Institutions, Policies, and Cross-Country Differences in Income and Growth

Institutions, policies, and cross-country differences in income and growth are complex and interrelated issues that have been the subject of much research and debate among economists.

Institutions, such as legal systems, property rights, and the rule of law, play a crucial role in promoting economic growth and development. Countries with strong institutions tend to have higher levels of economic growth and income per capita than those with weaker institutions. This is because institutions provide the framework for economic activity, and they shape the incentives for individuals and firms to invest and innovate.

Economic policies also play a key role in determining income and growth levels. For example, countries with low taxes and minimal regulation tend to have higher levels of economic growth than those with higher taxes and more regulation. Similarly, countries with open trade policies and flexible labor markets tend to have higher levels of income and growth than those with more protectionist policies.

Cross-country differences in income and growth can also be attributed to a variety of factors, including geography, culture, and history. For example, countries with abundant natural resources tend to have higher levels of income and growth than those without. Additionally, countries with long histories of political stability and economic freedom tend to have higher levels of income and growth than those without.

Overall, institutions, policies, and cross-country differences in income and growth are complex issues that are influenced by a variety of factors. To promote economic growth and development, it is important for countries to focus on building strong institutions and implementing policies that promote economic freedom and growth. Additionally, understanding the unique factors that contribute to cross-country differences in income and growth can help policymakers develop more effective strategies for promoting economic development.

1.As transportation and communication costs declined during the past half-century, international trade:

increased as a share of GDP more in the most geographically disadvantaged developing countries than in either the high-income or less geographically disadvantaged developing countries

increased as a share of GDP in the high-income countries but declined in developing countries

declined as a share of world GDP

increased as a share of GDP in the high-income countries but increased even more rapidly in the less geographically disadvantaged developing countries

2.Which of the following is inconsistent with the theory of development of Thomas Malthus?

The rapid growth of population in many low-income developing countries

The per capita level of income of the world during the centuries prior to 1800

The growth of per capita GDP in Western Europe, North America, Oceania and Japan following the Industrial Revolution

The stagnation of per capita GDP at or near the subsistence level in most of the world for a century and a half following the Industrial Revolution

3.Which of the following is true of the most geographically disadvantaged countries?

High-income countries have failed to provide foreign aid to geographically disadvantaged countries

They have slow population growth because of their unattractive climate conditions

The economic institutions and policies of the geographically disadvantaged countries have been sound, which makes their poor economic performance puzzling

Geographically disadvantaged countries generally have hot, humid climates and they are located far from the major markets of Europe, Asia, and North America

4.Which of the following provides the best explanation for the low per capita income of today’s poorest countries?

When the average income level is low, workers have little incentive to earn higher incomes

Poor countries are oppressed by developed nations that benefit from the cheap goods available from countries with low wage rates

Geographic disadvantages and poor institutions have discouraged productive activity and reduced the potential gains from specialization and exchange in many of the world’s poorest countries

Poor countries are poorly endowed with natural resources, which are essential for long-term economic growth

5.During the past 1000 years, real income per person:

persistently increased throughout the world, but the largest increases occurred during the three centuries following 1500

rose steadily in Western Europe, North America, Oceania, and Japan during the past two centuries, after stagnating for centuries in these regions and throughout the world prior to 1800

increased substantially throughout the world in each century and is now ten times greater than the level of 1000 years ago

rose rapidly in countries outside of Africa prior to 1800, but income growth has slowed substantially during the past 200 years

6.Compared to the least-free economies, the freest economies have:

lower levels of economic growth

lower rates of poverty

lower levels of investment

lower levels of labor productivity

7.Writing in 1798, Thomas Malthus argued that it would be impossible to sustain income much above the subsistence level because, if this occurred, it would trigger:

rapid growth of population

expansion of political democracy

rapid growth of government spending

expansion of communism to the developed world

8.(I) Historically, countries with colonial settlers who planned on staying for long periods of time set up sound economic institutions. (II) Countries with harsh environments not suitable for permanent settlements resulted in colonial settlers favoring extractive institutions because they were often primarily interested in resource extraction.

