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CHAPTER 4:

Quick Study 1
1. Q: Define economic system. What is the relation between culture and economics?
A: An economic system consists of the structure and processes that a country uses to allocate its
resources and conduct its commercial activities. A nations economy tends to express individual
or group values as reflected in its history and culture. However, no economy is focused entirely
on the group at the expense of individuals or vice versa.
2. Q: What is a centrally planned economy? Describe the link between central planning and
communism.
A: A centrally planned economy is one in which a nations government owns most of the land,
factories, and other economic resources and plans nearly all economic activity. Karl Marx
popularized the idea of central economic planning in the nineteenth century while promoting his
belief in communism. Marx argued that market economies cannot be reformedgovernments
must be overthrown and economies replaced with more equitable communist systems.
3. Q: Identify several factors that contributed to the decline of centrally planned economies.
A: Factors included: (1) failure to create economic value, (2) failure to provide incentives, (3)
failure to achieve rapid growth, and (4) failure to satisfy customer needs.
4. Q: Describe Chinas experience with central planning, and the challenges it faces.
A: China always reserved a place for private initiative even in the early days of its
implementation of communism in 1949. Families in rural areas owned their own land. Each
familys crop production in excess of that dictated by central planners could be consumed by the
family or sold on the open market. In 1979, the Chinese government strengthened work
incentives in agriculture by allowing families to grow whatever crops they wanted and to sell the
produce at market prices. The government also legalized township and village enterprises
(TVEs) in 1984.
Challenges ahead for China include: (1) Political and social problems loom, such as skirmishes
between secular and Muslim Chinese, and restrictions on democracy. (2) Unemployment, slow
economic progress in rural areas, and misery of migrant workers. (3) Chinas one country, two

systems policy must preserve order if Taiwan is ever going to freely accept reunification with the
mainland.
Quick Study 2
1. Q: What is a mixed economy? Explain the origin of mixed economies.
A: A mixed economy is one in which land, factories, and other economic resources are more
equally split between private and government ownership. Support for mixed economies grew out
of the belief that an economic system must protect society from the excesses of unchecked
individualism and organizational greed.
2. Q: Explain the changes occurring in mixed economies and the role of privatization.
A: The basic rationale underlying mixed economies is that a successful economic system must be
not only efficient but also must protect society from excesses. Many mixed economies are
beginning to mirror market-based systems. This is due in part to the need to be more competitive.
By selling off government-owned businesses, nations are both embracing market-based
economies and becoming more competitive from a tax and price perspective.
3. Q: Define what is meant by market economy and identify its three required features.
A: A market economy is an economic system in which the majority of a countrys land, factories,
and other economic resources are privately owned. To function smoothly, a market economy
requires: (1) Free choice that gives individuals access to alternative purchasing options. (2) Free
enterprise that gives companies the ability to decide which goods and services to produce and the
markets in which to compete. (3) Price flexibility that allows most prices to rise and fall to reflect
the forces of supply and demand.
4. Q: Explain governments role in a market economy. How are economic freedom and living
standards related?
A: In a market economy, the government has relatively little direct involvement in business
activities. Even so, it usually plays an important role in four areas: enforcing antitrust laws,
preserving property rights, providing a stable fiscal and monetary environment, and preserving
political stability. The more economic freedom a country has, the higher its per capita income is,
but economic freedom does not guarantee a high per capita income.
Quick Study 3

