Chapter 04

International Business, 14e (Daniels et al.) Chapter 4 The Economic Environments Facing Businesses 1) The recent global economic crisis has led to which of the following? A) governments seeking to impose more constraints on capitalism B) governments seeking to eliminate constraints on capitalism C) governments seeking to increase the interdependence of developing economies D) governments seeking to eliminate the interdependence of developing economies Answer: A Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 1 AACSB: Dynamics of the global economy 2) Which of the following is most likely a true statement about the global economy since the 1980s? A) Socialist governments are intervening more in global exchanges. B) Wealthy countries are exercising total control over emerging markets. C) Developing countries are losing growing shares of their foreign-exchange reserves. D) Emerging economies are adopting the principles and practices of free markets. Answer: D Diff: 3 Learning Outcome: Discuss trends in and the debate over globalization Skill: Concept Objective: 3 AACSB: Dynamics of the global economy 3) Kyle, an international manager for Apex Industries, has been given the task of analyzing the economies of three different emerging countries for the firm's potential expansion. Which of the following questions is LEAST relevant to Kyle's assignment? A) How much freedom will Apex have to run its foreign operations? B) What are the current economic policies related to development? C) What is the likelihood that Apex can fill manufacturing positions with locals? D) What factors in the country drive or hinder economic change? Answer: C Diff: 3 Learning Outcome: Describe how differences in political economy influence economic development Skill: Application Objective: 1 AACSB: Dynamics of the global economy

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4) Managers at Morrison Manufacturing are considering expanding the firm's production overseas and want to ensure that the firm is located in a country with a high degree of economic freedom. Presently, which of the following locations would most likely offer Morrison the highest economic freedom? A) Mexico B) Hong Kong C) Venezuela D) North Korea Answer: B Diff: 2 Skill: Application Objective: 2 AACSB: Dynamics of the global economy 5) Since the late 1980s, the growing emergence of freer markets has been powered by the realization that ________. A) economic growth is directly related to economic freedom B) economic growth has a limited effect on the standard of living C) adoption of free market principles contributes to social injustices D) centrally planned economies are best designed to deliver progress Answer: A Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Application Objective: 2 AACSB: Dynamics of the global economy 6) The Economic Freedom Index indicates that economic freedom is positively correlated with all of the following EXCEPT ________. A) life expectancy B) literacy C) environmental sustainability D) diversity Answer: D Diff: 2 Skill: Concept Objective: 2 7) The recent global credit crisis has interrupted the trend of national economies ________. A) rapidly adopting the command market model B) steadily adopting the free market model C) moving from the mixed to the command model D) turning away from the mixed model Answer: B Diff: 2 Learning Outcome: Discuss trends in and the debate over globalization Skill: Concept Objective: 2 AACSB: Dynamics of the global economy


8) History suggests that if the economic crisis worsens, we are likely to see more people question the ________. A) fall of communism B) legitimacy of capitalism C) practicality of mixed market economies D) correlation between economic freedom and prosperity Answer: B Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Concept Objective: 2 AACSB: Dynamics of the global economy 9) According to research, which of the following countries is the strongest supporter of free markets? A) China B) India C) France D) Ukraine Answer: A Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Concept Objective: 2 AACSB: Dynamics of the global economy 10) Which of the following is NOT a characteristic of capitalism? A) private ownership of assets B) right to profit from individual effort C) state control of factors of production D) private control of investment Answer: C Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Concept Objective: 3 11) Communism primarily relies on a system of ________. A) private business ownership B) competitive pricing and marketing C) market-generated supply and demand D) government controlled economic activity Answer: D Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Concept Objective: 3


12) In a market economy, the patterns of resource allocation are most directly influenced by ________. A) government administrators who monitor the equilibrium of supply and demand B) industry coalitions that strive to improve the efficiency of production and service C) consumer group alliances that negotiate with firms to improve product quality D) consumers who "vote" by their personal decision to buy or not buy products Answer: D Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Concept Objective: 3 13) A system in which individuals, rather than the government, make the majority of economic decisions is commonly referred to as a ________. A) command economy B) market economy C) private economy D) mixed economy Answer: B Diff: 1 Skill: Concept Objective: 3 14) Market economies are primarily characterized by ________. A) formal cooperation among government, companies, and workers to achieve stable growth B) heavy government spending and high taxation to pay for a range of social services C) minimal governmental participation D) restricted consumer powers Answer: C Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 15) 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 planned by ________. A) government officials B) private industries C) individual entrepreneurs D) local trade associations Answer: A Diff: 1 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3