Both I and II are false

I is false; II is true

I is true; II is false

Both I and II are true

9.According to the neoclassical theory of economic development, output is a function of

climate, access to an ocean coastline, and distance to the major markets of the world

physical capital, human capital, and technology

natural resources, climate, and the growth of population

the quality of a country’s economic institutions and policies

10.Which of the following has increased the incentive for countries to adopt sound institutions and policies in recent decades?

Increased barriers limiting the movement of people and businesses across national borders

Increased concern about transmission of highly contagious viruses such as COVID-19

A global move toward more exchange rate controls

Substantial reductions in the cost of transportation and communication

11.According to Thomas Malthus, economic growth cannot be sustained because:

exports grow exponentially, while imports increase linearly

the growth of consumption occurs exponentially, while growth in private investment occurs linearly

population grows exponentially, while resources required to expand production grow linearly

the growth of capital formation occurs linearly, while changes in investment occur exponentially

12.(I) History, institutions, geography, demography, technology, and entrepreneurial discovery all exert an impact on economic development. (II) The huge reductions in the real cost of transportation and communication during the past half-century increased the incentive for developing countries, particularly those with the least geographic disadvantages, to adopt policies more consistent with human progress.

Both I and II are false

I is false; II is true

I is true; II is false

Both I and II are true

13.Research indicates that countries with colonial settlers who planned on staying were more likely to:

extract mineral resources and increase their profit margins in the short run

choose institutions that protected individual property rights and limited the power of government

discourage trade, innovation, and entrepreneurial skills in the country

choose institutions that provided few limitations on the power of government

14.According to Acemoglu, Johnson, and Robinson, countries like the United States, Canada, Australia, and New Zealand were able to develop sound institutions and policies because:

their colonial settlers planned on staying in their new settlements

they had vast natural resources

their currencies had more purchasing power

their colonizers were primarily interested in resource extraction

15.What gives a country’s political decision-makers an incentive to adopt institutions and policies more consistent with economic freedom?

An increase in the foreign exchange value of a nation’s currency

Distant location from the major markets of western Europe, North America, and Asia

An increase in the potential gains from trade

Geographic disadvantages that reduce international trade

16.Which of the following about the growth rate of real per capita income since 1990 is true?

The three fastest-growing countries in the world are Germany, Sweden, and the United States

The fastest-growing economies in the world are mostly high-income industrial countries

The fastest-growing economies in the world are mostly African countries without an ocean coastline

The slowest growing countries in the world, many of which have experienced declines in per capita GDP, are less-developed countries with major geographic disadvantages or exceedingly poor economic institutions

17.Which of the following is most likely to occur when the government becomes heavily involved in activities that provide favors to some individuals and businesses at the expense of others?

An increase in economic freedom

A reduction in campaign contributions available to politicians to finance their political campaigns

An increase in gains from trade, investment, and other productive activities

Diversion of resources away from productive activities and toward lobbying and other forms of rent-seeking

18.Identify the correct statement about the growth rates of per capita GDP during 1990-2018.

Virtually all of the fastest growing countries in the world during 1990-2018 were high-income developed countries such as the United States

Most of the fastest-growing economies in the world during 1990-2018 were less-developed countries

The countries with the largest population had the lowest average annual rate of economic growth

The per capita incomes of less-developed countries declined at an annual rate of 0.3 percent during 1990-2018

19.Which of the following occurred during the Transportation-Communication Revolution?

The real cost of both ocean shipping and volume of international trade increased

The real cost of ocean shipping fell, and the volume of international trade increased

The real cost of ocean shipping fell, and the volume of international trade declined

The real cost of ocean shipping increased, and the volume of international trade declined

20.Which of the following is true?

The Industrial Revolution exerted an impact on a larger share of the world’s population than the Transportation-Communication revolution

The worldwide poverty rate declined more during the Industrial Revolution than during the Transportation-Communication revolution

Per capita GDP increased less rapidly during the Transportation-Communication Revolution than during the Industrial Revolution

Worldwide income inequality declined during the Transportation-Communication Revolution but it increased during the Industrial Revolution

21.Which one of the following factors is most important for the realization of gains from trade?