1. Q: What is meant by the term economic development? Explain the relation between
productivity and living standards.
A: Economic development is a measure for gauging the economic well-being of one nations
people, as compared to that of another nations people. Three categories of nations regarding
their levels of economic development are developed (e.g., Germany, Japan, and the United
States), newly industrialized (e.g., India, Mexico, and Taiwan), and developing (e.g., Chad,
Nicaragua, and Laos). Productivity can increase standards of living by bringing more wealth into
a nation. Some experts argue that information technology (IT) can assist in the improvement of
firm, and ultimately national, productivity and result in greater income at all levels. The
Productivity Paradox refers to the lag between IT spending and productivity gains, which arise
only after firms reorganize themselves around new technologies.
2. Q: Describe two measures of economic development and list their advantages and
disadvantages.
A: National production provides a good estimate of a nations overall wealth. It provides
marketers with a broad indicator of whether a nations people are wealthy enough to purchase
their products. It also gives managers an overall indicator of whether a nation has the level of
development to support production facilities.
But there are problems with national production as an indicator of economic development. First,
estimates for the wealth generated in the official economy can be almost meaningless for
countries with large, shadow economies or those that extensively employ barter. Second, national
production figures alone do not tell whether an economy is growing, static, or shrinking. Third,
national averages ignore differences between different regions within a nation. Fourth, simply
converting national production figures at official exchange rates does not provide any indication
of the quantity of goods that money can actually buy in an economy. Finally, this indicator takes
into account only the financial well-being of a people.
Purchasing power parity remedies the fourth disadvantage of national production figures. This
modified national production indicator relays the quantity of goods that a person can buy in their
own country using their own currency. The problem with this indicator of development is that it
ignores other aspects of a peoples total well-being.
3. Q: Explain the concept of purchasing power parity. What are its implications for a nations
relative income per capita?

A: (1) Purchasing power parity is the relative ability of two countries currencies to buy the same
basket of goods in those two countries. It shows what a currency can actually buy in real
terms. This basket of goods represents daily-use items such as apples, rice, and soap. (2)
Purchasing power parity can be used to compare the relative wealth of nations. For example,
unadjusted Swiss GDP per capita is $47,900. But, at PPP it falls to $34,700 and is actually lower
than the comparable figure for the U.S. GDP at PPP$39,700. Thus, it costs more to buy the
same basket of goods in Switzerland than in the United States.
Quick Study 4
1. Q: Explain the value of the Human Development Index (HDI) in measuring a nations level of
development.
A: The United Nations Human Development Index (HDI) evaluates the extent to which a
government equitably provides its people with a long and healthy life, an education, and a decent
standard of living. This indicator goes beyond estimating only financial wealth and directly
assesses human aspects of development.
2. Q: How are communicable diseases devastating human and economic development in some
poor nations?
A: A number of diseases create a serious challenge for poor nations and hamper the global
economy. HIV/AIDS, tuberculosis, and malaria are rampant in some regions of the world. AIDS
has killed more than 22 million people worldwide, tuberculosis kills 2 million people annually,
and malaria kills between 1 and 3 million per year.
3. Q: Identify the main characteristics of: (a) developed countries, (b) newly industrialized
countries, (c) emerging markets, and (d) developing countries.
A: (a) Developed countries are highly industrialized, highly efficient, and whose people enjoy a
high quality of life. People in developed countries receive the finest health care and benefit from
the best educational systems. Developed nations support aid programs to help poorer nations
improve their economies and their standards of living. (b) Newly industrialized countries have
recently increased the portion of national production and exports derived from industrial
operations. In the past two decades, these countries have received an increasing share of total
worldwide direct investment. (c) Emerging markets is the term for the group of countries formed
by combining newly industrialized countries and countries that have the potential to become
newly industrialized. They have developed some (but not all) of the operations and export
capabilities associated with NICs. (d) Developing countries have poor infrastructures and low

