Quiz 17: Institutions, Policies, and Cross-Country Differences in Income and Growth

Business

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population. The three major source of economic growth are: formation of new capital, investment in research and development for new technology and methods, and free trade. To reap the maximum benefit from these sources a country must have policies and institutions that supports economic freedom. Countries with higher economic freedom have experienced higher growth rate and income. A country to achieve higher economic freedom index must ensure to its citizen the freedom of choice, freedom to enter any market and exchange without any barrier, protection of property right and evenhanded enforcement of contract, stable money and prices, lower tax rate, free trade and free operation of market. The first five countries with higher income per capita are: • Norway • United States • Hong Kong • Switzerland • Netherlands These countries have higher income per capita because they have higher economic freedom index ranking. The higher the ranking the higher will be economic freedom and greater benefit from all the sources of growth. None of the countries listed above is ranked among fastest growing countries of the world. This is because they have steady rate of growth for last few decade.

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population. The three major source of economic growth are: formation of new capital, investment in research and development for new technology and methods, and free trade. To reap the maximum benefit from these sources a country must have policies and institutions that supports economic freedom. Countries with higher economic freedom have experienced higher growth rate and income. A country to achieve higher economic freedom index must ensure to its citizen the freedom of choice, freedom to enter any market and exchange without any barrier, protection of property right and evenhanded enforcement of contract, stable money and prices, lower tax rate, free trade and free operation of market. The first five countries with higher growth rate are: • China • Vietnam • Taiwan • India • Korea, Rep. These countries are among the lowest income per capita and are the so called developing nations. These countries achieved high economic growth because they through sound policies and stronger institutions moved towards economic freedom. The economic freedom ensures lower poverty and higher rate of growth.

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population. The three major source of economic growth are: formation of new capital, investment in research and development for new technology and methods, and free trade. To reap the maximum benefit from these sources a country must have policies and institutions that supports economic freedom. Countries with higher economic freedom have experienced higher growth rate and income. A country to achieve higher economic freedom index must ensure to its citizen the freedom of choice, freedom to enter any market and exchange without any barrier, protection of property right and evenhanded enforcement of contract, stable money and prices, lower tax rate, free trade and free operation of market. The per capita income alone cannot explain the true state of growth of every economy. The fastest growing economies of the world are among the countries which have lowest per capita income. These countries through sound policies and institutions are moving faster towards economic freedom and enjoying certain advantages of this growing freedom. These countries often follow the method and technologies that was followed by the high-income countries, so they save the cost of R D. Moreover, the return to capital is higher in these countries. This is why the foreign investors often invest more in these countries. A higher foreign investment means greater growth rate of GDP per capita and income. This is why they are catching up fast. So, the statement that the poor are getting poorer is untrue.

Related Quizzes