Week 5 LT Flashcards
Why are rich countries rich
more capital per person
use labour and capital more efficiently
WHat are the 5 factors which cause differences in TFP
human capital health technology institutions misallocation
what is human capital
stock of skills that individuals accumulate to make them more productive
education and training
what is health and how does it affect tfp
malnutrition = lower productivity
nutrition has a massive effect on productivity
healthier workers in general are more productive
what are institutions and effect on TFP
institutions are in place to foster human capital and technological growth
government systems, law, contract enforcement
what are property rights and why are they important
markets cannot work properly without respect for property rights
property rights are the ability of people to exercise authority over the resources they own
what is the problem in developing countries with property rights and political stability
the justice system doesn’t work very well
contracts are not always enforced
corruption and fraud
what is the impact of bad property rights on investment
when people fear their capital may be stolen by criminals or stolen by a corrupt government, there is less investment, including foreign investment and so the economy functions less efficiently
leads to lower living standards
what is misallocation and examples
resources not being put to their best use
e.g. inefficiency of state-run resources, political interference
what are the three types of capital
private capital stock
public infrastructure
human capital
what are the two views on how resources should be allocated
equalize tax treatment of all types of capital in all industries and let the market allocate investment to the type with the highest marginal product
industrial policy: government should actively encourage investment in capital of certain types or in certain industries because it may have positive externalities that private investors don’t consider
what are the possible problems with the industrial policy of allocating resources
government may not have the ability to pick winners ie choose industries with highest return to capital or biggest positive externalities
politics (e.g. campaign contributions) rather than economics may influence which industries get preferential treatment
why is creating the right institutions important and examples
in order to ensure resources are allocated to their best use
e. g. legal institutions to protect property rights
e. g. capital markets to help financial capital flow to the best investment projects
e. g. a corrupt free government to promote competition and enforce contracts etc
how can we encourage technological progress
patent laws - encourage innovation by granting temporary monopolies to inventors of new products#
tax incentives for R&D
grants to fund basic research at universities
industrial policy - encourages specific industries that are key for rapid technological progress
