TBChap 003

Chapter 03
National Differences in Economic Development
True / False Questions
1. GNI allows a more direct comparison of living standards in different countries.
True False
2. In Sen's view, development is an economic process that should be assessed by material output
measures such as GNI per capita.
True False
3. 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
4. Political freedom is one of the measures used by the Human Development Index (HDI) to measure the
quality of human life in different nations.
True False
5. 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
3-1
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Education.
6. Privatization refers to the process of hiring private management consultancy firms to manage state-
owned enterprises.
True False
7. 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
8. Most property in poor countries is owned legally by investors.
True False
9. Totalitarian states promote human freedom and human development, which facilitates economic
progress.
True False
10. 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
11. 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
12. New information and communication technologies have enabled the spread of democratic ideals.
True False
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Education.
13. 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
14. Economic freedom necessarily equates with political freedom.
True False
15. In a command economy, the prices are determined by the free interplay of demand and supply.
True False
16. In mixed economies, in certain sectors the state sets prices, owns businesses, limits private enterprise,
restricts investment by foreigners, and restricts international trade.
True False
17. 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
18. For privatization to work, it must also be accompanied by a more general deregulation and opening of
the economy.
True False
19. 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
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Education.
20. A well-functioning market economy requires laws protecting private property rights and providing
mechanisms for contract enforcement.
True False
21. 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
22. 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
23. 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
24. A country's economic system and property rights regime are reasonably good predictors of economic
prospects.
True False
25. Economic risks are independent of political risk.
True False
Multiple Choice Questions
3-4
Education.
26. _____ per person figures can be misleading because they don't consider differences in the cost of
living.
A. Gross domestic product (GDP)

B. Gross national income (GNI)
C. Purchasing power parity (PPP)
D. Human Development Index (HDI)
27. GNI per capita can be adjusted by _____ to account for differences in the cost of living.
A. gross domestic product

B. gross values added
C. purchasing power
D. the total value of goods and services produced
28. The _____ adjustment allows for a more direct comparison of living standards in different countries.

B. value added
C. gross national income (GNI)
D. purchasing power parity (PPP)
29. GNI and PPP data are useful because they provide a _____ of economic development.
A. dynamic analysis
B. cross-sectional view
C. static analysis
D. global view
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Education.
30. In a _____, the state owns all means of production.
A. mixed economy
B. planned economy
C. market economy
D. totalitarian state
31. The economic freedom associated with a _____ creates greater incentives for innovation and
entrepreneurship than either a planned or a mixed economy.
A. mixed economy
B. planned economy
C. market economy
D. command economy
32. Which of the following is a legal means by which the state can expropriate the profits from
innovation?
A. Demands for money to grant a license

B. Expropriation
C. Enforcing property rights
D. Excessive taxation
33. Some _____ have fostered a market economy and strong property rights protection and have
experienced rapid economic growth.
A. totalitarian regimes
B. command economies
C. dictatorships
D. centrally planned systems
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Education.
34. Several of the fastest-growing Asian economies adopted more _____ governments during the past
three decades, including South Korea and Taiwan.
A. totalitarian
B. democratic
C. dictatorial
D. socialists
35. Anecdotal comparisons suggest that the assertion that nations that invest more in _____ will have
higher growth rates is true.
A. infrastructure
B. centralized urban centers
C. education
D. manufacturing
36. One of the reasons for the spread of democracy is the emergence of _____ who have pushed for
democratic reforms.
A. a more vocal working poor

B. better educated lower classes
C. a desperate urban poor
D. increasingly prosperous middle and working classes
37. Political scientist _____ predicts that there will be a world that is split into different civilizations, each of
which has its own value systems and ideology.
A. Samuel Huntington
B. Amartya Sen
C. Francis Fukuyama
D. Hernando de Soto
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Education.
38. According to political scientist's thesis is global terrorism a product of the tension between civilizations
and the clash of value systems and ideology?
A. Amartya Sen
B. Samuel Huntington
C. Francis Fukuyama
D. Hernando de Soto
39. _____ involves removing legal restrictions to the free play of markets, the establishment of private
enterprises, and the manner in which private enterprises operate.
A. Privatization
B. Developing command economies
C. Deregulation
D. Globalization
40. _____ is seen as a way to stimulate gains in economic efficiency by giving owners a powerful
incentive—the reward of greater profits—to search for increases in productivity, to enter new markets,
and to exit losing ones.
A. Globalization
B. Economic transformation
C. Deregulation
D. Privatization
41. By identifying and investing early in a potential future economic star, international firms can _____ and
gain experience in that country's business practices.
A. build brand loyalty

B. learn which government officials need to receive kickbacks
C. begin to stockpile that country's currency
D. build infrastructure
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Education.
42. _____ are the advantages gained by early entrants into a market.
A. Early investor advantages

B. First-mover advantages
C. First-to-market advantages
D. Late-mover advantages
43. Countries with _____ economies in which property rights are protected tend to achieve greater
economic growth rates than other economies where property rights are poorly protected.
A. mixed
B. market
C. free market
D. command
44. It may be more costly to do business in relatively primitive or undeveloped economies because of:
A. international trade restrictions.