16) In a command economy, ________. A) businesses and consumers are assumed to be the best judges of how resources should be allocated B) the government sets goals and determines the price and quantity of what is produced C) different economic sectors coordinate the activities of the federal government D) each enterprise sets its goals before making reports to the central government Answer: B Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 17) In Country X, all dimensions of economic activity, including pricing and production decisions, are determined by the central government. Which term best describes Country X? A) market economy B) mixed economy C) command economy D) democratic economy Answer: C Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Application Objective: 3 18) Which of the following is most typical of a command economy? A) Consumers have choices of many substitutes for any given product. B) Quality of products and services tends to be consistent. C) The prices of goods and services frequently change. D) Many products are usually in short supply. Answer: D Diff: 2 Learning Outcome: Describe how differences in political economy influence economic development Skill: Application Objective: 3 19) In a ________ economy, certain sectors of the economy are left to private ownership and free market mechanisms, while other sectors have significant state ownership and government planning. A) state-directed B) market C) command D) mixed Answer: D Diff: 1 Skill: Concept Objective: 3


20) Some countries opt for a mixed economic system in the belief that although an economic system should aspire to achieve the efficiencies created by free markets, it must also support policies to ________. A) destabilize poverty rates B) achieve low unemployment C) restrict economic growth D) inequitably distribute wealth Answer: B Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 AACSB: Dynamics of the global economy 21) In the Economic Freedom Index, ________ exhibit high economic freedom whereas ________ exhibit little to no economic freedom. A) mixed economies; market economies B) command economies; market economies C) market economies; command economies D) centrally planned economies; command economies Answer: C Diff: 2 Skill: Concept Objective: 3 22) Which of the following countries is the best example of a mixed economic model? A) United States B) France C) United Kingdom D) Australia Answer: B Diff: 2 Skill: Concept Objective: 3 23) Country X is in the process of transforming from a command economy to a market economy. This process most likely involves ________. A) standardized procedures implemented by the state B) high economic growth rates for the long-term C) privatization of many factors of production D) violent political and legal upheaval Answer: C Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Application Objective: 3 AACSB: Dynamics of the global economy 6 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

24) In a country that practices state capitalism, all of the following are most likely to be handled by the state EXCEPT ________. A) leveraging control of the financial system B) developing national corporations C) supporting the local activities of foreign competitors D) systematically managing trade relations Answer: C Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 4 AACSB: Dynamics of the global economy 25) Gross national income (GNI), the broadest measure of economic activity for a country, is defined as the ________. A) total of all consumption and investment that takes place in a national economy B) income generated in one country, regardless of who owns the productive assets C) total of all economic activity in one country less services, such as government administration, health services, and education D) income generated by both total domestic production and the international production activities of national companies Answer: D Diff: 2 Skill: Concept Objective: 5 26) In computing GNI, the value of a Ford car that is manufactured in Mexico using capital from the United States would ________. A) be added to the GNI of the United States as well as to the GNI and GDP of Mexico B) not be added to the GNI of the United States but would be added to the GNI of Mexico C) only affect the computation of GDP and have no bearing on GNI D) be added to the GNI of the United States but not the GNI of Mexico Answer: D Diff: 3 Skill: Application Objective: 5 AACSB: Analytic Skills 27) The measure of the value of production that occurs within a country's borders without regard to whether the production is done by domestic or foreign factors of production is its________. A) net national product (NNP) B) gross national product (GNP) C) gross domestic product (GDP) D) gross national income (GNI) Answer: C Diff: 1 Skill: Concept Objective: 5 7 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

