Economic Growth, Institutions, and Long-Run Development

Comprehensive vocabulary flashcards covering macroeconomics, the production function, capital accumulation, historical state formation, and the deep institutional roots of comparative economic development.

GDP Function ($Y$)

The total market value of production within an economy, calculated by the expenditure identity $Y = C + I + G + (X - M)$, where $C$ is consumption, $I$ is investment, $G$ is government spending, $X$ is exports, and $M$ is imports.

Flaws in GDP Calculations

lack of account for distributional concerns, lack of moral consideration, and in impacted by the rate of financial transactions

Economic Growth Rate (Δ GDP)

The proportional rate of change in aggregate output over time, calculated as $\frac{\text{GDP}_t - \text{GDP}_{t-1}}{\text{GDP}_{t-1}} \times 100$.

Investment ($I$)

acquisition of capital goods by firms (what companies buy)

Gross Domestic Product

predicting how much we are producing and consuming by counting what goes out of the country

Production Function

mathematical relationship specifying the maximum output ($Y$) achievable from a given quantity of capital ($K$), expressed as $K(Y)$

Diminishing Marginal Return of Capital

as more capital ($K$) is added holding other inputs constant, the additional output produced by each subsequent unit of capital declines over time (increasing at a decreasing rate)

Depreciation

value diminishing over time causing capital to become worthless over time

Steady State Capital

The long-run equilibrium level of capital in an economy where gross investment equals total capital depreciation (producing just enough to maintain capital yet minimize depreciation)

Solow Growth Model

1. Diminishing Marginal Return - productivity is always increasing at a decreasing rate

2. Depreciation - the more capital we have increases the money we are losing at a constant rate

Why haven’t come countries gotten rich? (Issues with Solow’s Growth Model)

Human Capital, Institutions, Misallocation of Capital Goods, Poverty Trap, Geography, Conflict, Colonialism, Demography

Property Rights

Secure (transferable) legal rights that define the ownership and exchange of productive assets; without them, market price signals fail and incentives to invest capital collapse.

Capital Goods need to be…

heterogeneous and multi-specific

Heterogeneous Capital Goods

multiple kinds, many options or variations

Continental Axis Orientation

Jared Diamond's geographic concept that Eurasia's predominantly East-West axis (Fertile Crescent) allowed rapid diffusion of crops and domestic animals across identical latitudes and climates, unlike North-South axes. (Discussed in Guns, Germs, Steel 1997)

State

A centralized political organization maintaining a legitimate monopoly on violence to enforce rules and defend citizens against internal and external violence.

Thomas Hobbes' Leviathan

A political philosophy work arguing that an absolute sovereign power is necessary to enforce order and property, preventing a violent state of nature.

Settler Mortality

The historical death rate of European colonizers due to tropical diseases, determining whether colonizers established inclusive institutions or extractive colonies.

Instrumental Variable ($Z$)

An exogenous variable—such as colonial settler mortality—used in econometric models to estimate the causal effect of institutions ($X$) on economic development ($Y$) without confounding bias.

Roman Catholic Church (Middle Ages)

The universal institutional authority in post-Roman Western Europe that provided unified legal structures, canon law, and institutional continuity amidst territorial political fragmentation.

When does growth happen?

Capital goods increase productivity, investment grows capital goods, and investment comes from saving)

Savings

the forgoing of present goods for more future goods

Multi-Specific Capital Goods

a unit that can be used for multiple different purposes

Economic Calculation

the ability to determine whether a decision creates value by examining profit or loss along with the ability to forecast whether a decision will create value by examining prices

what constrains our consumption for production and directs how we make profitable captial?

profit and loss as they discipline procedures

the current price of goods

what projects the price command of newer items?

Economic Calculation Argument

1. without private property rights in the means of production there are no market prices

2. without prices there is no profit/loss

3. without profit/loss there is no calculation

Surplus

excess of production not to be immediately consumed (first step to becoming sedentary and also leads to banditry)

Sedentary individuals stop producing surplus (Mansur Olson 1993: Dictatorship, Democracy, and Development)

what happens when banditry leads to surplus?

What is James C. Scott’s argument?

domestication of agriculture and animals then domesticates humans (slavery)

What makes sedentary agriculture possible?

Slavery

What are the effects of slavery in the age of sedentary agriculture?

shorter lifespan, higher violence rates, higher female fertility + lower value of women, walls are built to keep people in, health declines (disease/malnutrition)

A, J, R’s Argument in Colonial Origins of Comparative Development

settler colonies in North America (w/ property rights) experienced more economic development than extractive colonies (w/ no property rights) not conquered by the English due to the development of legal systems in the north and a lack thereof in the extractive colonies

Environmental Conscription

when ancient states were confined by environmental conditions (specifically hinterland productivity) making it either harder or easier for slaves to run away (polity is volatile)