Micro Unit 1

Question 1

1.2 History’s Hockey Stick

Define GDP and its purpose

Answer 1

GDP is a measure of how much is produced in a particular country in a year. We refer to GDP as the ‘output’ of a country. This is used to measure and compare living standards.

Question 2

1.2 History’s Hockey Stick

What is GDP per capita and its purpose?

Answer 2

When GDP is divided by the total population the resulting number is GDP per capita. This is used to measure average income, or ‘living standards’.

Question 3

1.2 History’s Hockey Stick

Who enabled us to be able to draw this graph?

Answer 3

Angus Maddison-he dedicated his life to finding the data required to make comparison on how people lived for 1000 years (1000-2000)

Question 4

1.2 History’s Hockey Stick

Is the “history hockey stick” the same across all countries? Explain.

Answer 4

The hockey stick will vary depending on country. E.g. the kink is less abrupt in britain but begins in 1650 while it is sharper in Japan and begins in 1870. This is since different countries gain access to growth accelerators (timing to industrialise,access to resource, institution, trade, technology) at different times.

Question 5

1.2 History’s Hockey Stick

Why did it take places like India, China, Latin America, and Nigeria longer to experience substantial improvement?

Answer 5

Substantial improvements in people’s living standards did not occur before they gained independence from colonial rule or interference by European nations.

Question 6

1.2 History’s Hockey Stick

Have all countries experienced History’s Hockey stick?

Answer 6

No, the stick has still not tipped upwards in certain countries.

Question 7

1.3 Another hockey stick: Climate change

What is GDP’s limitations as a model for living standards?

Answer 7

• Ignores distribution: GDP measures total output, not who benefits → inequality can be hidden.
• Excludes non-market activity: Household work, volunteer work, and informal economies are left out.
• No measure of quality of life: Doesn’t capture health, education, happiness, or leisure.
• Environmental costs: Ignores resource depletion and pollution (growth can harm sustainability).
• Short-term focus: Prioritizes output today over long-term well-being.
• Doesn’t capture shadow/black economy: Especially significant in developing countries.

Question 8

1.3 Another hockey stick: Climate change

Which factors (other than improved living standards) have shown the shape of “History’s Hockey Stick”?

Answer 8

• CO2 emissions
• Temperature

Question 9

1.4 Inequality in global income

Overtime has poverty increased or decreased?

Answer 9

Overall the level of extreme poverty has decreased significantly and those considered rich by todays standards were very few in the past. Yet there are still many people that cannot meet their basic needs.

Question 10

1.4 Inequality in global income

Has income inequality between countries increased or decreased?

Answer 10

Income gap is larger today.

Question 11

1.4 Inequality in global income

What do economists today use to compare income?

Answer 11

PPP (Purchasing Power Parity)-adjusts for cost for living. This reflects in income inequality across countries as PPP varies significantly between the top and bottom countries.

Question 12

1.4 Inequality in global income

Does income inequality only vary between countries?

Answer 12

Varies within countries as well. If broken down into deciles there are something referred to as “skyscraper groups” where the top 10% is significantly far richer than the rest. Even in more equal countries the contribution in ratio of the rich to poor is significant.

Question 13

1.4 Inequality in global income

Overall what has the effect of inequality been within and between countries?

Answer 13

Both internally and compared to other countries income gaps have widened, with coutnries advantaged earlier on showing to have higher incomes

Question 14

1.5 The continuous technological revolution

What is meant by technological progress?

Answer 14

Technological progress= changes in technology that reduce the resources required to produce a given output.

Question 15

1.5 The continuous technological revolution

What is technology in economics?

Answer 15

Technology (in economics) = a process that transforms inputs (materials, labour, machines, energy) into outputs.

Question 16

1.5 The continuous technological revolution

What is considered a turning point in technological progress?

Answer 16

• A series of breakthroughs in textile, energy and transport
• earlier technologies were redundant due to replacement by more efficient and better developed ones
• An era of cummulative innovation
• Industrial revolution=technological and organizational change

Question 17

1.5 The continuous technological revolution

What happened to technological progress after the industrial revolution?

Answer 17

• Continued beyond this point
• new general purpose tech shaped vast sectors
• General purpose tech=applied to multiple areas

Question 18

1.5 The continuous technological revolution

How does technological progress relate to the hockey stick?

