How does the law affect the economic strength of a nation?

In summary, a well-developed legal system adds certainty in transactions - as it provides a means or method for individuals to enforce their rights.

This certainty provides additional confidence to parties in the transaction and incentivizes further transactions.

When is a state economically strong or weak?

Economists use a number of factors to determine the size and economic strength of a state. 

The most common of these measures are gross domestic product (GDP) and the purchase power parity (PPP) between currencies. 

GDP represents "an aggregate measure of production equal to the sum of the gross values added of all resident, institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs)." 

In contrast, PPP normalizes currencies and compares the purchasing power of each at a given point. 

One other measure of economic productivity is the per capita income of the individuals within the state. 

Taken together, these metrics help leaders or planners take action to maintain or improve conditions within the state. 

When is the role of law in determining a nation's economic strength?

Important for this course, we focus on the role of law in the economic development of a state. 

A commonly accepted theory about the economic strength of a nation regards the influence of law and the legal system. 

Many theorists believe that a strong legal system is a foundation for a functioning economy. 

That is, a strong legal system, through the clear delineation of individual rights and enforcement methods, provides confidence to individuals when undertaking productive activities. 

In nations with such a system, individuals will trade or undertake transactions with the confidence that they can enforce their rights against the other party. 

Not having to take extensive measures to protect her interests lowers transaction costs associated with an activity. 

The result is more and continued business relationships.

• Example: An individual or business may lend you money without taking physical possession of your belongings to secure payment of the debt. In the event you fail to pay the debt, the lender can use legal channels to recuperate the funds lent. This confidence allows you to possess and make productive use of the property while you are paying for it.

Related Concepts

• Understanding Law
• What is "Law"?
• Economic Strength of a Nation?
• Capitalism vs Communism
• What is the "Rule of Law"?
• What is "property law" or "property rights?
• What is "ownership"?
• Why recognize property rights?
• How the law protects property rights?
• What are the "common law" and "civil law" systems?
• What is "public law" and "private law"?
• What is "civil law" and "criminal law"?
• What is "substantive law" and "procedural law"?
• Sources of state and federal law?
• United States Code of Laws
• Role of Judiciary in the legal system?
• Business activity and legal entities?