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Explain the crucial relationship; the distance between the formal and informal institutions?
- Formal (Codified law, overnight shifts)
- Informal (Traditions & culture, Sluggish)
- - Informal economies can prevail in an environment with wrong institutions/ insufficient enforcement.
- -The informal economy offers a way to excape
Explain institutions and transaction costs when being well-defined & functioning and when being wrong & unsuitable?
- Well-defined & functioning
- -Institutions reduce uncertainties = lower transaction costs (specifying what is being exchanged - enforcing the consequent agreements = the costs for carrying through exchanges and upholding an agreement)
- Wrong/Unsuitable institutions- Increase transaction costs. Bureaucracy, corruption, insecure property rights & incomplete information (asymmetric information)
Why are property rights important?
- - A formal institution- a bundle of rights stipulating who owns what, who uses what and how property can be exchanged.
- -Functioning property rights need efficient enforcement mechanisms!- To make sure that rules , contracts and agreements are followed and obeyed.
- -Institutions and the technology employed determine the transaction and information costs.
What are some factors of production?
- - Land: natural resources as agricultural land, forests and the general physical environment (mines, waters etc)
- -Capital: not only money! Real capital eg: machinery and buildings (real estate), financial capital : credits.
- -Labour: related to the size of population- the size and not the least the composition/added skills of the labour force.
- -Technology, institutions and entrepreneurship: the relative impact of using more advanced production techniques, new forms of energies etc.
Measuring and interpreting economic growth.
GDP and GNP
- -GDP= Consumption + Gross investments
- - Total value of all final goods and services produced for consumption in a country during a particular time period.
- -Economic growth = GDP increase/decrease based on the combination of factors of production +- GDP per year.
- -GNP (gross national product) = GDP + factor incomes from abroad - factor incomes transferred abroad.