Macro Chapter 8
Suppose the return and cost of entrepreneurship curves are described by the following equations (with numbers measured in the thousands): R = 650 - 50N C = 50 where R = returns to entrepreneurship, C = cost of entrepreneurship, and N = number of entrepreneurs. The equilibrium number of entrepreneurs is N = _____ thousand. The equilibrium cost of entrepreneurship is C = $_____ thousand. Suppose the country's government begins providing a court system to provide legal backup of contracts, increasing the return to entrepreneurship by $100 thousand for each entrepreneur. The equilibrium number of entrepreneurs is N = _____ thousand. The equilibrium returns to entrepreneurship is R = $_____ thousand.
12 thousand $50 thousand 10 thousand $150 thousand
Zimbabwe, formerly known as Rhodesia, was a British colony for around ninety years. It became independent in 1980. The prime minister of newly formed Zimbabwe, Robert Mugabe, implemented a forced land redistribution policy, where commercial farms were confiscated from white farmers. Mugabe also proceeded to confiscate shares in companies owned by whites. In the following years, agricultural production in the country fell sharply. Zimbabwe, the country that used to be called the breadbasket of Africa, is now seeing food shortages in certain parts of the country. Would Zimbabwe be considered to have extractive or inclusive institutions? Explain your answer. A. Extractive institutions, because it doesn't protect property rights. B. Inclusive institutions, because there are food shortages. C. Extractive institutions, because it upholds contracts. D. Inclusive institutions, because income inequality has increased. Why would a government undertake policies that would adversely affect the lives of its citizens? A. To maintain its power. B. To promote economic growth. C. To invest in future prosperity. D. To change political institutions.
A. Extractive institutions, because it doesn't protect property rights. A. To maintain its power.
Sometimes development aid goes toward disaster relief. For example, after the Indian Ocean tsunami of 2004, non-governmental organizations helped devastated countries to rebuild. Based on your understanding of the chapter, which of the following statements are true of foreign aid? (Select all that apply). A. Foreign aid is inefficient when it is given directly to an extractive government. B. Foreign aid is inefficient when it is directly used to rebuild capital and promote growth in an economy. C. Foreign aid is efficient when it is given directly to an extractive government. D. Foreign aid is efficient when it is directly used to rebuild capital and promote growth in an economy.
A. Foreign aid is inefficient when it is given directly to an extractive government. D. Foreign aid is efficient when it is directly used to rebuild capital and promote growth in an economy.
In his book The Elusive Quest for Growth, development economist William Easterly discusses the relationship between foreign aid and investment in poor countries. He posits that to establish the effectiveness of aid in promoting investment, two tests should be passed: First, there should be a positive statistical association between aid and investment; second, aid should pass into investment 1 for 1, that is, a 1 percent (of GDP) increase in aid should result in a 1 percent (of GDP) increase in investment. Using a data set of 88 countries from 1965 to 1995, he finds that only 17 of 88 countries pass the first test, and of them, only 6 pass the second. Based on the information in the chapter, and perhaps your own reading, explain why foreign aid designed to spur investment usually does not work. A. It is insufficient to sustain growth. B. It spurs the expanse of inclusive economic institutions. C. It promotes political creative destruction. D. Increase physical capital. E. It may strengthen extractive political institutions. F. It is frequently diverted to corrupt officials.
A. It is insufficient to sustain growth. E. It may strengthen extractive political institutions. F. It is frequently diverted to corrupt officials.
After the Second World War, Germany was divided into two parts, East Germany and West Germany. East Germany was controlled by the former Soviet Union while West Germany was controlled by the other Allied governments: the United States, the United Kingdom, and France. The war had destroyed most of Germany's economy. The Soviet Union as well as the Allied occupation forces sought to rebuild the economies of their respective parts. Before the fall of the Berlin Wall reunited East and West Germany in 1990, West Germany's economy grew at an annual average growth rate of 4.4 percent, which was about 3 times higher than East Germany's rate. Draw the parallel between the natural experiment discussed in the chapter and the case of East and West Germany. Based on the information given in the question and your own research, why do you think two otherwise similar areas had such divergent growth rates? East and West Germany likely had different growth rates because ____________. A. West Germany's economic institutions were market oriented. B. East Germany received less foreign aid. C. East Germany's cultural values did not encourage growth. D. West Germany's climate was more favorable for growth.
