1. GNI per capita can be adjusted by purchasing power to account for differences in
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1 Chapter 03 Political Economy and Economic Development True / False Questions 1. GNI per capita can be adjusted by purchasing power to account for differences in the cost of living. True False 2. The base for the purchasing power parity adjustment of the GNI is the cost of living in the United States. True False 3. GNI and PPP data are useful because they provide a dynamic analysis of economic development. True False
2 4. In Sen's view, development is an economic process that should be assessed by material output measures such as GNI per capita. True False 5. Life expectancy at birth is one of the measures used by the Human Development Index (HDI) to measure the quality of human life in different nations. True False 6. Political freedoms is one of the measures used by the Human Development Index (HDI) to measure the quality of human life in different nations. True False 7. If a country's economy is to sustain long-run economic growth, the business environment must be conducive to innovations and entrepreneurial activity. True False 8. In a planned economy, the means of production are owned by private individuals. True False
3 9. The economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. True False 10. Privatization refers to the process of hiring private management consultancy firms to manage state-owned enterprises. True False 11. The state can expropriate the profits from innovation through legal means. True False 12. Peruvian development economist Hernando de Soto has argued that the chronic inability of property owners to establish legal title to the property they own is a key problem for innovation, and entrepreneurial activity in developing nations. True False 13. Some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. True False
4 14. Totalitarian states promote human freedom and human development, which facilitates economic progress. True False 15. Democracy is one of the consequences of economic growth and progress. True False 16. Anecdotal comparisons suggest that the assertion that nations that invest more in education will have higher growth rates is true. True False 17. Since the late 1980s, there has been a strong move away from a more free market economic model and toward a more centrally planned and mixed economies. True False 18. Many totalitarian regimes were able to deliver economic progress to the vast bulk of their populations, which curbed the spread of democracy during the late 1980s. True False
5 19. New information and communication technologies have enabled the spread of democratic ideals. True False 20. One of the reasons for the spread of democracy is the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms. True False 21. Political scientist Samuel Huntington predicts that there will be a more harmonious world dominated by a universal civilization characterized by democratic regimes and free market capitalism. True False 22. According to political scientist Samuel Huntington's thesis, global terrorism is a product of the tension between civilizations and the clash of value systems and ideology. True False
6 23. Transformation from centrally planned command economies to market-based economies can be attributed to the fact that command and mixed economies failed to deliver the sustained economic performance achieved by countries adopting market-based systems. True False 24. Economic freedom necessarily equates with political freedom. True False 25. In a command economy, the prices are determined by the free interplay of demand and supply. True False 26. Deregulation involves prohibiting private enterprises from operating in most sectors of the economy. True False 27. In mixed economies, in certain sectors the state set prices, owned businesses, limited private enterprise, restricted investment by foreigners, and restricted international trade. True False
7 28. Privatization reduces the incentive of business owners to increase productivity, enter new markets, and to exit losing ones. True False 29. Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition. True False 30. For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy. True False 31. The government of a country takes over the airport security industries following a major terrorist attack, to improve airport security. This is an example of privatization. True False 32. A well-functioning market economy requires laws protecting private property rights and providing mechanisms for contract enforcement. True False
8 33. When communism collapsed, many of the communist countries lacked the legal structure required to protect property rights because all the property was earlier held by the state. True False 34. A market with a large number of consumers, with low living standards will have a relatively large market when measured in economic terms. True False 35. The long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth of consumers in that market, and the likely future wealth of consumers. True False 36. By identifying and investing early in a potential future economic star, international firms can build brand loyalty and gain experience in that country's business practices. True False 37. First-mover advantages are the advantages that accrue to early entrants into a market. True False
9 38. A country's economic system and property rights regime are reasonably good predictors of economic prospects. True False 39. Countries with free market economies in which property rights are protected tend to achieve lower economic growth rates than command economies where property rights are poorly protected. True False 40. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses. True False 41. Economic risks are independent of political risk. True False 42. One visible indicator of political risks tends to be a country's inflation rate. True False
10 43. The overall attractiveness of a country as a potential market or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. True False Multiple Choice Questions 44. GNI per person figures can be misleading because. A. they also include barter agreements B. they provide a dynamic picture of development C. they don't consider differences in the cost of living D. they don't consider exchange rate 45. Which of the following helps in adjusting GNI such that it accounts for the differences in the cost of living? A. Purchasing power parity (PPP) adjustment B. Human Development Index C. Debt to GNI ratio D. Consumer Price Index
11 46. In some countries, the official GNI per capita measured at PPP data does not reflect the actual the total annual income because: A. it doesn't consider differences in the cost of living. B. it gives a static picture of development. C. it fails to include income earned from other countries in the form of dividends. D. large amounts of economic activity may be in the form of barter agreements. 47. Which of the following is a measure that is developed by the United Nations to measure the quality of life in different nations? A. Gross national income B. Human Development Index C. Purchasing power parity D. Gross domestic product 48. The HDI is based on all of the following measures EXCEPT: A. life expectancy at birth. B. political freedom. C. educational attainment. D. whether average incomes are sufficient to meet the basic needs of life.
