UNIT 1: KEY CONCEPTS OF ECONOMIC HISTORY

ECONOMIC HISTORY: understanding historical events by appealing to our knowledge of economic

processes

• Examines the consecutive economic systems that have allowed humans to survive and increase their
population
• WHY:
1. Importance of the role of context
2. Learning from the past
3. Business cycle from a long-term view
4. Focused on the real world

ECONOMIC SYSTEM: organized way in which a country locates resources and distributes goods and
services across a nation or a geographic area and defines how all entities in an economy interact.

1. Capitalism: state is an agency among the others.

• Market: system in which resources and prices are regulated by an offer-demand policy
• In Spain- state regulates economy through taxes, unemployment and laws. Influences the behaving of
markets. The decisions are made in the market.
2. Communism: state is the main actor in economy
• Sets prizes
• Market doesn’t function
• Example — Venezuela
3. Liberalism/socialism: state has a minor role. “Laissez-faire”
• They don’t regulate the market
• No public companies
• Example — Andorra, The Netherlands

THE LONG TERM PERSPECTIVE

Shows GDP per capita (Gross Domestic Product)
1. The Malthusian Trap (ut 3) lead to the Industrial Revolution in 1801 bc of
- Unorganized institutions
- Economy mainly based on agriculture (famine)
- Population grew faster than economy
2. 19th century —> The Great Divergence: growing gap between the West and the rest of the world.
• West: Western Europe + offshoots (USA, Canada, Australia, New Zealand)
• The rest: Asia, Africa, South America, Eastern Europe

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ECONOMIC GROWTH: sustained increase in the total output of goods and services
• Increase in the inputs of factors of production (extensive growth)
• Increase in the efficiency —> same quantity of factors of production, higher level of output (intensive
growth)

ECONOMIC DEVELOPMENT: economic growth + substantial estructural change + social progress

Entails a set of freedoms:
1. Political freedom and transparency in relations between people
2. Freedom of opportunity
3. Economic protection to avoid poverty — income supplements and unemployment relief

- Real development can’t be reduced to increasing income or rising GDP per capita. BUT overlapping
mechanisms that lead to a growing range of freedoms.

PRODUCTION: process by which the factors of production are combined to produce goods and services
for consumption. It can be measured in
• Physical units
• Value (monetary) terms

PRODUCTIVITY: average measure of the efficiency of production. Expressed as the ratio of output to
inputs used in the production process. (output/input)
DETERMINANTS OF PRODUCTIVITY GROWTH
1. Investment in human capital (improvements in education)
2. Advances in technology
3. Improvements in the organization and combination of the factors of production

LAW OF DIMINISHING RETURNS: it’s an economic theory that predicts that as the amount of a single
factor of production increases, while the amount of the resting factors of production remain constant, the
marginal output of a production process will decrease. This is because the optimal level of capacity has
already been reached.

ECONOMIC STRUCTURE: the relationship among the different sectors of economy (primary, secondary
and tertiary)

STRUCTURAL CHANGE: long-term shift in the structure of an economy. The process of decreasing the
importance of the primary sector and increasing the participation of the secondary and tertiary sectors in total
output.
• Change from primary sector, to secondary, to tertiary
• Engel’s law: as a consumer’s income increases, the proportion of income spent on food declines, rising the
income spent on other goods. 


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BASIC CONCEPTS AND INDICATORS (Measuring and comparing incomes)
1. Gross Domestic Product (GDP)
It’s the market value of all final goods and services produced within a country in a given period of
time
• Of all final — only the value of final goods, not intermediate goods
• Produced — includes services and goods currently produced, not transactions involving goods
produced in the past
• Given period of time — a year or a quarter (3 months)
Total income of everyone in the country
Total expenditure on the economy’s output of goods and services
Total income = total expenditure
I. Its components
• Items legally produced and sold
• NOT COUNTED:
• Items produced and consumed at home — never enter the marketplace
• Items produced and sold illicitly
II. Formula
• Y = Consumption + Investment + Gov. purchases + Net eXports. y=c+i+g+nx

2. GDP per capita

GDP per capita = GDP / population
It is not an accurate measure of wellbeing in a country because it doesn’t show the distribution of income

3. Real vs Nominal GDP: price index

Nominal GDP: values the production of goods and services at current prices
Real GDP: values the production of goods and services at constant prices
• Eliminates the effect of inflation
Nominal GDP can be converted into Real GDP by using price index:
• GDP deflator
• Consumer Price Index (CPI)

4. Index numbers
Technique for analyzing and comparing data in a different time or space
Comparison ALWAYS made between the value for a fixed period (base period H0) and the value reached
by the magnitude at any other time (t)

It cannot be negative

Index indicates the percentage change in magnitude H from period 0 to period t

It/0 (H) = Ht / H0 x 100 = 150
Per 100 units of variable H at period 0, at time T there are 150 units — variable grows 50%

5. Growth rates
Percentage change of a given variable in a specific period of time
GR= GDP year 2 - GDP year 1 x 100
GDP in year 1

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I. Compound Annual Growth Rate (CAGR)
Rate at which a given variable grows over a period of years, taking into account the effect of annual
compounding
R = [(Vf/V0)^(1/n) -1] x 100

N= number of years
Vf= final value
V0= initial value

STUDY GUIDE QUESTIONS

1. Are economic growth and economic development synonyms?

No, economic growth is referred to the sustained increase of total output of goods and services. There are
two types: extensive growth, which is given by the increase of the factors of production used, and intensive
growth, which occurs when the productivity increases while the amount of factors remains constant.
Meanwhile, economic development does not only depend on the increase on the output, but also on the social
progress and a substantial structural change. This will therefore entail a series of rights such as freedom of
opportunity, political freedom and transparency between people, and economic protection to avoid poverty
(based on income supplements and unemployment relief).

2. What is the Great Divergence? When did it begin? Do all economic historians agree?
The great divergence is known as the growing gap between the West and the rest of the world. The West is
formed by the Western Europe and its offshoots (USA, Canada, New Zealand), while the rest includes Asia,
Africa, South America and eastern Europe. It began in the 19th century right after the industrial revolution
(1801). Not all economic historians agree, as there are some who argue that the great divergence had its
origins after the 19th century as a matter of industrial revolution, and some suggest that it had its roots before
the 19th century.

3. How many stages can you identify in the development of world per capita income from the
beginning of recorded human history to the early 21st century?
The first stage is the one in which the GDP per capita is stagnated, which corresponds to the Malthusian trap.
The other stage is the one that occurs in the 19th century, characterized by the exponential increase of the gap
per capita thanks to the industrialization. This last stage is called the Great Divergence.

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 QUIZ QUESTIONS

The world economy achieved modern (or sustained) economic growth in the 19th century, thanks to the
advent of the industrialization

The reasons explaining why pre-industrial, agrarian societies were condemned to periodic subsistence crisis
are:
1) The diminishing returns over the land
2) Limited resources and lack of productivity
3) The Malthusian trap, that is, the idea that population growth exceeded the growth of food supply,
therefore leading to famine as food supply became too small to sustain the population

Adam Smith is an economist considered the father of modern economics and the first advocator of
liberalism.

China is not a developed economy because its GDP is too low compared to the other countries

Deflation: prices decline

Inflation: prices increase

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