Lecture Notes: Foundations of Economic Prosperity Lecture Notes


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Revision Foundations of Economic Prosperity Lecture Notes - main points.

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Lecture Notes: Foundations of Economic Prosperity Lecture Notes

  1. 1. Revision: Lecture notes on Foundations of Economic Prosperity The Foundations of economic prosperity Prosperity defined  For a prosperous individual, the bare necessities of life – food, clothing, shelter, transportation and so on are secure factors.  Further, resources are in place such as insurance and savings, in order to help address the long term necessities of life.  Individual prosperity means that one can afford to purchase goods beyond their necessities.  Therefore, the mark of national prosperity is that a strong majority of citizens can afford to consume goods and services other then the commodities necessary for survival.  Global prosperity exists when a strong majority of human possesses the necessary affluence to satisfy more than the basic needs. The Rarity of Affluence  In today’s world, it is generally believed that a country with a per capita income of $10, 000 or more per person is of middle income status.  Individuals in more prosperous societies tend to live longer due to better health infrastructure and greater access to food and medicine.  Aesthetic standards are another signal of material abundance and leisure. Affluent people tend to show their affluence via being in shape – I question this point in the lecture - to what extent is this true? Those who are less affluent may also be in good shape. Surely there are other more oblivious signals that can show you are affluent such as modern technological possessions, make of a car (s). Do children attend private school? Etc. Measures of National Prosperity  It is important to avoid confusing a powerful economy with a prosperous nation. Using China as a case in point, between 1980 and 2011, China averaged nearly double digit growth and to add to lecture notes the success of the Olympics was a strong factor in certain areas of economic growth, yet however it is still far from a prosperous nation. To add to lecture notes – They have one of the highest populations in the world it is difficult to gain economic prosperity as a whole nation as a large section of the population is on the poverty line. However, China’s growth in the economic world is growing steadily.
  2. 2.  In 2010 the UN Human Development Index, which includes factors other then income, such as health and education to measure prosperity, China in 2010 ranked 89th place whereas United States ranked 4th. To add to lecture notes China have since moved above 89th on the ladder however they still have a number of areas they need to address in order to position themselves as an economically prosperous country. How do they harness and promote the whole nations population growth as a strength? Myth verses Fact  Myths are harmful to our ability to understand the foundations of economic prosperity because they generalise and tend to obscure important truths.  A common myth about prosperity is that people can entirely control their own destinies and achieve prosperity on their own. National and global conditions matter and individual behaviour matters a great deal, however sometimes structural factors matter more. To add to lecture notes an individual’s chance of prosperity is affected via external factors they can not control. Does Economic Prosperity Make You Happy? Economic Affluence Verses Affluence  Most people tend to use the word income, prosperity and happiness as if they were synonyms. But the relationship between economic affluence and happiness is a bit more complex.  Traditionally, measuring national prosperity has examined either gross domestic product (GDP) or per capita income. Although this assumption seems straightforward, a surprising number of states, think tanks and international organisations have begun to look for alternate measures. To add to lecture notes – you can be an affluent individual and not happy, as affluence does not directly link in with happiness entirely. The Happiness Factor  In 1990, the UN Development programme created the Human Development Index (HDI), which incorporate factors beyond per capita income.  One HDI factor is health and well being measure via life expectancy, infant mortality rates etc.  A second factor is education as measured in whole years of schooling.  All of these factor tend to be linked positively to income, however not always.  In 2008, the Legatum Institute developed a Prosperity Index that included noneconomic components other then health and education.
  3. 3.  One component is the degree of safety and security citizens feel.  Another is the freedom citizens have to live, work and practice their beliefs.  Finally, the degree of social capitol a person possesses effects their feelings of prosperity and happiness.  Some national governments are broadening the definition of prosperity. For example since 2005, Butan has had a measure called “Gross national happiness.” This index well-being, good governance, cultural adversity and resilience.  In 2008, French President Nicolas Sarkozy created a commission to consider dimentions of national well-being, including quality of life, and sustainability.  In 2010, British Prime Minister David Cameron announced that they Office of National Statistics would survey people’s sense of well-being. To add to lecture notes – consider SCOPE and measuring employee’s well-being, quality of their experience at work – how to improve – Set Action Plans etc. Income and Health  Income contributes heavily to other recognised drivers of happiness A very strong correlation exists between income and happiness at an individual and national level.  More prosperous individuals are more likely to eat healthier foods, work on their fitness level, live securely and partake in preventative medicine (vaccinations against flu etc).  At a national level health has a significant public dimention. The more immunised against disease the more likely (whether immunised or not) everyone prevents falling ill. To add to lecture notes – this is true only to a certain extent it is recommended those who are not immunised should be offered the opportunity. Conclusion on Happiness  Happiness is not the same as prosperity. It is quite possible to be very happy and very poor at the same time.  There is strong evidence to support the level of income and happiness do correlate with each other in a positive way.  Because many of the noneconomic sources of happiness, such as health, are positively correlated with income, looking at income as the primary ingredient for prosperity is not a bad approximation for fostering the greatest degree of happiness. To add to lecture notes – how do you define happiness? And good health?