A low rate of unemployment

Economic freedom

Government subsidies

A progressive tax structure

22.If a low-income country is going to derive substantial benefits by borrowing technologies from more advanced economies and by obtaining an influx of investment capital, it must have:

a rich endowment of natural resources

a fixed exchange rate system

government controls over essential resources

sound institutions consistent with economic freedom

23.Data indicate that the Economic Freedom of the World (EFW) ratings of less-developed countries rose more rapidly than those of high-income countries during 1985-2015. Which of the following factors contributed to the increase in economic freedom of developing countries during these three decades?

Increases in tariff rates which expanded revenues and made it possible for governments to provide more public goods

Reductions in transportation and communication costs which increased the incentive to reduce trade barriers and provide more secure protection of property rights

Adoption of more extensive exchange rate controls

Increases in marginal tax rates which provided the governments of developing countries with more resources to transfer to the poor

24.Prior to 1800, most people:

could count on their income level to double approximately every 25 years

achieved steady economic growth and rising income levels

living in Western Europe and North America enjoyed income levels that were 15 to 20 times higher than those living in Eastern Europe and Asia

throughout the world experienced stagnating incomes at or near the subsistence level of income

25.Douglass North and Robert Thomas argue that “The factors we have listed (innovation, economies of scale, education, capital accumulation, etc.) are not causes of growth; they are growth.” This statement indicates that North and Thomas believe that:

the quality of institutions does not influence the growth of physical and human capital and use of technology in a country

while investment in physical and human capital and advancements in technology are closely related to growth, they are not the fundamental cause of growth

increases in physical and human capital and improvements in technology are the fundamental cause of economic growth and development

highly unfavorable locations and climate conditions will not reduce the growth of physical and human capital and use of technology

26.The standardized steel shipping container resulted in a huge reduction in the cost of loading and unloading ocean shipments. Which of the following entrepreneurs played a central role in the development of the standardized steel shipping container?

Peter Thiel

Jonathan Steel

Fred Smith

Malcom McLean

27.Which of the following is true regarding the growth rate of per capita GDP during 1990-2018?

The most geographically disadvantaged countries had the fastest growth rates of per capita GDP during 1990-2018

The fastest-growing economies in the world were virtually all high-income developed countries

While virtually all of the world’s fastest-growing economies were less- developed countries, less-developed countries also dominated the list of the countries with the worst growth records

The countries with the largest populations had the worst growth records during 1990-2018

28.(I) Between 1974 and 2016, ocean shipping costs as a share of cargo value fell by approximately 50 percent. (II) Between 1970 and 2019, the price of air shipping as measured by the real revenue of air carriers per ton-kilometer increased by nearly 40 percent.

Both I and II are false

I is false; II is true

I is true; II is false

Both I and II are true

29.Which of the following is true of the 40 most geographically disadvantaged countries?

The Economic Freedom of the World index indicates that these countries have a high degree of economic freedom

The ratio of international trade as a share of GDP of these countries is larger than most other developing countries

The per capita GDP of these countries has increased rapidly during the past half century

All but four of these countries are located outside of sub-Saharan Africa

30.The World Bank defines the extreme and moderate poverty rates as the percent of the population living on less than $1.90 and $3.20 per day respectively (measured in 2011 PPP dollars). If the 1980 extreme and moderate poverty rates of the world were present today, there would be:

approximately 2 billion more people living in both extreme and moderate poverty today

approximately one billion more people living in extreme poverty today, but no change in the number living in moderate poverty

no change in the number of people classified as poor, because the world’s extreme and moderate poverty rates are virtually the same today as in 1980

approximately 500 million fewer people living in both extreme and moderate poverty today

31.(I) Even though transportation and communication costs fell sharply during the decades following 1970, the volume of international trade declined. (II) As transportation and communication costs declined sharply in the half-century following 1970, people in poor countries became vastly more aware of what life was like in wealthier regions, and vice versa.