12 49., a Nobel Prize-winning economist, has argued that development is not just an economic process, but it is a political one as well. A. Hernando de Soto B. Karl Marx C. Samuel Huntington D. AmartyaSen 50. According to AmartyaSen, development should be: A. seen as a process of expanding the real freedoms that people experience. B. seen as a non-political concept that focuses on the net income of a country. C. should be viewed as a purely economic process. D. assessed by material output measures such as GNI per capita. 51. Which of the following statement pertaining to innovation and entrepreneurship is NOT true? A. They are the engines of growth. B. They require strong property rights. C. They require state ownership of means of production. D. They require a market economy.
13 52. A market economy encourages innovation because. A. state ownership of enterprises reduces risks of innovation B. economic freedom leads to greater incentives for innovation C. government-owned and funded research centers become hubs of innovation D. the prices of goods and services, including new products, are fixed by government 53. Stagnation can occur in planned economies because: A. entrepreneurial individuals have few economic incentives for innovation. B. private ownership of means of production leads to exploitation of workers. C. prices of goods and services are fixed by market forces of demand and supply. D. lack of barriers to trade results in increased competition for domestic producers. 54. is required for a business environment to be conducive to innovation and entrepreneurial activity. A. State ownership of means of production B. Strong legal protection of property rights C. Barriers to foreign trade and investment D. Government regulation of the market
14 55. The state can expropriate the profits from innovation through legal means, such as. A. bureaucratic kickbacks B. excessive taxation C. black market transactions D. privatization 56. The influential Peruvian development economist Hernando de Soto has argued that much of the developing world will fail to reap the benefits of capitalism until. A. they have political stability B. they invest in infrastructural development C. they have better defined and secure property rights D. they have adequate market regulation
15 57. According to Hernando de Soto, which of the following factors is essential for the developing world to be able to reap the benefits of innovation and entrepreneurship? A. Detailed state planning B. Restricting direct investment by foreign enterprises C. Strong property rights D. Market regulation 58. A free market economy in which property rights are protected leads to subsequent economic growth, which often leads to the establishment of: A. a democratic regime. B. a planned economy. C. government owned enterprises. D. a socialist economy.
16 59. The political economy of many of the world's nation-states has changed radically since the late 1980s. All of the following are trends that have been evident EXCEPT: A. a wave of democratic revolutions has swept the world. B. totalitarian governments collapsed and have been replaced by democratically elected governments. C. there has been a strong move away from centrally planned economies toward free market economic models. D. mixed economies are fast replacing market economies. 60. Since the late 1980s, there has been a spread of democracy. This is because. A. a state's ability to control access to uncensored information has increased B. the socialist model failed to deliver economic progress to the vast bulk of their populations C. in many countries the middle and working classes have become less powerful D. in many countries state-ownership of firms has encouraged innovation and entrepreneurship
17 61. In many countries entrepreneurs and other business leaders, eager to protect their property rights and ensure the dispassionate enforcement of contracts, had pushed for. This contributed to a wave of democratic revolutions during the late 1980s and early 1990s. A. state ownership of productive resources B. regulated markets C. democratic reforms D. planned economies 62. Political scientist Samuel Huntington argues that modernization in non-western societies can result in a retreat toward the traditional. This is exemplified by. A. the Islamic resurgence B. the popularization of modern gadgets C. the adoption of Western culture D. the higher levels of literacy and education
18 63. According to political scientist Samuel Huntington, the rise of Islamic fundamentalism is a response to. A. the corruption prevalent in planned economies B. the restricted access to formal education C. the alienation produced by modernization D. the restrictions associated with totalitarian regimes 64. Which of the following statements is true about Samuel Huntington? A. Samuel Huntington argues that there is a universal civilization based on widespread acceptance of Western democratic ideals. B. Samuel Huntington argues that the rise of Islamic fundamentalism is a response to the alienation produced by modernization. C. Samuel Huntington argues that global terrorism is a product of the static nature of traditional values and religious systems. D. Samuel Huntington argues that many societies, by adopting the material paraphernalia of the modern world, are becoming more Western.