28) To determine whether the standard of living within a country is rising or falling, economists would most likely use which of the following measures? A) per capita GNI B) GNI growth rate C) purchasing power parity D) degree of human development Answer: B Diff: 2 Skill: Concept Objective: 5 29) Eileen, a manager at an international restaurant chain, wants to know if it will be most cost effective to buy 1,000 pounds of sugar in Country X or in Country Y using U.S. dollars. Which of the following is Eileen most likely trying to determine? A) purchasing power parity B) economic growth rate C) gross domestic income D) gross national product Answer: A Diff: 2 Skill: Application Objective: 5 30) The United Nations' ________ measures life expectancy, educational attainment, and the standard of living in a given country. A) Human Development Index B) Emerging Economic Stability C) Genuine Progress Indicator D) Net National Product Answer: A Diff: 1 Skill: Concept Objective: 5 31) The Human Development Index measures the average achievements in a country on three basic dimensions of human development, including ________. A) promotion of cultural values B) quantity of free time C) extent of knowledge D) sustainability Answer: C Diff: 2 Skill: Concept Objective: 5


32) The ________ starts with the same accounting framework used to calculate GDP but then adjusts for values assigned to environmental quality, population health, livelihood security, equity, free time, and educational attainment. A) Gross National Index B) Net National Product C) Genuine Progress Indicator D) Human Development Index Answer: C Diff: 2 Skill: Concept Objective: 5 33) ________ is a general, sustained rise in prices measured against a standard level of purchasing power. A) Deflation B) Inflation C) Expansion D) Reflation Answer: B Diff: 1 Skill: Concept Objective: 5 34) What is the most likely reason that a universal scheme for assessing the performance and potential of a country's economic environment does NOT exist? A) difficulties of identifying a definitive set of predictive economic indicators B) a lack of reliable economic data from most developed economies C) the isolation of most markets from each other D) static nature of the marketplace Answer: A Diff: 2 Skill: Concept Objective: 5 35) A worrisome outcome of chronic inflation is that it tends to ________. A) erode confidence in a country's currency B) give central banking officials excessive flexibility to manage monetary policy C) increase the real income of people, thereby inflating their spending and borrowing levels D) lower consumer demand for foreign goods, which triggers lower prices and eventually lower employment Answer: A Diff: 2 Skill: Concept Objective: 5


36) In most cases, governments ________ in order to regulate inflation. A) lower interest rates B) increase taxes C) raise interest rates D) decrease taxes Answer: C Diff: 2 Skill: Concept Objective: 5 37) ________ typically results when demand decreases and supply increases. A) Inflation B) Chronic inflation C) Reflation D) Deflation Answer: D Diff: 1 Skill: Concept Objective: 5 38) In the U.S., the unemployment rate indicates the ________. A) percentage of the labor force that wants to work full-time but can only find part-time employment B) number of people who have stopped looking for work because full-time jobs are unavailable C) percentage of unemployed workers seeking paid work relative to the total labor force D) number of workers eligible for government services and unemployment benefits Answer: C Diff: 2 Skill: Concept Objective: 5 39) The so-called "misery index" is the sum of a country's ________. A) foreign and national debt B) inflation and unemployment rates C) unemployment level and total debt D) trade deficit and long-term inflation rate Answer: B Diff: 2 Skill: Concept Objective: 5 40) A government increases its internal debt for all of the following reasons EXCEPT which of the following reasons EXCEPT ________. A) The tax system is so poorly run that the government cannot collect all the revenues it expects. B) Government costs such as security and social programs exceed total tax revenues. C) The government borrows money from international financial institutions. D) State-owned enterprises run large deficits. Answer: C Diff: 3 Skill: Concept Objective: 5 10 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

41) Country X has a significant amount of external debt. Which of the following is the most likely cause? A) The government of Country X borrowed money from local banks. B) The government of Country X borrowed money from other governments. C) The government of Country X spent more than it collected in revenues. D) The government of Country X received short-term credits from selling bonds. Answer: B Diff: 2 Skill: Application Objective: 5 42) Uneven income distribution ________. A) exists in almost every country B) is largely a problem for poorer nations C) primarily affects people in urban settings D) is limited to a small share of the world population Answer: A Diff: 2 Skill: Concept Objective: 5 AACSB: Dynamics of the global economy 43) Which of the following is most likely a FALSE statement about income inequality? A) The richest 1% of the world's population claims as much income as the bottom 57%. B) GNI is the most effective tool for estimating the relative wealth of a nation's citizens. C) Among industrialized nations, the U.S. has the largest inequality gap between rich and poor. D) Income inequality between metropolitan and rural areas threatens a country's social stability. Answer: B Diff: 3 Skill: Concept Objective: 5 AACSB: Dynamics of the global economy 44) The World Bank reports that approximately ________ percent of the world's population is poor. A) 50 B) 75 C) 80 D) 95 Answer: C Diff: 2 Skill: Concept Objective: 5 AACSB: Dynamics of the global economy


45) The Gini coefficient estimates a country's ________. A) gross national product B) economic development C) political and legal risk D) income inequality Answer: D Diff: 1 Skill: Concept Objective: 5 46) The ________ view calls for companies to develop low-cost, high-powered, resource-minimizing innovations that can be marketed to the billions of people living on less than a few dollars a day. A) Base of the Pyramid B) Hierarchy of Needs C) Happy Planet Index D) Gini coefficient Answer: A Diff: 1 Skill: Concept Objective: 5 47) Which of the following is a statement that summarizes all economic transactions between a country and the rest of the world during a given period of time? A) trade deficit B) Gini coefficient C) balance of payments D) purchasing power parity Answer: C Diff: 1 Skill: Concept Objective: 5 48) The two main categories in the balance of payments are the ________. A) merchandise exchange account and the services account B) external debt and the unilateral transfers account C) merchandise trade account and the capital account D) current account and the capital account Answer: D Diff: 2 Skill: Concept Objective: 5


49) In a country's balance of payments, the ________ tracks all trade activity in merchandise. A) capital account B) current account C) payment account D) deficit account Answer: B Diff: 2 Skill: Concept Objective: 5 50) An economic system is the set of structures and processes that ________ in a country. A) guides the allocation of resources and shapes the conduct of business activities B) directs the movement of specific products to specific consumers C) sets the standards of competitive success for companies in the economy D) stipulates the roles and responsibilities of consumers Answer: A Diff: 1 Skill: Concept Objective: 3 51) Pender Pharmaceuticals is considering expanding overseas and is focusing primarily on the BRICs. Which of the following countries is one that Pender is considering? A) Indonesia B) Chile C) Russia D) Bangladesh Answer: C Diff: 2 Skill: Application Objective: 5 52) Taylor Enterprises wants to expand its operations into Asia. Managers are focusing on countries with high degrees of economic freedom most likely because the firm is interested in a country with ________. A) minimal government intervention B) standardized minimum wages C) laws favoring sustainability D) state-run corporations Answer: A Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Application Objective: 2


53) Tatum Manufacturing recently opened a new facility in Hong Kong. The firm can most likely expect the Hong Kong government to ________. A) monitor market prices B) control natural resources C) ensure fair competition D) provide innovation incentives Answer: C Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Application Objective: 3 AACSB: Dynamics of the global economy 54) Presently, which of the following countries is best characterized as a pure example of a command economy? A) Russia B) Libya C) China D) Vietnam Answer: B Diff: 2 Skill: Concept Objective: 3 55) A firm with operations in Denmark can most likely expect all of the following EXCEPT ________. A) high taxes B) significant regulation C) tough job-protection laws D) minimal monetary policies Answer: D Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Application Objective: 3 56) According to the concept of green economics, measuring a country's economic performance should also take into account ________. A) market share B) population size C) ecological costs D) cost-of-living increases Answer: C Diff: 1 Learning Outcome: Discuss the role of ethics and social responsibility in international business Skill: Concept Objective: 5


57) Which of the following calls for economic activity that meets present needs without hindering the future needs of society? A) privatization B) state capitalism C) economic freedom D) sustainable development Answer: D Diff: 1 Learning Outcome: Discuss the role of ethics and social responsibility in international business Skill: Concept Objective: 5 58) Which of the following ideas calls for assessing a country's performance based on factors such as life expectancy, leisure time, and income equality? A) microeconomics B) happynomics C) macroeconomics D) green economics Answer: B Diff: 1 Skill: Concept Objective: 5 59) During a time of reflation, the government is most likely to ________. A) lower taxes B) print money C) reduce interest rates D) support infrastructure Answer: B Diff: 2 Skill: Concept Objective: 5 60) Which of the following governmental actions is LEAST likely to increase national debt? A) macroeconomic stimulus plans B) unemployment benefits C) corporate bailouts D) T-bond sales Answer: D Diff: 2 Skill: Application Objective: 5


