Question

Identify each of the following situations as something that either promotes growth or retards growth.

a. Increasing corruption allows government officials to steal people’s homes.

b. A nation introduces patent laws for the first time.

c. A court order shuts down all banks permanently.

d. A poor country extends free public schooling from 8 years to 12 years.

e. A nation adopts a free-trade policy.

f. A formerly communist country adopts free markets.

Short answer

1. Increasing corruption that allows officials to steal people’s homes will retard economic growth.
2. The introduction of patent laws will promote economic growth.
3. An order by the court to shut down all banks permanently will retard the economic growth.
4. The decision by the poor country to extend public schooling from 8 to 12 years will promote economic growth.
5. The nation’s decision to adopt free trade decision policy will promote growth.
6. The decision by a formerly communist country to adopt a free market will promote growth.

Step-by-step solution

Step 1. Reason behind option (a).

If corruption allows government officials to steal people’s homes, then people will have less incentive to save and invest in building homes. This insecurity will compel the citizens to consume the whole income instead of saving some part of it for investment.

Since some investment is required to finance future growth, the decreased investment will retard the economic growth.

Step 2. Reason behind option (b).

The patent laws are used to protect the ideas of inventors and authors from being stolen by others. The introduction of patent laws by the government will create an incentive for the people who want to invest time and resources in inventing and creating new goods and services for society.

These rights will provide strong financial incentives to the inventors and artists to market and sell their products. Hence, it will promote economic growth.

Step 3. Reason behind option (c).

Banks are financial institutions that help exchange savings made by the households to the investors for investment. Banks channelize the exchange by providing some interest to the households on savings and taking interests from the lenders.

The decision of the government to shut down banks will discourage households from making savings from current income. The investment will decrease in the economy. Hence, the decision will retard the growth.

Step 4. Reason behind option (d).

Education is an essential institutional structure of economic growth. Since the nation is poor, most of the population will not access quality education due to a lack of money.

The decision of the government to extend public schooling from 8 to 12 years will increase the number of educated citizens in the economy, which will boost economic growth. Hence, the decision will promote growth.

Step 5. Reason behind option (e).

Free trade allows countries to specialize in the production of certain goods and services. It helps in the exchange of goods and services between countries at a lower price. It also enables the rapid exchange of ideas and technology between countries.Thus, free trade increases the output level of the nations, which increases economic growth.

Hence, the nation’s decision to adopt free trade policy will promote the country’s economic growth.

Step 6. Reason behind option (f).

A free market leads to a competitive market system. The indicators of free-market help firms in evaluating prices and profits more correctly. It enables them (firms) to predict the future returns from their investments and decreases the risk of wrong predictions. When government controls the market, its policies hurt the market forces. The price and profits are less predictable due to changes in policies.

Hence, the presence of government control on the market discourages firms from investing more. But a free trade encourages firms to invest more in the market, which increases economic growth. Therefore, the decision by a formerly communist country to adopt a free-market policy will promote growth.