ABSTRACT
This chapter explains the impact of institutions on economies in a static sense. It illustrates how institutions affect economic performance, assuming the level of technology is held constant. Given the level of technology, a nation's standard of living is roughly determined by its gross domestic product (GDP). Productivity usually refers to output per unit of labor input, or output per hour of labor. One way for workers to increase productivity is to increase degree of specialization and division of labor. Ultimately, production is a combination of labor, raw materials, technology, and a whole series of transactions. The ability of the supplier to make a profit from assembling computers will depend in large part on level of transaction costs. Well-functioning markets require low transaction costs. With low transaction costs, exchanges are easier and more certain for both suppliers and consumers. Institutions affect transaction costs and economic performance. Institutions must be created to reduce the costs of measuring and enforcing exchanges.