61) In the aftermath of the recent worldwide credit crisis, there has been a significant reduction in the level of government involvement in economic affairs. Answer: FALSE Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 1 62) When analyzing the key elements of a country's economic environment, it is best to apply a systems perspective. Answer: TRUE Diff: 2 Skill: Concept Objective: 1 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 Diff: 1 Skill: Concept Objective: 5 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 Diff: 2 Skill: Application Objective: 5 AACSB: Reflective thinking skills 65) The calculation of GNI per capita takes into account the differences in the cost of living from one country to another. Answer: FALSE Diff: 2 Skill: Concept Objective: 5 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 Diff: 2 Skill: Concept Objective: 5


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 Diff: 2 Skill: Concept Objective: 5 68) Inflation occurs because aggregate demand is growing as fast as aggregate supply. Answer: FALSE Diff: 2 Skill: Concept Objective: 5 69) Inflation affects interest rates, exchange rates, the cost of living, general economic confidence, and the stability of the current political system. Answer: TRUE Diff: 1 Skill: Concept Objective: 5 70) The so-called "misery index" is the sum of a country's inflation and unemployment rates. Answer: TRUE Diff: 2 Skill: Concept Objective: 5 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 Diff: 2 Skill: Concept Objective: 5 72) Uneven income distribution is largely a problem confined to poorer nations. Answer: FALSE Diff: 2 Skill: Concept Objective: 5 AACSB: Multicultural and diversity understanding 73) There is a strong relationship between skewed income distributions and the split between those who live in urban settings versus those who live in rural areas. Answer: TRUE Diff: 2 Skill: Concept Objective: 5 AACSB: Multicultural and diversity understanding


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 Diff: 1 Skill: Concept Objective: 5 75) In a country's balance of payments, the current account and the capital account represent equal values. Answer: FALSE Diff: 2 Skill: Concept Objective: 5 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 Diff: 1 Skill: Concept Objective: 3 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 Diff: 2 Skill: Concept Objective: 3 AACSB: Dynamics of the global economy 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 Diff: 1 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 AACSB: Dynamics of the global economy 79) A market economy is one in which resources are primarily owned and controlled by individuals and companies. Answer: TRUE Diff: 1 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 AACSB: Dynamics of the global economy


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 Diff: 1 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 AACSB: Dynamics of the global economy 81) The government considers itself a better judge of resource allocation than businesses or citizens in a market economy. Answer: FALSE Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 82) In a mixed economy, all dimensions of economic activity, including pricing and production decisions, are determined by a central government plan. Answer: FALSE Diff: 1 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 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 Diff: 1 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 3 84) There is a positive correlation between economic freedom and economic growth. Answer: TRUE Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 2


85) The collapse of communism in the late 1980s and early 1990s led to a more widespread adoption of the principles of capitalism. Answer: TRUE Diff: 2 Skill: Concept Objective: 3 AACSB: Dynamics of the global economy 86) In response to the global credit crisis, the United States government took actions that increased economic freedom. Answer: FALSE Diff: 2 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Concept Objective: 2 AACSB: Dynamics of the global economy 87) The BRICs are the strongest developed economies in the world. Answer: FALSE Diff: 1 Skill: Concept Objective: 5 88) Between 2000 and 2008, China's economy grew at a faster rate than Japan's economy. Answer: TRUE Diff: 1 Skill: Concept Objective: 5 89) The Happy Planet Index measures well-being and perceptions of living conditions by assessing areas such as housing, incomes, security, and work-life balance. Answer: FALSE Diff: 2 Skill: Concept Objective: 5 90) In most cases, if the misery index of a country is high, then consumers and businesses are less likely to spend and invest. Answer: TRUE Diff: 1 Skill: Concept Objective: 5


