Question

please answer thourghly in one page minimum.

Most economists today believe that earlier models of growth, which focused on physical capital development, are flawed. More recent research has focused on the role of geography (e.g., see Jeffrey Sachs, and Jared Diamond) and institutions (e.g., Daron Acemoglu and Niall Ferguson).
a. Carefully and fully explain each of these perspectives?
b. Can you reconcile these views? (Are they mutually exclusive?0
c. Do you think one view better explains economic growth?

Answer 1

(a). Earlier models of economic growth and development focused on development and modernisation of physical capital. At a micro- level firms believed that it was the factor endowment with respect to physical capital that determined the growth of a firm. Hence, firms concentrated simply on development and modernisation of physical capital. Physical capital includes machinery, buildings, office stationaries, tools etc. The older models were of the view that more efficiency in production meant cost reduction per unit output which would mean more quantity produced at cheaper rates. This savings on cost could be distributed as increased wage rates, investment on capital, or increased revenue to the firms. This theory cannot be completely ruled out as it has been proven that increased efficiency due to investment on capital has resulted in higher rate of return. But is this the only factor that played a key role in economic growth? Let us consider the other view.

The other view in question is how geography is of great importance with respect to economic growth.

Geography plays a key role in determining the rate of growth of an economy. This is because there are several factors that influence the growth of an economy from a geographical perspective. These are mentioned as follows:-

Resources--- A country's location on the global map determines how much and what kind of resources it is blessed with. Examples of resources include soil, water, minerals, plants, trees, sunlight etc. Different kinds of soil can support different plant life. This means it influences the kind of crops that can be grown in a region. Water is a key source for any life form. It can be used for power generation(hydroelectricity), trade, for agricultural purposes etc. Minerals such as metals, coal, crude oil, chemicals etc. reflect the potential for the manufacturing sector.
Location---- A country's location is of prime importance as it determines the ease of trade by land, sea or air. A landlocked region would face the problem of not being able to use sea routes for trade. It would have to depend on another country for that purpose. That means increased costs. A region surrounded by mountains would face difficulties in transportation of goods both within and outside the country.
Climate---- A country's climate determines what kind of goods it can produce. For instance a country that is close to the polar regions or in a desert region would have extreme climate which allows only a certain kind of plants to grow. Such countries cannot expect to grow tropical plants or food grains. They have to rely mostly on meat products for food and food grains could be imported or traded for meat. In contrast to the above, a country with abundant sunshine, rainfall and fertile soil is blessed with rich in plant life. It can grow almost any crops.
Institutions---- A strong and stable political setup and availability of good educational institutions form the backbone of economic stability and growth. High literacy means the labor or human capital is skilled and can contribute more towards national income and growth whereas it has been proven that a country that lacks education usually has severe problems such as high crime rates, unskilled labor, tyrannical regimes etc. A stable political setup provides ground for less corruption, reduced inequality of income distribution, environmental regulations, judicious use of resources, sustainable development.

(b). They are not mutually exclusive as both theories or models of growth reflect the truth and are firmly backed by numerical data that can be found in many research reports. But to say that only one of the two perspectives is applicable while accounting for economic growth is totally wrong as both are a factors that need to be considered while establishing a firm or analysing the growth potential.

(c). I would say both the views are equally important. One has to consider the technological developments as well as the geographical location while explaining the growth. For example, Japan does not have a lot of mineral resources. It is a small island nation. But it is an advanced economy with cutting edge technological developments and industrial capacity. It has managed to generate revenue with little resources and high technology.