Answer 18

• The hockey stick shows stilted and consistent levels of per capita growth but a sudden increase
• This is attributed to the increase in technological progress
• This shows how after the industrial revolution countries were able to sustain living standards being higher

Question 19

1.6 Explaining the flat part of the hockey stick

What was Malthus basing his model off of? (Not what his model is but the key principles to how he formed his ideas)

Answer 19

• Simple economic model that agricultural output and living standards depend on the population employed in agriculture
• Those living standards affect the growth of the population

Question 20

1.6 Explaining the flat part of the hockey stick

What did Malthus argue? (simple)

Answer 20

Sustained increase in income per capita is not possible and living standards will almost always be consistent.

Question 21

1.6 Explaining the flat part of the hockey stick

Why is Malthus’ argument imporant, despite knowing now that it is inaccurate?

Answer 21

Helps us understand why living standards remained both low and consistent for hundreds of years.

Question 22

1.6 Explaining the flat part of the hockey stick

What is the formula for average product of labour?

Answer 22

APL=total output/total number of farmers

Question 23

1.6 Explaining the flat part of the hockey stick

What are factors of production?

Answer 23

Factors of production are the resources used to produce goods and services — basically, the inputs that make production possible. (e.g. land and labour)

Question 24

1.6 Explaining the flat part of the hockey stick

What would happen to average product of labour if employment increases?

Answer 24

The quantity of land is fixed. More workers means more people on the same quantity of land. Average product of labour falls.

Question 25

# 1.6 Explaining the flat part of the hockey stick What do you call the relationship between inputs and the amount of output?

Answer 25

A production function (A production function is a graphical or mathematical description of the relationship between the quantities of the inputs to a production process and the amount of output produced.) If there are X workers there will be Y amount of grain produced. Therefore Y is a function of X. Y=f(X)

Question 26

# 1.6 Explaining the flat part of the hockey stick Since quantity of land is fixed, what should be represented on the graph (what is written on each axis) to describe the production function?

Answer 26

Output of grain (vertical axis), Number of workers (Horizontal axis)

Question 27

# 1.6 Explaining the flat part of the hockey stick Describe and explain this graph.

Answer 27

The more farmers there are, the lower is the average product of labour. There is a concave shape of the production function: it continues to rise but gets flatter as more farmers work the land.

Question 28

# 1.6 Explaining the flat part of the hockey stick How can you tell graphically what has a higher average product of labour?

Answer 28

Since A has a steeper slope (gradient from origin to point A) the APL must be higher than at B.

Question 29

# 1.6 Explaining the flat part of the hockey stick What are the two plausible assumptions made in Malthus' model?

Answer 29

Labour combined with land is productive. The more workers there are, the more output is produced. As more workers work on a fixed quantity of land, the average product of labour falls. This diminishing average product of labour is one of the foundations of Malthus’s model (and many other models).

Question 30

# 1.6 Explaining the flat part of the hockey stick Some argue that while you can use more land and it does not have to be fixed, how did Malthus counter this?

Answer 30

Earlier generations would have picked the best land, therefore new land would not be as productive. Therefore also reducing the APL.

Question 31

# 1.6 Explaining the flat part of the hockey stick What are the two ways to diminish APL?

Answer 31

1. more labour devoted to a fixed quantity of land 2. more (inferior) land brought into cultivation

Question 32

# 1.6 Explaining the flat part of the hockey stick How does this then affect living standards.

Answer 32

When APL is diminished the amount of output each person can consume (their income or living standard) inevitably falls.

Question 33

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) What was the third key idea of Malthus' model that described why living standards were low and consistent?

Answer 33

The first idea shows how a population size determines living standards. However, Malthus suggested that population expands if living standards increase.

Question 34

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) Malthus' assumed that when people are slightly better off..

Answer 34

Population will expand as they met the economic level to have children.

Question 35

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) What is Malthus' poverty trap

Answer 35

1. Low living standards, but tech improves. 2. Average output per farmer increases temporarily (Higher living standards) 3. Population rises (more birth and lower death rate) 4. Land is fixed and there are more people in the land. Less land per person 5. APL diminished 6. Living standards fall back to original level

Question 36

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) What is the subsistence level?

Answer 36

The minimum required for someone to survive regarding basic neccessity. This describes the minimum standard of living required to sustain life. - Above subsistence: Population rises - Below subsistence: Population falls - At subsistence: population is stable

Question 37

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) Describe subsistence level graphically as well as what number of farmers looks like plotted against APL.