19 65. Paralleling the spread of democracy, since the 1980s there has been the transformation from: A. free-market economies to socialist economies. B. mixed economies to collectivist economies. C. open economies to closed economies. D. command economies to market-based economies. 66. Many states in Asia, Latin America, and Western Europe have shifted away from a mixed economy to a market-based economy. Which of the following measures is most likely to be promoted by such states? A. State-ownership of enterprises B. Fixing of prices by the government C. Deregulation of the economy D. Lowering competition 67. Which of the following is a step in the shift toward a market-based economic system? A. Increasing trade barriers B. Increasing price controls C. Nationalization D. Creation of a legal system to safeguard property rights
20 68. involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. A. Deregulation B. Trade certification C. A product law D. A liability law 69. Which of the following is an example of deregulation? A. A country that implements a simplified income tax filing system B. A country that takes over a leading private bank to prevent it from filing for bankruptcy C. A country that provides agricultural subsidies to farmers D. A country that encourages foreign direct investment 70. Which of the following is a characteristic of a command economy? A. Promotion of foreign direct investment B. Allowing prices to be set by the interplay between demand and supply C. Limited international trade D. Restricted state-ownership of means of production
21 71. The finance minister of a country considers several large, state-owned iron manufacturing units to be inefficient and a source of corruption. To generate resources for public expenditure and promote economic growth, the government decides to auction an entire iron manufacturing plant to sell it to a strategic investor. This process exemplifies. A. nationalization B. industrialization C. liberalization D. privatization 72. Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms: A. stop receiving subsidies from the government. B. are completely owned by private individuals. C. are sheltered from foreign competition. D. are allowed to restructure their operations.
22 73. The sale of state assets through an auction is most likely to lead to. A. trade certification B. privatization C. nationalization D. market regulation 74. For privatization to work, it must also be accompanied by: A. an increase in trade barriers and tariffs. B. an increase in government subsidies. C. stronger barriers to foreign competition. D. a general deregulation of the economy. 75. Which of the following factors is NOT likely to make a country a more attractive location for international business? A. Democratic regimes B. Planned economies C. Strong protection of property rights D. Market-based economic policies
23 76. The benefits of doing business in a country are a function of all of the following EXCEPT: A. the size of the market. B. its present wealth. C. its past growth. D. its future growth prospects. 77. Sony was a pioneer in the portable music market segment. Sony's Walkman was an innovative product which created a new category altogether and made Sony a technological leader. This gave the company an edge over other consumer electronics brands that introduced portable music players for a very long time. In this example, Sony had the: A. vertical integration advantage. B. purchasing power parity advantage. C. free-rider advantage. D. first-mover advantage.
24 78. Google launched Google Plus to gain a foothold in the social media market. However, given that there are numerous social networking platforms and Facebook is already a leader in social media, Google Plus found it challenging to generate brand loyalty and establish itself in the market. This was because of. A. incumbent disadvantage. B. disintermediation disadvantage. C. late-mover disadvantage. D. horizontal integration disadvantage. 79. In all of the following scenarios, the costs of doing business in a country tend to be greater, EXCEPT where: A. political payoffs are required to gain market access. B. supporting infrastructure is lacking. C. local laws set strict standards with regard to environmental pollution. D. there is limits or caps on damage awards.