B. the lack of governmental support.
C. difficulty obtaining workers.
D. the lack of infrastructure and supporting businesses.
45. One visible indicator of _____ tends to be a country's inflation rate.
A. economic mismanagement
B. high GNI
C. political risks
D. low HDI
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Education.
46. The overall attractiveness of a country as a potential market or investment site for an international
business depends on:
A. if the country has a high gross national income.

B. balancing the benefits, costs, and risks associated with doing business in that country.
C. whether the company can be the first mover in the market.
D. whether the government can be greased.
47. 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
48. 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
49. 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.
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Education.
50. 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

C. Purchasing power parity
D. Gross domestic product
51. Which of the following is one of the measures that HDI is based on?
A. Life expectancy at birth.

B. Political freedom.
C. Attainment of housing.
D. Whether the lowest incomes are sufficient to meet the basic needs of life.
52. _____, 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. Amartya Sen
53. According to Amartya Sen, 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. viewed as a purely economic process.
D. assessed by material output measures such as GNI per capita.
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Education.
54. Which of the following statements pertaining to innovation and entrepreneurship is true?
A. They are the engines of growth.

B. They require strong legal systems.
C. They require state ownership of means of production.
D. They require a mixed economy.
55. 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.
56. 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.
57. _____ 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
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Education.
58. 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
59. 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 they:
A. have political stability.

B. invest in infrastructural development.
C. have better defined and secure property rights.
D. have adequate market regulation.
60. 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
61. 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.
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Education.
62. The political economy of many of the world's nation-states has changed radically since the late 1980s.
Which of the following is a trend that has been evident?
A. a wave of democratic revolutions has swept the world.

B. totalitarian governments have arisen, replacing democratically elected governments.
C. there has been a strong move toward centrally planned economies and away from free market
economic models.
D. mixed economies are fast replacing market economies.
63. 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.
64. 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
65. Political scientist Samuel Huntington argues that modernization in non-Western societies can result in
a retreat toward the traditional. This is exemplified by the _____.
A. Islamic resurgence
B. popularization of modern gadgets
C. adoption of Western culture
D. higher levels of literacy and education
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Education.
66. According to political scientist Samuel Huntington, the rise of Islamic fundamentalism is a response to
the:
A. corruption prevalent in planned economies.

B. restricted access to formal education.
C. alienation produced by modernization.
D. restrictions associated with totalitarian regimes.
67. 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.
68. 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.
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Education.
69. 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
70. 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
A. Deregulation
B. Trade certification
C. A product law
D. A liability law
72. 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
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Education.
73. 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
74. 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
75. 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.
76. The sale of state assets through an auction is most likely to lead to _____.
A. trade certification
B. privatization
C. nationalization
D. market regulation
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Education.
77. 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.
78. Which of the following factors is likely to make a country a more attractive location for international
business?
A. Totalitarian regimes
B. Planned economies
C. Government ownership of production methods
D. Market-based economic policies
79. The benefits of doing business in a country are a function of which of the following?
A. The size of the market.

B. Its past wealth.
C. Its past growth.
D. Its future plans for infrastructure development.
80. 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.
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Education.
81. 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
82. The costs of doing business in a country tend to be greater if:
A. political payoffs are not required to gain market access.

B. supporting infrastructure is sponsored by government.
C. local laws set strict standards with regard to environmental pollution.
D. there is limits or caps on damage awards.
83. 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
84. A change in political regime in a country can result in laws that _____ to international businesses.
A. are more favorable

B. are less favorable
C. provide less incentives
D. provide more incentives
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Education.
85. Economic growth appears to be a function of a country's capacity for growth and its _____.
A. previous economic success

B. political environment
C. free market system
D. mixed economy
86. To account for differences in the cost of living, one can adjust GNI per capita by _____, which allows for
a more direct comparison of living standards in different countries.

C. living standards rate
D. purchasing power
87. Which of the following are more conducive to economic growth?
A. Democratic regimes
B. Totalitarian regimes
C. Dictatorships
D. Benevolent monarchies
88. _____ are the handicaps that late entrants to a market might suffer.
A. Government regulations
B. Late-mover disadvantages
C. Black economy
D. Purchasing power disparity
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Education.
89. In a _____, 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).
A. command economy
B. planned economy
C. market economy
D. mixed economy
90. Jeffrey Sachs argues that by virtue of _____, certain societies are more likely to engage in trade than
others and are thus more likely to be open to and develop market-based economic systems, which in
turn promotes faster economic growth.
A. friendly political systems

B. favorable economic conditions
C. high gross national incomes
D. favorable geography
91. Which of the following is one of the three main reasons for the spread of democracy?
A. New information and communication technologies have broken down the ability of the state to
control access to uncensored information.
B. Totalitarian regimes delivered economic progress to the bulk of their populations but not enough to
the power brokers.
C. Democratic regimes failed to deliver economic progress to the vast bulk of their populations.
D. Economic advances in the past quarter-century have led to the emergence of a class of ruling elite.
92. Since the 1980s, there has been a transformation from _____ economies to _____ economies.
A. mixed; market-based
B. centrally planned command; market-based
C. centrally planned command; mixed
D. market-based; centrally planned command
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Education.
93. Which of the following is a step involved in the deregulation of a command economy?
A. Adding price controls

B. Temporarily restricting international trade
C. Abolishing laws regulating the establishment and operation of private enterprises
D. Increasing restrictions on direct investment by foreign enterprises
94. Without a strong legal systems in a market economy:
A. the incentive to engage in economic activity can be increased substantially.

B. private-sector entrepreneurs can expropriate the profits generated by the efforts of private and
public entities.
C. mechanisms for contract enforcement fall to private and corporate lawyers.
D. private and public entities can expropriate the profits generated by the efforts of private-sector
entrepreneurs.
95. Which of the following is a first-mover advantage?
A. International firms may gain experience in that country's business practices.

B. An international firm can reap the rewards of growth in a new market without incurring the risks.
C. A firm may have the opportunity to be the first to introduce generic brands to a market.
D. A firm can gauge how well their product will do in the market without taking the risk of investing
their.
Essay Questions
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Education.
96. What is the philosophy of Amartya Sen?
97. Why does education lead to economic development?
98. Discuss Samuel Huntington's views on Islamic fundamentalism.
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Education.
99. Since the 1980s, there has been a transformation from centrally planned command economies to
market-based economies. What is the rationale for this transformation?
100. Is privatization by itself enough to guarantee economic growth? Why? Explain using an example.
101. How does the ownership structure of newly privatized firms affect its functioning?
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Education.
102. What are the factors that determine the long-run monetary benefits of doing business in a country?
103. What are the factors that determine the costs of doing business in a country?
104. Why does doing business in a country with a relatively unsophisticated economy result in increased
costs?
3-25
Education.
105. What are the factors that contribute to the risks of doing business in a country?
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Education.
Chapter 03 National Differences in Economic Development Answer Key
True / False Questions
1. GNI allows a more direct comparison of living standards in different countries.
FALSE
Referred to as a purchasing power parity (PPP) adjustment, it allows a more direct comparison of
living standards in different countries.
AACSB: Knowledge Application

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 03-01 Explain what determines the level of economic development of a nation.
Topic: The Uses of National Income Data
2. 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 Amartya Sen 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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
3-27
Education.
3. 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).

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Economic Development
4. Political freedom 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).

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-28
Education.
5. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
6. 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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Nationalization and Privatization of Business
3-29
Education.
7. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Property Rights and Intellectual Property Rights
8. Most property in poor countries is owned legally by investors.
FALSE
Because most property is poor countries is informally "owned," the absence of legal proof of
ownership means that property holders cannot convert their assets into capital, which could then
be used to finance business ventures.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
3-30
Education.
9. 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
Gradable: automatic
10. 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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring worldwide.
Topic: Differences in Economic Systems
3-31
Education.
11. 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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Different Forms of Government
12. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: How the Physical Environment and Technology Influence Culture
3-32
Education.
13. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
14. Economic freedom necessarily equates with political freedom.
FALSE
Economic freedom does not necessarily equate with political freedom.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: The Political Debate
3-33
Education.
15. 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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 03-03 Describe how transition economies are moving toward market-based systems.
16. In mixed economies, in certain sectors the state sets prices, owns businesses, limits private
enterprise, restricts investment by foreigners, and restricts international trade.
TRUE
In mixed economies, the role of the state was more limited; but here too, in certain sectors the state
sets prices, owns businesses, limits private enterprise, restricts investment by foreigners, and
restricts international trade.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-34
Education.
17. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
18. 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

Blooms: Understand
Gradable: automatic
3-35
Education.
19. 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: Apply
Gradable: automatic
20. 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.

Blooms: Apply
Gradable: automatic
Topic: Country Risk Produced by Legal Systems
3-36
Education.
21. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
22. A market with a large number of consumers with low living standards will have a relatively large
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

Blooms: Understand
Gradable: automatic
Learning Objective: 03-04 Explain the implications for management practice of national difference in political economy.
Topic: The Potential, Risks, and Challenges of Emerging Markets
3-37
Education.
23. 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
24. 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
Gradable: automatic
3-38
Education.
25. 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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Multiple Choice Questions
26. _____ per person figures can be misleading because they don't consider differences in the cost of
living.
A. Gross domestic product (GDP)

B. Gross national income (GNI)
C. Purchasing power parity (PPP)
D. Human Development Index (HDI)
GNI per person figures can be misleading because they don't consider differences in the cost of
living.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
3-39
Education.
27. GNI per capita can be adjusted by _____ to account for differences in the cost of living.