A. West Germany's economic institutions were market oriented.
Political creative destruction refers to ____________. A. economic growth destabilizing political regimes. B. governments subsidizing new technologies. C. political leaders blocking the adoption of new technologies. D. existing regimes limiting economic development. The potential process of political creative destruction could lead to extractive institutions because ____________. A. upholding contracts increases prosperity and reduces poverty. B. the politically powerful fear losing their privileged positions. C. more economic activities will fall under the control of existing rulers. D. new technology will limit the entry of new leaders into government.
A. economic growth destabilizing political regimes. B. the politically powerful fear losing their privileged positions.
Unlike extractive economic institutions, inclusive economic institutions ____________. A. enforce contracts. B. create barriers to entry. C. are comprised of laws. D. do not include regulations.
A. enforce contracts.
Suppose the country of Burondo is one of the poorest countries in the world. Its economy is heavily reliant on income from the export of oil. There are only two oil-extracting companies in Burondo. Both are owned by the government. A large part of the earnings from oil exports goes toward financing the president's lifestyle and entourage. Burondo has not had a single democratic election ever since it gained independence 50 years ago. Although Burondo is said to have abundant oil resources, only a small proportion is extracted every year because the extraction process is so inefficient. Transporting goods in and out of the country is costly, as Burondo is surrounded by lofty mountain ranges. School enrollment in this country is very low and as a result, most of the adult population is illiterate. Life expectancy is also quite low. Agriculture is collectivized in Burondo and so food shortages are common in the country. Using the information given, distinguish between the fundamental and proximate causes of prosperity (or its absence) in Burondo. Proximate causes of Burondo's lack of prosperity are ___________. (Check all that apply.) A. school enrollment is low. B. most of the adult population is illiterate. C. there are few constraints to the exercise of power D. the climate is unfavorable. E. the agricultural industry is collectivized. F. food shortages affect health. G. the workforce is not skilled Fundamental causes of Burondo's lack of prosperity are ____________. (Check all that apply.) A. the workforce is not skilled. B. the agricultural industry is collectivized. C. the farmers have limited incentives to increase output D. the geography is not favorable. E. the topography is not favorable. F. the government is an extractive political institution. G.There are few constraints to the exercise of power H. most of the adult population is illiterate.
A. school enrollment is low. B. most of the adult population is illiterate. F. food shortages affect health. G. the workforce is not skilled B. the agricultural industry is collectivized. C. the farmers have limited incentives to increase output D. the geography is not favorable. E. the topography is not favorable. F. the government is an extractive political institution. G.There are few constraints to the exercise of power
Which of the following is an example of a proximate cause of prosperity? A. Geography B. Human capital C. Culture D. Institutions
B. Human capital
In the 1990s, Uganda received a sizable amount of foreign aid from the international community for education. However, only 13 percent of schools in Uganda actually received the grants funded by the aid. What might explain why so few Ugandan primary schools benefited from the foreign aid? A. It was needed first to develop inclusive economic institutions. B. It was stolen by government officials for their own use. C. It was instead used to invest in physical capital. D. It was instead used by rebels to destabilize the government.
B. It was stolen by government officials for their own use.
Look at the following map of Nogales, a twin city that is divided by the U.S. border. One part of Nogales lies in the United States, in Arizona, and the other part lies in Sonora, Mexico. Life in Nogales, Mexico is very different from life in Nogales, Arizona. The average income in Nogales, Mexico is about one-third the average income in Nogales, Arizona. Education levels, life expectancy, and health conditions are better in Nogales, Arizona than in Nogales, Mexico. Unlike Nogales in Arizona, Nogales in Mexico has only recently adopted political reforms, bringing it closer to functioning as a democracy. Crime rates are also lower in Nogales, Arizona than in Nogales, Mexico. Since both cities are located so close to each other, they share similar geographical conditions and climate. The inhabitants of both cities also share a common ancestry and enjoy the same type of food and music. Based on this information, Nogales, Arizona is likely more prosperous than Nogales, Mexico because ____________. A. Mexico strictly enforces private property rights, which creates inequality. B. U.S. citizens can hold their government responsible for its actions. C. Mexico has inclusive economic institutions that limit economic growth. D. U.S. economic institutions do not encourage employers to invest in technology.
