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

Question 1

Name five countries with a high income per capita. Why do you think the income is so high in these countries? How many of your high-income countries also ranked among the fastestgrowing countries in the world since 1990?

Answer 1

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.

Question 2

Name five of the fastest-growing economies in the world since 1990. Why do you think these economies have grown so rapidly?

Answer 2

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.

Question 3

"The rich countries are getting richer, while the poor are getting poorer." Evaluate this statement.

Answer 3

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.

Question 4

What conditions must be present for a country to achieve a high score on the Economic Freedom of the World (EFW) index?

Question 5

Indicate five of the world's economies that are most free. How do the income levels and growth rates of freer economies compare with those that are less free?

Question 6

*What are the major sources of economic growth? Why do some countries grow and achieve highincome levels while others stagnate in poverty? What do you think can be done to change this situation?

Question 7

Has the United States become more or less economically free during the past decade? What impact will this have on the future economic growth of the United States?

Question 8

*If there were no high-income developed countries like those of Western Europe, North America, and Japan, would less-developed countries like Hong Kong, Singapore, South Korea, China, and India have been able to grow so rapidly in recent decades? Explain.

Question 9

Do we count on majority rule to protect civil liberties such as the right to free speech, freedom of the press, the right to assembly, and religious freedom? Should we count on majority rule to protect economic rights like the freedom to trade, the freedom to compete in the business or occupation of one's choice, and the protection against the taking of one's property by others, including the government? Discuss both of these questions.

Question 10

*Does a country have to be democratic in order to achieve economic freedom? If a country is democratic, will it necessarily be economically free? Why or why not?

Question 11

Why are income levels in the United States so high? Is the United States prosperous because it is democratic? Discuss.

Question 12

*Firms can choose where to establish a production facility. What are some of the major factors that will influence whether a firm will invest and produce in a country?

Question 13

*Even though workers in low-wage countries often seek to immigrate to higher-wage countries, the flow of investment toward many low-wage countries is small. Why is this so?

Question 14

*Why will political decentralization make it more difficult for governments to levy taxes and spend the revenues on things that provide citizens with little value relative to cost?