EC Chapter 1. Burak Alparslan Eroğlu. October 13, Burak Alparslan Eroğlu EC Chapter 1

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1 EC Chapter 1 Burak Alparslan Eroğlu October 13, 2016

2 Outline Introduction to New Course Module Introduction to Unit 1 Hockey Stick Growth Capitalism Inequality Economics and Economy

3 Introduction Blended course with high online orientation Core Econ: Register! Monitor Blackboard regularly for assignments and announcements!

4 Unit 1: Introduction I Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time Historical facts about well-beings of people: Ibn Battuta (Maroccan Traveler): India had plentiful provisions in 14th century. Jean Baptiste Tavernier (French Diamond merchant): Many goods can be procured in abundance 17th century. In time of Battuta, India was not much richer or poorer than rest of the world. 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?

5 Unit 1: Introduction II

6 Unit 1: Introduction III Summary of Figure 1.1a World was flat for 8 centuries from Income differences are small until 18th century. Some countries deviate faster than other countries. Some exhibit slower progress.

7 Unit 1: Hockey Stick Growth Scale vs Ratio scales: Level of GDP per capita vs Growth rate of GDP per capita Growth rate = Change in GDP Original 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 different countries

8 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 omits important 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 include Quality of social life and physical environment Free goods and services from government Household production GDP includes government spending, thus it is a better measure of well-being

9 Permanent Technological Revolution Important scientific and technological advances occurred almost at the same 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 using scientific knowledge In Economics = a process that takes a set of materials and other inputs and creates an output Until the Industrial Revolution, the economy s technology was advancing very slowly and passing from generation to generation As technological progress revolutionized production, this accelerate the progress

10 Technological changes in lighting

11 Summary of Technological (Industrial) Revolution Technological innovations give a particularly strong impact on growth in living standards because they change the way large parts of the economy work. By reducing the amount of work time it takes to produce the things we need, technological changes allowed significant increases in living standards David Landes calls Technological revolution as an interrelated succession of technological changes

12 Diffusion Speed of Information Permanent technological changes has created a connected world = Globalization The speed of information provides more evidence of the novelty of the permanent technological revolution

13 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 climatic adversity and other disasters. Rapid world s population growth in the 20th century with the development and spread of improved sewerage, clean water, and other public health measures. Increased Labour productivity = less farmer required = People left farming and pursue new occupation = immigration to big cities

14 Environmental Degradation Increased production = Increased natural source usage = natural environment degradation Changes in environment is much more radical than ever Extreme use of coal, oil and gasoline = increasing emissions of carbon dioxide = Climate change (Global Warming) In the last century, average temperatures have risen in response to increasingly high levels of greenhouse gas concentrations Local environmental impact affect cities and rural areas differently

15 The Economy People interact with each other and with also nature in producing their livelihood

16 Capitalist Revolution Hockey stick shaped pattern in Gross domestic product per capita Productivity of labor (light per hour of work) Connectivity of the various parts of the world (the speed at which news travels) World population Impact of the economy on the global environment (Carbon emissions, atmospheric CO 2 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 Capatalist revolution an epidemic or a war most of the time each generation is noticeably, and predictably, better off than the previous one

17 Capitalism Defined Economic system: a way of organising the production and distribution of goods and services in an entire economy Institutions: sets of laws and social customs regulating production and distribution in different ways in families, private businesses, and government bodies Capitalist revolution introduced a new economic system called capitalism characterized by a new combination of institutions: Private property Market Firms Examples of previous systems: Private property + markets + family = Family farms Private property + markets + Government = Centralized planned economic system

18 Private Property Private property has following features: Owners enjoy their possessions in a way that they choose Owners can exclude others from their use if they wish Owners can dispose of them by gift or sale to someone else who becomes their owner Examples of private property: Personal ornaments and clothing Crops and animals Land Other human (sad but true!!!) Capital goods Capital goods are fuel of the Capitalism as they can be listed as The equipment Buildings Raw materials patents and other intellectual property and other inputs used 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, or some entity other than the government.

19 Markets Market is a way of connecting people who mutually benefit by exchanging goods 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 transfer of a good or service to another is directly reciprocated by a transfer in the other direction voluntary: The exchange should be beneficial for both parties

20 Firms Firms are most recent institution in Capitalism Example of firms: restaurants, banks, large farms that pay others to work there, 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 goods Owners of the firms (Employers) pay wages and salaries to employees (related to Labor market) Employers direct the employees (through the managers they also employ) in the production of goods and services The goods and services are the property of the owners Owners sell them on markets with the intention of making a profit

21 Summary of Capitalist institutions Capitalism decentralizes: It limits the powers of governments and of other individuals in the process of owning, buying and selling. Capitalism centralizes: It concentrates power in the hands of owners and managers of firms who are then able to secure the cooperation of large numbers of employees in the production process.

22 Dynamism of Capitalism Capitalism can be a dynamic economic system when it combines: Private incentives for cost reducing innovation deriving from market competition 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 essential goods and services. Economic and political environment impacts dynamism of capitalism

23 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 of corruption and misdirection of government funds, for example may help explain their contrasting trajectories.

24 Measuring Economic Inequality Gini coefficient indicates how much disparity there is in income, or any other measure, across the population If everyone has the same income, so there is no inequality, the Gini coefficient takes a value of 0 If a single person has all of the income the Gini coefficient takes a value of 1 The Gini coefficient is based on a statistical construct called the Lorenz curve The Lorenz curve shows the entire population lined up along the horizontal axis from the poorest to the richest The height of the curve at any point on the horizontal axis indicates the fraction of total income received by the fraction of the population given by that point on the horizontal axis.

25 Lorenz Curve and Gini Coefficient I Gini = A A + B

26 Lorenz Curve and Gini Coefficient II Gini = A A + B Redustibution of income = reduced income inequality

27 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

28 Comparison of Inequality Index Across Countries The differences between countries in inequality in disposable incomes are much greater than inequalities in income before taxes and transfers The US and the UK are among the most unequal of the high-income economies. The few poor and middle income countries for which data are available are even more unequal in disposable income than the US.

29 Economics Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time It is about: How we come to acquire the things food, clothing, shelter, free time that make up our livelihood How we interact with each other either as buyers and sellers, employees or employers, citizens and public officials, parents, children and other family members How we interact with our natural environment, from breathing to extracting raw materials from the earth How each of these changes over time