B. gross values added
C. purchasing power
D. the total value of goods and services produced
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: Remember
Difficulty: 1 Easy
Gradable: automatic
28. The _____ adjustment allows for a more direct comparison of living standards in different countries.

B. value added
C. gross national income (GNI)
D. purchasing power parity (PPP)
of living standards in different countries. The base for the adjustment is the cost of living in the
United States.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-40
Education.
29. GNI and PPP data are useful because they provide a _____ of economic development.
A. dynamic analysis
B. cross-sectional view
C. static analysis
D. global view
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.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
30. In a _____, the state owns all means of production.
A. mixed economy
B. planned economy
C. market economy
D. totalitarian state
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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-41
Education.
Topic: Centrally Planned Economy
31. The economic freedom associated with a _____ creates greater incentives for innovation and
entrepreneurship than either a planned or a mixed economy.
A. mixed economy
B. planned economy
C. market economy
D. command economy
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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
32. Which of the following is a legal means by which the state can expropriate the profits from
innovation?
A. Demands for money to grant a license

B. Expropriation
C. Enforcing property rights
D. Excessive taxation
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).

Blooms: Apply
3-42
Education.
Gradable: automatic
Topic: Government Policies Affecting Trade
33. Some _____ have fostered a market economy and strong property rights protection and have
experienced rapid economic growth.
A. totalitarian regimes
B. command economies
C. dictatorships
D. centrally planned systems
Some totalitarian regimes have fostered a market economy and strong property rights protection
and have experienced rapid economic growth.

Blooms: Apply
Gradable: automatic
34. Several of the fastest-growing Asian economies adopted more _____ governments during the past
three decades, including South Korea and Taiwan.
A. totalitarian
B. democratic
C. dictatorial
D. socialists
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.

3-43
Education.
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
35. Anecdotal comparisons suggest that the assertion that nations that invest more in _____ will have
higher growth rates is true.
A. infrastructure
B. centralized urban centers
C. education
D. manufacturing
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.

Blooms: Apply
Gradable: automatic
3-44
Education.
36. One of the reasons for the spread of democracy is the emergence of _____ who have pushed for
democratic reforms.
A. a more vocal working poor

B. better educated lower classes
C. a desperate urban poor
D. increasingly prosperous middle and working classes
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.

Blooms: Apply
Gradable: automatic
37. Political scientist _____ predicts that there will be a world that is split into different civilizations, each
of which has its own value systems and ideology.
A. Samuel Huntington
B. Amartya Sen
C. Francis Fukuyama
D. Hernando de Soto
Huntington sees a world that is split into different civilizations, each of which has its own value
systems and ideology.

Blooms: Understand
Gradable: automatic
Topic: The Political Debate
3-45
Education.
38. According to political scientist's thesis is global terrorism a product of the tension between
civilizations and the clash of value systems and ideology?
A. Amartya Sen
B. Samuel Huntington
C. Francis Fukuyama
D. Hernando de Soto
In Huntington's thesis, global terrorism is a product of the tension between civilizations and the
clash of value systems and ideology.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Terrorism, Terrorist Activities, and Countermeasures
A. Privatization
B. Developing command economies
C. Deregulation
D. Globalization
Deregulation involves removing legal restrictions to the free play of markets, the establishment of
private enterprises, and the manner in which private enterprises operate.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
3-46
Education.
40. _____ is seen as a way to stimulate gains in economic efficiency by giving owners a powerful
incentive—the reward of greater profits—to search for increases in productivity, to enter new
markets, and to exit losing ones.
A. Globalization
B. Economic transformation
C. Deregulation
D. Privatization
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
Gradable: automatic
41. By identifying and investing early in a potential future economic star, international firms can _____
and gain experience in that country's business practices.
A. build brand loyalty

B. learn which government officials need to receive kickbacks
C. begin to stockpile that country's currency
D. build infrastructure
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.

Blooms: Remember
3-47
Education.
Difficulty: 1 Easy
Gradable: automatic
42. _____ are the advantages gained by early entrants into a market.
A. Early investor advantages

B. First-mover advantages
C. First-to-market advantages
D. Late-mover advantages
First-mover advantages are the advantages that are gained by early entrants into a market.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
43. Countries with _____ economies in which property rights are protected tend to achieve greater
economic growth rates than other economies where property rights are poorly protected.
A. mixed
B. market
C. free market
D. command
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.

3-48
Education.
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
44. It may be more costly to do business in relatively primitive or undeveloped economies because of:
A. international trade restrictions.

B. the lack of governmental support.
C. difficulty obtaining workers.
D. the lack of infrastructure and supporting businesses.
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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
45. One visible indicator of _____ tends to be a country's inflation rate.
A. economic mismanagement
B. high GNI
C. political risks
D. low HDI
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.

3-49
Education.
Blooms: Apply
Gradable: automatic
46. The overall attractiveness of a country as a potential market or investment site for an international
business depends on:
A. if the country has a high gross national income.

