The three principles concerning economic interactions are: (1) trade can make everyone better off; (2) markets are usually a good way to organize economic activity; and (3) governments can sometimes improve market outcomes. Trade can make everyone better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and services. Markets are usually a good way to organize economic activity because the invisible hand leads markets to desirable outcomes. Governments can sometimes improve market outcomes because sometimes markets fail to allocate resources efficiently because of an externality or market power.
The three principles that describe how the economy as a whole works are: (1) a country’s standard of living depends on its ability to produce goods and services; (2) prices rise when the government prints too much money; and (3) society faces a short-run tradeoff between inflation and unemployment. A country’s standard of living depends on its ability to produce goods and services, which in turn depends on its productivity, which is a function of the education of workers and the access workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run tradeoff between inflation and unemployment that is only temporary and policymakers have some ability to exploit this relationship using various policy instruments.
Why Nations Fail explains why inclusive political institutions give rise to economic growth. Political institutions (such as a constitution) determine the de jure (or written) distribution of political power, while the distribution of economic resources determines the de facto (or actual) distribution of political power. Both de jure and de facto political power distribution affect the economic institutions in how production is carried out, as well as how the political institutions will be shaped in the next period. Economic institutions also determine the distribution of resources for the next period. This framework is thus time dependent—institutions today determine economic growth tomorrow and institutions tomorrow.
Different institutions result in different levels of economic growth. The paper examines institutional choices during the colonial period of several nations in relation to the same nations' economic development today. It found that in countries where the disease environment meant that it was hard for colonizers to survive (high mortality rate), they tended to set up extractive regimes, which resulted in poor economic growth today. In places where it was easier for colonizers to survive (low mortality rates), however, they tended to settle down and duplicate institutions from their country of origin—especially from Britain, as we have seen in the colonial success of Australia and United States. Thus, the mortality rate among colonial settlers several hundred years ago has determined the economic growth of today's post-colonial nations by setting institutions on very different paths.
If you want your economy to grow, there must be a robust framework of laws and institutions to favor investors. Extremely corrupt nations with low safeguards tend to experience capital flight.
The World Bank states that, economic growth and political stability are deeply interconnected. The uncertainty associated with an unstable political environment may reduce investment and the pace of economic development. On the other hand, poor economic performance may lead to government collapse and political unrest. However, political stability can be achieved through oppression or through having a political party in place that does not have to compete to be re-elected. In these cases, political stability is a double edged sword. While the peaceful environment that political stability may offer is a desideratum, it could easily become a breeding ground for cronyism with impunity. Such is the dilemma that many countries with a fragile political order have to face. When political stability comes with having one party or a coalition of parties in office for a long time, it may eventually be detrimental. The economy may do well in terms of attracting foreign direct investment because stability means a predictable political environment. However, other aspects of the society might suffer because of complacency, lack of competition, and opacity. The economy eventually suffers because of these. Consequently, stable governments do not necessarily lead to higher economic growth. India is another case in point. India’s performance on the economic front in the first 30 years of post-independence era, which epitomized political stability, exhibited 3 to 3.5 percent level of economic growth, lowest in the last sixty years. In contrast, in the last 20 years when India saw as many as four Prime Ministers, industrial growth rates jumped to double digits, something that had not happened before.
Bottom-line: Not all forms of political stability are equally development friendly; much depends on the extent to which stability translates into good governance. Do not expect applying as a fascist Australia and having the same economic indicators of IRL Australia.
MONETARY POLICY & GOVERNMENT SPENDING
If a country is facing a high unemployment rate during a slowdown or a recession, the monetary authority can opt for an expansionary policy aimed at increasing economic growth and expanding economic activity. As a part of expansionary monetary policy, the monetary authority often lowers the interest rates through various measures that make money saving relatively unfavorable and promotes spending. It leads to an increased money supply in the market, with the hope of boosting investment and consumer spending. Lower interest rates mean that businesses and individuals can take loans on convenient terms to expand productive activities and spend more on big ticket consumer goods.
However, increased money supply can lead to higher inflation, raising the cost of living and cost of doing business. Contractionary monetary policy, by increasing interest rates and slowing the growth of the money supply, aims to bring down inflation. This can slow economic growth and increase unemployment, but is often required to tame inflation.
Bottom-line: Your government's policies will determine the state of the economy. Do you borrow a lot of money to fund your government’s programs? You might have to deal with high inflation rates. Does your government try to aggressively control inflation? You might have to deal with high unemployment in the short run. Do you tax your citizens too much? Your country will certainly experience capital flight and you might actually have less money as the Laffer Curve tells us. (A 1981 article published in the Journal of Political Economy presented a model integrating empirical data that indicated that the point of maximum tax revenue in Sweden in the 1970s would have been 70%. So try to keep your taxes under this number to maximise revenue and to be able to raise money in times of need)
An economy is the most complex aspect of your nations, and there are many points to take into consideration to determine the size, effectiveness, and well-being of your economy.
- Have a strong legal framework that fosters a safe environment for investors to put their money in. Failure to do so will create an environment of uncertainty and will feed corruption, business does not thrive under these conditions.
- A sensible monetary policy to address the specific economic reality of your nation. If you face inflation, raise rates (your economy might shrink, and you might suffer from unemployment), if you face a recession, lower rates and increase the money supply (if you're irresponsible with the printing machine you might face hyperinflation). Try to target an inflation rate of 2% under normal conditions.
- Realistic fiscal policy (don't tax too much, don't spend a large proportion of your GDP in your military and don't use a large percentage of your workforce in the military as well).
- Autarky does not work. Autarky or economic self-sufficiency is a state of affairs where there is no foreign trade at all; every nation consumes only goods produced within its own borders. Protectionism might be necessary in some cases, but if you plan to have a closed economy, it's not going to be big, at all, and probably will be incredibly unsustainable.
- Modern Monetary Theory: no, just don't. MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. 'Magic Money Tree' advocacy, particularly in the political sphere, is often driven by Utopian thinking by those who want massive unaffordable public spending programmes. MMT is rejected by most economists. A recent survey by the University of Chicago found that no economic expert thinks that countries that borrow in their own currency need not worry about deficits because they can print money to finance debt. Similarly, none thought that it is possible to fund as much real government spending as you want by creating money.
These are some main points, but others may be discussed in the future.
-A ceiling on rents reduces the quantity and quality of housing available.
-Tariffs and import quotas usually reduce general economic welfare.
-Flexible and floating exchange rates offer an effective international monetary arrangement.
-Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy.
-Developed economies should eliminate agricultural subsidies.
-An appropriately designed fiscal policy can increase the long-run rate of capital formation.
-A large federal budget deficit has an adverse effect on the economy.
-Inflation is caused primarily by too much growth in the money supply.
-A minimum wage increases unemployment among young and unskilled workers.
-Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings.