# Growth mode, writing homework help

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The article below does a great job in summarizing the relevance of institutions for economic performance. We also saw how the growth model can accommodate the notion of institutional quality through the lens of a tax on capital.

For next class, your task is to seamlessly blend the two perspectives in an essay. Your only sources shall be the textbook and the article. The theme question is what explains income differences across countries.

Also, I have a good answer which is my previous classmate did it and sent to my, it will help you to write the answer.

the article and the answer in the attachment. (You almost doing paraphrasing for the answer).

What Explains Income Differences Across Countries Equation Theory Economies in Developed Countries Economies in Developing Countries Institutional Theory Income Level Explaining why some countries are rich and why some are poor can be explained through two theories: equation theory and institutional theory. Equation allows us to algebraically look at how we manipulate the different inputs to maximize output while institution focuses on the practices within a country and its effect on the economy. The main point of focus here is how the rental rate on capital, less depreciation and capital income taxes, affects the rate of return on capital. By looking at the equation, we must set an equilibrium. Households demand a certain after-tax and after-depreciation return on capital (as denoted in the equation by 1 less tax rate and capital less depreciation). That figure leftover is equal to the rate of return on capital. Therefore, the tax rate greatly affects the rate of return on capital as seen in the equation. Labor (income tax) and capital must go hand-in-hand. High capital income tax rates will discourage accumulation of capital which will then lead to lower wages. Higher rates of taxation on capital income actually tends to make workers worse off. So, when tax rates on capital are relatively high, the levels of capital output and wages are relatively low. In a poorer countries, corrupt government entities impose a higher capital income tax (i.e. bribes). Therefore, because of this high tax, firms are unable to accumulate capital. Thus they are unable to pay their workers sufficient wages and therefore, the economy is unable to flourish as they don’t have the income to then Growth Volatility Policies put back into the economy. The opposite holds true for wealthier, developed nations such as the US. Institutional theory, on the other hand, is based on concepts and policies within a country. Institution theory looks at the policies that a particular country has in place and how it affects the economy and real GDP. Institutional theory is studied by looking at four components: income level, growth, volatility, and policies and how they are all correlated. When looking at income, economic outcomes could be substantially improved if developed countries strengthen their institutions. The income gain is much larger if institutional quality rises to the level of advanced economies as we see in developed countries. Institutions are also directly correlated to volatility. Therefore, the better the institutions, the lower the volatility of growth. Institutional improvements could have significant impact on growth rates and as a result, institutions have a strong and significant impact on GDP growth. When institutional and policy variables are considered together, institutions are found to be the dominant influence on economic performance, with policies having little independent influence. However, acountry’s level of financial development, which may be highly influenced by policy, has a significant positive impact on growth. Institutions are very important as seen in developed countries because lack of them can lead to corruption and stagnant growth as seen in the developing countries. Institutional theory is based on concepts. Equation theory stipulates income tax and deprecation are driving factors as seen through the equation. This theory depicts institution theory by using numbers to algebraically show how changes in taxes and depreciation affect real-GDP. Both theories suggest growth and development be allocated towards finding equilibrium with the rate of return on capital and also having a solid foundation such as institutions to ensure growth. In summation, both concepts are looking to find an equilibrium within the country to ensure a growing economy. Equation theory looks at how increases/decreases in taxes or depreciation affect that equilibrium while institution theory looks at social factors and their effect on the equilibrium. Both theories are vital for economic growth and development and both illustrate the same concept but demonstrate them in different ways.

maciej
School: University of Maryland

Hi buddy,Here is the answer to your question. Have a look at it and in case you need any edits, in regards to content and format, please inform me.

Explanations for
income differences
across countries

Equation Theory

Economies in
Developed
Countries

Economies in
Developing
Countries

Institutional Theory

Income Level

There are two theories that can be used to
explain why some countries are rich while others
are poor; the equation theory and the
institutional theory. Generally, the equation
theory explains how rate of return on capital is
affected by depreciation and capital income
taxes while the institutional theory explains the
effect that practices within a country have on
that country’s economy.
The equat...

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Anonymous
Outstanding Job!!!!

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