B. balancing the benefits, costs, and risks associated with doing business in that country.
C. whether the company can be the first mover in the market.
D. whether the government can be greased.
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.

Blooms: Apply
Gradable: automatic
3-50
Education.
47. 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
Gradable: automatic
48. 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

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.
of living standards in different countries.

Blooms: Apply
Gradable: automatic
3-51
Education.
49. 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: Apply
Gradable: automatic
50. 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

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.

Blooms: Remember
3-52
Education.
Difficulty: 1 Easy
Gradable: automatic
51. Which of the following is one of the measures that HDI is based on?
A. Life expectancy at birth.

B. Political freedom.
C. Attainment of housing.
D. Whether the lowest incomes are sufficient to meet the basic needs of life.
The HDI comes much closer to Amartya Sen'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. 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).

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-53
Education.
52. _____, 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. Amartya Sen
The Nobel Prize-winning economist Amartya Sen 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
53. According to Amartya Sen, 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. viewed as a purely economic process.
D. assessed by material output measures such as GNI per capita.
The Nobel Prize-winning economist Amartya Sen 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-54
Education.
54. Which of the following statements pertaining to innovation and entrepreneurship is true?
A. They are the engines of growth.

B. They require strong legal systems.
C. They require state ownership of means of production.
D. They require a mixed 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.
AACSB: Analytical Thinking

Blooms: Apply
Gradable: automatic
55. 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).

3-55
Education.
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
56. 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).

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Centrally Planned Economy
3-56
Education.
57. _____ 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.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
58. 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).

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-57
Education.
59. 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 they:
A. have political stability.

B. invest in infrastructural development.
C. have better defined and secure property rights.
D. have adequate market regulation.
and protected.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
60. 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
and protected.

Blooms: Apply
3-58
Education.
Gradable: automatic
61. 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.
While it is possible to argue that democracy is not a necessary precondition for a free market
economy in which property rights are protected, subsequent economic growth often leads to
establishment of a democratic regime.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
62. The political economy of many of the world's nation-states has changed radically since the late
1980s. Which of the following is a trend that has been evident?
A. a wave of democratic revolutions has swept the world.

B. totalitarian governments have arisen, replacing democratically elected governments.
C. there has been a strong move toward centrally planned economies and away from free market
economic models.
D. mixed economies are fast replacing market economies.
There has been a strong move away from centrally planned and mixed economies and toward a
more free market economic model.
3-59
Education.
Blooms: Apply
Gradable: automatic
63. 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.
Many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations.
In looking for alternatives to the socialist model, the populations of these countries could not have
failed to notice that most of the world's strongest economies were governed by representative
democracies.

Blooms: Apply
Gradable: automatic
3-60
Education.
64. 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
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.
Entrepreneurs and other business leaders, eager to protect their property rights and ensure the
dispassionate enforcement of contracts, are another force pressing for more accountable and open
government.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Differences in Political systems
3-61
Education.
65. Political scientist Samuel Huntington argues that modernization in non-Western societies can result
in a retreat toward the traditional. This is exemplified by the _____.
A. Islamic resurgence
B. popularization of modern gadgets
C. adoption of Western culture
D. higher levels of literacy and education
Huntington maintains that while many societies may be modernizing—they are adopting the
material paraphernalia of the modern world, from automobiles to Coca-Cola and MTV—they are
not becoming more Western. On the contrary, Huntington theorizes that modernization in non-
Western societies can result in a retreat toward the traditional, such as the resurgence of Islam in
many traditionally Muslim societies.

Blooms: Apply
Gradable: automatic
Topic: Economic and Business Implications of Cultural Change
66. According to political scientist Samuel Huntington, the rise of Islamic fundamentalism is a response
to the:
A. corruption prevalent in planned economies.

B. restricted access to formal education.
C. alienation produced by modernization.
D. restrictions associated with totalitarian regimes.
Huntington theorizes that modernization in non-Western societies can result in a retreat toward the
traditional, such as the resurgence of Islam in many traditionally Muslim societies. The rise of Islamic
fundamentalism is portrayed as a response to the alienation produced by modernization.

3-62
Education.
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
67. 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.
Huntington theorizes that modernization in non-Western societies can result in a retreat toward the
traditional, such as the resurgence of Islam in many traditionally Muslim societies.

Blooms: Analyze
Gradable: automatic
3-63
Education.
68. 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.
Paralleling the spread of democracy since the 1980s has been the transformation from centrally
planned command economies to market-based economies. More than 30 countries that were in
the former Soviet Union or the Eastern European Communist bloc have changed their economic
systems.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
69. 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
Many states in Asia, Latin America, and Western Europe have sold state-owned businesses to
private investors (privatization) and deregulated their economies to promote greater competition.

Blooms: Understand
Gradable: automatic
3-64
Education.
70. 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
The shift toward a market-based economic system often entails a number of steps: deregulation,
privatization, and creation of a legal system to safeguard property rights.

