The Economic Environment

Question 1

How do we measure the level of development of a particular economy?

Answer 1

The size, growth potential, and stability of the market

Question 2

Command Economic System

Answer 2

• Government owns most or all of the resources
• Bias toward large-scale, capital-intensive production
• Applies the visible hand of the state, central planning, and collectivism
• Philosophical anchor: communism

Question 3

Mixed Economic System

Answer 3

• Government and private ownership of economic resources
• Balancing economic efficiency but protecting against greed
• philosophical anchor: socialism

Question 4

Market Economic System

Answer 4

• Mostly private ownership
• Bias toward entrepreneurial innovation
• Applies the invisible hand and individualism
• Philosophical anchor: capitalism

Question 5

Example of Pure Centrally Planned Economy?

Answer 5

North Korea, Cuba

Question 6

Example of Pure Market Economy?

Answer 6

Hong Kong (United States following but not pure market economy)

Question 7

What type of system do managers prefer?

Answer 7

Market economy because it allows them to operate their business, there is a link between economic freedom and wealth (graph of freedom level vs. gdp per capita)

Question 8

Property rights dimension

Answer 8

Ability of individuals to accumulate private property

Question 9

Freedom from corruption dimension

Answer 9

Degree that corruption introduces insecurity and uncertainty into economic relaitonships

Question 10

Fiscal freedom

Answer 10

Tax burden imposed onto citizens

Question 11

Government spending

Answer 11

Government spenditures as a percentage of GDP

Question 12

Labor freedom

Answer 12

Aspects of the legal and policy framework that regulates the country’s labor market

Question 13

Business freedom

Answer 13

The ability to start, operate, and close a business (burden of regulation)

Question 14

Monetary freedom

Answer 14

The degree of price stability and the extent of price controls

Question 15

Trade freedom

Answer 15

The absence of tariff and non-tariff barriers that affect imports

Question 16

Investment freedom

Answer 16

Ability of individuals and firms to move resources without restrictions internally and across borders

Question 17

Financial freedom

Answer 17

Efficiency of banking as well as independence of financial sector from the government

Question 18

Political freedom and economic freedom are generally….

Answer 18

Linked. However, examples like China, some countries can improve in one index (economic) and still remain the same in the other (political)

Question 19

Why have China and Russia developed so differently economically?

Answer 19

They both began with low economic and political freedom, but Russia tried to jump and improve both factors which caused too much change and stress at one time and China focused only on economic freedom

Question 20

What happened to Chile in between 1985 and 1995?

Answer 20

They previously had a totalitarian free market, but became democratic after imprisoning dictator which caused them to increase political freedom only

Question 21

Argentina, what happened?

Answer 21

100 years ago it was the country of the future and GDP was higher than Germany, France, and Italy but now it is behind Chile, Mexico, Uruguay, and Brazil because of a history of PROTECTIONISM and populism (corruption)

Question 22

Economic freedom supermodels?

Answer 22

Small populations, but free and independent

• Denmark
• Finland
• Norway
• Sweden

Question 23

Why is this region the economic supermodel?

Answer 23

• Trust in strangers, but belief in individual rights
• Lots of honesty and transparency in government
• Leader in e-government
• Moving quickly toward capitalism and privitization

Question 24

Highest misery index in Europe?

Answer 24

Spain, high levels of inflation and unemployment lead to high economic misery index

Question 25

Caution of economic measurements?

Answer 25

- System complexity - Market Dynamism - Market Interdependence - Data overload

Question 26

Key economic measures

Answer 26

- GDP - GNI - Purchasing Power Parity - Rate of economic growth - Population size - Sustainability - Degree of stability - Key indicators

Question 27

GNI

Answer 27

Gross National Income - Market value of final goods and services newly produced by domestically owned factors - Ford production value in USA and Mexico would count - Toyota production in USA would not count in USA (counts in Japan) - Quick measure to compare one country to another

Question 28

GDP

Answer 28

Gross Domestic Product - GDP: The market value of production that takes place within a nation's borders without regard to whether production is done by domestic or foreign factors - Both Ford and Toyota production in the USA counts - Ford produced in Mexico does not - Large populations and high per capita GDP are most desirable

Question 29

For USA, does GDP and GNI differ much?

Answer 29

No, but for a smaller country there is a large discrepancy (Ireland for example)

Question 30

Largest economy by GNI?

Answer 30

USA, accounts for 22% of world total (next are China, Japan, and Germany)

Question 31

Purchasing power parity

Answer 31

The number of units of a country's currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in another country - Helps adjust GNI because it will either be understated or overstated (dollar buys more things other places) - USA is overstated in GNI - Adjusted for PPP, India is 4th (from 9th)

Question 32

Current Account Balance

Answer 32

- Exports v. imports - Want a surplus - Germany is number 1 - strong manufacturing sector (China second)

Question 33

Re Emerging economies

Answer 33

India & China, as developed economies decrease, india and China are re-emerging (highest GDP growth rates)

Question 34

Why interest in emerging economies?

Answer 34

- Less developed economies with indication of advanceement - Low income, rapid growth, LIBERALIZATION - Investment to fuel economic growth - Availability of resources (manufacturing potential)

Question 35

Challenges of emerging economies?

Answer 35

- Lack of developed communication - Inefficient distribution - High economic and political volatility - High levels of government involvement (corruption)