ECON-2120 Lecture Notes - Lecture 4: Capital Accumulation, Savings Account, Real Interest Rate
6 Feb 2017
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Institutions: the rules of the game that structure economic incentives. Good institutions: property rights, honest government, political stability, dependable legal system, competitive and open markets. Catch up growth: economic growth caused by capital accumulation and investment. Cutting edge growth: improvements in technology that lead to small, incremental growth. This is caused by research and development. Patents are not meant only for producers. Patents and other intellectual property (ip) are designed to provide new options for consumers. Ex: suppose a pharmaceutical company abc believes it can develop a drug for a 1000000$ investment. The drug will save many lives and net the company 500,000$ per year on the market. So after 2 years, they clear the investment. However, suppose a competitor reverse engineers the drug. If many companies do this, abc"s annual profits fall to ,000/year. It"s likely that abc won"t even develop the drug. Patents ensure that investments like this are made. Savings: income that is not spent on composition.