25 80. The likelihood that a trading partner will opportunistically break a contract or expropriate property rights is called a(n). A. economic risk B. legal risk C. cultural risk D. political risk Essay Questions 81. What is gross national income? Is it related to purchasing power parity?
26 82. What is the philosophy of AmartyaSen? 83. What are the conditions required to encourage innovation and entrepreneurship? 84. Why are democratic regimes more conducive to economic growth than dictatorships?
27 85. Explain how geography of a nation influences its economic development. 86. Why does education lead to economic development? 87. Discuss the three main reasons for the spread of democracy.
28 88. Discuss Samuel Huntington's views on Islamic fundamentalism. 89. Since the 1980s, there has been a transformation from centrally planned command economies to market-based economies. What is the rationale for this transformation?
29 90. What is deregulation? What are the steps involved in the deregulation of a command economy? 91. Is privatization by itself enough to guarantee economic growth? Why? Explain using an example.
30 92. How does the ownership structure of newly privatized firms affect its functioning? 93. Explain why a well-functioning market economy requires strong legal systems? 94. What are the factors that determine the long-run monetary benefits of doing business in a country?
31 95. What are first-mover advantages? Explain with an example. 96. What are late-mover disadvantages? 97. What are the factors that determine the costs of doing business in a country?
32 98. Why does doing business in a country with a relatively unsophisticated economy result in increased costs? 99. Describe how overinvestment led to the financial crises in Southeast Asia.
33 100. What are the factors that contribute to the risks of doing business in a country?
34 Chapter 03 Political Economy and Economic Development Answer Key True / False Questions 1. GNI per capita can be adjusted by purchasing power to account for differences in the cost of living. TRUE To account for differences in the cost of living, one can adjust GNI per capita by purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows for a more direct comparison of living standards in different countries. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
35 2. The base for the purchasing power parity adjustment of the GNI is the cost of living in the United States. TRUE Referred to as a purchasing power parity (PPP) adjustment, it allows for a more direct comparison of living standards in different countries. The base for the adjustment is the cost of living in the United States. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development 3. GNI and PPP data are useful because they provide a dynamic analysis of economic development. FALSE The GNI and PPP data give a static picture of development. They tell us, for example, that China is much poorer than the United States, but they do not tell us if China is closing the gap. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
36 4. In Sen's view, development is an economic process that should be assessed by material output measures such as GNI per capita. FALSE The Nobel Prize-winning economist AmartyaSen has argued that development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. In Sen's view, development is not just an economic process, but it is a political one too. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development 5. Life expectancy at birth is one of the measures used by the Human Development Index (HDI) to measure the quality of human life in different nations. TRUE The HDI is based on three measures: life expectancy at birth (a function of health care), educational attainment (measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education), and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).
37 Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development 6. Political freedoms is one of the measures used by the Human Development Index (HDI) to measure the quality of human life in different nations. FALSE The HDI is based on three measures: life expectancy at birth (a function of health care), educational attainment (measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education), and whether average incomes, based on PPP estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care). Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
38 7. If a country's economy is to sustain long-run economic growth, the business environment must be conducive to innovations and entrepreneurial activity. TRUE Innovations in production and business processes lead to an increase in the productivity of labor and capital, which further boosts economic growth rates. Entrepreneurs first commercialize innovative new products and processes, and entrepreneurial activity provides much of the dynamism in an economy. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress 8. In a planned economy, the means of production are owned by private individuals. FALSE In a planned economy, the state owns all means of production. Consequently, entrepreneurial individuals have few economic incentives to develop valuable new innovations, because it is the state, rather than the individual, that captures most of the gains. Learning Objective: Explain what determines the level of economic development in a nation
39 Topic: Political Economy and Economic Progress 9. The economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. TRUE It has been argued that the economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress 10. Privatization refers to the process of hiring private management consultancy firms to manage state-owned enterprises. FALSE Privatization refers to the process of selling state-owned enterprises to private investors. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
40 11. The state can expropriate the profits from innovation through legal means. TRUE The state can expropriate the profits from innovation through legal means, such as excessive taxation, or through illegal means, such as demands from state bureaucrats for kickbacks in return for granting an individual or firm a license to do business in a certain area (i.e., corruption). Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
41 12. Peruvian development economist Hernando de Soto has argued that the chronic inability of property owners to establish legal title to the property they own is a key problem for innovation, and entrepreneurial activity in developing nations. TRUE The influential Peruvian development economist Hernando de Soto has argued that much of the developing world will fail to reap the benefits of capitalism until property rights are better defined and protected. His arguments are interesting because he says the key problem is not the risk of expropriation but the chronic inability of property owners to establish legal title to the property they own. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress 13. Some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. TRUE Some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth.