Answer 37

The subsistence level is a horizontal line on the graph showing average product of labour. Above that line=APL above subsistence->Population rises->APL diminshes. Below that line=APL below subsistence->Population falls->APL rises.

Question 38

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) What is significant about the equilibrium point according to Malthus' argument?

Answer 38

- the economy tends to the equilibrium level of population and income where income=subsistence - If there are no external changes ot the economy, population and income will not change at this point

Question 39

# 1.7 Explaining the flat part of the hockey stick (IN-DEPTH) What does Malthus' model predict that imrpoved technology does?

Answer 39

Rather than raising living standards, a better technology provides subsistence income for a larger population. It will not raise living standards if: - The average product of labour diminishes as more labour is applied to a fixed quantity of land - Population grows in response to an increase in living standards.

Question 40

# 1.8 Capitalist Institutions What is capitalism in an economic system?

Answer 40

The primary mode of organising production is through firms. Private owners higher labour to produce goods and services with the goal of making a profit.

Question 41

# 1.8 Capitalist Institutions What are the three core institutions of capitalism?

Answer 41

- Private property - Markets - Firms

Question 42

# 1.8 Capitalist Institutions What is an institution?

Answer 42

A regular set of laws or informal rules that regulate interactions for production and distribution in society.

Question 43

# 1.8 Capitalist Institutions Who can private property be owned by?

Answer 43

Any entity other than the government

Question 44

# 1.8 Capitalist Institutions What does a market refer to?

Answer 44

A means to trasnfer goods and services from one person to another. This differs from theft, gifting, or government order.

Question 45

# 1.8 Capitalist Institutions How does a market vary from other methods of transferring goods and services (e.g. theft, gifting, government order)?

Answer 45

* Reciprocity: The exchange is directly matched in both directions * Voluntary participation * Competition: buyers and sellers are limited in the prices they can set

Question 46

# 1.8 Capitalist Institutions What qualities make up a firm?

Answer 46

* Individual(s) own a set of capital goods used in production * wages are paid to employees * Employees are directed in production of goods and services * Goods and services are property of owner(s) * Goods and services are sold with the intention of making a profit

Question 47

# 1.8 Capitalist Institutions What are structures that are productive entities that are not firms? Why?

Answer 47

Family organisations, employee owned cooperatives, government owned entities. - Either dont make profit, owners are not private individuals who own assets of the firm and employ people to work there

Question 48

# 1.8 Capitalist Institutions Describe the differences between self sufficient family based production, market economies with family based production, and capitalist economies

Answer 48

* Left most circle describes an economy where families are isolated to the labour and land they own, with little to no exchange with others. * Middle circle is consistent with mostly production by individuals or in families with markets but few to no firms. * The rightmost circle describes a capatalist economy, most production takes place in firms but markets and private property are still required for the function of firms.

Question 49

# 1.8 Capitalist Institutions Why are markets and private property essential for firms to work?

Answer 49

- Output and capital goods are private property: the firms buildings, equipment (etc.) which are a neccesity for a firm to produce outputs is the private property of owners. - Private property is important to buyers as people dont want to buy things they cannot own. - Firms use markets to buy inputs and sell outputs: Profits made by the owner is dependent on the markets in which buyers choose to exchange for money.This price must be more than production costs to yield a profit.

Question 50

# 1.8 Capitalist Institutions What is a centrally planned economic system?

Answer 50

When a government is an institution that owns capital goods, thereby deciding the method of ditribution, production and to whom.

Question 51

# 1.8 Capitalist Institutions How does a capitalist economy combine centralisation and decentralisation?

Answer 51

Centralisation: Owners and managers of firms have the sole ability to ensure cooperation of employees and make decisions regarding the production process. Decentralisation: The control of owners and managers is limited by markets where they face competition to buy and sell. This combinations accounts for capitalisms success as an economic system.

Question 52

# 1.8 Capitalist Institutions How are governments and family farms separated from firms?

Answer 52

Family farms and governments are not dependent on success and profit like farms are so poor performance has more sever consequence on firms.

Question 53

# 1.8 Capitalist Institutions How can capitalism lead to improve living standards?

Answer 53

Technogically: Firms face competition and face the incentive to adopt/invent better capital goods to outperform competition. Specialisation: As firms expand it leads to the division of labour and specialisation of employees in specific tasks, making production more refines and efficient.

