ECON 231 STUDY NOTES - MIDTERM
Recall that the objective of microeconomics is to maximize welfare for all. Constraints include
technology and land endowment (resources, geography). Welfare is social welfare over the indefinite
future, a.k.a. SWF for Social Welfare.
SWF = f(consumption, health, freedoms, environmental quality, education [things that make you
consumption = g($ value market goods + services/non-market goods + services). Value reflects quality
Therefore, income leads to consumption, which in turn leads to welfare. However, income may be high
by lowering other determinants. The key question is to ask: are other determinants normal or inferior?
We use the Kuznets Curve for equality and freedom.
Real Income per Capita is used to measure income.
Nominal GDP/population =
i = country, t = year/month/time
The price effects are removed so only
consumption is examined to determine welfare.
These vary across time and space; therefore there is
a change in price and change in consumption over
different time periods and geographical areas. Laspeyers price index uses the original basket where Q is
not adjusted (leads to high growth in P) while the Paasche price index uses the final basket where the
Q growth is complete (leads to P growth being minimized).
If income is a pure good, literacy is a normal good.
The difficulty with gathering data from the period is that there were no contemporary measurements of
GDP at the time. However, things that were taxed were measured and there were no real privacy laws,
leading to a lot of micro data. Sources of data include public institutions such as universities, as well as
court records, church records, tax records and guilds.
These are useful so that we can examine similarities to modern economic growth, where there was a
rapid increase in income per capita, persistent increases in income per capita, and unambiguous link
between increase in income per capita and the improvement in welfare.
The key is that in the future, income should increase due to an increase in productivity.
The Solow Residual = total factor productivity = tfp = A Q = f(A,L,K,M) where L = worker hours, K = machine hours (investment goods), M = other goods (raw
materials) and L, K and M change over time and space. As A improves, the value of Q moves outward
from the origin.
A becomes the residual unexplained growth. q = A + K
What is A? A is input quality, technology, scale, market efficiency, institutional quality, magnified by
urbanization and globalization.
Transaction Costs: search costs, negotiation cost, enforcement cost
Transactions in UK: large increase in K, large increase in urbanization, large increase in A
Cotton, coal, steam, transport, steel = location, investment and technology.
-demography is connected to economy, population leads to income.
-book published prior to moderm economic growth
-key tenet is the environmental constraint on growth, where there is not enough space or resources to
provide food for an ever-growing population.
According to Malthus, prior to Modern Economic Growth, the limiting factor in production was the land
that food could be produced on. There was extensive growth in the long run but no intensive growth.
That is, there was an increase in GDP but the GDP per capita remained constant.
Some characteristics of the economy at the time include:
- A single sector (agriculture)
- Closed economy
- Fixed factors of land
- No endogenous technological change
- Children are normal goods, that is, as income increases, demand is higher.
Richardian model of economy => Q = f(L,M), M= M in LR, leading to low diminishing returns.
L = UMP ,LTP = A + B, B = Wages Paid, A = Land Rent,
L* = equilibrium
Subsistence wage comes from demography, and is the wage
where population is stable but not at the biological minimum
wage for survival.
W SUB= where P = CPI = food prices (which made up 80% of
the average consumption.Britain and the Netherlands had the highest subsistence wage. Their food supplies were inelastic,
where an increase in demand for food implies a high price of food. Land is fixed, so increasing the food
supply was difficult. This made the supply curve almost vertical.
Crude death rate = CDR = = f(healthcare, location, occupation, population, income).
Positive checks on population growth such as disease or famine would decrease the population and
result in an increase in W/P, resulting in additional calories being available. Infant mortality decreases,
and CDR falls, leading to a rise in population. However, as population increases, demand for food
increases, the price of food increases, W/P falls and CDR increases once again.
Crude birth rate = CBR =
CBR was affected by the age at
marriage, the incidence of