Macroeconomics (ECON 2120) Chapter 8 Why Isn't the Whole World Developed?

31) Which of the following statements is true?

A nation's institution comprises of the rules and regulations in the nation, while a nation's culture comprises of the saving habits of its citizens.

18) Which of the following statements is true?

After Czechoslovakia split into Czech Republic and Slovakia, the nations adopted a market economy which accelerated their economic growth.

19) Which of the following statements is true?

An individual with property rights is likely to have higher productivity than an individual without property rights.

What is creative destruction? Define political creative destruction.

Answer: Creative destruction refers to the process in which new technologies replace old ones, new businesses replace existing businesses, and new skills make old skills irrelevant. The process of creative destruction implies that technological change is the main driver for economic growth but also creates losers as it replaces otherwise profitable firms or technologies with newer ones. Political creative destruction refers to the process in which economic growth destabalizes existing regimes and reduces the political power of rulers and monarchs.

55) How do entry barriers hamper economic prosperity?

Answer: Entry barriers discourage the entry of new firms into businesses. Thus, the existence of entry barriers is likely to support inefficient firms and prevent entrepreneurs with new ideas from entering into the right lines of business. This restricts workers from working in occupations to which their skills are best suited. Hence, the presence of entry barriers lowers productivity and hampers economic prosperity.

54) Explain the differences between inclusive and extractive economic institutions.

Answer: Inclusive economic institutions protect private property, uphold law and order, allow and enforce private contracts, and allow free entry into lines of businesses and occupations. On the other hand, extractive economic institutions do not protect property rights, do not uphold contracts, interfere with the working of markets and instead erect significant entry barriers into businesses and occupations.

40) What are institutions? What is the institutions hypothesis of economic growth?

Answer: Institutions are the formal and informal rules governing the organization of society, including its laws and regulations. The institutions hypothesis claims that differences in institutions, that is, the way in which societies have organized themselves and shaped the incentives of individuals and businesses, are at the root of the differences in prosperity across the world.

41) What is the main reason behind the disparity in the growth rates of South Korea and North Korea over the last sixty years?

Answer: Over the last sixty years, South Korea has been one of the fastest growing economies in the world while North Korea has almost stagnated. The main reason behind this difference is the type of institutions that exist in both countries. Resources in North Korea were allocated through central planning, private property was outlawed, and markets were banned. Therefore, the citizens of North Korea did not have any incentive to increase work effort and productivity. On the other hand, South Korea was a market-based economy that provided incentives to businesses for investment and industrialization and invested in the education of South Koreans. With the right incentives in place, investors and entrepreneurs in South Korea focus on investment and increasing economic activity, leading to economic growth.

52) What are private property rights? Does enforcement of property rights promote economic growth and prosperity?

Answer: Private property rights mean that individuals can own businesses and assets, and their ownership is secure. Private property rights are conducive to economic prosperity, because when they exist, citizens do not have to worry about the government or someone else taking away their assets arbitrarily. This provides an incentive to innovate, and improve efficiency of production that leads to economic prosperity.

57) What is the likely reason for the Industrial Revolution to have started in Britain and not somewhere else?

Answer: The primary reason for why the Industrial Revolution started in Britain is that institutions in Britain were inclusive. Britain had a well-developed market system with private property rights. This improved profitability of businesses, and encouraged entrepreneurs to innovate. Britain also had a patent system that allowed the inventors of new technologies to protect their property rights not only in tangible assets but also in ideas. These institutional features of the British society were the key prerequisites for the industrial revolution.

58) What was the main cause for the reversal-of-fortune of many countries?

Answer: The reversal-of-fortune can be attributed to the nature of the institutions set up in European colonies around the world. European colonialism was driven by profit motive, and hence, they set up extractive institutions in places that were previously more developed. This drained out the economic prosperity from these well-performing nations and reversed their fortunes. On the other hand, inclusive institutions were set up in places that were previously less developed. This encouraged growth and reversed their fortunes.

