Question

5. Economic growth and public policy

Suppose an American buys stock issued by an Argentinian corporation. The Argentinian firm uses the proceeds from the sale to build a new office complex.

This is an example of foreign investment in Argentina.

question 1: Which of the following policies are consistent with the goal of increasing productivity and growth in developing countries? Check all that apply.

Pursuing inward-oriented policies.

Protecting property rights and enforce contracts.

Imposing restrictions on foreign ownership of domestic capital.

Increasing taxes on income from savings.

question 2: In less developed countries, what does the brain drain refer to?

Rapid population growth that lowers the stock of capital per worker

Lower productivity due to a malnourished workforce

The emigration of highly skilled workers to rich countries

Rapid population growth that increases the burden on the educational system

Answer 1

Question 1: Protecting property rights and enforce contracts.

Protecting property rights and enforcing contracts will win investors trust in the economic system and hence it will encourage greater investment. This happens since property rights and institutions protect private property and rights of the investor.

However, Pursuing inward-oriented policies, Imposing restrictions on foreign ownership of domestic capital and Increasing taxes on income from savings will only hinder capital formation in the economy and hence not improve productivity in the economy.

Question 2:  The emigration of highly skilled workers to rich countries

When highly skilled workers immigrate to developed countries, it is called brain drain. These highly skilled workers either realize that their skills are valued higher in rich countries and hence they migrate there.