Both I and II are false

I is false; II is true

I is true; II is false

Both I and II are true

32.When less-developed countries began to grow during the 1970s and 1980s, how did the composition of their population change?

The prime working-age population declined as a share of the total, resulting in a reduction in both productivity and the future growth of per capita income

The prime working-age population declined as a share of the total, providing an additional boost to productivity and the growth rate of per capita income

The prime working-age population increased as a share of the total, providing an additional boost to productivity and the growth rate of per capita income

The prime working-age population increased as a share of the total, resulting in a reduction in both productivity and the future growth of per capita income

33.Researchers have found that when European colonists did not plan to settle permanently in a country because of the disease-prone climate or the high population density, they were:

less likely to protect private ownership, but more likely to limit the power of the government

less likely to protect private ownership rights and more likely to favor extraction of resources

more likely to protect private ownership rights and limit the power of the government

more likely to protect private ownership, but less likely to limit the power of the government

34.The real per capita GDP of the developing countries outside of sub-Saharan Africa:

increased more rapidly than the per capita GDP of high-income countries during 1970-2015

increased more rapidly than the per capita GDP of high-income countries during 1820-1950

increased more slowly than the per capita GDP of the sub-Saharan African countries during 1970-2015

stagnated prior to 1800 but increased rapidly during 1820-1950 following the Industrial Revolution

35.How did the Industrial Revolution influence the world’s per capita income and the degree of income inequality during 1800-1980?

The per capita income of the world declined, but the income was distributed more equally

Per capita income expanded by approximately tenfold and income inequality declined

Per capita income expanded by approximately tenfold and income inequality increased

The per capita income of the world was virtually unchanged and income inequality declined

36.Which of the following groups of countries is most geographically disadvantaged?

Burkina Faso, Chad, and Central African Republic

Pakistan, Nepal, and Vietnam

Mexico, Costa Rica, and Venezuela

Austria, Albania, and Ukraine

37.Which of the following is true of political institutions?

There is no assurance that political decision-making will lead to sound economic institutions and policies

History indicates that autocratic leaders and dictators will generally adopt sound economic policies and institutions

Political institutions will lead to sound economic policies and institutions when decisions are made democratically

Political decision-making does not influence economic policies and institutions

38.(I) Economics is unable to provide insight with regard to the types of institutions and policies that will lead to wealth creation, growth, and prosperity. (II) History, institutions, geography, demographics, technology, and entrepreneurial discovery all exert an impact on economic development.

Both I and II are false

I is false; II is true

I is true; II is false

Both I and II are true

39.As the cost of transportation and communication declined rapidly during recent decades, low-income developing economies were able to achieve impressive growth rates partially because they:

were better able to protect their domestic industries from competition with more established firms in high-income countries

were able to gain from copying and emulating successful ideas and technologies of high-income countries

had higher rates of savings than the high-income countries

were able to invest more heavily in human capital than the high-income countries

40.Identify the correct statement regarding the growth of per capita GDP during 1990-2018.

The growth rates of per capita income of Australia and Norway were the lowest among the high-income industrial economies during 1990-2018

The per capita incomes of China and India declined during 1990-2018

The ten fastest-growing countries in the world since 1990 were all high-income industrial countries

The growth rates of per capita income in the ten fastest-growing developing countries during 1990-2018 were more than twice the rates of the high-income developed countries

41.During the 150 years following the Industrial Revolution that started around 1800, real per capita income:

grew rapidly in Japan and China but stagnated near subsistence levels in the rest of the world

increased in Western Europe, North America, Oceania, and Japan, but continued to stagnate in the rest of the world

increased substantially in all parts of the world

declined in Western Europe, North America, Oceania, and Japan, but continued to grow in the rest of the world

42.Which of the following is true of economic development during the past half-century?

