Unit 1: Capitalism and democracy

Divide the average income of the top 10% by the average income of the bottom 10%.

Greater inequality.

Gross domestic product: the total value of all goods and services produced in a country in a given period of time.

GDP divided by population.

It allows GDP to be compared across countries while accounting for differences in population size.

It does not capture every aspect of economic performance, human capital or living standards.

The amount of human capital that a child born today can expect to attain by age 18.

The amount of human capital that a child born today can expect to acquire over their working life, extending the original HCI into adulthood.

(Current GDP − Previous GDP) ÷ Previous GDP × 100.

Compound annual growth rate.

To determine whether the economy has grown faster or slower than its average annual growth rate over the long term.

A hockey-stick shape, with slow growth followed by a sharp increase.

A scale used to compare growth rates over time by representing proportional changes on the vertical axis.

Using ratios, so that equal distances represent equal proportional changes.

The value has doubled.

Constant growth.

Faster growth.

Adam Smith.

The idea that individuals making self-interested choices can contribute to economic growth.

Dividing production into specialised tasks, with different people responsible for different parts.

It allows workers to specialise in particular tasks.

They may collude to create market power.

Protecting citizens, investing in education and providing public works.

A way to investigate causality by comparing groups exposed to different conditions or changes.

The group that undergoes a change.

The group that does not undergo the change.

East Germany introduced centralised planning under the Communist Party, while West Germany returned to market-based capitalism.

It was less than half of West Germany's real GDP per capita.

How different economic systems affect economic performance.

A process that uses inputs, such as materials and machinery, to create outputs.

Less labour is needed to produce the same output.

It transformed a craft-based economy into an industrial powerhouse.

It helped drive the sharp increase in GDP per capita.

The power loom and the spinning jenny.

It can reduce the amount of work needed to produce the same basic necessities.

Goods required to produce other goods and services.

New technologies needed machinery and other productive assets to be implemented.

A way of organising the production and distribution of goods and services in an economy.

An economic system that organises production and society through a combination of private property, markets and firms.

Private property, markets and firms.

Property owned by individuals or firms.

A collection of buyers and sellers exchanging goods.

Machinery and buildings.

In firms.

They hire labour to produce goods and services.

They are privately owned.

They sell them on markets to make a profit.

The owners and managers.

Slavery, feudalism and socialism.

The process in which innovation creates something new while destroying or replacing something that already exists.

The need for constant innovation leads to new products and processes that replace existing ones.

When private property is insecure, markets are not competitive, or firms are owned or managed by people with government connections.

Private property must be secure, markets must be competitive, and firms should not depend on privileged connections to survive.

Secure ownership supports economic activity and gives owners confidence in their property.

Competition encourages firms to improve and prevents market power from undermining economic performance.

The government must function well, a legal system must exist, and competition must be present and active in markets.