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Chapter 3 National Differences in Economic Development TRUE/FALSE 1) GDP allows a more direct comparison of living standards in different countries than other measures. FALSE 2) In Sen's view, development is an economic process that should be assessed primarily by material output measures such as GNI per capita. FALSE 3) GDP is one of the measures used by the Human Development Index (HDI) to measure the quality of human life in different nations. FALSE 4) Political freedom is one of the measures used by the Human Development Index (HDI) to measure the quality of human life in different nations. FALSE 5) If a country's economy is to sustain long-term economic growth, the business environment must be conducive to innovations and entrepreneurial activity. TRUE 6) The state of Illinois was having budget difficulties, so it hired several private management consultancy firms to manage some state-owned enterprises. This is an example of privatization. FALSE 7) Peruvian development economist Hernando de Soto has argued that the chronic inability of property owners to establish legal title to the property they own is a key problem for innovation and entrepreneurial activity in developing nations. TRUE 8) Most property in poor countries is owned legally by investors. FALSE 9) Totalitarian states promote human freedom and human development, which facilitates economic progress. FALSE 10) Since the late 1980s, there has been a strong move away from a more free market economic model and toward more centrally planned and mixed economies. FALSE 11) Many totalitarian regimes were able to deliver economic progress to the vast bulk of their populations, which curbed the spread of democracy during the late 1980s. FALSE 12) New information and communication technologies have enabled the spread of democratic ideals. TRUE 13) Transformation from centrally planned command economies to market-based economies can be attributed to the fact that command and mixed economies failed to deliver the sustained economic performance achieved by countries adopting market-based systems. TRUE 14) Hong Kong has economic freedom, so it follows that it also has political freedom. FALSE 15) In a command economy, the prices are determined by the free interplay of demand and supply. FALSE 16) In mixed economies, in certain sectors the state sets prices, owns businesses, limits private enterprise, restricts investment by foreigners, and restricts international trade. TRUE 17) Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition. TRUE 18) For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy. TRUE 19) To improve airport security following a major terrorist attack, the government of a country takes over the airport security industries This is an example of privatization. FALSE 20) A country with a well-functioning market economy does not need laws protecting private property rights and providing mechanisms for contract enforcement. FALSE 21) When communism collapsed, many of the communist countries lacked the legal structure required to protect property rights because all the property was earlier held by the state. TRUE 22) A market with a large number of consumers with low living standards will have a relatively large market when measured in economic terms. FALSE 23) The long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth of consumers in that market, and the likely future wealth of consumers. TRUE 24) A country's economic system and property rights regime are reasonably good predictors of economic prospects. TRUE 25) Economic risks are independent of political risk. FALSE MULTIPLE CHOICES 26) ________ per person figures can be misleading because they don't consider differences in the cost of living. A) Gross domestic product (GDP) B) Gross national income (GNI) C) Purchasing power parity (PPP) D) Human Development Index (HDI) 27) GNI per capita can be adjusted by ________ to account for differences in the cost of living. A) gross domestic product B) gross values added C) purchasing power D) the total value of goods and services produced 28) The ________ adjustment allows for a more direct comparison of living standards in different countries. A) gross domestic product B) value added C) gross national income (GNI) D) purchasing power parity (PPP) 29) GNI and PPP data are useful because they provide a ________ of economic development. A) static picture B) dynamic analysis C) static analysis D) global view

30) In a ________, the state owns all means of production. A) mixed economy B) planned economy C) market economy D) totalitarian state 31) The economic freedom associated with a ________ creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy. A) closed economy B) political economy C) market economy D) command economy 32) Which of the following is a legal means by which the state can expropriate the profits from innovation? A) demands for money to grant a license B) expropriation C) enforcing property rights D) excessive taxation 33) Some ________ have fostered a market economy and strong property rights protection and have experienced rapid economic growth. A) totalitarian regimes B) command economies C) dictatorships D) centrally planned systems 34) Several of the fastest-growing Asian economies adopted more ________ governments during the past three decades, including South Korea and Taiwan. A) totalitarian B) democratic C) dictatorial D) socialist 35) The general assertion is that nations investing more in ________ will have higher economic growth rates. A) infrastructure B) centralized urban centers C) education D) manufacturing 36) To account for differences in the cost of living, one can adjust GNI per capita by ________, which allows for a more direct comparison of living standards in different countries. A) gross domestic product B) Human Development Index C) living standards rate D) purchasing power 37) Which of the following are more conducive to economic growth? A) democratic regimes B) totalitarian regimes C) dictatorships D) benevolent monarchies 38) In a ________, any individual who has an innovative idea is free to try to make money out of that idea by starting a business (by engaging in entrepreneurial activity). A) command economy B) planned economy C) market economy D) mixed economy 39) GNI per person figures can be misleading because A) they also include barter agreements. B) they provide a dynamic picture of development. C) they don't consider differences in the cost of living. D) they don't consider exchange rate. 40) Which of the following helps in adjusting GNI such that it accounts for the differences in the cost of living? A) purchasing power parity (PPP) adjustment B) Human Development Index C) debt to GNI ratio D) consumer price index 41) In some countries, the official GNI per capita measured at PPP data does not reflect the actual total annual income because A) it doesn't consider differences in the cost of living. B) it gives a static picture of development. C) it fails to include income earned from other countries in the form of dividends. D) large amounts of economic activity may be in the form of barter agreements. 