Tuesday, February 10, 2009

Capital and Economic Development

This post relates to the following Keystone Economic Principles:
8. Quantity and quality of available resources impact living standards.
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

A couple years ago, I posted on an interesting story (free content at this writing) about fishermen in India who were improving their business thanks to the arrival of cell phones. Yesterday's issue of The Wall Street Journal had a similar story about farmers in India benefitting from the arrival of cell phones.

We teach about productive resources: land, labor, capital and entrepreneurship. But we frequently forget how what seems to be a small (to us) addition of capital can significantly alter productivity and raise standards of living.

By adding cell phones to the mix in rural India, farmers get better access to more information that allows them to make better production decisions. Information about weather and prices in more distant markets provide a more efficient allocation of resources and better prices.

In addition to using this as an example of the addition of capital to the production process, you may also consider using it when you discuss economic development in the macro portion of your class.

I look forward to your comments.

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