Question

As defined by economic historian Douglass North,” institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.”

Does the role of institutions or geography offer a more plausible explanation of cross-country differences in economic growth? Explain with reference to the work of Daron Acemoglu.

How does the institution hypothesis explain the difference, in terms of economic growth, between North and South Korea?

How is Gross Domestic Product (GDP) calculated using expenditure-based accounting (3 points)

Answer 1

Human made institutions have strong influence on economic growth of country. These factors are responsible for different level of economic development in different countries.

Business environment affects the business in one sided manner. There are very scant chances that enterprise affects business environment. Conducive environment can contribute towards the profitability of business.

A country which has strong democratic rules and regulations are hold constitutionally, then it promotes political stability which is inevitable for successful business. Further, if contracts are honestly enforced, then it promotes investments and economic activities.

Country where laws and contracts are not enforced in right perspective, businesses do not thrive in such environment.

North Korea does not have democratic and friendly political system which hampers economic growth. Hence, as comparison to the south Korea, North Korea is lagging behind.

Further more, social customs and human interactions are major non-economic factors that affect business in most profound manner. A country where traditional values and customs are not agile enough, business can not thrive in such environment.

To sum up, these institutions are most critical for gaining high growth rate. these institutions do not act favorable in developing countries, hence growth rate is retarded in such countries

Calculation of GDP through expenditure method:

Y = C+I+G+Xn

C: Final consumption expenditure method

I= Gross domestic investment

G: Final government consumption expenditure.

Xn : Net export or export – import.

By adding all such final expenditure, we reach at Gross domestic product or GDP at market price.

Net Indirect tax is deducted from GDP at market price to reach GDP at Factor cost.