42 Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress 14. Totalitarian states promote human freedom and human development, which facilitates economic progress. FALSE Totalitarian states, by limiting human freedom, also suppress human development and therefore are detrimental to progress. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress 15. Democracy is one of the consequences of economic growth and progress. TRUE Several of the fastest-growing Asian economies adopted more democratic governments during the past three decades, including South Korea and Taiwan. Thus, although democracy may not always be the cause of initial economic progress, it seems to be one consequence of that progress. Learning Objective: Explain what determines the level of economic development in a nation
43 Topic: Political Economy and Economic Progress 16. Anecdotal comparisons suggest that the assertion that nations that invest more in education will have higher growth rates is true. TRUE Education emerges as another important determinant of economic development. The general assertion is that nations that invest more in education will have higher growth rates because an educated population is a more productive population. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
44 17. Since the late 1980s, there has been a strong move away from a more free market economic model and toward a more centrally planned and mixed economies. FALSE The political economy of many of the world's nation-states has changed radically since the late 1980s. There has been a strong move away from centrally planned and mixed economies and toward a more free market economic model. Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition 18. Many totalitarian regimes were able to deliver economic progress to the vast bulk of their populations, which curbed the spread of democracy during the late 1980s. FALSE One of the causes for the spread of democracy is that many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.
45 Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition 19. New information and communication technologies have enabled the spread of democratic ideals. TRUE New information and communication technologies have created new conduits for the spread of democratic ideals and information from free societies. Today, the Internet is allowing democratic ideals to penetrate closed societies as never before. Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition
46 20. One of the reasons for the spread of democracy is the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms. TRUE In many countries the economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms. Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition 21. Political scientist Samuel Huntington predicts that there will be a more harmonious world dominated by a universal civilization characterized by democratic regimes and free market capitalism. FALSE Huntington sees a world that is split into different civilizations, each of which has its own value systems and ideology. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition
47 22. According to political scientist Samuel Huntington's thesis, global terrorism is a product of the tension between civilizations and the clash of value systems and ideology. TRUE In Huntington's thesis, global terrorism is a product of the tension between civilizations and the clash of value systems and ideology. Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition
48 23. Transformation from centrally planned command economies to market-based economies can be attributed to the fact that command and mixed economies failed to deliver the sustained economic performance achieved by countries adopting market-based systems. TRUE Command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems, such as the United States, Switzerland, Hong Kong, and Taiwan. As a consequence, even more states have gravitated toward the market-based model. Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition 24. Economic freedom necessarily equates with political freedom. FALSE Economic freedom does not necessarily equate with political freedom. Learning Objective: Identify the macro-political and economic changes occuring worldwide Topic: States in Transition
49 25. In a command economy, the prices are determined by the free interplay of demand and supply. FALSE Before the collapse of communism, the governments in most command economies exercised tight control over prices and output, setting both through detailed state planning. Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation 26. Deregulation involves prohibiting private enterprises from operating in most sectors of the economy. FALSE Deregulation involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation
50 27. In mixed economies, in certain sectors the state set prices, owned businesses, limited private enterprise, restricted investment by foreigners, and restricted international trade. TRUE In mixed economies, the role of the state was more limited; but here too, in certain sectors the state set prices, owned businesses, limited private enterprise, restricted investment by foreigners, and restricted international trade. Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation 28. Privatization reduces the incentive of business owners to increase productivity, enter new markets, and to exit losing ones. FALSE Privatization is seen as a way to stimulate gains in economic efficiency by giving new private owners a powerful incentive the reward of greater profits to search for increases in productivity, to enter new markets, and to exit losing ones. Blooms: Understand
51 Difficulty: 2 Medium Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation 29. Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition. TRUE Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition by barriers to international trade and foreign direct investment. Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation
52 30. For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy. TRUE For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation 31. The government of a country takes over the airport security industries following a major terrorist attack, to improve airport security. This is an example of privatization. FALSE Privatization transfers the ownership of state property into the hands of private individuals, frequently by the sale of state assets through an auction. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation
53 32. A well-functioning market economy requires laws protecting private property rights and providing mechanisms for contract enforcement. TRUE Without a legal system that protects property rights, and without the machinery to enforce that system, the incentive to engage in economic activity can be reduced substantially by private and public entities, including organized crime, that expropriate the profits generated by the efforts of private-sector entrepreneurs. Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation
54 33. When communism collapsed, many of the communist countries lacked the legal structure required to protect property rights because all the property was earlier held by the state. TRUE When communism collapsed, many of these countries lacked the legal structure required to protect property rights, all property having been held by the state. Although many nations have made big strides toward instituting the required system, it will be many more years before the legal system is functioning as smoothly as it does in the West. Learning Objective: Describe how trasition economies are moving toward market-based systems Topic: The Nature of Economic Transformation 34. A market with a large number of consumers, with low living standards will have a relatively large market when measured in economic terms. FALSE While some markets are very large when measured by number of consumers (e.g., China and India), low living standards may imply limited purchasing power and therefore a relatively small market when measured in economic terms.
55 Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers 35. The long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth of consumers in that market, and the likely future wealth of consumers. TRUE The long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers
56 36. By identifying and investing early in a potential future economic star, international firms can build brand loyalty and gain experience in that country's business practices. TRUE By identifying and investing early in a potential future economic star, international firms may build brand loyalty and gain experience in that country's business practices. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers 37. First-mover advantages are the advantages that accrue to early entrants into a market. TRUE First-mover advantages are the advantages that accrue to early entrants into a market. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers
57 38. A country's economic system and property rights regime are reasonably good predictors of economic prospects. TRUE A country's economic system and property rights regime are reasonably good predictors of economic prospects. Countries with free market economies in which property rights are protected tend to achieve greater economic growth rates than command economies or economies where property rights are poorly protected. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers
58 39. Countries with free market economies in which property rights are protected tend to achieve lower economic growth rates than command economies where property rights are poorly protected. FALSE A country's economic system and property rights regime are reasonably good predictors of economic prospects. Countries with free market economies in which property rights are protected tend to achieve greater economic growth rates than command economies or economies where property rights are poorly protected. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers 40. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses. TRUE It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses. At the extreme, an international firm may have to provide its own infrastructure and supporting business, which obviously raises costs.
59 Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers 41. Economic risks are independent of political risk. FALSE Economic risks are not independent of political risk. Economic mismanagement may give rise to significant social unrest and hence political risk. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers 42. One visible indicator of political risks tends to be a country's inflation rate. FALSE One visible indicator of economic mismanagement tends to be a country's inflation rate. Another is the level of business and government debt in the country. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers
60 43. The overall attractiveness of a country as a potential market or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. TRUE The overall attractiveness of a country as a potential market or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. Learning Objective: Explain the implications for management practice of national differences in political economy. Topic: Implications for Managers Multiple Choice Questions
61 44. GNI per person figures can be misleading because. A. they also include barter agreements B. they provide a dynamic picture of development C. they don't consider differences in the cost of living D. they don't consider exchange rate One common measure of economic development is a country's gross national income (GNI) per head of population. GNI per person figures can be misleading because they don't consider differences in the cost of living. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
62 45. Which of the following helps in adjusting GNI such that it accounts for the differences in the cost of living? A. Purchasing power parity (PPP) adjustment B. Human Development Index C. Debt to GNI ratio D. Consumer Price Index To account for differences in the cost of living, one can adjust GNI per capita by purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows for a more direct comparison of living standards in different countries. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
