Consider two economies: A and B. Economy A is located close to ...

[tiffannnnyyyyyy]

Consider two economies: A and B. Economy A is located close to the equator and is characterized by an extreme climate. The terrain in economy A is inhospitable and it lacks rivers or other water bodies in its territory.
 
  On the other hand, economy B is located in the temperate zone with a pleasant climate, fertile soil, and navigable rivers. Suppose the geography hypothesis of economic growth holds.
  a) Which of the two economies is likely to be more prosperous?
  b) Is the difference in prosperity between the two economies likely to be sustained in the long run?

Question 2

The primary motivation for private foreign investment in developing nations is
 
  A) to eradicate poverty.
  B) to improve the standard of living for workers.
  C) the potential for high rates of return.
  D) to do research in countries with fewer social regulations.

[micaelaswann]

Answer to Question 1

The geography hypothesis claims that the differences in geography, climate, and ecology are ultimately responsible for the major differences in prosperity observed across the world.
a) If the geography hypothesis holds, economy A is likely to be less prosperous than economy B. This is because the productivity of different factors of production will be lower in economy A due to the extreme weather conditions and inhospitable terrain. The absence of rivers is likely to make transportation and trade expensive. On the other hand, economy B is characterized by geographical conditions that are conducive to development. Therefore, economy B is likely to be more prosperous in the long run.
b) Yes, the difference in prosperity is likely to be sustained in the long run. This is because the geography of a nation does not change over time and so, economy A is likely to be at a permanent disadvantage.

Answer to Question 2

C