Blooms: Apply
Gradable: automatic
A. Deregulation
B. Trade certification
C. A product law
D. A liability law

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-65
Education.
72. 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

Blooms: Apply
Gradable: automatic
Topic: The Nature of Economic Transformation
73. 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
The governments in most command economies exercised tight control over prices and output.
They also prohibited private enterprises from operating in most sectors of the economy, severely
restricted direct investment by foreign enterprises, and limited international trade.

Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
3-66
Education.
74. 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

Blooms: Apply
Gradable: automatic
75. 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.

3-67
Education.
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
76. The sale of state assets through an auction is most likely to lead to _____.
A. trade certification
B. privatization
C. nationalization
D. market regulation

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
77. 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.

Blooms: Understand
Difficulty: 1 Easy
3-68
Education.
Gradable: automatic
78. Which of the following factors is likely to make a country a more attractive location for international
business?
A. Totalitarian regimes
B. Planned economies
C. Government ownership of production methods
D. Market-based economic policies
Countries with democratic regimes, market-based economic policies, and strong protection of
property rights are more likely to attain high and sustained economic growth rates, and are thus a
more attractive location for international business.

Blooms: Analyze
Gradable: automatic
Topic: Implications for Managers
79. The benefits of doing business in a country are a function of which of the following?
A. The size of the market.

B. Its past wealth.
C. Its past growth.
D. Its future plans for infrastructure development.
In the most general sense, 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.

3-69
Education.
Blooms: Apply
Gradable: automatic
80. 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.
First-mover advantages are the advantages that accrue to early entrants into a market.

Blooms: Apply
Gradable: automatic
3-70
Education.
81. 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
Late-mover disadvantages are the handicaps that late entrants might suffer.

Blooms: Apply
Gradable: automatic
82. The costs of doing business in a country tend to be greater if:
A. political payoffs are not required to gain market access.

B. supporting infrastructure is sponsored by government.
C. local laws set strict standards with regard to environmental pollution.
D. there is limits or caps on damage awards.
The costs of doing business in a country tend to be greater where political payoffs are required to
gain market access, where supporting infrastructure is lacking or underdeveloped, and where
adhering to local laws and regulations is costly. It can also be more costly to do business in a
country like the United States, where the absence of a cap on damage awards has meant spiraling
liability insurance rates.

Blooms: Understand
3-71
Education.
Difficulty: 1 Easy
Gradable: automatic
83. 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
A legal risk can be defined as the likelihood that a trading partner will opportunistically break a
contract or expropriate property rights.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
84. A change in political regime in a country can result in laws that _____ to international businesses.
A. are more favorable

B. are less favorable
C. provide less incentives
D. provide more incentives
A change in political regime can result in the enactment of laws that are less favorable to
international business. For example, Venezuela's Hugo Chávez pledged to improve the lot of the
poor in the country by increasing the royalties foreign companies had to pay from 1 to 30 percent
of sales.
3-72
Education.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
85. Economic growth appears to be a function of a country's capacity for growth and its _____.
A. previous economic success

B. political environment
C. free market system
D. mixed economy
Economic growth appears to be a function of a free market system and a country's capacity for
growth.

Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
3-73
Education.
86. To account for differences in the cost of living, one can adjust GNI per capita by _____, which allows
for a more direct comparison of living standards in different countries.

C. living standards rate
D. purchasing power
A common measure of economic development is a country's gross national income (GNI) per head
of population. GNI is regarded as a yardstick for the economic activity of a country; it measures the
total annual income received by residents of a nation. GNI per person figures can be misleading
because they don't consider differences in the cost of living. 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: Remember
Difficulty: 1 Easy
Gradable: automatic
3-74
Education.
87. Which of the following are more conducive to economic growth?
A. Democratic regimes
B. Totalitarian regimes
C. Dictatorships
D. Benevolent monarchies
Some totalitarian regimes have fostered a market economy and strong property rights protection
and have experienced rapid economic growth. However, there is no guarantee that a dictatorship
will continue to pursue such progressive policies. Dictators are rarely benevolent. Many are
tempted to use the apparatus of the state to further their own private ends, violating property
rights and stalling economic growth. Totalitarian states, by limiting human freedom, also suppress
human development and therefore are detrimental to progress. Given this, it seems likely that
democratic regimes are far more conducive to long-term economic growth than are dictatorships,
even benevolent ones.

Blooms: Apply
Gradable: automatic
88. _____ are the handicaps that late entrants to a market might suffer.
A. Government regulations
B. Late-mover disadvantages
C. Black economy
D. Purchasing power disparity
Late-mover disadvantages are the handicaps that late entrants might suffer. Late entrants may find
that they lack the brand loyalty and experience necessary to achieve a significant presence in the
market.
3-75
Education.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
89. In a _____, 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).
A. command economy
B. planned economy
C. market economy
D. mixed economy
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.
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). Similarly, existing
businesses are free to improve their operations through innovation. To the extent that they are
successful, both individual entrepreneurs and established businesses can reap rewards in the form
of high profits. Thus, market economies contain enormous incentives to develop innovations.