35) An important reason for the Industrial Revolution to have started in Britain is that:

Britain had a patent system.

34) One of the main reasons that explains why the Industrial Revolution started in Britain is that:

Britain had inclusive institutions.

15) Which of the following statements is true?

Competition among firms is likely to be higher in market economies than in communist economies.

12) Which of the following statements is true of economic growth?

Countries with inclusive institutions are likely to grow faster than countries with extractive institutions.

8) Consider two countries—country A and country B. Both countries are exactly similar in all aspects except for one. The institutions in country A are inclusive while the institutions in country B are extractive. Given this information, which of the following statements is likely to be true?

Country A is likely to have well-defined property rights, while country B is likely to lack well-defined property rights.

4) Consider two countries-country A and B. Both countries are exactly similar in all aspects except for one. In country B it is possible for entrepreneurs to borrow money from banks and financial markets. While in country A, there is no loan for entrepreneurship. Given this information, which of the following statements is likely to be true?

Country B is likely to grow faster than country A.

27) Which of the following statements is true of creative destruction?

Creative destruction creates losses for some economic agents and benefits for others.

3) Consider two countries-country A and B. Both economies are exactly similar in all aspects except for one. There are well-defined property rights in country A, while there are no property rights in country B. Given this information, which of the following statements is likely to be true?

Economy A is likely to grow faster than economy B.

22) Which of the following statements correctly highlights a difference between countries with extractive economic institutions and countries with inclusive economic institutions?

Entry barriers for new businesses are likely to be higher in countries with extractive economic institutions than in countries with inclusive economic institutions.

50) Institutional reversal refers to the fact that:

Europeans established more extractive institutions in places that were previously more developed, and set up more inclusive institutions that were previously less developed.

47) Which of the following statements is true of the Europeans in the period of colonization?

Europeans set up relatively extractive economic institutions in areas that had greater population densities.

21) Which of the following statements is true?

Extractive institutions may prevent workers from working in occupations to which their skills are best suited.

4) Which of the following statements is true of foreign aid?

Foreign aid will work better in eradicating poverty in countries with inclusive institutions than in countries with extractive institutions.

28) Which of the following statements is true?

Geography of a nation is not always under human control, while institutions of a nation are man-made.

3) Which of the following statements is true of foreign aid?

In practice, much of foreign aid does not get invested in new technology or education.

5) Which of the following statements is true of foreign aid?

In some instances foreign aid can be beneficial to dictators.

17) Which of the following statements is true?

Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity, while extractive institutions fail to do so.

23) Which of the following statements correctly highlights a difference between countries with extractive economic institutions and countries with inclusive economic institutions?

Innovation is more likely in countries with inclusive economic institutions, than in countries with extractive economic institutions.

27) Which of the following is NOT true of institutions?

Institutions are permanent and cannot be changed over time.

1) Which of the following statements is true?

Institutions determine the degree to which society accumulates factors of production and adopts new technology.

37) Which of the following statements is true of the process of colonization?

Institutions in North America were set up by Europeans.

16) Consider two countries—A and B. Economy A is a command economy, while economy B is a market economy. Given this information, which of the following statements is likely to be true?

Institutions in economy A are likely to be more inclusive than institutions in economy B.

26) Which of the following is a characteristic of an institution?

Institutions place constraints on the behavior of economic agents.

13) Which of the following statements is true?

It is possible for an economy to change both its political and economic institutions.

7) Which of the followings statements correctly identifies an advantage of using foreign aid to eradicate poverty?

It leads to a redistribution of income around the world.

2) Which of the following is a valid shortcoming of the use of foreign aid to eradicate poverty?

It may not lead to a sizeable increase in physical capital in poorer countries.

25) Which of the following economists first coined the concept of creative destruction?

Joseph Schumpeter

41) Which of the following is a good proxy for the measure of economic prosperity when GDP per capita data is unavailable?