91) What is gross national income? How is it calculated? Illustrate your answer with a specific example. Answer: Gross National Income is the broadest measure of economic activity. It is the market value of final goods and services newly produced by domestically owned factors of production, which includes the international production activities of national companies. For example, the value of a Ford car manufactured in the United States and the portion of the value of a Ford manufactured in Mexico using U.S. capital and management counts in U.S. GNI. However, the portion of the value of a Japanese Toyota manufactured in the United States using Japanese capital and management would not be counted in U.S. GNI, but it would be counted in Japanese GNI. Diff: 3 Learning Outcome: Define the fundamental concepts of international business Skill: Critical Thinking Objective: 5 AACSB: Analytic Skills 92) What general characteristics of a country should managers consider when analyzing an economic environment? What specific indicators help managers measure the economic development, performance, and potential of a country? Answer: Managers apply three perspectives to help make sense of the economic environments of various countries. First, they estimate how much freedom they will have to make investments and run operations as they see fit. Second, they evaluate the type of economic system in the country, studying how current policies shape development and performance. The third investigates the points of change that drive economic change, assessing the conditions that moderate economic freedom as well as move a country from one economic system to another. Collectively, the insights help managers pinpoint where investments should go and, perhaps more importantly, where they should not. The key dimension used to distinguish one country from another is the gross national income (GNI). In particular, countries are classified according to per capita GNI, or the size of GNI of a nation divided by its total population. Those countries with high populations and high per capita GNI are generally most desirable in terms of market potential. A country's GNI growth rate also indicates its economic potential. Businesses comparing markets will also likely examine the purchasing power parity (PPP) of a possible foreign market. Diff: 3 Learning Outcome: Define the fundamental concepts of international business Skill: Synthesis Objective: 1, 5 AACSB: Analytic Skills 93) What is inflation? How does inflation affect international business? Answer: Inflation means that prices are going up as measured against a standard level of purchasing power. The inflation rate is the percentage increase in the change in prices from one period to the next, usually a year. Economists use different types of indices to measure inflation. In the United States, the Consumer Price Index is the official measure of inflation. The CPI measures a fixed basket of goods and compares their prices from one period to the next. A rise in the index results in inflation. Inflation affects interest rates, exchange rates, the cost of living, and the general confidence in a country's political and economic system. Diff: 3 Learning Outcome: Define the fundamental concepts of international business Skill: Critical Thinking Objective: 5 AACSB: Reflective thinking skills 21 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

94) Describe the three ways economies can be categorized. Which one do you believe is best? Why? 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. Diff: 3 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Critical Thinking Objective: 3 AACSB: Analytic Skills 95) What is meant by the idea of economic freedom? What factors are used in the Economic Freedom Index? For managers, what role does the Economic Freedom Index play in analyzing the potential of a country? Answer: a. Economic freedom is the "absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself." Rather than the state, individuals decide how they wish to work, produce, consume, save, and invest. Importantly, that freedom is both protected by the state as well as unconstrained by the state. b. The economic factors on which the index of economic freedom is based are trade freedom, business freedom, monetary freedom, investment freedom, freedom from corruption, freedom from government, property rights, financial freedom, and labor freedom. c. The study is helpful in that it identifies ways that governments control economic activity and the degree to which they do so. Operationally, this index helps managers understand the degree to which the government of a country intervenes with the principles of free choice, free enterprise, and free prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency. This information helps managers make better plans to invest funds and run operations in a particular country. Diff: 3 Learning Outcome: Define the fundamental concepts of international business Skill: Synthesis Objective: 2, 5 AACSB: Analytic Skills