42) Which of the following was developed by the United Nations to measure the quality of life in different nations? A) gross national income B) Human Development Index C) purchasing power parity D) gross domestic product 43) Many countries in Africa score below 0.5 on the Human Development Index. This means that these countries have A) few political freedoms. B) poor quality of life. C) low purchasing power parity. D) no gross domestic product. 44) Which of the following is one of the measures that HDI is based on? A) life expectancy at birth B) political freedom C) attainment of housing

45) ________, a Nobel Prize–winning economist, has argued that development is not just an economic process, but it is a political one as well. A) Hernando de Soto B) Karl Marx C) Samuel Huntington D) Amartya Sen 46) According to Amartya Sen, development should be A) seen as a process of expanding the real freedoms that people experience. B) seen as a nonpolitical concept that focuses on the net income of a country. C) viewed as a purely economic process. D) assessed by material output measures such as GNI per capita. 47) Which of the following statements pertaining to innovation and entrepreneurship is true? A) They are the engines of growth. B) They require strong legal systems. C) They require state ownership of means of production. D) They require a mixed economy. 48) A market economy encourages innovation because A) state ownership of enterprises reduces risks of innovation. B) economic freedom leads to greater incentives for innovation. C) government-owned and funded research centers become hubs of innovation. D) the prices of goods and services, including new products, are fixed by government. 49) Stagnation can occur in planned economies because A) entrepreneurial individuals have few economic incentives for innovation. B) private ownership of means of production leads to exploitation of workers. C) prices of goods and services are fixed by market forces of supply and demand. D) lack of barriers to trade results in increased competition for domestic producers. 50) ________ is required for a business environment to be conducive to innovation and entrepreneurial activity. A) State ownership of means of production B) Strong legal protection of property rights C) Barriers to foreign trade and investment D) Government regulation of the market 51) The influential Peruvian development economist Hernando de Soto has argued that much of the developing world will fail to reap the benefits of capitalism until they A) have political stability. B) invest in infrastructural development. C) have better defined and secure property rights. D) have adequate market regulation. 52) According to Hernando de Soto, which of the following factors is essential for the developing world to be able to reap the benefits of innovation and entrepreneurship? A) detailed state planning B) restricting direct investment by foreign enterprises C) strong property rights D) market regulation 53) A free market economy in which property rights are protected leads to subsequent economic growth that often leads to the establishment of A) a democratic regime. B) a planned economy. C) government-owned enterprises. D) a socialist economy. 54) The political economy of many of the world's nation-states has changed radically since the late 1980s. Which of the following is a trend that has been evident? A) A wave of democratic revolutions has swept the world. B) Totalitarian governments have arisen, replacing democratically elected governments. C) There has been a strong move toward centrally planned economies and away from free market economic models. D) Mixed economies are fast replacing market economies. 55) Political scientist ________ predicts that there will be a world that is split into different civilizations, each of which has its own value systems and ideology. A) Samuel Huntington B) Amartya Sen C) Francis Fukuyama D) Hernando de Soto 56) Which of the following is one of the three main reasons for the spread of democracy? A) New information and communication technologies have broken down the ability of the state to control access to uncensored information. B) Totalitarian regimes delivered economic progress to the bulk of their populations but not enough to the power brokers. C) Democratic regimes failed to deliver economic progress to the vast bulk of their populations. D) Economic advances in the past quarter-century have led to the emergence of a class of ruling elite. 57) According to what political scientist's thesis is global terrorism a product of the tension between civilizations and the clash of value systems and ideology? A) Amartya Sen B) Samuel Huntington C) Francis Fukuyama D) Hernando de Soto 58) One of the reasons for the spread of democracy is the emergence of ________ who have pushed for democratic reforms. A) a more vocal working poor B) better educated lower classes C) a desperate urban poor D) increasingly prosperous middle and working classes

59) Since the late 1980s, there has been a spread of democracy. This is because A) a state's ability to control access to uncensored information has increased. B) the socialist model failed to deliver economic progress to the vast bulk of their populations. C) in many countries the middle and working classes have become less powerful. D) in many countries state-ownership of firms has encouraged innovation and entrepreneurship. 60) In many countries entrepreneurs and other business leaders, eager to protect their property rights and ensure the dispassionate enforcement of contracts, had pushed for ________; this contributed to a wave of democratic revolutions during the late 1980s and early 1990s A) state ownership of productive resources B) regulated markets C) democratic reforms D) planned economies 61) Political scientist Samuel Huntington argues that modernization in non-Western societies can result in a retreat toward the traditional. This is exemplified by the A) Islamic resurgence. B) popularization of modern gadgets. C) adoption of Western culture. D) higher levels of literacy and education. 