Royal Holloway University: Capital Revolution Homework Assignment

This document presents a comprehensive solution to a homework assignment on the Capital Revolution, addressing key concepts in economics. The assignment explores the roles of economic agents like households, businesses, and governments, and defines essential terms such as firms, markets, and private property. The solution analyzes income inequality across different countries, examining trends and contributing factors using the 90/10 income ratio, and discusses the evolution and significance of GDP, its limitations, and alternative measures of well-being such as the Human Development Index. Furthermore, it investigates the correlation between life expectancy and GDP per capita, emphasizing the causal relationship and underlying mechanisms. The assignment concludes by highlighting aspects of well-being beyond GDP, such as education, environmental quality, and income equality. This resource provides a detailed understanding of the capitalist revolution and its impact on economic and social development.

Running head: THE CAPITAL REVOLUTION
The Capital Revolution
Name of the Student
Name of the University
Course ID

1THE CAPITAL REVOLUTION
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................4
Question 4........................................................................................................................................5
Question 5........................................................................................................................................6
References........................................................................................................................................7

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Question 1
A) The main economic agents are household, business, firms, individual and government.
B) A firm refers to way of organizing production process having some specific characteristics.
C) All the people staying under one roof and acts as a single decision maker is known as
household.
D) Government is an economic entity that sets economic rules, set regulation, collect tax and
spend the collected money.
E) Market in economics signifies an arrangement where sellers and buyers come in direct contact
and exchange goods or service1.
F) Private property implies a legal designation signifying ownership of particular property by
legal non-governmental entity.
Question 2
Table 1: 90/10 Income Ratio in 1980, 1990 and 2014
90/10 Income Ratio
1980 1990 2014
Australia 7.5 8.6 9.0
United State 11.2 14.3 16.0
France 7.9 9.1 8.4
China 6.6 23.3 41.7
Liberia 57.4 57.4 58.5
1 Goodwin, Neva, et al. Macroeconomics in context. Routledge, 2015

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Australia United State France China Liberia
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Income Inequlaity
1980
1990
2014
Figure 1: 90/10 income ratio
B.
In terms of income United State has the highest average income followed by Australia
and France. During 1980, China recorded a higher average income compared to Liberia.
However, overtime with economic progress average income in China exceeds that in Liberia.
As observed from the 90/10 ratio, most of the chosen countries experienced an increase
in income equality within nation overtime. It is only France that experienced a decline in income
inequality between 1990 and 2014. Among the five nations, China experienced highest increase
in the income inequality in the three years followed United States, Australia and Liberia.
C.
During 1980, Liberia recorded the highest income inequality followed by United State,
France, Australia and China. The reasons for largest income inequality is dependency of majority

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of population on traditional agricultural sector2. In developed nations like United State, Australia
and France dominant share of capital over labor explains income inequality.
Overtime China recorded significantly high income equality. This is because the
economy though has made significant progress but the benefits of economic growth had not
spread equally3. In rest of the four nations, inequality has increased marginally because of
relatively slow growth rate and lesser structural change as compared to China.
Question 3
The concept of GDP was originated in the late seventieth century. William Petty first
attempted to estimate national income with an objective of making monarch understood how
much taxes can possibly be raised despite of foreign wars.
Since introduction of the idea, it had useful policy implication. During war, it gave great
benefit to Britain involving in constant war with France because Britain had more capacity of
raise necessary funds and increase its troops as compared to its opponents. During great
depression the concept was used to portrait state of the economy and helped government to
design its policy accordingly.
The concept of GDP only includes only material things valued in monetary terms. It does
not include intangible items such as happiness valuable for well-being and therefore
underestimate social welfare4.
2 Mukherjee, Shantanu, et al. Income Inequality Trends in sub-Saharan Africa: Divergence, determinants and
consequences: Inequality, Gender and Human Development in Africa. No. 2063-2018-617. 2017.
3 Tian, Xu, et al. "Regional income inequality in China revisited: A perspective from club convergence." Economic
Modelling 56 (2016): 50-58.
4 econtalk.org. "Diane Coyle On GDP - Econlib." Econlib. N.p., 2019. Web. 4 Oct. 2019.

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GDP supplemented by measures covering other aspects of well-being such as life
expectancy, education, happiness and others can give a more suitable measure of human well-
being. One such measure is called Human Development Index (HDI) which include life
expectancy, education and per capita income.
Question 4
A)
There exists a positive correlation between life expectancy and GDP per capita.
B)
It matters to understand the quality of living supported by the evidence that countries
experiencing an increasing income since 1810 also experienced an upsurge in life expectancy.
C)
The relationship is casual with the causation goes from income towards life expectancy5.
D)
The mechanism of improvement in health condition of people with increase in come
drives the causation.
Question 5
There are various other aspects of well-being that can help a society to better off except a
rise in GDP. Increase in level of education generates positive externality and increase level of
social welfare. A society can also improve its well-being by improving quality of environment.
5 youtube.com. "Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy Of Stats - BBC Four." YouTube.
N.p., 2019. Web. 4 Oct. 2019.

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By lowering emission level nations can escape from the dangerous effect of climate change.
Ensuring fairness in terms of reducing income inequality is another means of increased welfare
following which a society can be better off6. Achieving a higher expectancy help a society to
achieve a better life.
6 Heijdra, Ben J. Foundations of modern macroeconomics. Oxford university press, 2017.

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References
econtalk.org. "Diane Coyle On GDP - Econlib." Econlib. N.p., 2019. Web. 4 Oct. 2019.
Goodwin, Neva, et al. Macroeconomics in context. Routledge, 2015.
Heijdra, Ben J. Foundations of modern macroeconomics. Oxford university press, 2017.
Mukherjee, Shantanu, et al. Income Inequality Trends in sub-Saharan Africa: Divergence,
determinants and consequences: Inequality, Gender and Human Development in Africa. No.
2063-2018-617. 2017.
Tian, Xu, et al. "Regional income inequality in China revisited: A perspective from club
convergence." Economic Modelling 56 (2016): 50-58.
youtube.com. "Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy Of Stats - BBC
Four." YouTube. N.p., 2019. Web. 4 Oct. 2019.