Practice question · Multiple choice
Two countries invest the same in machines and schooling, and one grows much faster. Institutions are usually invoked to explain the gap. How do they act on growth?
Hints
- Ask what a firm needs to believe before it builds a factory it will own for 20 years.
- Institutions are not an input in the production function.
Show the answer
A. By determining whether investment pays off for the investor
Why
Institutions change the return on everything else. That is why they show up as the residual: they do not enter the production function but they determine whether anyone bothers to fill it.
Practise Economic Growth
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