B. U.S. citizens can hold their government responsible for its actions.
The geography hypothesis states ____________. A. prosperity may affect a country's ecology. B. geography has a common effect on prosperity in all countries. C. climate is a proximate cause of prosperity. D. climate is responsible for differences in prosperity.
B. geography has a common effect on prosperity in all countries.
Suppose a relatively poor country receives foreign aid to be used for education. However, a large portion of the money is stolen by local government officials. Nevertheless, some of the schools do receive some of the money that was intended for them. Suppose the schools that receive the aid tend to be those in richer areas that have more resources to start with and better connections. In this case, the foreign aid for education is likely to ____________. A. have more of a permanent effect on prosperity. B. result in political creative destruction. C. contribute to greater inequality of resources. D. force economic institutions to become more inclusive.
B. result in political creative destruction.
Initial phases of the growth process are often accompanied by increasing income inequality within a country. Using concepts developed in the chapter, explain why this might be the case. A. Extractive economic institutions protect private property rights. B. Inclusive economic institutions discourage entrepreneurs from starting companies. C. Creative destruction creates economic winners and losers. D. Political creative destruction generates political power among the elite.
C. Creative destruction creates economic winners and losers.
Suppose a country has well-enforced private property rights for entrepreneurs, but a large fraction of the population does not have access to education and thus cannot become entrepreneurs and would have low productivity as workers. Would you say this country has inclusive or extractive economic institutions? A. Extractive institutions, because enforcing property rights creates inequality. B. Inclusive institutions, because talents and skills are used efficiently. C. Extractive institutions, because barriers block access to education. D. Inclusive institutions, because investment in human capital is inefficient. Could the country achieve a high level of economic development? A. No, the country's extractive institutions limit prosperity. B. No, the country's inclusive institutions generate creative destruction. C. Yes, because the country's extractive institutions do not affect inequality. D. Yes, the country's extractive institutions promote growth.
C. Extractive institutions, because barriers block access to education. A. No, the country's extractive institutions limit prosperity.
Which of the following statements about foreign aid is true? A. Foreign aid increases efficiency of labor but not capital. B. Foreign aid is mostly used to feed and sustain citizens. C. Foreign aid does not have an impact on technology. D. Foreign aid increases efficiency of labor and capital.
C. Foreign aid does not have an impact on technology.
In the context of this chapter, what is meant by an institution? A. Geography. B. Climate. C. Laws. D. Regulations E. Prosperity. Which of the following is one of the three important elements that define institutions? A. They place constraints on behavior. B. They determine incentives C. They are determined by individuals. D. They are outside human control. E. They change very slowly. F. They are independent from prosperity.
C. Laws. D. Regulations A. They place constraints on behavior. B. They determine incentives C. They are determined by individuals.
Which of the following can't be a reason why foreign aid has been unsuccessful as a permanent solution to poor economic development? A. The amount of aid is not large enough to lead to a significant increase in physical capital or the level of technology. B. The presence of extractive economic institutions in the receiving country. C. The donor countries demand preference in trade from the receiving country in exchange for providing aid. D. The presence of corruption in the receiving country which prevents the aid from being invested in new technology and education.
C. The donor countries demand preference in trade from the receiving country in exchange for providing aid.
The existence of extractive institutions discourages entrepreneurship in an economy by ____________. A. upholding private property rights. B. failing to regulate markets. C. creating barriers to entry. D. allowing excessive profitability.
C. creating barriers to entry.
To say that private property rights are well-enforced in an economy means that ____________. A. governments are authorized to tax property. B. businesses are owned by shareholders. C. individuals can securely hold assets. D. government assets are public property. Private property rights foster economic development by ____________. A. redistributing income to those less fortunate. B. replacing the law. C. removing the need for costly contracts. D. providing incentives to borrow money. E. providing incentives to invest.
