ECON 202 Exam 1

Which of the following variables have followed the so-called 'hockey-stick' trajectory—that is, little to no growth for most of history followed by a sudden and sharp change to a positive growth rate?

-GDP per capita -Labor productivity -Inequality -Atmospheric CO2

Firms

-Owners of firms own the "capital" of the firm, that is, equipment, structures and also "intellectual property" such as patents, trademarks and trade secrets -Owners hire managers who hire workers (employees) in the "labor market" -Firms are organized in a hierarchy with managers (bosses) telling workers what to do -The output of the Firms is sold in markets to end users (other firms or households) -Owners usually aim to make a profit, or at least survive and bear the risk of the firm "losing money"

Prior to the emergence of capitalism (often data prior to the 17th century), what the key economic institutions?

-Private property (people owning things) -Markets (where goods could bought and sold) -Families (goods produced within the family, for family consumption or for sale in markets) -Government

What conditions might make capitalism more or less dynamic?

-Security of private property -Competitiveness of markets -Merit-acquired leadership -Government is willing to defend private property rights, fund infrastructure, is willing to allow creative destruction

What are the two key ideas in the Malthusian Model?

-The law of diminishing average product of labor -Population expands if living standards increase

What is the difference between causality and correlation?

Causality: A direction from cause to effect, establishing that a change in one variable produces a change in another. Correlation is simply an assessment that two things have moved together.

Labor market

Instead of working within families, workers are hired to work in firms and can be fired by firms. The relationship of a worker in firm is may be shorter term than family relationships.

Why is private property important for technological progress to occur?

Investing in a capital (machinery) intensive technology requires that the owners of capital feel secure in their ownership, that is feel fairly certain that their factors will not be seized by the government or by local hugs, gangsters, mobsters

How does the economy respond to innovation rents?

It encourages new firms adopt the new technologies, make the new products, enter the new markets or adopt the new ways of organizing business. As a consequence, production increases resulting in more competition with decreases prices and hence decreases profits resulting in the disappearance of innovation rents.

How can production in firms, rather than families, contribute to the growth of living standards?

Production in firms, rather than in families allows for a larger scale of operation and allows for a labor market with possibility of firing those employees who do not expend sufficient effort. With family production it is hard to fire a member of your family!

Explain how markets can provide both carrots and sticks to encourage innovation.

The carrots of the market are the innovation rents (excess profits) that can be earned by capitalists who early adopters of new technology. This is creative part of creative destruction. The sticks of the market is those capitalists that don't innovate or don't adopt new technology will go bankrupt. This is destructive part of creative destruction.

Why does text argue that comparing GDP per capita of West and East Germany from 1950 to 1989 is a natural experiment? What conclusions can be drawn from this experiment?

West and East Germany were separated from each other at the end of WWII. West Germany adopted capitalist institutions while East Germany adopted communist (central planning) institutions. Both started with same culture, history, climate...the main difference, one can argue was the different institutions. Hence can be considered as a "natural experiment" for the impact of these different institutions. Figure 1.10 shows that GDP per capita was higher and grew faster in West Germany than in East Germany which suggests (but doesn't prove) that capitalism beat central planning in terms of economic growth and per capita income.

Family

a group consisting of parents and children living together in a household

Markets

a way of connecting people who may mutually benefit by exchanging goods and services through a process of buying and selling

Model

an abstract representation of reality

Government

collects taxes, spends (historically mainly on wars), provides a legal system for settling conflicts

How would you know if a model is useful?

if the model gives us an answer to some question which consistent with observations or empirical data about the world

Diminishing average product of labor

if we add more labor to a production process, HOLDING ALL OTHER INPUT CONSTANT, output increases, but the increases in output get increasingly smaller as we add more labor

Are models realistic?

no - by definition they are abstract

Production function

output / # of workers

APL (average product of labor)

output / work as more labor is added the average product of labor decreases

Private property

property owned by individuals or companies, not by the government or the people as a whole

Creative destruction

the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business

Innovation rents

the excess profits that entrepreneurs earn by developing new technologies which either lower costs of producing existing products, or create new products, or new markets, or new ways of organizing business

What are the key economic institutions of capitalism?

what makes capitalism unique is the addition of firms and the labor market to the older mix of private property + markets + families + government as key economic institutions