IB 150 Lecture Notes - Lecture 7: Mixed Economy, Legal Risk, Totalitarianism

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IB 150 – Lecture 7
Reflect economic freedom of countries
Differences in Economic Development
Gross National Product (GNP)
Common yardstick for measuring economic activity
Measures total value of goods and services produced annually by
Doesn't consider the differences in cost living (price of things, makes it more
Different than GDP
Purchasing Power Parity
Uses US cost of living for basis of adjustment among countries
Price of coca cola can here in the US and in China is different, but compared to
the cost of living
World’s GDP
A monetary measure of the market value of all final goods and services produced in a
period (quarterly or yearly).
Nominal GDP estimates are commonly used to determine the economic performance of
a whole country or region, and to make international comparisons.
Broader Conception of Development – Human Development Index (HDI)
a composite statistic of life expectancy, education, and per capita income indicators,
which are used to rank countries into four tiers of human development.
Development should be measured less by material output measures, such as GNP,
per capita and more by the capabilities and opportunities that people enjoy
HDI measures quality of life in different nations
The UN report covers 185 member states of the United Nations (out of 193), along
with Hong Kong and the Palestinian territories; 8 UN member states are not included because
of lack of data. The average HDI of regions of the World and groups of countries are also
included for comparison.
The Human Development Index (HDI) is a comparative measure of life expectancy,
literacy, education, standards of living, and quality of life for countries worldwide.
It is a standard means of measuring well-being, especially child welfare. It is used
to distinguish whether the country is a developed, a developing or an underdeveloped
country, and also to measure the impact of economic policies on quality of life.
Countries fall into four broad human development categories, each of which
comprises 47 countries: Very High Human Development, High Human Development, Medium
Human Development and Low Human Development (46 countries in this category).
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Political Economy Influences Economic Progress
Innovation and entrepreneurship are the engines of long run economic growth
Innovation induces new products, new processes, new organizations, new
management practices, and new strategies
Entrepreneurs commercialize innovative new products and processes
A country’s economic development is a function of its economic and political
Economic freedom associated with a market economy creates greater incentives for
innovation and entrepreneurship than either a planned or a mixed economy.
The Opening Case: Democracy and Economic Development in Sub-Saharan Africa
considers the trend toward political and economic reform in sub-Saharan Africa over the past
25 years. The establishment of democratic institutions and the trend toward market
deregulation have contributed to the region’s emergence as one of the world’s fastest
growing economies.
Innovation and entrepreneurship help increase economic activity by creating new
markets and products that did not previously exist
Innovation in production and business processes result in more productive labor and
capital further boosting economic growth rates
Innovation and entrepreneurship require a market economy
There is little incentive to develop new innovations in planned economies
because the state owns all means production and therefore, the gains
There is a strong relationship between economic freedom and economic growth
The six countries with the highest ratings of economic freedom from 1975 to
1995 were also among the highest for economic growth
Hong Kong, Switzerland, Singapore, US, Canada, and Germany
Innovation and entrepreneurship require strong property rights
Without strong property rights, individuals and businesses risk having their
innovations and potential profits stolen
Inadequate property protect in many developing nations limits economic growth
Reason why Microsoft is so big, patents are necessary to protect intellectual
While it is possible to argue that democracy is not a necessary precondition for a
free market economy in which property rights are protected, subsequent economic growth
often leads to establishment of a democratic regime
Democratic regimes are probably more conducive to long-term economic growth
than dictatorships, even the benevolent kind
Property rights are only secure in well-functioning, mature democracies
Subsequent economic growth leads to the establishment of democratic regimes
South Korea
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