62) According to political scientist Samuel Huntington, the rise of Islamic fundamentalism is a response to the A) corruption prevalent in planned economies. B) restricted access to formal education. C) alienation produced by modernization. D) restrictions associated with totalitarian regimes. 63) Which of the following statements is true about Samuel Huntington? A) Samuel Huntington argues that there is a universal civilization based on widespread acceptance of Western democratic ideals. B) Samuel Huntington argues that the rise of Islamic fundamentalism is a response to the alienation produced by modernization. C) Samuel Huntington argues that global terrorism is a product of the static nature of traditional values and religious systems. D) Samuel Huntington argues that many societies, by adopting the material paraphernalia o the modern world, are becoming more Western. 64) Paralleling the spread of democracy since the 1980s has been the transformation from A) free-market economies to socialist economies. B) mixed economies to collectivist economies. C) open economies to closed economies. D) command economies to market-based economies. 65) Since the 1980s, there has been a transformation from ________ economies to ________ economies. A) mixed; market-based B) centrally planned command; market-based C) centrally planned command; mixed D) market-based; centrally planned command 66) Many states in Asia, Latin America, and Western Europe have shifted away from a mixed economy to a market-based economy. Which of the following measures is most like to be promoted by such states? A) state-ownership of enterprises B) fixing of prices by the government C) deregulation of the economy D) lowering competition 67) Which of the following is a step in the shift toward a market-based economic system? A) increasing trade barriers B) increasing price controls C) nationalization D) creation of a legal system to safeguard property rights 68) ________ involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. A) Privatization B) Developing command economies C) Deregulation D) Globalization 69) ________ is seen as a way to stimulate gains in economic efficiency by giving owners powerful incentive—the reward of greater profits—to search for increases in productivity, enter new markets, and to exit losing ones. A) Globalization B) Economic transformation C) Deregulation D) Privatization 70) ________ involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. A) Deregulation B) Trade certification C) A product law D) A liability law 71) Which of the following is a step involved in the deregulation of a command economy? A) adding price controls B) temporarily restricting international trade C) abolishing laws regulating the establishment and operation of private enterprises D) increasing restrictions on direct investment by foreign enterprises

72) Without a strong legal system in a market economy A) the incentive to engage in economic activity can be increased substantially. B) private-sector entrepreneurs can expropriate the profits generated by the efforts of private and public entities. C) mechanisms for contract enforcement fall to private and corporate lawyers. D) private and public entities can expropriate the profits generated by the efforts of private-sector entrepreneurs. 73) Which of the following is an example of deregulation? A) a country that implements a simplified income tax filing system B) a country that takes over a leading private bank to prevent it from filing for bankruptcy C) a country that provides agricultural subsidies to farmers D) a country that encourages foreign direct investment 74) Which of the following is a characteristic of a command economy? A) promotion of foreign direct investment B) allowing prices to be set by the interplay between demand and supply C) limited international trade D) restricted state-ownership of means of production 75) The finance minister of a country considers several large, state-owned iron manufacturing units to be inefficient and a source of corruption. To generate resources for public expenditure and promote economic growth, the government decides to auction an entire iron manufacturing plant to sell it to a strategic investor. This process exemplifies A) nationalization. B) industrialization. C) liberalization. D) privatization. 76) Studies of privatization in central Europe have shown that the process often fails to deliver predicted benefits if the newly privatized firms A) stop receiving subsidies from the government. B) are completely owned by private individuals. C) are sheltered from foreign competition. D) are allowed to restructure their operations. 77) The sale of state assets through an auction is most likely to lead to A) trade certification. B) privatization. C) nationalization. D) market regulation. 78) For privatization to work, it must also be accompanied by A) an increase in trade barriers and tariffs. B) an increase in government subsidies. C) stronger barriers to foreign competition. D) a general deregulation of the economy. 79) Which of the following factors is likely to make a country a more attractive location for international business? A) totalitarian regimes B) planned economies C) government ownership of production methods D) market-based economic policies 80) The benefits of doing business in a country are a function of which of the following? A) the size of the market B) its past wealth C) its past growth D) its future plans for infrastructure development 81) Sony was a pioneer in the portable music market segment. The Sony Walkman was an innovative product that created a new category altogether and made Sony a technological leader. This gave the company an edge over other consumer electronics brands that introduced portable music players for a very long time. In this example, Sony had the A) vertical integration advantage. B) purchasing power parity advantage. C) free-rider advantage. D) first-mover advantage. 82) Google launched Google Plus to gain a foothold in the social media market. However, given that there are numerous social networking platforms and Facebook is already a leader in social media, Google Plus found it challenging to generate brand loyalty and establish itself in the market. This was because of A) incumbent disadvantage. B) disintermediation disadvantage. C) late-mover disadvantage. D) horizontal integration disadvantage. 83) The costs of doing business in a country tend to be greater if A) political payoffs are not required to gain market access. B) supporting infrastructure is sponsored ...