Institutions

What are good institutions?

When economists use this term, they mean: property rights, honest government, political stability, dependable legal system, and competitive and open markets.

Why are these considered important for an economy? They create the right environment to allocate scarce resources.

Property rights enable owners to protect their investments and an honest government prevents citizens from having to resort to bribes. A dependable legal system allows for disputes to be resolved, contracts to be enforced, and money to be borrowed and lended. Political stability is necessary for investor confidence. And finally, competitive and open markets prevent inefficient and unnecessary regulations – preventing monopolies and allowing for innovation and growth.

All of these institutions are crucial factors for economic growth. In the video, we’ll give you a concrete example of each.

Interested in digging deeper into economic growth? Check out our Macroeconomics section on The Wealth of Nations and Economic Growth.