Chapter 2

1. Free market economies stimulate greater economic growth, whereas state-directed

economies stifle growth. Discuss
- In a market economy, all productive activities are privately owned. By having a right
of ownership, people have an incentive to work hard, introduce new products, and
invent new products to create capital and wealth for themselves. Plus, the production
is determined by the interaction of supply and demand and signaled to producers
through price system. However, the command economy is planned by the
government to produce goods and services. The government also controls the quantity
to be produced and price to be sold. The command economy allows people to work
for the good of the society; however, it does not provide any incentive for individuals
to work, to invent new products, and to find an efficient operation. Therefore, the
market economy creates more innovation and efficiency than the command economy.
2. A democratic political system is an essential condition for sustained economic progress.
Discuss.
- Democratic political system allows people to be involved in decision making; for the
modern democratic system, there is representative democracy allowing people to
elect individuals to represent them. By doing so, it allows people to elect the best
individual to lead them and to listen to their voices. People believe in the
representative democracy to make good decisions for the economy. We can see
sustained economic progress from Japan, South Korea, Taiwan, France, Germany,
Canada, United States, Australia, and New Zealand. Nevertheless, totalitarianism
political system has one person control totally over all spheres of human life and
prohibits opposing political parties. People receive less freedom to express
themselves and control their life. They have limited choices to do what they want and
what they think is right. Hence, the economy in the totalitarian political system grows
very slow. As we can see from North Korea, Austria, and Uzbekistan.
3. What is the relationship between corruption in a country (i.e., bribe- taking by
government officials) and economic growth? Is corruption always bad?
- Corruption is so endemic in some countries that politicians and bureaucrats regard it
as a perk of office and openly flout laws against corruption. Corruption has been well
documented in every society, from the banks of the Congo River to the palace of the
Dutch royal family, from Japanese politician to Brazilian bankers, and from
Indonesian government officials to the New York City Police Department. Economic
evidence suggests that high levels of corruption significantly reduce the foreign direct
investment, level of international trade, and economic growth rate in a country. By
siphoning off profits, corrupt politicians and bureaucrats reduce the returns to
business investment and, hence, reduce the incentive of both domestic and foreign
business to invest in that country. The lower level of investment that results hurts
economic growth. Countries with high level of corruptions are Indonesia, Nigeria,
and Russia.
4. You are the CEO of a company that has to choose between making a $100 million
investment in Russia or the Czech Republic. Both investments promise the same long-run

return, so your choice is driven by risk considerations. Assess the various risks of doing
business in each of these nations. Which investment would you favor and why?
- Risk factors that needed to be considered for the investment are political issues,
economic, social issues, legal issues, environmental issues, and technological issues.
The political risk in Russia is very high, but the government is still involved between
the main government and local government. The economics of Russia depend mainly
on natural resources such as oil and gas. For the social issues, Russia is the country
being affected by HIV and alcohol poisoning. For the technology, Russia has high
technology development program such as Rosnano and Nano technology, helping the
country cut out inflation and increase unemployed rate. For the legal issues, Russia is
considered as one of the country having high corruption rate. However, Czech
Republic a pluralist multi-party parliamentary representative democracy. For the
economy, Czech Republic has a developed and higher-income economy than Russia.
For the technology, Czech Republic is well known for its renewable energy. For the
legal issues, workers unions are a fixture of the communist system. Therefore, the
Czech Republic is more stable than Russia. I would be in favor of investing in Czech
Republic.
5. Read the Country Focus on Venezuela in this chapter and answer the following questions:
a. Under Chavezs leadership, Venezuela was a command economy, which the
government plans the goods and services to be produce, the quantity to be
produced, and the price to be sold. The political system in Venezuela seemed to be
a totalitarian system.
b. A unilateral change is a change which is made in the provision of a contract
without the consent of all parties. Chavez controlled foreign oil producers in
Venezuela; in 2005, he increased the oil sales from 1 percent to 30 percent, and
tax rate from 34 percent to 50 percent. By doing so, many foreign investors would
not work with Venezuela in the future. Hence, there would be no competition and
no foreign investment in Venezuelas oil industry, which led to a huge negative
affect on country economy.
c. Venezuela was ranked 172 out of 183 as one of the most corrupt countries in the
world by Transparency International in 2012. Venezuela is well known for its rich
variety of natural resources, such as oil, natural gas, iron, gold, diamonds, and
bauxite. However, the corruption would decrease incentives for producers to
compete and there would be no competitions in the country.
d. Venezuela is known for its natural resources such as oil. However, oil prices are
very high. If Chavez retreat the oil price, the economy will suffer tremendously
because the country depends significantly on oil. It will also affect other industries
to manufacture goods.
e. The country is too risky for investment due to its high corruption. Plus, Venezuela
is closing to trade with other countries, there will be less attractive for
international business to invest in Venezuela.
6. Polands economy
a. Poland was able to tight monetary policy form the early 2000s. The policy helped
Poland control inflation and got into the European Union. Furthermore, Poland

could avoid the asset price bubble that brought down other countries. Poland had
a stable political and economic environment, which attracted foreign investors.
b. Maintaining a stable political system was the most important thing because it
helped Poland to attract international investors to do business with Poland.
Indeed, Poland worked on exports and debt to create an attractive environment for
foreign investors.
c. The stable political system and strong economic grow attract many international
companies to invest in the country. In 2009, Poland benefited from economic
stimulus in neighboring Germany, its largest trading partner, boosting demand for
automobile companies. In March 2009, there were a reduced number of health,
labor, and tax controls, which made start-up business run easier through
Entrepreneurship Law. There are two problems: excessive bureaucracy and high
tax rates. The World Bank rates the country at 76th in doing business.
d. It took decades for Poland to switch from communism government to democratic
government in 1989. Poland allowed privatization state-owned business and
opened trade with international companies. However, the tax rate is still high and
many state businesses needed to be privatized. The processes of transformation
could be slow due to the global financial crisis in 2008.