  4. 4. Varieties of Entrepreneurships Foundations of Individual Prosperity  For individuals numerous pathways to prosperity exist, but the most important and lucrative is entrepreneurships.  The traditional ways of thinking how individuals achieve prosperity is that they act in their own self interest. If everyone were to act selfishly wouldn’t society as a whole suffer? Productive Entrepreneurial Activity  Innovating new products  Developing new production processes  Developing new gains from trade and new markets  Reorganising existing operations to improve productivity.  These activities do not benefit everyone at all times; Acts of innovations might reward the individuals who created them as well as consumers who purchased those goods. But innovations often destroy other sectors of the economy.  The growth of Tesco’s, Sainsburys, Walmart and Amazon for example put a lot of similar smaller businesses out of business because they were less efficient overall and charged more money for their goods and services.  Development of iphone, digital cameras, ipad effected Kodak and the need to purchase film and printing photographs.  Although productive entrepreneurship can lead to adverse effects on products it does enrich the individual. Added on to lecture notes – think how has the advancement of the internet effected high street stores both negative and positive? Incentive Systems  If society and government set up alternative incentive systems individuals will redirect their entrepreneurial activates toward destructive options.  Individuals usually have little influence over the set of institutions and incentive systems in which they operate. They will choose the set of activates that seem the most promising to them.
  5. 5.  The institutions that reward particular forms of entrepreneurship may exert a path dependent effect – history matters. If a government enacts a law today that law can limit the scope of reforms in the future. Individual Prosperity in the Developed World Individual Relative productivity  Most people in developed countries earn their income through wages. Why does a person earn a particular wage? Due to productivity.  What determines an individuals relative productivity? Public goods provision and access to human and physical capital.  A public good possesses two qualities: 1. It is nonrival which means that one persons consumption doesn’t appreciably affect another’s. 2. It is nonexcludable, which means that no one is prevented from benefiting.  On the individual level, the less one has to worry about – protecting life, securing possessions and enforcing contracts – the more that individual can improve productivity. A key advantage of developed countries is that the level of public goods provision is high, so individuals can focus on maximising their individual wealth.  Access to physical and human capitol increases individual productivity. For example, computer hardware and software can’t write a book for you, but they can enable you to translate thoughts from your brain to the page more easily. The computerlaptopipad is a physical capitol that helps to maximise your productivity.  Human capitol permits individuals to perform more complexed skilled tasks, which means greater value added. You could have the best computer software money can by but if you do not know what or how to write, or don’t know how to use that software your computer might as well be a paperweight.  Education is the most vital form of human capitol formation, but it is not the only one. Many trades and professions require apprenticeships as a way of developing necessary skills. The human capitol that comes out of this process is the ability to be highly productive. Importance of Credit, saving and investing  Physical capital and human capital are procured through financial capital, which brings us to the importance of credit. Paradoxically those who process the least financial capital could enhance their prosperity if they could afford to acquire the skills (courses) and machines (learning how to use software) to help maximise their productivity.
  6. 6.  Saving and investing is one way to wealth, but the real key is the access to credit. It would take forever to save enough to create wealth without human capital; after earning human capital is possible to earn more money and pay back the loan. – to add to lecture notes – Never get a loan until you have discussed the pro’s and con’s with the bank staff or an independent financial Advisor.  Access to credit allows access to education, key training and equipment.  The more accessible credit is to individuals the easier it is for people who were not born prosperous to gain a pathway to prosperity. – Add to lecture notes, there are numerous courses on line, libraries, evening classes that can improve ones education further. Value Shift in Components of Capital  An increasing amount of human capital formation requires formal education rather than apprenticeships. – add to lecture notes I challenge this as is this true of today? Experience through internship, practical education, apprenticeships are very important in a time where many can not afford University tuition fees and other costs.  Physical capital is still necessary, but key elements of physical capital is becoming cheaper for individuals. The Education Premium  More evidence of the shifting importance of education and human capital appears a s a ratio of wages to educational attainment.  Some argue that the increased value of university costs are not worth the reward.  The best investment you can make for your future is to earn a degree.  People who have also completed a masters degree earn 22% more then those who have only a degree. Those who have earned a PHD out earn degrees by 50%.  Particularly striking is that the education premium exists across all professions, not just those we would associate with degrees. Education is the single most important factor in determining ones income. More so then race, age and gender. Rupinder K Gill