Pros and cons of capitalism

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Capitalism is an economic system characterised by:

  • Lack of government intervention
  • Means of production owned by private firms.
  • Goods and services distributed according to price mechanism (as opposed to government price controls)

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Capitalism - pros and cons

Pros of capitalism

“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
― Milton Friedman

  • Economic freedom helps political freedom. If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy which may extend into other areas of life.
  • Efficiency. Firms in a capitalist based society face incentives to be efficient and produce goods which are in demand. These incentives create the pressures to cut costs and avoid waste. State-owned firms often tend to be more inefficient (e.g. less willing to get rid of surplus workers and fewer incentives to try new innovative working practices.)
  • Innovation. Capitalism has a dynamic where entrepreneurs and firms are seeking to create and develop profitable products. Therefore, they will not be stagnant but invest in new products which may be popular with consumers. This can lead to product development and more choice of goods.
  • Economic growth. With firms and individuals facing incentives to be innovative and work hard, this creates a climate of innovation and economic expansion. This helps to increase real GDP and lead to improved living standards. This increased wealth enables a higher standard of living; in theory, everyone can benefit from this increased wealth, and there is a ‘trickle-down effect‘ from rich to poor.
  • There are no better alternatives. As Winston Churchill, “It has been said that democracy is the worst form of government except for all the others that have been tried.” A similar statement could apply to capitalism.

Cons of capitalism

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
– John Maynard Keynes (1)
  • Monopoly power. Private ownership of capital enables firms to gain monopoly power in product and labour markets. Firms with monopoly power can exploit their position to charge higher prices. See: Monopoly
  • Monopsony power. Firms with monopsony power can pay lower wages to workers. In capitalist societies, there is often great inequality between the owners of capital and those who work for firms. See: Monopsony exploitation

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Reasons for falling price of electronic goods

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With any new technology – especially electronic goods (TVs, computers, cameras), we tend to see a sharp fall in price over time. Initially, the new technology is very expensive, and a high percentage of disposable income, but over time, prices tend to fall considerably. There are a number of reasons to explain this fall in …

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Devaluation and Depreciation Definition

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Definition of devaluation and depreciation

  • A devaluation occurs when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate.
  • A depreciation is when there is a fall in the value of a currency in a floating exchange rate.

In general, everyday use, devaluation and depreciation are often used interchangeably. They both have the same effect – a fall in the value of the currency which makes imports more expensive, and exports more competitive.

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In 2008, the Pound Sterling fell in value by 30%. The correct term is a depreciation because the Pound Sterling was a floating currency. (no fixed exchange rate.)

  • For A-Level economics, it is not absolutely essential to distinguish between the two, but there is a distinct technical difference and using them correctly is good practice.
  • Essentially devaluation is changing the value of a currency in a fixed exchange rate. A depreciation is reducing the value in a floating exchange rate.

Definition of Devaluation

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Sterling exchange rate index, which shows the value of Sterling against a basket of currencies. In 1992, The Pound devalued after exiting the Exchange Rate Mechanism.

A devaluation is when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate. Therefore, technically a devaluation is only possible if a country is a member of some fixed exchange rate policy.

  • For example in the late 1980s, the UK joined the Exchange Rate Mechanism ERM. Initially, the value of the Pound was set between say 3DM and 3.2DM.
  • However, if the government thought that was too high, they could make the decision to devalue and change the target exchange rate to 2.7DM and 2.9DM. In 1992, they left ERM as they couldn’t maintain the value of Pound.

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Reasons for Youth Unemployment

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A look at the economics reasons for high youth unemployment (16-25) in many western economies.
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In the UK, youth unemployment has averaged higher than the main unemployment rate. This is is a similar situation to the US and European economies.

The reasons for youth unemployment include

  1. Lack of qualifications. Young people without any skills are much more likely to be unemployed (structural unemployment) A report by Centre for Cities suggest there is a correlation between youth unemployment and poor GCSE results in Maths and English. To some extent, the service sector has offered more unskilled jobs such as bar work, supermarket checkout and waiters. However, the nature of the labour market is that many young people lack the necessary skills and training to impress employers.
  2. Geographical Unemployment. Youth unemployment is often focused in certain areas – often inner cities where there is a cycle of low achievement and low expectations. For example, the employment rate for 16-24 year-olds is only 64% in the North East compared to a national average of 70%

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Currency Speculation and Exchange Rate

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Readers Question: Hi! Can you explain why floating exchange rates reduce the risks of currency speculation? What are those risks? Thank you very much! Currency speculation is when investors feel the exchange rate is wrongly valued and so buy/sell currency in the hope of making a profit. For example, if a currency is pegged at …

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Causes of resource scarcity

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Resource scarcity is defined as a situation where demand for a natural resource is exceeding the supply – leading to a decline in available resources. When we talk about scarce resources, we usually imply that current use is unsustainable in the long-term. Scarcity can involve non-renewable resources, such as oil, precious metals and helium. It …

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The True Level of Unemployment in UK

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Readers Question: To what extent do the official UK figures for unemployment accurately reflect economic reality? The unemployment rate measures those who are officially seeking work but unable to find employment. However, the official unemployment rate does not include those who are not working and are classed as economically inactive. For example, economically inactive can …

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