Measurements of urbanization

39) Which of the following statements is true of British colonies in Jamaica and Barbados?

Participation of the natives in politics was greatly limited.

38) Which of the following statements is true of colonies set up in North America?

Production was based on defined property rights in the colonies in North America.

5) Which of the following statements is true?

Proximate causes of prosperity are shaped by fundamental causes of prosperity.

9) Trends in economic growth of South Korea have been significantly different from the trends in economic growth of North Korea. This is primarily because

South Korea has inclusive institutions while North Korea has extractive institutions.

9) Which of the following statements is true?

Stock of human capital and physical capital available to a nation can be considered proximate causes of prosperity.

22) According to Max Weber, the Protestant world view that encouraged hard work and saving was crucial to industrialization and the development of capitalism. Which hypothesis is this view based on?

The culture hypothesis

20) Suppose we claim that the rapid economic growth in Barylia can be attributed to the culture hypothesis. Which of the following statements is most likely to be concluded from this claim?

The local people in Barylia must be socially inclined to work hard.

40) Which of the following statements is true of British colonies set up in areas of Mexico, Guatemala, and Bolivia?

The natives were forced to work in mines and agricultural estates.

14) Which of the following statements is true?

The type of economic institutions in a country are inter-linked with the type of political institutions in a country.

16) Which of the following may partially reduce the geographical disadvantages faced by poorer countries?

Transferring technology from richer to the poorer countries

45) The phrase "reversal of fortunes" refers to the fact that:

areas that were relatively highly urbanized in 1500, are generally poorer today.

48) The reversal of fortune in terms of population density suggests that:

areas with a higher population density in 1500 are today relatively less prosperous.

51) The pattern of colonialization adopted by European countries was:

basically profit driven.

17) One of the methods of reducing the geographical disadvantage faced by poorer countries is:

by undertaking large-scale disease eradication programs.

6) Foreign aid:

can lead to corrupt practices in countries ruled by dictators.

24) The process in which new technologies replace old ones, new businesses replace existing businesses, and new skills make old ones irrelevant is referred to as:

creative destruction.

19) Certain countries remain backward because they nurture superstition and are suspicious of new technology. This argument is based on the:

culture hypothesis.

21) A hypothesis states that religious teachings, family ties, and/or social norms are the root cause of economic prosperity. According to this hypothesis:

culture is a fundamental cause of prosperity.

23) According to Samuel Huntington, South Korea's economy experienced rapid economic growth because South Koreans valued thrift, investment, education, and discipline. On the other hand, Ghana's economy did not grow as fast because the country had different social values. This argument claims that:

culture is a fundamental cause of prosperity.

18) The cultural hypothesis of economic growth claims that:

different values and cultural beliefs cause differences in prosperity around the world.

52) The reversal of fortune can be attributed to the fact that:

economic institutions in European colonies were extractive in prosperous nations and inclusive in other nations.

5) The aspects of the society's rule that concern economic transactions are referred to as:

economic institutions.

24) Consider two economies: A and B. In economy A, the work culture is such that people do not mind working for 12 hours a day. On the contrary, in economy B, people work for a maximum of 6 hours in a day. If the culture hypothesis holds, then:

economy A is likely to grow faster than economy B.

32) Many communist dictators ban the adoption of new technologies to:

encourage political creative destruction.

1) The aim of development aid is basically to:

eradicate poverty.

7) When institutions do not protect private property rights, do not uphold contracts, interfere with the working of markets and instead erect significant barriers into businesses and occupations, they are referred to as:

extractive economic institutions.

8) The availability of vast stocks of natural resources is an example of a(n):

fundamental cause of prosperity.

6) Those factors that lead to differences in the proximate causes of prosperity between nations are referred to as:

fundamental causes of prosperity.

7) Geographical conditions such as good climate, availability of natural resources, and fertile soil are examples of:

fundamental causes of prosperity.

