horizontal axis indicates thefraction of total income received by the fraction of the population given bythat point on the horizontal axis.


Lorenz Curve and Gini Coefficient I

Gini =A

A + B


Lorenz Curve and Gini Coefficient II

Gini =A′

A′ + B ′

Redustibution of income =⇒ reduced income inequality


Comparison of Inequality Index Across Countries

Inequaility in income changes over time and across country

Main reason is different policies in taxes and transfers made by government


Comparison of Inequality Index Across Countries

The differences between countries in inequality in disposable incomes aremuch greater than inequalities in income before taxes and transfers

The US and the UK are among the most unequal of the high-incomeeconomies.

The few poor and middle income countries for which data are available areeven more unequal in disposable income than the US.


Economics

Economics is the study of how people interact with each other and withtheir natural surroundings in producing their livelihoods, and how thischanges over timeIt is about:

How we come to acquire the things — food, clothing, shelter, free time —that make up our livelihoodHow we interact with each other either as buyers and sellers, employees oremployers, citizens and public officials, parents, children and other familymembersHow we interact with our natural environment, from breathing to extractingraw materials from the earthHow each of these changes over time


ec 101 - chapter 1

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