Per capita income increased in less developed countries, but it increased even more rapidly in high-income countries, leading to a continuation of the increases in income inequality worldwide

Economic freedom has declined throughout the world, but the reduction in economic freedom has been particularly large for less-developed countries

The high-income countries have gotten richer and the poor less-developed countries have gotten poorer

Propelled by large reductions in the real cost of transportation and communication, the bulk of the world’s population has escaped the Malthusian trap and achieved sustained increases in per capita income

43.The neoclassical theory of economic development stresses that:

international trade is the key to economic development

the growth of population is the fundamental source of economic growth and rising levels of per capita GDP

large investments in physical capital, increases in education and other forms of human capital, and rapid advances in technology provide the major ingredients for strong economic growth

a country will be unable to achieve rapid economic growth unless it has sound economic institutions

44.Compared to the Industrial Revolution, how did worldwide per capita GDP and worldwide income inequality change during the Transportation-Communication Revolution?

Per capita GDP grew more rapidly during the Transportation-Communication Revolution and worldwide income inequality increased

Per capita GDP grew more rapidly during the Transportation-Communication Revolution and worldwide income inequality declined

Per capita GDP grew less rapidly during the Transportation-Communication Revolution and worldwide income inequality declined

Per capita GDP grew less rapidly during the Transportation-Communication Revolution and worldwide income inequality increased

45.The most geographically disadvantaged countries:

grew more rapidly than the less geographically disadvantaged developing countries during 1990-2018

have slow population growth because of their unattractive climate conditions

have often followed policies and adopted economic institutions that are inconsistent with economic growth and development

are located mostly in eastern Europe and southeast Asia

46.Which of the following factors are stressed by Jeffrey Sachs as sources of geographic disadvantage?

Absence of mineral resources and location in the Northern Hemisphere

A hot, humid climate, absence of an ocean coastline, and location distant from the major markets of the world

Mountains, a dry climate, and a lengthy ocean coastline

Excessive rainfall, cold climate, and location near populous countries

47.According to the economic freedom measure of the Canadian Fraser Institute, which of the following was true with regard to the level of economic freedom during 1985-2015?

The average economic freedom rating of high-income countries increased more rapidly than that of low-income countries during 1985-2018

The degree of economic freedom decreased throughout the world during 1985-2018

There was virtually no change in economic freedom in either high-income developed countries or low-income developing countries during 1985-2015

The economic freedom gap between high-income, developed countries and less-developed countries decreased during 1985-2018

48.According to the virtuous cycle of development, economic growth will increase the opportunity cost of children,

which will lead to an increase in both the birth rate and the prime working-age population as a share of the total, reducing productivity and future growth

which will lead to a reduction in the birth rate and an increase in the prime working-age population as a share of the total, providing an additional boost to productivity and future growth

which will lead to an increase in both the birth rate and the prime working-age population as a share of the total, providing an additional boost to productivity and future growth

which will lead to a reduction in the birth rate and an increase in the prime working-age population as a share of the total, reducing productivity and future growth

49.The Malthusian trap is the theory that:

rapid growth of income will trigger civil unrest that will undermine the protection of property rights and continuation of growth

rapid growth of income will soon result in shortages of natural resources as more and more of those resources are used up

increases in technology will fail to increase income levels

income levels much above subsistence will trigger rapid population growth that will soon drive income downward to the subsistence level

50.The World Bank classifies persons with incomes of less than $1.90 per day (measured in 2011 international dollars) as living in extreme poverty. Between 1980 and 2017, the extreme poverty rate of the world:

decreased from 58 percent to 24 percent

was virtually unchanged during this 37-year period

increased from 40 percent to nearly 50 percent

decreased from approximately 40 percent to less than 10 percent

#AustrianEconomics #EconomicEducation #EconomicPrinciples #EconomicThought #FreeMarket #GwartneyBooks #GwartneyEconomics #JamesGwartney #LibertarianEconomics Economics Gwartney income and growth Institutions

Institutions, Policies, and Cross-Country Differences in Income and Growth

Institutions, Policies, and Cross-Country Differences in Income and Growth

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