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Links Between Economic Growth and Economic Institution in the Long Run

In: Business and Management

Submitted By Kleron
Words 2485
Pages 10
Introduction
Understanding of the economic growth process and it connection to institutions is highly important for explaining why certain countries are less developed than the other ones. Economic growth is defined as “An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. (http://www.investopedia.com/). The role of institutions in economic growth was first proposed in writings of Adam Smith in 1776. Later in 1993 Douglass North received a Nobel Prize for his work on connection between institutions and economic growth. By studying history, analyzing data and statistics we can see that high quality institution have positive effect on economic growth and therefore on income in a long and short runs. In order to prove it we are going to find out what economic institutions are, why they are matte, what are the reasons behind different institutions in different countries and finally support it with historical facts.

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Links between economic growth and economic institution

What are institutions?

The term “Economic institutions” can be defined in mach different way and have multiple meanings. On the one hand North (1990, p.3 ) defines institutions in a general wide way as “ the rules of the game in a society, or more formally, are the humanly devised constants that shape human interaction… In consequence they structure incentives in human exchange, whether political, social, or economic”. Hadgson (2004, p. 655) explains economic institutions as “ durable systems of established and embedded social rules that...

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