personal incomes. They may show potential for becoming newly industrialized countries, but
typically lack the resources and skills to do so. They often rely for much of their wealth on
production from one or a few sectors of the economy such as agriculture, mining, or oil.
Quick Study 5
1. Q: What are several reform measures that are involved in economic transition?
A: Several reform measures include: (1) stabilize the economy, reduce budget deficits, and
expand credit availability; (2) allow prices to reflect supply and demand; (3) legalize private
business, sell state-owned companies, and support property rights; and (4) reduce barriers to
trade and investment and allow currency convertibility.
2. Q: Describe some of the remaining obstacles to businesses in transitional economies.
A: (1) A lack of managerial expertise caused by the fact that central planners formerly decided
nearly every aspect of the nations commercial activities hampers progress today. There was little
need for managers to learn management skills including how to develop production, distribution,
pricing, and marketing strategies. (2) A shortage of capital presents special problems because of
the high cost of economic transition. Governments of nations in transition can often only afford a
portion of the required investment. These nations lack capital because of the disastrous financial
management during the years of central planning. (3) Economic transition can be especially slow
when a nations people find reform difficult for cultural reasons. In addition, importing modern
management practices without tailoring them to the local culture can have serious consequences.
(4) Environmental degradation caused by the headlong rush among transition economies to catch
up to developed countries is leaving serious environmental damage in its wake. The direct effects
of environmental destruction are evident in increased levels of sickness and disease, including
asthma, blood deficiencies, and cancerwhich obviously negatively impact national
productivity.
3. Q: Explain Russias experience with economic transition.
A: Russias experiment with communism lasted nearly 75 years beginning in 1917a longer
period than for any other centrally planned economy. Communism became so ingrained in
Russian culture in part because it endured for so many generations. Also, Russias political and
economic systems fell apart at the same time. The nation is now struggling to rebuild itself with
new institutions. The political system is rife with corruption and contract killings of major
political figures. The economy is in turmoil because of the governments empty coffersthis
being a direct result of its inability to collect taxes because of the very little business actually

being done in the official economy. Inflation is one force that has hampered more rapid
progress. Personal incomes and business profits are eaten away by rising prices and costs.

CHAPTER 5:
Quick Study 1
1. Q: What portion of world trade occurs in (a) merchandise and (b) services?
A: Merchandise (manufactured goods and other physical products) accounts for about 80 percent
of worldwide trade; services account for the remaining 20 percent.
2. Q: What is the relation between trade and world output?
A: The volume of international trade outstrips growth in world output. The level of world output
of any given year influences the level of international trade in that year. Output and world trade
move together. If a country is in recession, people make fewer purchases because of uncertainty
about the future and a typically weaker currency relative to other currencies.
3. Q: Describe the broad pattern of international trade.
A: Trade among the worlds high-income economies accounts for roughly 60 percent of total
world merchandise trade. Two-way trade between high-income countries and low- and middleincome nations accounts for about 34 percent of world merchandise trade. Intraregional trade
accounts for nearly 70 percent of Europes exports, 56 percent of Asias exports, and 38 percent
of North Americas exports. Some economists call this century the Pacific century, referring to
the expected future growth of Asian economies and the expected shift in trade flows from the
Atlantic to the Pacific Ocean.
4. Q: Why is a nations level of trade dependence or independence important?
A: Developing and transition nations that share borders with developed countries are often
dependent upon their wealthier neighbors. A nations level of trade dependence is important
because recession or political turmoil in the dominant nation can cause problems for the
dependent nation. Countries try to reduce their dependence on other nations. The level of
interdependency between pairs of countries is often reflected by the amount of trade that occurs
between a companys subsidiaries in the two nations.

CHAPTER 6:
Quick Study 1
1. Q: What are some political reasons why governments intervene in trade? Explain the role of
national security concerns.
A: (1) Practically every government restricts imports that threaten jobs in the domestic economy.
(2) Governments restrict certain imports for national security reasons because the nation must
have access to a domestic supply of certain items in the event of war. Agriculture is often
protected for national security because a nation importing food could face starvation in war. (3)
A government often threatens to restrict imports coming from a nation that restricts its own
imports. (4) The largest nations may get involved in trade to gain influence over smaller nations.
For example, Japan has influence among many Asian nations because they rely on Japan for a
large amount of their imports and exports. (5) Nations restrict exports containing high
technology and those with dual uses. They also restrict imports to protect domestic sources in
case of war.
2. Q: Identify the main economic motives for government trade intervention. What are the
drawbacks of each method of intervention?
A: One economic motive for a nation to intervene in trade is protection of young (infant)
industries from competition. According to the infant industry argument, a countrys emerging
industries need protection from international competition during their development phase until
they become sufficiently internationally competitive. However, drawbacks of this policy include:
(1) Governments may not identify industries worth protecting and those not to protect. (2)
Protection from international competition can cause domestic companies to become complacent.
(3) It can be political suicide to remove protection once it has been given. (4) Consumers can
wind up paying more if domestic companies are protected and do not become highly
competitive. (5) A main argument of this policy is that small businesses often cannot obtain
financing is less true today than in the past.
Another economic motive for intervention is pursuit of a strategic trade policy. The new trade
theorists believe government intervention can help companies take advantage of economies of
scale and be first movers in their industries. First-mover advantages result because economies of
scale limit the number of companies that an industry can sustain. Supporters of strategic trade
policy argue that strategic trade policies result in increased national income. However,
drawbacks of this strategy are: (1) because it fosters inefficiencies and high costs, following a