Blooms: Understand
Gradable: automatic
3-76
Education.
90. Jeffrey Sachs argues that by virtue of _____, certain societies are more likely to engage in trade than
others and are thus more likely to be open to and develop market-based economic systems, which
in turn promotes faster economic growth.
A. friendly political systems

B. favorable economic conditions
C. high gross national incomes
D. favorable geography
The influential Harvard University economist Jeffrey Sachs argues that by virtue of favorable
geography, certain societies are more likely to engage in trade than others and are thus more likely
to be open to and develop market-based economic systems, which in turn promotes faster
economic growth. He also argues that, irrespective of the economic and political institutions a
country adopts, adverse geographical conditions, such as the high rate of disease, poor soils, and
hostile climate that afflict many tropical countries, can have a negative impact on development.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
3-77
Education.
91. Which of the following is one of the three main reasons for the spread of democracy?
A. New information and communication technologies have broken down the ability of the state to
control access to uncensored information.
B. Totalitarian regimes delivered economic progress to the bulk of their populations but not
enough to the power brokers.
C. Democratic regimes failed to deliver economic progress to the vast bulk of their populations.
D. Economic advances in the past quarter-century have led to the emergence of a class of ruling
elite.
There are three main reasons for the spread of democracy. First, many totalitarian regimes failed to
deliver economic progress to the vast bulk of their populations. Second, new information and
communication technologies have broken down the ability of the state to control access to
uncensored information. Third, 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.

Blooms: Apply
Gradable: automatic
3-78
Education.
92. Since the 1980s, there has been a transformation from _____ economies to _____ economies.
A. mixed; market-based
B. centrally planned command; market-based
C. centrally planned command; mixed
D. market-based; centrally planned command
The rationale for economic transformation has been the same the world over. In general, 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,
based model.

Blooms: Apply
Gradable: automatic
93. Which of the following is a step involved in the deregulation of a command economy?
A. Adding price controls

B. Temporarily restricting international trade
C. Abolishing laws regulating the establishment and operation of private enterprises
D. Increasing restrictions on direct investment by foreign enterprises
private enterprises, and the manner in which private enterprises operate. Deregulation in command
economies involved removing price controls, thereby allowing prices to be set by the interplay
between demand and supply; abolishing laws regulating the establishment and operation of private
enterprises; and relaxing or removing restrictions on direct investment by foreign enterprises and
international trade.
3-79
Education.
Blooms: Apply
Gradable: automatic
94. Without a strong legal systems in a market economy:
A. the incentive to engage in economic activity can be increased substantially.

B. private-sector entrepreneurs can expropriate the profits generated by the efforts of private and
public entities.
C. mechanisms for contract enforcement fall to private and corporate lawyers.
D. private and public entities can expropriate the profits generated by the efforts of private-sector
entrepreneurs.
A well-functioning market economy requires laws protecting private property rights and providing
mechanisms for contract enforcement. 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. Private and public entities, including organized crime, can expropriate the
profits generated by the efforts of private-sector entrepreneurs.

Blooms: Apply
Gradable: automatic
3-80
Education.
95. Which of the following is a first-mover advantage?
A. International firms may gain experience in that country's business practices.

B. An international firm can reap the rewards of growth in a new market without incurring the
risks.
C. A firm may have the opportunity to be the first to introduce generic brands to a market.
D. A firm can gauge how well their product will do in the market without taking the risk of
investing their.
First-mover advantages are the advantages that accrue to early entrants into a market. By
identifying and investing early in a country with high potential for future growth, international firms
may build brand loyalty and gain experience in that country's business practices. These will pay
back substantial dividends if that country achieves sustained high economic growth rates. For
example, eBay was the first company to take the auction process online. Coca-Cola was the first
cola producer, and began selling its product to the public in 1886; this has given it considerable
advantage over competitors.

Blooms: Apply
Gradable: automatic
Essay Questions
3-81
Education.
96. What is the philosophy of Amartya Sen?
Amartya Sen is a Nobel Prize-winning economist who has argued that economic 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.

Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
97. Why does education lead to economic development?
Nations that invest more in education will have higher growth rates because an educated
population is a more productive population. A survey of 14 statistical studies that looked at the
relationship between a country's investment in education and its subsequent growth rates
concluded investment in education did have a positive and statistically significant impact on a
country's rate of economic growth.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
3-82
Education.
98. Discuss Samuel Huntington's views on Islamic fundamentalism.
According to Samuel Huntington's thesis, global terrorism is a product of the tension between
civilizations and the clash of value systems and ideology. He maintains that while many societies
may be modernizing, they are not becoming more Western. Huntington theorizes that
modernization in non-Western societies can result in a retreat toward the traditional, such as the
resurgence of Islam in many traditionally Muslim societies. According to him, the rise of Islamic
fundamentalism is a response to the alienation produced by modernization.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
99. Since the 1980s, there has been a transformation from centrally planned command economies to
market-based economies. What is the rationale for this transformation?
The rationale for economic transformation has been the same the world over. In general, 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,
based model.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
3-83
Education.
100. Is privatization by itself enough to guarantee economic growth? Why? Explain using an example.
As privatization has proceeded around the world, it has become clear that simply selling state-
owned assets to private investors is not enough to guarantee economic growth. 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, they will have little
incentive to restructure their operations to become more efficient. For privatization to work, it must
also be accompanied by a more general deregulation and opening of the economy. For example,
when Brazil decided to privatize the state-owned telephone monopoly, Telebras Brazil, the
government also split the company into four independent units that were to compete with each
other and removed barriers to foreign direct investment in telecommunications services. This action
ensured that the newly privatized entities would face significant competition and thus would have
to improve their operating efficiency to survive.