C. individuals can securely hold assets. D. providing incentives to borrow money. E. providing incentives to invest.
The institutions hypothesis explains the difference in prosperity among nations is due to ____________. A. proximate factors, such as physical capital. B. geographic variation in climate. C. the way societies organize themselves. D. differences in a society's beliefs.
C. the way societies organize themselves.
According to the geography hypothesis, incomes in poor countries are ____________. A. unlikely to be changed, because poor countries will not invest to improve technology. B. likely to decrease with the spread of disease related to climate change. C. unlikely to be changed, because geography is largely out of their control. D. likely to be increased by government policies to improve their climate.
C. unlikely to be changed, because geography is largely out of their control.
Suppose the return and cost of entrepreneurship curves are described by the following equations (with numbers measured in the thousands): R = 600 - 50N C = 100 + 150N, where R = returns to entrepreneurship, C = cost of entrepreneurship, and N = number of entrepreneurs. Based on the equations given, the cost-of-entrepreneurship curve differs from the one drawn in the chapter because it is ____________. A. downward-sloping, indicating economies of scale as the number of entrepreneurs increases. B. horizontal, indicating a constant marginal cost of entrepreneurship as the number of entrepreneurs increases. C. upward-sloping, indicating the opportunity cost of entrepreneurship increases with the number of entrepreneurs. D. upward-sloping, indicating specialization as the number of entrepreneurs increases. The equilibrium number of entrepreneurs is N = ______ thousand. The equilibrium returns to entrepreneurship is R = $_____ thousand. The government enacts a license fee of $50 thousand to file the paperwork necessary to start a firm. The new equilibrium number of entrepreneurs is N = ______ thousand. The new equilibrium returns to entrepreneurship is R = $__________ thousand.
C. upward-sloping, indicating the opportunity cost of entrepreneurship increases with the number of entrepreneurs. 2.5 thousand $475 thousand 2.25 thousand $487.50 thousand
The great disparity in economic prosperity between North and South Korea can best be explained by the _____________. A. Fundamental prosperity hypothesis B. Culture hypothesis C. Geography hypothesis D. Institutions hypothesis
D. Institutions hypothesis
How are the proximate causes of prosperity different from the fundamental causes of prosperity? A. The fundamental causes of prosperity are the factors that evaluate the effects of the proximate causes of prosperity. B. The fundamental causes of prosperity are the factors that result from the proximate causes of prosperity. C. The fundamental causes of prosperity are the factors that measure the proximate causes of prosperity. D. The fundamental causes of prosperity are the factors that explain the levels of the proximate causes of prosperity.
D. The fundamental causes of prosperity are the factors that explain the levels of the proximate causes of prosperity.
The culture hypothesis states ____________. A. prosperity may affect a country's cultural beliefs. B. shared experiences are reducing differences in prosperity. C. cultural beliefs are proximate causes of prosperity. D. cultural beliefs are responsible for differences in prosperity.
D. cultural beliefs are responsible for differences in prosperity.
The return-to-entrepreneurship curve shows the ____________. A. opportunity cost of engaging in entrepreneurial activities. B. net benefit to entrepreneurship for different enforcement levels of property rights. C. return to entrepreneurship ranked across countries. D. number of entrepreneurs with at least a particular level of returns. The opportunity cost of entrepreneurship is the ____________. A. additional cost to the entrepreneur of increasing her activity by one unit. B. cost borne by society from the entrepreneur's activities. C. value to a potential entrepreneur of her best alternate activity. D. start-up cost of business for a new entrepreneur.
D. number of entrepreneurs with at least a particular level of returns. C. value to a potential entrepreneur of her best alternate activity.
