chapter 16 economics

`Institutional elements that are key to the growth process:

a legal system that protects property rights and enforces contracts evenhandedly, competitive markets, access to money of stable value, minimal regulation, avoidance of high marginal tax rates, and trade openness

a measure of output and income.

GDP

In a _ setting, producers must provide goods at a low cost and serve the interests of consumers because if they don't, other suppliers will.

competitive

Unless growth-oriented policies are adopted, foreign aid will

continue to be ineffective

_ policies in one or two key areas can substantially harm the overall performance of an economy.

counterproductive

the process of entrepreneurial discovery is referred to as _

creative destruction

The poverty rate in Africa has _ than in other regions of the world.

declined slower

will encourage entrepreneurial activity and provide producers with a strong incentive to produce quality products at a low cost.

freedom to compete

Modern growth analysis stresses that institutions and policies influence the realization of

gains from trade, discovery and dissemination of improved products and production methods, and the level and productivity of investment.

high and variable rates of inflation generate uncertainty and thereby increase the cost of exchanges across time periods and reduce investment. Thus, the _are diminished.

gains from trade, entrepreneurial discovery, and investment

Sources of Economic Growth:

gains from trade, entrepreneurial discovery, and investment in physical and human capital

necessary for the growth of income.

growth of output

In the '50s & '60s, it was widely believed aid from high-income countries would help poor countries invest in infrastructure such as roads and power generating facilities and that this would provide the start-up capital needed to trigger the _.While the theory sounded good, studies indicate that the aid was largely ineffective. The aid was often used to prop up corrupt authoritarian regimes and thereby retard needed institutional change. Further, aid in the form of surplus agricultural products often disrupted markets in less developed countries.

growth process

reduce the incentive of people to earn, invest, and engage in other productive activities.

high marginal tax rates

also reduce efficiency by driving productive activity into the underground economy, encouraging tax avoidance, and even inducing highly productive persons to move to other countries.

high taxes

means that the typical person has a better diet, improved health and access to medical services, a longer life expectancy, and greater educational opportunity.

higher per capita GDP

If contracts are not enforced or if they are enforced in a biased manner, transaction costs will be _, trade will be _ and the volume of trade will _

higher, riskier, fall

stresses the importance of institutions and policies.

modern growth analysis

Like domestic trade, international trade is

mutually advantageous

There is a tendency to think that income differences across countries are largely the result of

natural resources

Many resource rich countries are poor:

nigeria, venezuela, indonesia, and russia

When the residents of a nation are free to trade with foreigners, domestic producers will be able to

supply a larger quantity of goods they can produce at a relatively low cost.

reduce the gains from specialization and international trade and thereby reduce income below its potential.

tariffs, quotas, and other trade restrictions

scientific discovery

technological improvement

Malthus theory was wrong because he did not understand the importance of

technological improvements, innovation, and entrepreneurial discovery

During the past 200 years, the income growth of the high-income industrial countries (west) has been even higher - nearly

20 fold

The "rule of 70" is a simple rule

(70 divided by the growth rate) that approximates the number of years it will take for income to double at various growth rates.

Jeffery Sachs of Columbia University argues that tropical countries are disadvantaged because:

-Their hot, humid climates erode the energy level of workers and increase the risk of disabling and life-threatening diseases, and, -Their location is far from the major markets of Western Europe, North America, and Japan.

The institutional environment in Africa is inconsistent with economic growth. Africa is characterized by:

-Trade restrictions, a poor legal environment, and extensive regulation of business. - Most sub-Saharan countries rank in the bottom quarter of the Economic Freedom of the World (EFW) index.

Life expectancy at birth for the world rose from24 to 26 years between 1000 and 1820, but it soared to _ by _

70, 2010

If the U.S. had a growth rate of 2.5%, how many years would it take for the income level of the U.S. to double?

70/2.5 = 28

Which of the following is true for the world as a whole?

During the 800 years between 1000 and 1800, the increases in both world income per person and life expectancy at birth were small, but both of these indicators have increased sharply during the past 200 years.

What can governments do to promote prosperity?

Governments promote economic progress when they protect individuals & their property, enforce contracts impartially, provide access to money of stable value, avoid high taxes and excessive regulation, and foster competitive markets and free international trade.

