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Rule of 70

- if a variable grows at a rate of x percent per year, 70/x will approximate the years required for the variable to double

3 Key sources of economic growth

Gains from trade
Entreprenuial Discovery

Gains from trade

allows for specialization, division of labor
Mass production
And a wide variety of goods
Restrictions cause reduced living standards

Entreprenuial Discovery

Ideas that increase the value of resources create economic profits
Ideas that take resources away from more valuable uses generate losses
Technological advancements improve the quality of life

** Jobs dont lead to economic growth


Makes workers more productive by:
Physical capital- machines
human capital- knowledge and skills

Institutional Environment

The things that encourage the 3 keys:
Legal system
Competitive Markets
Stable money and prices
Minimal regulation
avoiding high taxes
open international trade


the legal, regulatory, and social constraints that affect the security of property rights and enforcement of contracts.

Other not as important institutions

Climate and location, foreign aid, Natural resources, Population growth,

Thomas Malthus

overpopulation is bad and not sustainable... examples that prove him wrong: singapore, hong kong, japan

The resource curse

If a country doesnt have many resources they cant thrive
Examples to prove this wrong: Hong kong , singapore, japan

foreign aid

has unintended consequences if its politically distributed it disrupts the markets


•Income levels and growth rates vary among countries because of variance in institutional factors that change incentives.

If a poor country is going to grow rapidly and achieve a high level of per capita income, which of the following is most important?

institutions and policies that encourage productive activities

Suppose the United States reduced the tariff on television sets, allowing foreign-produced televisions to more freely enter the U.S. market. Which of the following would most likely occur?

The price of televisions to U.S. consumers would fall, and the demand for U.S. export products would rise.

For a country to double its per capita income every twenty years, it would have to sustain an annual economic growth rate equal to

3.5 percent... the rule of seventy is used

Stable money and prices are a key source of economic growth because

price stability reduces the risks that accompany investment and other long-term commitments.

Some low-income countries generally remain poor because

their institutional arrangements and policies often discourage productive activity and reduce the potential gains from specialization and exchange.

The historical record indicates that foreign aid has

re-enforced corrupt governments and policies that stifle productive activities.

When individuals and businesses are permitted to trade freely over a larger market area,

they will be able to produce a larger output and consume a more diverse bundle of goods.

With trade, the price of wagons in this country is

$5, with 40 wagons being produced in this country and another 50 wagons being imported. (The world price, and the domestic supply meeting the world price gives you what should be produced, and where the domestic demand meets the world price you take that quantity and subtract the produced quantity to find the amount being imported)

Which of the following did Thomas Malthus believe would deter sustained increases in the growth of income per capita?

rapid growth of population

The major sources of economic growth are

gains from trade, entreprenuial discovery, and ivestments

Trade restrictions like tariffs and quotas will

reduce the value of goods and services that we will be able to produce and consume.

Which of the following is most important if a country is going to achieve and sustain rapid economic growth?

institutions and policies that are supportive of competition (open markets) and freedom of exchange.

Imposing a restrictive quota on the import of spiked track shoes will likely

increase the price of the shoes but decrease the quantity consumed.

The replacement of the phonograph by the cassette tape player and the eventual replacement of the latter by CD and MP3 players is an example of

creative destruction.

The growth records of Japan and Hong Kong during the last fifty years indicate that an economy can grow rapidly without

abundant domestic natural resources.

Investment in both physical and human capital tends to enhance economic growth because it generally

makes it possible for individuals to produce more goods and services per hour worked.

Gains from trade are based on comparative advantage, not absolute advantage


1. Gains from large-scale production

Lower per-unit costs
Small countries' producers benefit (South Korea)
Domestic consumers benefit from lower prices too (U.S. Boeing)

2. Gains from more competitive markets

Encourages efficiency and innovation
Local producers emulate their competitors' best ideas

3. Pressure to adopt sound institutions

Domestic capital and productive people will leave hostile nations
Capital and productive people will enter free nations

Open countries that engage in trade have higher incomes per capita than closed countries



a tax levied on goods imported into a country

What does a tariff do?

oBenefits domestic producers and government at the expense of consumers
oLike a subsidy to domestic producers
oCauses deadweight loss
oEncourages lobbying by domestic producers

IMpact of exporting

Domestic price will rise to world price
Domestic producers of the good winners
Domestic consumers of the good losers
Country overall gains to producers are greater than losses to consumers

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