Blooms: Evaluate
Difficulty: 3 Hard
Gradable: manual
101. How does the ownership structure of newly privatized firms affect its functioning?
Many former command economies lack the legal regulations regarding corporate governance that
are found in advanced Western economies. In such cases, managers with a small ownership stake
can often gain control over the newly privatized entity and run it for their own benefit, while
ignoring the interests of other shareholders.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
3-84
Education.
102. What are the factors that determine the long-run monetary benefits of doing business in a
country?
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. 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.

Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
103. What are the factors that determine the costs of doing business in a country?
A number of political, economic, and legal factors determine the costs of doing business in a
country. With regard to political factors, a company may have to pay off politically powerful entities
in a country before the government allows it to do business there. With regard to economic factors,
one of the most important variables is the sophistication of a country's economy. As for legal
factors, it can be more costly to do business in a country where local laws and regulations set strict
standards with regard to product safety, safety in the workplace, environmental pollution, and the
like (since adhering to such regulations is costly).

Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
3-85
Education.
104. Why does doing business in a country with a relatively unsophisticated economy result in increased
costs?
One of the most important economic variables is the sophistication of a country's economy. 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. When
McDonald's decided to open its first restaurant in Moscow, it found that to serve food and drink
indistinguishable from that served in McDonald's restaurants elsewhere, it had to vertically integrate
backward to supply its own needs.

Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
105. What are the factors that contribute to the risks of doing business in a country?
The risks of doing business in a country are determined by a number of political, economic, and
legal factors. Political risk has been defined as the likelihood that political forces will cause drastic
changes in a country's business environment that adversely affect the profit and other goals of a
business enterprise. An economic risk can be defined as the likelihood that economic
mismanagement will cause drastic changes in a country's business environment that hurt the profit
and other goals of a particular business enterprise. A legal risk can be defined as the likelihood that
a trading partner will opportunistically break a contract or expropriate property rights.

Blooms: Remember
Difficulty: 3 Hard
Gradable: manual
3-86
Education.
3-87
Education.

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Chapter 03

National Differences in Economic Development

True / False Questions

1. GNI allows a more direct comparison of living standards in different countries.

8. Most property in poor countries is owned legally by investors.

14. Economic freedom necessarily equates with political freedom.

25. Economic risks are independent of political risk.

Multiple Choice Questions

A. Gross domestic product (GDP)

A. gross domestic product

A. gross domestic product

A. Demands for money to grant a license

A. a more vocal working poor

A. build brand loyalty

A. Early investor advantages

A. international trade restrictions.

45. One visible indicator of _____ tends to be a country's inflation rate.

A. if the country has a high gross national income.

47. GNI per person figures can be misleading because ____.

A. they also include barter agreements

A. Purchasing power parity (PPP) adjustment

A. it doesn't consider differences in the cost of living.

A. Gross national income

A. Life expectancy at birth.

53. According to Amartya Sen, development should be:

A. seen as a process of expanding the real freedoms that people experience.

A. They are the engines of growth.

55. A market economy encourages innovation because:

A. state ownership of enterprises reduces risks of innovation.

56. Stagnation can occur in planned economies because:

A. entrepreneurial individuals have few economic incentives for innovation.

A. State ownership of means of production

A. have political stability.

A. Detailed state planning

A. a wave of democratic revolutions has swept the world.

A. a state's ability to control access to uncensored information has increased.

A. state ownership of productive resources

A. corruption prevalent in planned economies.

67. Which of the following statements is true about Samuel Huntington?

A. free-market economies to socialist economies.

A. Increasing trade barriers

72. Which of the following is an example of deregulation?

A. A country that implements a simplified income tax filing system

A. Promotion of foreign direct investment

A. stop receiving subsidies from the government.

A. an increase in trade barriers and tariffs.

A. The size of the market.

A. vertical integration advantage.

82. The costs of doing business in a country tend to be greater if:

A. political payoffs are not required to gain market access.

A. are more favorable

A. previous economic success

A. gross domestic product

87. Which of the following are more conducive to economic growth?

A. friendly political systems

A. Adding price controls

94. Without a strong legal systems in a market economy:

A. the incentive to engage in economic activity can be increased substantially.