strategic trade policy can be very damaging to a nations economy in hard times; (2) those
industries with the best political connections might benefit most from such a policy; and (3)
strategic trade policies can spark destructive competition and even trade wars among nations.
3. Q: What cultural motives do nations have for intervening in free trade?
A: The main cultural motive for government intervention in trade is protection of national
identity. For example, France has laws that guarantee French artists a minimum amount of
airtime on French radio programs and Canada is considering doing something similar.
Governments also block imports of products they think might be harmful to the nations culture.
They also restrict the importation of certain services such as media and entertainment in order to
protect budding artists and others in these industries.
Quick Study 2
1. Q: How do governments use subsidies to promote trade? Identify the drawbacks of subsidies.
A: Governments employ the use of subsidies to assist domestic companies in fending off
international competitors. One drawback of subsidies is that they can cause companies to become
complacent about increasing efficiency and cutting costs. This can cause companies to overuse
resourcesan especially difficult problem in developing and emerging countries. Because
subsidies are generally funded through tax revenues earned from sales and income taxes, critics
charge that they amount to corporate welfare on behalf of consumers.
2. Q: How does export financing promote trade? Explain its importance to small and mediumsize firms.
A: Export financing can help a nation increase exports. A government can offer its companies
financing to expand their export activitiesfinancing that they would otherwise be unable to
obtain. Governments can also offer to guarantee the loans of its domestic companies that will use
the money to expand their exports. Such loans and loan guarantees are often crucial to the export
success of small and midsize companies because they often have a far greater need for cash than
large, established exporters.
3. Q: Define the term foreign trade zone. How can it be used to promote trade?
A: A foreign trade zone (FTZ) is a designated geographic region in which merchandise is
allowed to pass through with lower customs duties (taxes) or fewer customs procedures. FTZs
promote the most trade when they are established as low-cost assembly points for companies

manufacturing products that will then be shipped out to other international markets. An example
of an FTZ is the location of Japanese car plants in U.S. states that are administered by the U.S.
Department of Commerce.
4. Q: How can special government agencies help promote trade?
A: Special government agencies are often created for the purpose of promoting a nations
exports. They organize trade missions to promising markets for the countrys products to
generate contracts for new export business. They may have trade offices in other countries that
are designed to promote the home countrys exports and introduce businesses to potential local
partners. Such agencies can also identify products abroad that fulfill a current need in the home
country.
Quick Study 3
1. Q: How do tariffs and quotas differ from each other? Identify the different forms each can
take.
A: A tariff is a government tax levied on a product as it enters or leaves a country. A quota is a
restriction on the amount (measured in units or weight) of a good that can enter or leave a
country during a certain period of time. An export tariff is levied by the government of an
exporting country. A transit tariff is levied by the government of a country that a product passes
through. An import tariff is levied by an importing government.
The import tariff can be further subcategorized. (1) An ad valorem tariff is levied as a percentage
of the stated price of an imported product. (2) A specific tariff is levied as a specific fee for each
unit (by number or weight) of an imported product. (3) A compound tariff is calculated partly as
a percentage of the stated price of an imported product, and partly as a specific fee for each unit.
Quotas come in two forms: import quotas and export quotas. There is also a combined tariffquota.
2. Q: Describe how a voluntary export restraint works and how it differs from a quota.
A: A voluntary export restraint (VER) is a unique version of export quota that a nation imposes
on its exports usually at the request of an importing nation. It differs from a typical quota
because a country normally self-imposes a VER in response to a threat of an import quota or
total ban on a product by an importing nation.