Question 54

# 1.9 Structural transformation: From farm to firm What is structural transformation?

Answer 54

As capitalist firms grow using new technologies, the structure of the economy changes. Such as:   * Agriculture no longer dominates output or employment   * Manufacturing and services grow faster than agriculture The share of population in agriculture declines, while the non-agricultural sectors (industry, services) expand

Question 55

# 1.10 Capitalism, causation, and history’s hockey stick Can we conclude that capitalism caused the upward kink in the hockey stick?

Answer 55

A causal relationship cannot be drawn due to the interaction of many individuals and combination fo various external factors that could have caused the kink.

Question 56

# 1.12 Varieties of capitalism: Institutions, government, and politics What is a developmental state?

Answer 56

Government plays a leading role in economic take off of the country.

Question 57

# 1.12 Varieties of capitalism: Institutions, government, and politics Why was central planning banned as an economic system?

Answer 57

Inefficient resource allocation, a lack of innovation and productivity due to the absence of competition and profit motive.

Question 58

# 1.12 Varieties of capitalism: Institutions, government, and politics When is capitalism dynamic? Why is this important? (economic conditions)

Answer 58

The success of capitalism is only achieved when it is dynamic. This requires: - Private property is secured - Markets for firm outputs must be competitive - Firms are controlled by people based on merit (if you are not able to produce high quality goods this decreases output and profit of firm) Shifting from these three factors leads to more criminal activity as consumers may gain more income distribution from that and lobbying.

Question 59

# 1.12 Varieties of capitalism: Institutions, government, and politics How does capitalist economy disregard the wealthy?

Answer 59

It is based on economic performance as competition is central to the system. This means that in order to be successful in a capitalist economy, it is based on merit and ability to generate a profit, therefore weeding out those who underperform.

Question 60

# 1.12 Varieties of capitalism: Institutions, government, and politics What are the political conditions required for a dynamic capitalist system?

Answer 60

- Markets, firms and private property are regulated by laws/policies - Governments are also essential to settling disputes (e.g. property/ownership rights,prevents firms from undermining market competition) - Required for essential public goods and services (infrastructure,education, national defence)

Question 61

# 1.12 Varieties of capitalism: Institutions, government, and politics What is the influence of a political system?

Answer 61

A political system⁠ determines how governments are selected, and how those governments make and implement decisions that affect the population. - Different democracies vary in how much government intervenes (Some capitalist systems use taxes and redistribution extensively, others intervene much less)

Question 62

# 1.13 Economics, the economy, and the biosphere Why is the biosphere important?

Answer 62

Humans depend on the biosphere (all life on Earth) and the physical environment for essentials: air, water, food, raw materials (wood, minerals, oil). - The natural environment also plays a large role in producing and securing our livelihoods. - The economy is embedded in society, which exists in the biosphere.

Question 63

# 1.13 Economics, the economy, and the biosphere Describe the flow of resources

Answer 63

* The environment supplies ecosystem services, resource stocks, and regenerative capacity (e.g. forests, clean air, soil, biodiversity) which are necessary for ongoing production and life. * Both firms and households generate pollution and waste that flow back into the biosphere / environment. * Firms produce goods and services using inputs (labour, capital, materials), supplying them to households and other firms.

Question 64

# 1.13 Economics, the economy, and the biosphere What is a large environmental issue regarding current technologies?

Answer 64

- Many of them run on carbon based energy which harms the ecosystem. - Dramatic declines in biodiversity - Human demand now exceeds Earth’s regenerative capacity- the rate at which resources are being used now cannot be replenished. -

Question 65

# 1.13 Economics, the economy, and the biosphere What are externalities and how does this relate to environmental damage?

Answer 65

Environmental damage and resource depletion are often externalities: costs not borne by those who exploit the resources.

Question 66

# 1.13 Economics, the economy, and the biosphere How is GDP misleading?

Answer 66

GDP can mislead: it counts sales of resource-based extraction (e.g. timber, fish) but does not deduct the loss of the underlying stocks.

Question 67

# 1.13 Economics, the economy, and the biosphere What are methods to overcome the effects of new technologies on the physical environment?

Answer 67

* Governments can use regulation ot market-based instruments (e.g. tradable permits for CO₂ emissions) to internalize environmental costs. * Technological shift to not be carbon-based * Subsidies or support for green technologies * International agreement on cooperative goal regarding improving the environment.

Question 68

# 1.13 Economics, the economy, and the biosphere