SEVEN MAJOR SOURCES OF ECONOMIC GROWTH
1) Legal System
2) Competitive markets
3) Limits on Government regulation
4) An efficient capital (K) market
5) Monetary stability
6) Low Tax rates
7) Free Trade
1) Legal System: Foundation for economic progress is a legal system that protects privately owned property and enforces contracts in an evenhanded manner.
Provides protection of property rights and enforcement of contracts. This reduces the uncertainties accompanying trade. Provides the foundation for capital formation and gains from trade; which is the root of economic growth.
Private ownership of property has incentives, and 4 reasons why these incentives propel economics progress: a) Encourages wise stewardship: More likely to maintain well. Eg: Car owner takes good care of the car. If owned by government, incentive to take good care is weakened. Eg: council houses b) Encourages productive use of property: When able to keep the fruits of labor, strong incentive to improve, work harder and smarter. Eg: 1978 Communist Government of China: rice farmers c) Incentive to develop PP in ways that are beneficial to others: Gain from actions that enhance its value to others, i.e. when others find it attractive, market value rises. Eg: Apartments, students d) Promotes wise development and conservation of resources for the future: Owner has incentive to conserve current use to make property more valuable for future customers. Eg: Tree farmers. Wise development: When a resource becomes scarce, its price rises so higher incentive to conserve, find & develop a substitue. Eg: Whale oil as an energy source. [Conservation, substitution, new technology]
2) Competitive Markets
C methods: quality, style/design, service, location, advertising, price Producers cannot be complacent. Need to anticipate, identify and quickly adopt improved ideas. To succeed, need to have cost-effectiveness.
• Promotes efficient use of resources and provides continuous stimulus for innovative improvements. • Puts pressure on producers to operate efficiently (eliminates waste and cut costs), cater to customer preferences and weeds out inefficient producers. Eg: McD vs BK, Wendy’s, Subway • Gives a strong incentive to develop better products. Eg: MP3 & Ipod replaced CDs • Discover lower cost methods of production.
• Helps discover what consumers want next
• Discovers the business structure and firm size for optimum cost per unit: Eg: Airplane/automobile manufacturers need to be v.large to take advantage of economies of scale VS small firms (law/medical practices) offer valued personalized service and individual products. • Harnesses personal self-interest and puts it to work to raise society’s standard of living
3) Limits on Government Regulation: Regulation that reduces trade also retards economic progress.
Trade promotes social gain, but when G limits cooperation, it stifles economic progress. Regulations that make it costly to legally operate a business stifle competition, encourage political corruption and drive decent people into the underground/informal economy. 3 ways regulatory policies reduce trade:
a) Regulations that Limit entry: May need permission from many bureaus and sometimes bribes or contributions to political coffers. Eg: To open a business, Haiti 196 days vs. 6 days in USA. b) Regulations that substitute political authority for rule of law and freedom of contract tends to undermine gains from trade: • Discretionary authority is an open invitation for government officials to solicit bribes. Creates regulatory uncertainty. Laws need to be precise, unambiguous and nondiscriminatory. • Regulatory roadblocks are costly to the economy, but they do help some businesses by restricting competition. Because of this, those benefiting groups will seek to influence political process (lobbying occurs: costly, time & effort). • Regulations that...
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