Many high income countries have few natural resources:

Japan, singapore, and hong kong

More foreign aid has been directed at _ than any other region in the world.

africa

Which of the following is important if a country is going to achieve and sustain high rates of economic growth? a. investment in physical and human capital b. improvements in technology c. institutional and policy arrangements consistent with economic efficiency d. All of the above.

all of the above

When markets are competitive, self-interested individuals have a strong incentive to

develop resources and provide goods that are highly valued by others

Trade makes larger outputs possible because of

division of labor, specialization in areas of comparative advantage, and application of mass production techniques

a complex process that generally involves a combination of several interrelated factors.

economic growth

important because it is a necessary ingredient for higher incomes and higher living standards.

economic growth

leads to more than just material goods. It also generally leads a cleaner environment and more time for leisure and recreation.

economic growth

makes larger outputs possible. This can be illustrated by an outward shift in the PPC (production possibilities curve).

economic growth

means that a larger quantity of goods and services can be produced.

economic growth

When institutions and policies provide secure property rights,a fair and balanced judicial system, monetary stability, and effective limits on government's ability to transfer wealth through taxation and regulation, individuals are encouraged to

engage in productive activities

When the legal and regulatory environment fails to protect property rights and often favors some at the expense of others, individuals are instead encouraged to

engage in rent-seeking, lobbying, bribes, and other counterproductive activities.

Discovery of improved products and lower cost production methods is a driving force of economic growth.

entrepreneurial discovery

With trade, countries can specialize in the production of goods they can produce economically and trade for those that would be costly to produce domestically. As a result, joint output can be

expanded and both trading partners can consume a larger, more diverse bundle of goods.

Through the years, economists have developed several theories about why some countries grow and others stagnate. While some are valid, history has shown others to either be

fallacious or incomplete

Increases in per capita GDP are

important, because they generally improve our living standards.

The record of Singapore & Hong Kong shows that tropical countries with sound institutions can achieve

impressive growth and income

technological improvement and innovation play a role in the development of _

improved products and better ways of doing things

The successful introduction and adoption of a new product or process is called

innovation

its practical application and dissemination.

innovation

weaken the incentive to invest and to engage in entrepreneurial activity.

insecure property rights

-More and better machines and tools can enhance the productivity of people. -Education and training that improves the skill level of workers will also increase output. -Other things constant, countries that invest more will tend to grow more rapidly. But, investment is costly; it involves the sacrifice of current consumption. -High investment rates do not guarantee rapid growth. The investment must be channeled into wealth-creating projects.

investment in physical and human capital

protects property rights and enforces contracts even-handedly is necessary for the smooth operation of markets.

legal system

the nation's GDP divided by its population. Growth of per capita GDP means more goods & services per person.

per capita GDP

has contributed to the dismal economic performance of several nations, including the Democratic Republic of Congo, Zimbabwe, Haiti, Nicaragua, Russia, and Iraq.

political instability

The security of property rights is often undermined by

political instability, civil unrest, and war

In 1798, economist Thomas Malthus argued that if income rose above subsistence level, this would trigger a _ that would drive income back down to subsistence level.

population boom

provides people with a strong incentive to develop and use resources wisely, innovate and discover better ways of doing things, and to invest and conserve for the future.

private ownership

Institutions and policies matter because they shape incentives and thereby influence whether individuals engage in

productive, unproductive, or even counterproductive activities

It is vitally important that entrepreneurs have a chance to try out new ideas, but it is also important that resources are not wasted on inefficient projects. In a market economy, _ and _ perform these functions

profits, losses

A legal system that protects private property and enforces contracts in an even-handed manner helps promote economic growth because it

provides people with a strong incentive to supply others with things that they value at an economical price.

Regulations that restrict entry and interfere with voluntary exchange will

reduce the competitiveness of markets and the volume of trade.

When the inflation rate is low and highly predictable, the risks of exchange across time periods is

reduced

a blunt instrument and it often generates harmful secondary effects.

regulation

Regulations that favor some at the expense of others will encourage

rent-seeking and political corruption.

View that abundant resources often lead to the adoption of counterproductive policies. This would weaken the link between the abundance of natural resources & income levels

resource curse

Malthus argued that population would grow exponentially (e.g. 1, 2, 4, 8, 16, etc.) while the resources required to expand production would grow only linearly (1, 2, 3, 4, etc.). Therefore, any increase of income above subsistence would

soon be eliminated by rapid population growth

Dividing 70 by a country's average growth rate gives the number of years required for an economy's income level to double.

the rule of 70

While income levels of tropical countries are generally lower than incomes in more temperate climates, their institutions and policies are also less consistent with the realization of gains from

trade, entrepreneurship and investment

The gains from trade will be greater when

transaction costs are lower and people are permitted to trade over a larger market area

Country A and country B initially have the same per capita income. Suppose that A sustains an annual growth rate of 3.5 percent, while the annual growth rate of country B is 1.75 percent. The "rule of 70" indicates that after forty years, the per capita income of country A will be approximately ____ that of country B.

twice

Unless countries adopt institutions and policies supportive of trade, entrepreneurial discovery, and private investment, they will be

unable to sustain long-term growth and achieve high income levels.

While resources may give a country an advantage, the linkage between resources and income is

weak