Lecture One (189 - 219)

Question 1

what is Wagner’s law

Answer 1

GDP per capita and government spending rise together

Question 2

what are the explanations behind Wagner’s law, why does GDP per capita rise with government spending?

Answer 2

1. higher income people demand better infrastructure, public services, health insurance, unemployment insurance
2. supply of government grows and stays big (difficult to shrink it, takes extra action to do so)
   - this relates to hysteresis (historical stickiness)

Question 3

why are people with the same skills richer and poorer in some countries vs. others?

Answer 3

more socially efficient institutions

(i.e. the country is more developed and encourages economic growth + free market competition)

Question 4

what are the 3 routes that a country can take to grow

Answer 4

1. crony capitalism (easiest for elites)
2. communism, like USSR and Moaist China
3. end mercantilism and adopt free mkts

Question 5

what is the low-middle income trap that occurs in corrupt countries?

Answer 5

few large firms (elite, protected by govt) dominate the mkt

small (illegal) firms survive by bribing corrupt rent-seeking police

Question 6

what are institutions (economist’s definition)

Answer 6

things that constrain our self interested behavior

• can be formal or informal

Question 7

difference between formal and informal institutions

Answer 7

formal: laws, regulations, contracts with fines and jail time as punishment

informal: cultural taboos, religious ideals, social norms with the punishment of embarrassment and social isolation

Question 8

how can an institution be socially efficient

Answer 8

induces competition where competition moves the economy to a high-level equilibrium and prevents competition that leads to a suboptimal Nash equilibrium

Question 9

the purpose of institutions is to

Answer 9

keep us OUT of socially undesirable nash equil.

keep us IN socially desirable nash equil.

Question 10

was Marx right about religion being the opium of the masses?

Answer 10

No!

religion can be an effective institution which keeps people out of socially undesirable nash equil.

Question 11

ex-British colony effect

Answer 11

countries that were formerly colonies of Britain were more successful than French, Spanish and Turkish colonies

Question 12

Public Choice Theory

Answer 12

the idea that religions compete to have the most socially efficient institutions

• controversial topic that implies an evolutionary origin of religion

Question 13

what’s the natural resources curse

Answer 13

countries with abundant natural resources grow more slowly and are more corrupt (on average) than similar countries without natural resources

Question 14

why are natural resource economies more prone to corruption

Answer 14

political rent-seeking becomes simplified, all wealth is in one place

• in Nigeria, citizens would poke holes in the pipelines and steal oil to use in heating their homes, stoves, etc.

Question 15

is foreign aid an inhibitor to economic growth?

Answer 15

Evidence that foreign aid helps poor countries is statistically flawed

Foreign aid is simply moving money from poor people in rich countries to rich people in poor countries

diverts talent in these countries by attracting top talent to work for foreign aid agencies (highest wages)o

Question 16

does foreign aid in developing countries help or hurt economic growth? what is the regression equation like

Answer 16

it hurts economic growth

negative slope on regression

Question 17

difference between open access and limited access institutions

Answer 17

in open access, the government and courts protect the rights of everyone, while in limited access institutions the government and courts protect the rights of just the ELITE

Question 18

T or F: the switch to free market economics reduced dire poverty in most of the world

Answer 18

True!