Institutions that Promote Economic Growth - Video Tutorials & Practice Problems

Role of Government in Economic Growth

Alright now, let's discuss the role that the government can play in promoting economic growth. So we want to see things that the government can do to help the economy grow, right? The government can play a role in this. Some of the most important things they can do is to increase human capital. So the first one here, public education, this is an investment in human capital by the government offering uh free public schools. Well, that's going to make their uh their population smarter, right, more educated, technically savvy to to be more productive at their jobs. Right? So smart and experienced workers are more productive, so we'll have economic growth pretty straightforward. Public education is a key to economic growth. Um and the government can also, in another way they can invest in public health and nutrition. So this is kind of like an investment in human capital, but a little different. Remember when we talk about human capital, it's like investing in education and training of the citizens, right? Well, how about the health of the citizens, right? Healthy citizens are going to be more productive than six citizens, right? If you're sick and you can't go to work well, you're not being productive. So, by investing in health and having healthy healthy population Well, that's going to increase productivity as well. So it's kind of like an alternative investment. Now, when when we talk about human capital, I do want you to really focus that definition on like education that should be like the keyword that triggers in your mind, having like educated citizens when you think about human capital, but health, it's kind of like an alternative investment there. So those are two things already that the government can do to help promote economic growth, right? We're trying to see how can the government help help the citizens be more productive. So the next one here is property rights. So property rights by, we're gonna say, by establishing establishing property rights, um, they're going to help entrepreneurs and investors make investments. So when we talk about property rights, this is the ability to exercise authority over your property. So you own something. Well, who says that you own it? You live in a house, But is it your house? Who says it's your house? Well, the government has property rights that says this is your house. Now, what if property rights weren't clearly defined? Right? What if it wasn't so simple to show the deed and say, hey, this is my house? Well then it would be a lot riskier, right? Entrepreneurs and investors would not risk their funds if their property could be seized. And this is actually very relevant in developing countries. Um, there's a lot of developing countries where property rights can be undermined by government corruption. So a lot of times, with this third bullet point, especially if a country is at war or maybe the citizens are unhappy and there's a big revolution going on? Well, if you have a factory in that country, who knows what could happen, right? If there's a new government gets put in place if they could seize your assets, right, who knows what could happen? Um So if property rights are not clearly defined and you can't really control your property, well, that would not help uh, entrepreneurs make investments, right? And that's the key to economic growth here, is that we want to be able to make these investments to allow the economy to grow. So, by establishing these property rights. Well, that's going to allow entrepreneurs to feel better about making these investments, right? So establishing property rights. That's another thing the government does, right? The government is the one who who protects your property and in any case you have the deeds right? You're able to show that this is your property and you can take them to court if someone tried to deny you. Right? So establishing property rights, that is a key to economic growth. The next one here, let's go into savings and investment. So we've mentioned these terms before savings and investment. Now let's go ahead and define define them first. And let's see how that relates to productivity growth. Remember, our goal here is how can the government help growth? So when we talk about savings, this is things that the households do households have savings and this is when the current consumption is less than current output, right? So there's less, they don't consume everything today, they save some for the future. Well, how does that help our how does that help productivity growth? Well we're gonna we're gonna see how savings and investment are highly interrelated. So when households save that allows firms to borrow money and invest, right? And remember when we talk about investments. So this is things firms do here. When we talk about investment, we're not talking about like buying stock or buying Bitcoins or something. We're talking about an economic investment. When we talk about economic investment, this is things that increase future output. So current resources being devoted to increasing future output, What does that mean? That's like building a factory, Right? If we build a factory today, we're taking current resources to build this factory so that in the future we can use the factory to to be more productive and create more output in the future. Okay, so that's things that the firms do. They invest to create future output. So the savings and investments go hand in hand, the household save so that the firms can borrow those savings and invest them. Okay, so the government can help incentivize savings and they can help incentivize investment. They can incentivize savings with things. You've probably heard of their tax incentives by giving households reasons to save like uh 401k. Or other retirement vehicles that there are to help you save on taxes by saving your money. You don't get taxed on it right away and you're able to save on the taxes and that incentivizes people to save some of their money because they'll have money put away for retirement and they won't have to pay taxes on it now. How can the firm, how can the government help firms invest? How can they incentivize firms to invest in the future? Instead of saying, hey, let's just make money now, let's instead, uh, they want to incentivize them to grow in the future as well, to make these investments so they can give subsidies for research and development. So, remember research and development, well, we're gonna be making more technology here, right? We're improving our technology, improving technology, um, which will increase the value of investment in the future, right? By subsidizing research and development. Well, that's going to help technology growth, which is an important part of economic growth. And the government also plays a role in, in infrastructure by building roads and power lines and that's an important part of economic growth, right? Thinking the highway system here in the US. Right. When the government built the highway system, it made it a lot easier for businesses to do logistics, right? To be able to send and receive things across the country by, uh, by different materials. Right? So infrastructure plays a key role in investment as well. So by, by incentivizing saving and incentivizing investment, the government can promote economic growth as well. The last one we have here is free trade. So free trade, this is integrating into the worldwide marketplace. We've got this word globalization that gets thrown around a lot. Well, that's just being part of the global marketplace, becoming more open to foreign trade and investment. Okay, by being part of the global marketplace, you can uh sustained economic growth. And this is especially true for, let's say low income countries may be in a low income country, a developing country, um They don't have the the savings to be able to invest and create new factories well, by allowing foreign investments. And we call them here foreign direct investments. So this is purchasing or building factories, facilities in foreign countries. So by investing in other countries, well, these low income countries can increase their production and increase this would be economic growth here. Right? Whoops by allowing the foreign investment, Right? So maybe a factory they couldn't build themselves if they allow if they have free trade and they allow foreign investment. Well, they can the foreigners can build the factory and help that country grow, Right? So that's about it. These are things that the that governments can can do to help promote economic growth. So, remember by uh the main ones here to think about is investing in here in in human capital through education and health, establishing property rights is key. That's a key to economic growth. Savings and investment. And finally, free trade. Cool, alright, let's go ahead and move on to the next topic