10) The ________ hypothesis claims that differences in natural environment such as climate, and ecology are ultimately responsible for the major differences in prosperity observed around the world.

geography

46) The reversal of fortune is strong evidence against the:

geography hypothesis of economic prosperity.

13) The presence of navigable rivers and fertile soil is seen as a source of economic prosperity under the:

geography hypothesis.

14) Countries in sub-Saharan Africa are economically disadvantaged because infectious diseases spread in these countries relatively easily. This statement reflects the:

geography hypothesis.

12) Suppose the lack of agricultural land is a key reason for the slow economic growth of Lithasia. This argument claims that:

geography is the fundamental cause of slow economic growth in Lithasia.

6) When a society's economic institutions provide secure property rights, set up a judicial system that enforces contracts and upholds the law, allow private parties to sign contracts for economic and financial transactions, and maintain relatively free entry into different businesses and occupations, the institutions in the society can be said to be:

inclusive.

2) Private property rights mean that:

individuals can own businesses and assets, and their ownership is secure.

34) The difference in economic growth in North Korea and South Korea can be primarily attributed to differences in ________.

institutions

32) The ________ claims that the way societies have organized themselves and shaped the incentives of individuals and businesses are at the root of the differences in prosperity across the world.

institutions hypothesis

30) A researcher claims that the standards of law and order are the basis of the economic prosperity of a certain country. This argument is based on the:

institutions hypothesis.

35) The reason why the differences in the growth stories of North Korea and South Korea can be viewed approximately as a natural experiment or an experiment of history is that:

institutions in both countries was changing radically, while geography and culture remained largely unchanged.

25) The formal and informal rules governing the organization of a society on the whole, including its laws and regulations, are referred to as:

institutions.

29) Political creative destruction:

is likely to adversely affect the ruling government in an economy with extractive institutions.

26) Creative destruction:

is more likely in an economy with inclusive institutions.

33) Initially, the creation of railroads was opposed in some countries because:

it was likely to initiate creative destruction.

43) If urbanization in a nation keeps increasing, GDP per capita in the nation is likely to:

keep increasing.

30) Political creative destruction is likely to be opposed:

less in an economy with inclusive institutions than in an economy with extractive institutions.

20) Extractive economic institutions are:

likely to prevent entrepreneurs with new ideas from entering into the right line of business.

11) A researcher claims that the slow economic growth of countries located in Africa can be attributed to the geography hypothesis. If the researcher is correct, it implies that economic growth of countries in Africa is greatly affected by:

natural factors such as climate and quality of soil available.

31) If an economy with extractive institutions allows for political creative destruction:

new leaders are likely to replace old leaders.

29) Institutions:

place constraints on human behavior, and these constraints may not be absolute.

28) The process in which economic growth destabilizes existing regimes and reduces the political power of rulers and monarchs is referred to as:

political creative destruction.

15) If the geography hypothesis holds, then:

poorer countries are permanently disadvantaged.

11) Extractive institutions:

privilege a few at the expense of many.

2) Differences in the stock of physical capital between nations are an example of a(n):

proximate cause of prosperity.

3) Differences in the stock of human capital between nations are an example of a(n):

proximate cause of prosperity.

4) Differences in the stock of technology between nations are an example of a(n):

proximate cause of prosperity.

1) The causes of prosperity that link high levels of prosperity to high levels of inputs of production, without explaining why the levels of those inputs are high, are referred to as:

proximate causes of prosperity.

42) Urbanization is measured by:

the fraction of the population living in towns with a population of more than 5,000.

33) Adam Smith supported the view that ________ greatly influenced its economic growth.

the institutions in a nation

49) The reversal of fortune can be primarily attributed to:

the type of institutions in a nation.

10) Extractive institutions control political power to:

transfer resources from society to the ruling party.

44) The relationship between urbanization and GDP per capita, it is likely to be represented by a(n):

upward-sloping curve.

36) The reason why the Industrial Revolution originated in Britain can be partly attributed to its:

well-developed market system.