63 46. In some countries, the official GNI per capita measured at PPP data does not reflect the actual the total annual income because: A. it doesn't consider differences in the cost of living. B. it gives a static picture of development. C. it fails to include income earned from other countries in the form of dividends. D. large amounts of economic activity may be in the form of barter agreements. In some countries the "official" figures do not tell the entire story because large amounts of economic activity may be in the form of unrecorded cash transactions, or barter agreements. Estimates suggest that in India it may be around 50 percent of GDP, which implies that the Indian economy is half as big again as the officially reported figures. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
64 47. Which of the following is a measure that is developed by the United Nations to measure the quality of life in different nations? A. Gross national income B. Human Development Index C. Purchasing power parity D. Gross domestic product Sen's influential thesis has been picked up by the United Nations, which has developed the Human Development Index (HDI) to measure the quality of human life in different nations. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
65 48. The HDI is based on all of the following measures EXCEPT: A. life expectancy at birth. B. political freedom. C. educational attainment. D. whether average incomes are sufficient to meet the basic needs of life. The HDI comes much closer to AmartyaSen's conception of how development should be measured than narrow economic measures such as GNI per capita although Sen's thesis suggests that political freedoms should also be included in the index, and they are not. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
66 49., a Nobel Prize-winning economist, has argued that development is not just an economic process, but it is a political one as well. A. Hernando de Soto B. Karl Marx C. Samuel Huntington D. AmartyaSen The Nobel Prize-winning economist AmartyaSen has argued that development is not just an economic process, but it is a political one too, and to succeed requires the "democratization" of political communities to give citizens a voice in the important decisions made for the community. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
67 50. According to AmartyaSen, development should be: A. seen as a process of expanding the real freedoms that people experience. B. seen as a non-political concept that focuses on the net income of a country. C. should be viewed as a purely economic process. D. assessed by material output measures such as GNI per capita. The Nobel Prize-winning economist AmartyaSen has argued that development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedoms that people experience. Learning Objective: Explain what determines the level of economic development in a nation Topic: Differences in Economic Development
68 51. Which of the following statement pertaining to innovation and entrepreneurship is NOT true? A. They are the engines of growth. B. They require strong property rights. C. They require state ownership of means of production. D. They require a market economy. The lack of economic freedom and incentives for innovation occurred in many mixed economies in those sectors where the state had a monopoly. This stagnation provided the impetus for the widespread privatization of state-owned enterprises that was witnessed in many mixed economies during the mid- 1980s and is still going on today. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
69 52. A market economy encourages innovation because. A. state ownership of enterprises reduces risks of innovation B. economic freedom leads to greater incentives for innovation C. government-owned and funded research centers become hubs of innovation D. the prices of goods and services, including new products, are fixed by government The economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. In a market economy, any individual who has an innovative idea is free to try to make money out of that idea by starting a business (by engaging in entrepreneurial activity). Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
70 53. Stagnation can occur in planned economies because: A. entrepreneurial individuals have few economic incentives for innovation. B. private ownership of means of production leads to exploitation of workers. C. prices of goods and services are fixed by market forces of demand and supply. D. lack of barriers to trade results in increased competition for domestic producers. The lack of economic freedom and incentives for innovation was probably a main factor in the economic stagnation of many former communist states and led ultimately to their collapse at the end of the 1980s. Similar stagnation occurred in many mixed economies in those sectors where the state had a monopoly (such as coal mining and telecommunications in Great Britain). Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
71 54. is required for a business environment to be conducive to innovation and entrepreneurial activity. A. State ownership of means of production B. Strong legal protection of property rights C. Barriers to foreign trade and investment D. Government regulation of the market Strong legal protection of property rights is another requirement for a business environment to be conducive to innovation, entrepreneurial activity, and hence economic growth. Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
72 55. The state can expropriate the profits from innovation through legal means, such as. A. bureaucratic kickbacks B. excessive taxation C. black market transactions D. privatization The state can expropriate the profits from innovation through legal means, such as excessive taxation, or through illegal means, such as demands from state bureaucrats for kickbacks in return for granting an individual or firm a license to do business in a certain area (i.e., corruption). Learning Objective: Explain what determines the level of economic development in a nation Topic: Political Economy and Economic Progress
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