Economics Study Set 18

Business

Quiz 16 :

Creating an Environment for Growth and Prosperity

Quiz 16 :

Creating an Environment for Growth and Prosperity

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What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure? How important is innovation as a source of economic growth? Discuss.
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An entrepreneur must find ways to bring practical application to the scientific knowledge in order to introduce a new innovative product.
In other words, an entrepreneur must use his or her brain power to bring in a new innovative product to the market.
If the new product creates that much value to the consumer that it exceeds the opportunity cost of producing that good and generates economic profit, in that case the new product will be successful, otherwise not.
Innovation results in refinement of production process, reduction in cost of production, improvement in quality of products.
In a nut shell, innovation enhances the production possibilities of an economy. Enhancement of production possibilities of an economy means economic growth. So, in this way, innovation is an important source of economic growth.

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The diversity of goods available to consumers today is much greater than in the past. How does this influence consumer welfare? Do the GDP growth figures capture the impact of the increased diversity? Why or why not?
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If we compare the availability and variety of goods today with those in the past then clearly today we not only have higher availability but also more variety.
This has resulted in an increase in per capita availability of goods coupled with enlarged bundle of goods per person.
Increase in per capita availability of goods means increase in standard of living.
Apart from this, many newly available goods like dishwashers, mobile phones, microwaves etc. have made our life easier by making our work much simpler and easy to execute.
All this has resulted in an increase in consumer welfare.
The GDP growth figures do not capture the impact of the increased diversity because GDP growth figures depend on the GDP of respective years and does not take into account the basket of goods comprising the GDP.
Secondly, GDP growth figures simply state the availability of more goods and services per person in quantitative terms but do not state anything about the composition.
So, GDP growth figure simply state that availability of goods per person has increased but does not specify whether this increase is in terms of availability of larger variety of goods or in terms of previously available goods but in larger quantities.

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Indicate in your own words why trade, entrepreneurial discovery, and investment are important sources of economic growth and achievement of high income levels.
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Trade expands the size of market available to the country. This expansion of market enables the producers to benefit from economies of scale resulting in lower cost of production and larger output.
Secondly, trade enable a country or region to exploit its comparative advantage and produce goods which it can produce at lower opportunity cost and exchange with goods in production of which it does not have comparative advantage.
In this way, region or economy concerned would not only be producing more but consuming more and that also the variety of goods.
More production and more consumption coupled with availability of variety of goods and services imply economic growth and higher income levels.
Thus, in this way, trade is an important source of economic growth and higher income level.
Entrepreneurial discovery is an important source of economic growth and higher income levels in the sense that entrepreneurs are the ones who organize the production process by combining the factors of production.
When entrepreneur combines the scientific knowledge with practical application and discovers the better ways of organizing the production then such discoveries, innovations or technological advancement results in higher production, lower cost per unit, and new and improved production.
This results in better utilization of resources and thus increases the value of resources.
More production in efficient manner with new and improved production methods means economic growth and higher and improved living standards - a synonym of higher income levels.
Investment is an important source of economic growth and higher income level in the sense that investment in both physical and human capital expands the productive potential of workers.
As workers became capable of producing more and that also in efficient manner, total production in the economy also increases.
Apart from this, productive and efficient workers command higher wages so income levels will also increase.
Thus, investment not only stimulates production resulting in economic growth but also leads to achievement of higher income levels.

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"Because government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises." Evaluate this view.
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What happened to economic growth between 1000 and 1800? How did the situation change after 1800? Why were these two periods so dramatically different? Discuss.
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Suppose that you have just been appointed to a high-level position in the economic analysis unit of the State Department. The secretary of state has asked you to prepare a memo describing the key policies and economic arrangements that less-developed countries should follow in order to achieve rapid growth and high income levels. Briefly describe your response. Be sure to indicate why each factor you mention is important if a nation is going to attain a high level of economic progress.
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What impact do natural resources have on economic growth? Will it be possible for a country with few natural resources to grow rapidly? Why or why not?
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"Regulatory policies that restrict trade and voluntary agreements between parties will retard economic progress." Indicate why you either agree or disagree with this statement.
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Why is competition important for the efficient use of resources? What must a firm do in order to compete effectively? Competitive forces often result in firms being driven out of business. How does this "business failure" influence the growth of income?
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How does economic growth influence the living standards of people? Does it really make much difference whether an economy grows at 2 percent or 4 percent annually? Discuss.
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"Without aid from industrial nations, poor countries are caught in a poverty trap. Because they are poor, they are unable to save and invest; and, lacking investment, they remain poor." Evaluate this view.
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How does money of stable value influence the volume of trade? When the inflation rate is volatile, how is the volume of trade affected? How will this influence the income levels of people?
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Why did Thomas Malthus believe that per person income could never rise much above the subsistence level? Given the era of his writings, was Malthus's view on this topic surprising? Why or why not?
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When the government is heavily involved in the regulation of markets, how will this influence the gains from trade? How will it influence the degree of rent-seeking by business and labor groups and the campaign contributions available to politicians?
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