1climate change is a
external cost of rapid economic growth
2public good
ex: environmental protection
is nonrival (it is costless for others to share the benefits) and nonecludable ( non-payers cannot be excluded)
3positive discount rates arise from
impatience and consumption smoothing over time
4national wealth is a better mesaure of wellbeing than
GDP
5central banks
controls the money supply
supervises the formal financial sector
must be independent between savers and investors
6commerical banks
Accepts deposits and grants short-term credit (known as
financial intermediation between savers and investors)
7central banks in LDC are
less independent of the ruling party and face greater pressure to finance government debt by creating money
8roles of finance
ir reallocates risk amond economic agents
it reallocates capital amng economic agents
9foreign direct investment
private capital flows began to replace foreign
aid in middle-income countries
10Why would private banks, firms, or individuals invest in
developing countries?
high income growth rates, creating expanding markets for consumer goods, they have comparative advantages in producing goods for export to foreign markets
11What is foreign direct investment?
long-term investment in which a non-resident entity exerts significant
control (at least 10-percent) over an enterprise in the host
country.
12For middle-income countries, the largest international capital
flow is
FDI
13Pros of fdi
More stable than other forms of private foreign capital
Enable specializations in manufactured exports and improve access to the world markets
Can facilitate the transfer of technology(ideas) and skills (through training of managers and workers)
14Cons of fdi
fbi can drive out local businessess
large multinationals might overmatch government resources in negotiations over leasing natural resources
15How do commercial banks protect themselves against
default by borrowers?
By requiring collateral (title to property).
16How do banks evaluate credit worthiness?
Investigate credit history.
17providing micro-enterprise business
training to women
can raise sales and profits substantially
18best practices in foreign aid
transparency
specilization
overhead costs
selectivity
19South Asia and Western Europe favor
income equlity
20East Asia and North America favor the incentives for
effort associated with
inequality
21Geography hypothesis
the places that were rich (or poor)
before colonization remain rich (or poor) after colonization, for
geographical factors have remained similar over time
22Institutional hypothesis
places where Europeans settled
and planted institutions conducive to growth overtake regions
with merely extractive institutions.
23Institutions are
onstraints imposed on human
behavior. They can be either formal or informal.
24Asymmetric information
he buyer or seller has information that the
other party does not have
ex: disclosure rules
25Adverse Selection
reputable parties are driven out of the market by
disreputable parties
ex: Regulation of access or entry
26Moral hazard
asymmetric information combined with unobservable
actions by one of the parties (buyers or sellers)
ex: signaling and relational contracting