Quiz 3

Question 1

consequences of extractive political and economic institutions

Answer 1

no innovation
no incentives to work hard/invest/think creatively
no creative destruction
-> only possible in short run

Question 2

feedback loop

Answer 2

eco institutions -> political power -> political institutions -> eco institutions

Question 3

dependency theory

Answer 3

elite dependent from the “center” (developed countries, multinational corporations, World Bank, IMF) for import or debt

Question 4

outcomes of institutions on international level

Answer 4

trade and debt

Question 5

problems with institution theory

Answer 5

difficult to prove
empirical tests on the impact of institutions can be critized (reversal of fortunes = correlation not causality + mortality rate of settlers = data controversy)

Question 6

geography

Answer 6

climate and soil suitability to sugar VS grain also impact the nature of institutions

Question 7

6 characteristics inclusive economic institutions

Answer 7

1) 2 functions: restrain powerful actors and facilitate exchange
2) secure property rights
3) unbiased system of law
4) provision of public services
5) permit entry of new businesses
6) allow people to choose their careers

Question 8

role of foreign aid

Answer 8

1) directly support inclusive eco institutions
2) hope for the feedback loop to kick in
3) reward/sanction inclusive eco institutions

Question 9

capitalism

Answer 9

a system in which a country’s trade and industry are controlled by owners for profit rather than by the state
free enterprise + individual property rights
minimal role of gov

Question 10

liberal democracy

Answer 10

both inclusive political and eco institutions

Question 11

How GDP affects the balance of power in society

Answer 11

broad-based eco growth -> more inclusive political + eco institutions

Question 12

role of context

Answer 12

policies implemented in one place or another can have dramatically different outcomes depending on the nature of local institutions

Question 13

populism

Answer 13

people VS self-serving elite
often used by strong men to keep power to themselves

Question 14

solow model

Answer 14

understand why some countries grow fast and others not

Question 15

production function

Answer 15

Y = F(K,L)
-> how much output depending on the amount of capital and labour

Question 16

returns to scale

Answer 16

if increase both K and L by same factor > output multiplied by same factor = constant returns to scale
if increase only K but not L > less output than λ = not constant returns to scale (output still going to increase but at a decreasing level)

Question 17

constant returns to scale

Answer 17

λ Y = F( λ K, λ L)
-> y = f(k)

Question 18

2 assumptions of the Solow Model

Answer 18

1) always possible to sell the good
2) all of Y goes back to the entrepreneur (secure property rights)

Question 19

propensity to save

Answer 19

people save a fraction of their income

Question 20

convergence

Answer 20

when positive force and negative force curves meet = equilibrium, steady state, 0 long-run growth

Question 21

all growth comes from

Answer 21

1) rate of technical progress
2) propensity to save

Question 22

why Solow Model doesn’t work if extractive institutions

Answer 22

no incentives to save, invest, educate
not made for developing countries