87) Russia is in transition from ________.
A) a capitalist economy to a mixed economy
B) a centrally planned economy to a free-market economy
C) a market economy to a centrally planned economy
D) a mixed economy to a centrally planned economy
Answer: B
AACSB: Dynamics of the global economy
Skill: Concept
Objective: 5
Difficulty: Easy
Course LO: Describe how differences in political economy influence economic development
88) Which of the following challenges is Cleanshot most likely to face in Russia?
A) organized crime
B) too many competitors
C) low demand for the products of non-Russian companies
D) fading underground economy
Answer: A
AACSB: Dynamics of the global economy
Skill: Concept
Objective: 5
Difficulty: Moderate
Course LO: Describe how differences in political economy influence economic development
89) Given the lack of available hard currency, Russian businesses often use goods and services as payment for other products they buy from abroad. This practice is referred to as ________.
A) letter of credit
B) fiat money
C) barter
D) guanxi
Answer: C
AACSB: Dynamics of the global economy
Skill: Concept
Objective: 4
Difficulty: Easy
Course LO: Define the fundamental concepts of international business
90) Describe the three main types of economic systems.
Answer: A country's economic system consists of the structure and processes that it uses to allocate its resources and conduct its commercial activities. Every economy displays a tendency toward individualist or collectivist economic values. If national economies are arranged on a horizontal scale that is anchored by two extremes, at one end of the scale is a theoretical pure centrally planned economy, at the other end is a theoretical pure market economy, and in between is a mixed economy.
A centrally planned economy is a system in which a nation's land, factories, and other economic resources are owned by the government. The government makes nearly all economy-
related decisions—including who produces what and the prices of products, labor, and capital. Central planning agencies specify production goals for factories and other production units, and they even decide prices. The ultimate goal of central planning is to achieve a wide range of political, social, and economic objectives by taking complete control over the production and distribution of a nation's resources.
A mixed economy is a system in which land, factories, and other economic resources are rather equally split between private and government ownership. In a mixed economy, the
government owns fewer economic resources than does the government in a centrally planned economy. Yet in a mixed economy, the government tends to control the economic
sectors that it considers important to national security and long-term stability. Many mixed economies also maintain generous welfare systems to support the unemployed and provide health care for the general population.
In a market economy, the majority of a nation's land, factories, and other economic resources are privately owned, either by individuals or businesses. This means that who
produces what and the prices of products, labor, and capital in a market economy are determined by the interplay of two forces: supply and demand. Market economics is rooted in the belief that individual concerns should be placed above group concerns.
91) Discuss the factors that contributed to the collapse of centrally planned economies.
Answer: Centrally planned economies collapsed due to the following reasons. First, they failed to create economic value. They failed to see that commercial activities succeed when they create economic value for customers. Along the way, scarce resources were wasted in the pursuit of commercial activities that were not self-sustaining.
Second, they failed to provide incentives for economic success. Government ownership of economic resources drastically reduced incentives for businesses to maximize the output obtained from those resources. Except for aerospace, nuclear power, and other sciences (in which government scientists excelled), there were few incentives to create new technologies, new products, and new production methods. The result was little or no economic growth and consistently low standards of living.
Third, they failed to achieve rapid growth. Leaders in communist nations took note of the high rates of economic growth in countries such as Hong Kong, Singapore, South Korea, and Taiwan—called Asia's four tigers. That a once-poor region of the world had so rapidly achieved such astounding growth awakened central planners to the possibilities. They realized that an economic system based on private ownership fosters growth much better than one hampered by central planning.
Finally, centrally planned economies failed to satisfy consumer needs. People in centrally planned economies were tired of a standard of living that had slipped far below that found in market economies. Ironically, although central planning was conceived as a means to create a more equitable system of distributing wealth, too many central planners failed to provide even basic necessities such as adequate food, housing, and medical care.
92) Discuss the challenges China faces as it continues its experiment on "socialism with Chinese characteristics."
Answer: Three factors have posed challenges for China in its transition to a market economy. First, political and social problems pose threats to China's future economic performance. For the most part, political leaders restrict advanced democratic reforms. Protests sporadically arise from time to time whenever ordinary Chinese citizens grow impatient with political progress.
Another potential problem is unemployment. Intensified competition and the entry of international companies into China are placing greater emphasis on efficiency and the cutting of payrolls in some industries. But the biggest contributor to the unemployed sector seems to be migrant workers. Hundreds of thousands of workers have left their farms and now go from city to city searching for better-paying factory work or construction jobs.
Another key issue is reunification of "greater China." China regained control of Hong Kong in 1997 after 99 years under British rule. For the most part, China has kept its promise of "one country, two systems." Although the economic freedoms of people in Hong Kong have remained largely intact, the rest of China has continued along lines drawn by the communist leadership.