Property Rights

Question 1

What are property rights?

Answer 1

Property rights give people legal rights over their own property meaning they can go to court if their property is stolen.

Question 2

What are possessions without property rights called?

Answer 2

Dead Capital

Question 3

How do low levels of investment affect aggregate supply and demand?

Answer 3

Low levels of investment keeps AD to the left as investment is a component of AD.
Low levels of investment also keeps LRAS to the left as low investment will keep productivity low which will keep the productive capacity of the economy low.

Question 4

Dead capital can not be used as:

Answer 4

Collateral is an asset that the bank requires if you take out a loan. It is used to ensure that the bank is not out of pocket if you don’t pay back the loan, in which case they will take ownership of the asset. If you do not have the property rights to this asset then it is dead capital and can’t be used as collateral. If the bank can’t take ownership of it (as you don’t own it) it is of no use to them.

Question 5

Which of the combinations above shows the impact of low investment?

Answer 5

Since investment is a component of AD, low levels of investment will keep the AD curve to the left.
Low levels of investment will also keep the LRAS curve to the left as low investment will decrease productivity which will decrease the productive capacity of the economy.
Moreover, a lack of investment will mean that workers can’t invest in their small businesses and so their incomes stay low.
Low incomes mean that the Colombian government collects very little income tax which in turn means that they don’t have much money to invest in development.

Question 6

Banks will not accept dead capital as:

Answer 6

Collateral is an asset that the bank requires if you take out a loan. It is used to ensure that the bank is not out of pocket if you don’t pay back the loan, in which case they will take ownership of the asset. If you do not have the property rights to this asset then it is dead capital and can’t be used as collateral. If the bank can’t take ownership of it (as you don’t own it) it is of no use to them.

Question 7

What will happen to investment if dead capital can not be used as collateral?

Answer 7

If dead capital cannot be used as collateral, individuals will be less able to take out loans and so investment will stay low.

Question 8

Property Rights

Answer 8

Property rights give people the legal right to their property and so they can go to court if their property is stolen

Question 9

Dead Capital

Answer 9

Possessions which lack property rights

Question 10

Collateral

Answer 10

An asset given as security for the repayment of a loan

Question 11

Studies in Argentina and Peru have found that:

Answer 11

Studies in Argentina and Peru have found that poor people with property rights are no more likely to take out loans than those without property rights!

Question 12

Is allocating property rights a market based or interventionist policy for development?

Answer 12

Allocating property rights is a market based policy for development as the government is giving property rights to individuals in the free market and allowing them to do what they like with the property (rather than the government deciding what is done with the property).

Question 13

Which of the following explains how dead capital might constrain development?

Answer 13

A It can not be used as collateral when borrowing and so investment will be limited

Question 14

How might trade liberalisation be an effective strategy for promoting development?

Answer 14

B Machinery needed to increase productivity becomes cheaper to import

Question 15

How might the removal of government subsidies be an effective strategy for promoting development?

Answer 15

Subsidies are an amount of money given by the government for every unit that is produced. They are often given out to producers in some developing countries - such as farmers. However, subsidies have a huge opportunity cost as the government cannot spend the money on development e.g. education and healthcare.
Also, government subsidies can encourage inefficiency in firms as the subsidy helps make them more competitive without them actually having to become more productive.

Question 16

How might a switch from a fixed to a floating exchange rate be an effective strategy for promoting development?

Answer 16

So, floating exchange rates can help development by:

1. No need to hold large reserves of foreign currency
2. Being able to have an effective monetary policy
3. Automatic adjustment following economic shocks

Question 17

How might privatisation be an effective strategy for promoting development?

Answer 17

Privatisation is when government assets are sold to the private sector. There are two main benefits:

1. Selling government assets raises revenue, which can be spent on development
2. The private sector has a profit incentive which can mean they produce things much more efficiently than the government and so prices decrease as a result of an increase in competition. This is good for consumers and should increase AD which will increase real GDP and lead to economic development.

Question 18

Which of the following is least likely to be an effective strategy for economic development?

Answer 18

Subsidies are an amount of money given by the government for every unit that is produced. They are often given out to producers in some developing countries - such as farmers.

However, subsidies have a huge opportunity cost as the government cannot spend the money on development e.g. education and healthcare.

Also, government subsidies can encourage inefficiency in firms as the subsidy helps make them more competitive without them actually having to become more productive.

So, removing government subsidies is likely to be a more effective strategy for development than increasing them.