3. Q: What is an embargo? Explain why it is seldom used today.


A: An embargo is a complete ban on trade (imports and exports) in one or more products with a
particular country. It may be placed on one or a few goods or completely ban trade on all goods.
Embargoes can be decreed by individual nations or by supranational organizations such as the
United Nations. Embargoes are used less frequently today because they are difficult to enforce
some nations will always continue to trade with an embargoed nation.
4. Q: Explain how local content requirements, administrative delays, and currency controls
restrict trade.
A: A local content requirement is a law that stipulates a specified amount of a good or service be
supplied by producers in the domestic market. Its designed to force foreign companies to
employ local resources in production processesparticularly labor.
Administrative delays are regulatory controls or bureaucratic rules designed to impair the flow of
imports into a country. It can include a range of government actions such as requiring:
international air carriers to land at inconvenient airports, product inspections that damage the
product, understaffing customs offices to cause delays, and special licenses that take a long time
to obtain. The central aim is protectionism.
Currency controls are restrictions on the convertibility of a currency into other currencies. A
country can restrict who is allowed to convert the home country currency into others or stipulate
an exchange rate that is unfavorable to potential importers. It can be an effective tool for
governments because conversion into one of several internationally acceptable currencies is
often required for most trade deals.
Quick Study 4
1. Q: What was the General Agreement on Tariffs and Trade (GATT)? List its main
accomplishments.
A: The GATT was designed to promote free trade by reducing both tariff and nontariff barriers to
trade. The GATT was formed in 1947 and early success began to wane in the 1980s. Between
1947 and 1988, it helped to reduce average tariffs from 40 percent to 5 percent and multiply the
volume of international trade by 20 times. But by the middle to late 1980s, rising nationalism
worldwide and trade conflicts led to a nearly 50 percent increase in nontariff barriers to trade.
Also, services (not covered by the original GATT) had become increasingly important

accounting for between 25 and 30 percent of total world trade. It was clear that a revision of the
treaty was necessary, and in 1994 a new round of trade talks were concluded.
2. Q: What is the World Trade Organization (WTO)? Describe how the WTO settles trade
disputes.
A: The WTO is the international organization regulating trade among nations. WTO agreements
are essentially contracts between member nations that commit them to maintaining fair and open
trade policies. The Dispute Settlement Body goes to work as soon as a member nation files a
complaint. The rulings of the Body cannot be ignored or blocked by members. Offenders must
realign their trade policies according to WTO guidelines or suffer financial penalties and perhaps
trade sanctions.
Dumping occurs when a company exports its product at a lower price than it normally charges in
its domestic market. The WTO cannot punish the country in which the company accused of
dumping is based. The WTO can only rule on the retaliatory actions of other nations. The WTO
allows a country to retaliate if it can show that dumping is actually occurring, calculate the
damage to its own companies, and show that the damage is significant. Finally, because
countries, not companies, give subsidies, the WTO regulates and rules on the actions of both
parties in a dispute over subsidies.
3. Q: Explain the difference between an antidumping duty and a countervailing duty.
A: An antidumping duty is an additional tariff placed on an imported product that a nation
believes is being dumped on its market. A countervailing duty is an additional tariff placed on an
imported product that a nation believes is receiving an unfair subsidy.
4. Q: What efforts have been made to protect the environment from trade and rapid
industrialization?
A: Steady gains in global trade and rapid industrialization in many developing and emerging
economies has generated environmental concerns among both governments and special-interest
groups. The WTO has no separate agreement dealing with environmental issues. It explicitly
states that the WTO is not to become a global environment agency responsible for setting
environmental standards. However, its preamble mentions as objectives environmental protection
and sustainable development. It also has an internal committee called the Committee on Trade
and Environment.