International Business, 13e (Global Edition) (Daniels/Radebaugh/Sullivan)

Chapter 4 The Economic Environment

61) In the aftermath of the recent worldwide credit crisis, there has been a dropping off in the level of
government involvement in economic affairs.
Answer: FALSE

62) When analyzing the key elements of a country's economic environment, it is best to apply a systems
perspective.
Answer: TRUE

63) Gross domestic product is the value of production that takes place within a nation's border, without regard
to whether the production is done by domestic or foreign factors of production.
Answer: TRUE

64) A car manufactured in the U.S. by Toyota would be included in the calculation of the GDP for the United
States.
Answer: TRUE

65) The calculation of GNI per capita takes into account the differences in the cost of living from one country to
another.
Answer: FALSE

66) Economic indicators such as GNI, and its expression in terms of per capita, growth rate, and PPP, are not
sufficient to develop a clear picture of the overall quality of life in a country.
Answer: TRUE

67) The Human Development Index measures the average achievements in a country on three basic dimensions
of human development: mortality, knowledge, and standard of living.
Answer: TRUE

68) Inflation occurs because aggregate demand is growing as fast as aggregate supply.
Answer: FALSE

69) Inflation affects interest rates, exchange rates, the cost of living, general economic confidence, and the
stability of the current political system.
Answer: TRUE

71) External debt results when the government spends more than it collects in revenues, whereas internal debt
results when a government borrows money from foreign lenders.
Answer: FALSE

72) Uneven income distribution is largely a problem confined to poorer nations.

Answer: FALSE

74) The balance of trade records is a record of a country's international transactions that take place among
companies, governments, or individuals.
Answer: FALSE
75) In a country's balance of payments, the current account and the capital account represent equal values.
Answer: FALSE

76) An economic system is the set of structures and processes that guides the allocation of resources and shapes
the conduct of business activities within a country.
Answer: TRUE

77) The range of economic systems in the world today, when represented on a spectrum, has one end anchored
by the idea of capitalism, the other with that of socialism.
Answer: FALSE

78) A market economy gives individuals the freedom to decide where to work doing what, how to spend or save
money, and whether to consume now or later.
Answer: TRUE

79) A market economy is one in which resources are primarily owned and controlled by individuals and
companies.
Answer: TRUE

80) In a command economy, the goods and services that a country produces, the quantity in which they are
produced, and the prices at which they are sold are all planned by the government.
Answer: TRUE

81) The government considers itself a better judge of resource allocation than businesses or citizens in a market
economy.
Answer: FALSE

82) In a mixed economy, all dimensions of economic activity, including pricing and production decisions, are
determined by a central government plan.
Answer: FALSE

83) A mixed economy is a system where economic decisions are largely market driven and ownership is largely
private, but the government intervenes in many private economic decisions.
Answer: TRUE

84) There is a positive correlation between economic freedom and economic growth.
Answer: TRUE

88) As countries in transition from a command to a market economy move to control expenditures and reduce
their budget deficits, one important strategy to pursue is privatization of state-owned enterprises.
Answer: TRUE

89) Economic transition from a command to market economy requires developing market-oriented instruments
for macroeconomic stabilization.
Answer: TRUE

91) In principle, regulations prevent companies from maximizing efficiency.

Answer: TRUE
Essay Questions

96) A useful way to classify countries is by economic system. In a short essay,

describe and discuss the three ways economies can be categorized.
Answer:
a. Market economy: A market economy is one in which resources are
primarily owned and controlled by the private sector, not the public sector.
The key factors that make the market economy work are consumer
sovereignty and freedom of companies to operate in the market. Prices are
determined by supply and demand.

b. Command economy: In a command economy, also known as a centrally

planned economy, all dimensions of economic activity, including pricing
and production decisions, are determined by a central government plan.
The government owns and controls all resources. The government sets
goals for every business enterprise in the country by how much they
produce and for whom. In this type of economy, the government considers
itself a better judge of resource allocation than its businesses or citizens.

c. Mixed economy: In actuality, no economy is purely market or completely

command oriented. Most economies are mixed economies, falling in the middle and
combining elements of both. In a mixed economy, economic decisions are
principally market driven and ownership is principally private, but the government
intervenes, from slightly to extensively, in resource allocations and economic
decisions.
.
98) Many economies are in the process of transition. In a short essay, identify
the key means that would power a transition from a command economy to a
market economy.

Answer: In general, transition to a market economy involves elements of the

following:
Privatization—the sale and legal transfer of government-owned resources to
private interests—is vital to creating a market economy. Transferring ownership
and control of factors of production from the state to private owners via the process
of privatization improves general market efficiency.

Deregulation—Relaxing or removing restrictions on the free operation of markets

and business practices represents the idea of deregulation. This allows businesses to
be more productive by saving the time and money previously spent complying with
regulations.

Property Right Protection—The protection of property rights means that

entrepreneurs who come up with an innovation can legally claim the present and
future rewards of their idea, effort, and risk. This protection also supports a
competitive economic environment by assuring investors and entrepreneurs that
they, not the state, will prosper from their hard work. Put differently, improving the
rewards of hard work essentially makes people more willing to work hard.

Fiscal and Monetary Reform—In general terms, economic decision making by

political officials often leads governments to adopt tax or spending policies that
slow growth and increase interest rates, inflation, and unemployment. Adopting
free-market principles requires a government to rely on market-oriented instruments
for macroeconomic stabilization, set strict budget limits, and use market-based
policies to manage the money supply.

Antitrust Legislation—Left to their own devices, markets can create situations in

which a single seller or producer supplies a good or service. When one company is
able to control a product's supply and, therefore, its price, it is considered a
monopoly. The anticompetitive practices of monopolies are antithetical to a free
market. Consequently, liberalizing an economic system requires a government to
legislate antitrust laws that encourage the development of industries with as many
competing businesses as the market will sustain.