Chapter 16 Creating an Environment for Growth and Prosperity rule of 70 if a variable grows at a rate of x percent per year 70 x will approximate the year s required for the variable to double major sources of economic growth gains from trade entrepreneurial discovery investment in physical and human capital and favorable institutional environments o o o o o o o o o o gains from trade trade moves items from people who value them less to people who value them more allows for division of labor specialization and mass production more trade means more output and growth entrepreneurship and technology technological advancement and innovation allows us to produce more the market rewards good ideas and puts a stop to resource draining products investments in physical and human capital investments in machines and people with skill knowledge will pay off in the long run institutional environments institutions legal regulatory and social constraints that impact property rights and enforcement of contracts the institutional environment o minimal regulation regulations make starting a business difficult regulations often have unintended consequences avoidance of high tax rates high taxes reduce efficient use of resources high taxes increase underground activity and labor force dropout open international trade avoid tariffs avoid quotas other factors that may affect economic growth population growth people produce not just consume Thomas Malthus natural resources institutions more important than natural resources natural resources do not guarantee growth ex Japan vs Nigeria foreign aid agricultural and monetary donations aid can have unintended consequences climate and location far from major markets tropical climate institutions are more important than location
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