Parts of the world that were relatively more prosperous 500 years ago have experienced a reversal of fortune and are relatively poorer today. What factors could explain this? A. The establishment of inclusive institutions by European colonialists in areas previously not well developed. B. Changing geographic and climatic conditions that have evolved to work against previously prosperous areas. C. The establishment in those previously prosperous places of extractive institutions by European colonialists. D. All of the above can explain the reversal of fortune. E. A and C only
E. A and C only
Suppose the return and cost of entrepreneurship curves are described by the following equations (with numbers measured in the thousands): R = 1,000 − 100N C = 500 where R = returns to entrepreneurship, C = cost of entrepreneurship, and N = number of entrepreneurs. The equilibrium number of entrepreneurs is N = _____ thousand. The equilibrium returns to entrepreneurship is R = $_____ thousand. Suppose the amount that entrepreneurs could earn in the next best occupation increases by $50 thousand. The equilibrium number of entrepreneurs is N = ______ thousand. (Round your response to two decimal places.) The equilibrium returns to entrepreneurship is R = $______ thousand.
R = C 1,000 - 100N = 500 >5 thousand R = 1,000 - 100 (5) >$500 thousand R = C 1,000 - 100N = 500 + 50 >4.5 thousand R= 1,000 - 100 (4.5) >$550 thousand
The Wall Street Journal and the Heritage Foundation jointly publish "The Freedom Index." This index gives a yearly ranking of world countries based on economic freedom. Factors considered include the status of property rights, the extent of corruption, and the ease of starting and running a business. Consider North Korea and South Korea. Go to http://www.heritage.org/index/ranking. The freedom ranking category of North Korea is __________________ and the freedom ranking category of South Korea is ___________________. Now go to http://www.heritage.org/index/explore?view=by-variables. Per capita GDP in North Korea is________________ per capita GDP in South Korea. Based on this example, what is the relationship between economic freedom and economic development (as measured by GDP per capita)? Economic freedom and GDP per capita appear to be ______________________.
Repressed; Mostly Free lower than positively related
Suppose a country has well-enforced private property rights for entrepreneurs, but a large fraction of the population does not have access to education and thus cannot become entrepreneurs. Moreover, their productivity as workers is low. This country is likely to have _____________ economic institutions, which will likely _____________ its ability to achieve a high level of economic development.
extractive; prevent
Foreign aid often ______________ the power of extractive economic institutions and ______________ overall inequality within the country.
increases; increases
Jointly published by the Wall Street Journal and the Heritage Foundation, "The Freedom Index" gives an annual ranking of most of the countries of the world based on their level of economic freedom. Factors considered in the rankings include the status of property rights, the extent of corruption, and the ease of starting and running a business. The index can be found at http://www.heritage.org/index/ranking Go to http://www.heritage.org/index/ranking and find three countries in each of the freedom categories ("Free," "Mostly Free," etc.). Click on the country name in the table for each country you select and read about the rationale for their ranking. In particular, consider Australia, Canada, and Hong Kong from the "Free" category, Germany, the United Kingdom, and the United States from the "Mostly Free" category, Albania, Poland, and Spain from the "Moderately Free" category, China, Ethiopia, and Vietnam from the "Mostly Unfree" category, and Iran, North Korea, and Zimbabwe from the "Repressed" category. In 2014, the average per capita GDP for the "Free" countries is $_____________, the average per capita GDP for the "Mostly Free" countries is $______________, for the "Moderately Free" countries is $_____________, for the "Mostly Unfree" countries is $_____________, and for the "Repressed" countries is $____________. (Round your responses to two decimal places.) Based on this example, what is the relationship between economic freedom and economic development (as measured by GDP per capita)? What pattern do you notice? What preliminary conclusions can you draw concerning the relationship between economic freedom and economic development? Economic freedom and GDP per capita appear to be ________________________. Of the three hypotheses mentioned in the chapter, the results of this information tend to support the ____________________________________. Sub-Saharan Africa is known to be one of the poorest regions of the world. Go to the "Interactive Freedom Heat Map" at http://www.heritage.org/index/heatmap. Most of the Sub-Saharan African countries are in the _______________________ category. The two exceptions to the overall pattern are: (Check two that apply.) A. Botswana. B. Sudan. C. South Africa. D. Ghana. E. Mauritius.
$45,622.67 $41,963.67 $19,733.67 $4,633.67 $5,162.00 positively related institutions hypothesis Mostly Unfree A. Botswana. E. Mauritius.
