Consider two countriesA and B. Country A is characterized by a ...

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Consider two countriesA and B. Country A is characterized by a command economy, absence of property rights, high entry barriers for new businesses, and forced child labor.
 
  Country B, on the other hand, is characterized by well-defined private property rights, a developed market system, and no entry barriers for new businesses. Which of the two countries is likely to oppose creative destruction more? Why?

Question 2

The income per worker of a country increases if ________.
 
  A) the number of children in the country aged below 15 increases
  B) the country's GDP increases, all other variables remaining constant
  C) the number of retired people in the country increases
  D) the country's GDP falls, all other variables remaining constant

[EAN94]

Answer to Question 1

Since, economy A is characterized by the absence of property rights, high entry barriers for new businesses, and forced child labor, it can be concluded that the institutions in the economy are extractive. On the other hand, since economy B has well-defined property rights, a developed market system, and no entry barriers for new businesses its institutions can be concluded to be inclusive.

Creative destruction refers to the process in which new technologies replace old ones, new businesses replace existing businesses, and new skills make old ones irrelevant. One of the implications of creative destruction is that it can cause political creative destruction. Political creative destruction refers to the process in which economic growth destabilizes existing regimes and reduces the political powers of rulers and monarchs. Since, institutions in economy A are extractive in nature, it would like to continue to extract wealth from the citizens in the economy. Hence, economy A is likely to oppose political creative destruction and creative destruction. On the other hand, since institutions in country B are conducive to economic development, it is likely that the economy will favor creative destruction.

Answer to Question 2

B

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