Chapter 7- Wealth of Nations

Question 1

Facts about Wealth of Nations

Answer 1

GDP per capita varies form nation to nation
low infant mortality rates = higher GDP per capita
everyone used to be poor
economic growth- growth rate of real GDP
even slow economic growth can build into big changes
Rule of 70- tells how long it will take for an economy’s real GDP to double
growth miracles- when a country undergoes tremendous growth that results in the GDP per capita doubling fast
growth disasters- when a country undergoes little to no growth in GDP per capita

Question 2

Factors of Production

Answer 2

physical capital- stock of tools(machines, equipment, plants), called capital, results in increased productivity of another product
human capital- productive knowledge and skills workers acquire from education, training, and experience, nations with education have more human capital(can apply physical capital better)
technological knowledge- knowledge about how the world works, increased through research and development
organization- all three need to be organized in order to create valuable goods and services

Question 3

Institutions

Answer 3

poor countries don’t just have little capital, they use it insufficiently(poor organization)
institutions- laws and regulations that determine economic structure
property rights- people need to have the opportunity to buy their land and own their business(creates incentives to work harder, allows them to expand if need be)
honest government- corruption results I excessive rules created for people, makes it harder for business to open and stay open
political stability- threats of anarchy(who wants to invest when there could be a revolt?)
dependable legal system- lawsuits can’t get held up in court, no one wants to build if they can’t protect their investment
competitive and open markets- poor countries use capital insufficiently, unnecessary regulations(impede market and creates monopolies), poor countries should use economies of scale(producing large amount of good for cheaper cost), excessive red tape(presents high costs before business begins)