96) What is state capitalism? Why do you think state capitalism is becoming increasingly popular around the world? Answer: State Capitalism is an economic system whereby the State decides how, when, and where assets will be valued and resources allocated. The State develops national champions, manages trade relations and exchange rates to promote exports and punish imports, leverages control of the financial system to provide low-cost capital to domestic industries, and maintains accommodative legal and regulatory systems. The global credit crisis has expanded the scale and scope of State Capitalism. Countries that favored a larger state presence, higher taxes, heavier regulation, tougher job-protection laws, and more generous social safety programs dealt more successfully with market disruptions than did their free-market counterparts. More fundamentally, State Capitalism professes to better protect protected social values, equalize income distribution, and prevent the accumulation of vast wealth and powerful self-interests that threaten social harmony. Diff: 3 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Critical Thinking Objective: 4 AACSB: Reflective thinking skills 97) What is the difference between a developing country and a developed country? What significant trends are occurring in each type of market that relate to international business decisions? Answer: Low- and middle-income nations are known as developing countries. This type has low per capita income--an average of $2,963 in 2009. The vast majority of their citizens have a low standard of living with limited access to few goods and services. Developing countries comprise the largest number of countries (151 or so, according to the World Bank) and have the highest number of inhabitants (a combined 5.5 billion) in the world. In contrast, developed countries are those with high per capita income-- an average of $37,970 in 2009. Their citizens have a high standard of living with access to a variety of goods and services. Emerging economies are developing rapidly and have increased their share of the world's foreign exchange reserves by 70% since the mid-1990s. Since 2001, annual growth in emerging markets has averaged 6.4 percent; in contrast, the rich economies have averaged 1.6 percent. While they expand, the global financial crisis slows and shrinks many developed economies. Diff: 3 Learning Outcome: Describe how differences in political economy influence economic development Skill: Synthesis Objective: 1, 5 AACSB: Dynamics of the global economy


98) What issues complicate international economic analysis? Answer: International economic analysis uses many scientific principles but still relies on a variety of behavioral assumptions to interpret activity. Assessments are often more conditional than universal because the complexity of even the simplest economic system defies straightforward classification. Stipulating indicators that definitively represent a country's economic performance and potential is difficult. Secondly, marketplace dynamism means that today's valid measures may prove invalid tomorrow. Third, countries are not isolated. The consequence of connections is an integrated system of markets in which actions in one influences outcomes in others. Interdependencies complicate interpretations. Adjusting analysis for actions and reactions across a broad scope of markets is difficult. Diff: 3 Learning Outcome: Define the fundamental concepts of international business Skill: Critical Thinking Objective: 1 AACSB: Dynamics of the global economy 99) What is the difference between a command economy and state capitalism? Answer: State Capitalism is an economic system whereby the State decides how, when, and where assets will be valued and resources allocated. The State develops national champions, manages trade relations and exchange rates to promote exports and punish imports, leverages control of the financial system to provide low-cost capital to domestic industries, and maintains accommodative legal and regulatory systems. In a command economy, the government owns and controls resources, commanding the authority to decide what products to make, in what quantity, at what price, and in what way. Unlike the command economy, State Capitalism is a system whereby the government explicitly manipulates market outcomes for political purposes. Politics has a profound and pervasive impact on the performance of markets. The government uses markets to promote stability and growth, thereby creating the prosperity and wealth that maximize state power and supports its continued rule. State Capitalism does not have an ideological component--the government manages markets for long-term political survival and power projection, not to enforce an abstract ideal or promote the cult of personality as with the command economy. Diff: 3 Learning Outcome: Discuss arguments for and against government intervention in international business Skill: Synthesis Objective: 3, 4


100) Why is economic freedom an important factor to consider when analyzing a country's economic development, performance, and potential? Answer: Economic freedom helps explain a country's development, performance, and potential. Higherrated countries generally outperform laggards on a variety of measures. Countries with high economic freedom have higher rates of growth and productivity. Income is higher in countries with higher economic freedom; it more than doubles the worldwide average and is 7 times higher than in mostly unfree and repressed economies. Positive relationships exist between economic freedom inflation, and employment. Economic freedom pays social dividends. Life expectancy, literacy, political openness, and environmental sustainability show positive relationships with economic freedom. Collectively, data indicate a positive relationship between economic freedom and various measures of economic performance and quality of life. The data support the argument that liberating resources from government control improves financial performance, economic stability, and standards of living. Diff: 3 Learning Outcome: Describe how differences in political economy influence economic development Skill: Synthesis Objective: 2, 5 AACSB: Dynamics of the global economy


Chapter 04

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