Chap 002

Chapter 02 - National Differences in Political Economy
Chapter 02
National Differences in Political Economy
True / False Questions
1. (p. 44) A system that stresses the primacy of collective goals over individual goals is called
collectivism.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Learning Objective: 2-1
Topic: Political Systems
2. (p. 43-44) Political systems that emphasize collectivism tend to be totalitarian, while political
systems that place a high value on individualism tend to be democratic.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
3. (p. 44) The Greek philosopher Plato advocated individualism.

FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-1
4. (p. 44) Communists believed that socialism could be achieved by democratic means, turning
their backs on violent revolution and dictatorship.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
5. (p. 44) Modern socialists trace their intellectual roots to Karl Marx.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
6. (p. 44) In the early 20th century, the socialist ideology split into two broad camps,
communists and capitalists.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
7. (p. 44) Social democrats believed that socialism could be achieved only through violent
revolution and totalitarian dictatorship.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-2
8. (p. 45) Individualism refers to a philosophy that an individual should have freedom in his/her
economic and political pursuits.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
9. (p. 45-46) Individualism underlies the ideas expressed in the Declaration of Independence.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
10. (p. 46) In practical terms, collectivism translates into an advocacy for democratic political
systems and free market economics.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
11. (p. 46) Democracy refers to a political system in which government is by the people,
exercised either directly or through elected representatives.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-3
12. (p. 46-47) A form of government in which one person or political party exercises absolute
control over all spheres of human life, and opposing political parties are prohibited, is referred
to as totalitarianism.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
13. (p. 47) The most common form of theocratic totalitarianism is based on Islam and is
exemplified by states such as Iran and Saudi Arabia.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
14. (p. 47-48) The four major forms of totalitarianism are: communist, theocratic, tribal, and
right-wing.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
15. (p. 48) Tribal totalitarianism is found in states where political power is monopolized by a
party, group, or individual that governs according to religious principles.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-4
2-5
16. (p. 48) Right-wing totalitarianism generally permits some individual economic freedom but
restricts individual political freedom, frequently on the grounds that it would lead to the rise
of communism.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
17. (p. 48) One common feature of most right-wing dictatorships is an affinity for socialist or
communist ideas.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
18. (p. 49) In a market economy, all productive activities are privately owned, as opposed to
being owned by the state.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Topic: Economic Systems
19. (p. 49) In a pure command economy, the goods and services that a country produces, the
quantity in which they are produced, and the prices at which they are sold are all planned by
the government.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-6
2-7
20. (p. 49) In a market economy, state-owned enterprises have little incentive to control costs
and be efficient.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
21. (p. 50) The legal system of a country is influenced by its prevailing political system as well
as historical tradition.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Topic: Legal Systems
22. (p. 50) Collectivist-inclined totalitarian states tend to enact laws that encourage private
enterprise.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
23. (p. 50) Contract law, civil law, and theocratic law are the three main types of legal systems in
use around the world.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-8
24. (p. 51) A civil law system is one in which the law is based on religious teachings.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
25. (p. 51) Although Islamic law is primarily concerned with moral behavior, it has been
extended to cover certain commercial activities.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
26. (p. 52) Property rights refer to the bundle of legal rights over the use to which a resource is
put and over the use made of any income that may be derived from that resource.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
27. (p. 52) Because common law tends to be relatively ill specified, contracts drafted under a
common law framework tend to be very detailed with all contingencies spelled out.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-9
28. (p. 52) Property refers to a resource over which an individual or business holds a legal title.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
29. (p. 54) The Foreign Corrupt Practices Act makes it illegal to bribe a foreign government
official in order to obtain or maintain business over which that foreign official has authority.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
30. (p. 54) Economic evidence suggests that high levels of corruption significantly increase
foreign direct investment, level of international trade, and economic growth rate in a country.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
31. (p. 56) A copyright grants the inventor of a new product or process exclusive rights to the
manufacture, use, or sale of that invention.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-10
32. (p. 56) Designs and names, often officially registered, by which merchants or manufacturers
designate and differentiate their products are patents.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
33. (p. 57) Product liability involves holding a firm and its officers responsible when a product
causes injury, death, or damage.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
34. (p. 58) GNI stands for gross national income.

TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Topic: The Determinants of Economic Development
35. (p. 62) The GNI is used to measure the quality of human life in different nations.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-11
36. (p. 62) The Human Development Index is based on three measures: per capita income, life
expectancy, and poverty rate.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
37. (p. 69) In "partly free" countries, the political process is tightly controlled and basic
freedoms are denied.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
Topic: States in Transition
38. (p. 75) Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
TRUE
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Topic: The Nature of Economic Transformation
39. (p. 77) The United States, Japan, and Australia are currently the three largest national
economies in the world.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
Topic: Implications of Changing Political Economy
2-12
40. (p. 80) A political risk can be defined as the likelihood that economic mismanagement will
cause drastic changes in a country's business environment that affect the profit and other goals
of a particular business enterprise.
FALSE
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
Multiple Choice Questions
41. (p. 43) Collectively, we refer to political, economic, and legal systems as constituting the
_____ economy of a country.
A. domestic
B. civic
C. administrative
D. political
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
42. (p. 43) Political systems can be assessed according to:

A. the degree to which they emphasize individualism opposed to totalitarian and the degree to
which they are individualistic versus democratic.
B. the degree to which they are market orientated opposed to production orientated and the
degree to which they are democratic versus individualistic.
C. the degree to which they emphasize social democracy opposed to communism and the
degree to which they emphasize collectivism opposed to individualism.
D. the degree to which they emphasize collectivism opposed to individualism and the degree
to which they are democratic.
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
2-13
2-14
43. (p. 44) When _____ is practiced, the needs of society as a whole are generally viewed as
being more important than individual freedoms.
A. totalitarianism
B. collectivism
C. individualism
D. capitalism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
44. (p. 44) Under _____, the idea is to manage a state-owned enterprise to benefit society as a
whole, rather than individual capitalists.
A. individualism
B. totalitarianism
C. collectivism
D. absolutism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
45. (p. 44) The group that believed socialism could be achieved only through violent revolution
and totalitarian dictatorship was referred to as:
A. communists.
B. fascists.
C. political democrats.
D. social democrats.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-15
46. (p. 44) Followers who commit themselves to achieving socialism through democratic
reforms are:
A. communists.
B. social democrats.
C. individualists.
D. political democrats.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
47. (p. 44) In the 1970s, which of the following countries was NOT communist?
A. The Soviet Union
B. USA
C. Hungary
D. China
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
48. (p. 45) The Labor Party that won control of the government in Great Britain in 1997 is
considered a(n):
A. communist party.
B. representative democracy.
C. capitalist party.
D. social democracy.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-16
49. (p. 45) Which of the following can be traced to an ancient Greek philosopher, Aristotle?
A. Collectivism
B. Individualism
C. Socialism
D. Totalitarianism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
50. (p. 45) _____ stresses that the interests of the individual should take precedence over the
interests of the state.
A. Totalitarianism
B. Socialism
C. Individualism
D. Collectivism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
51. (p. 45) Which of the following individuals argued that private property is more highly
productive than communal property and will thus stimulate progress?
A. Aristotle
B. Socrates
C. Plato
D. Marx
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
2-17
52. (p. 46) Which of the following is NOT a central tenet of individualism?
A. Guaranteeing individual freedoms.
B. Establishing laws that promote society's best interests.
C. Guaranteeing self-expression.
D. Allowing people to pursue their own economic self-interest.
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
53. (p. 46) The pro-business and pro-free trade values of _____ create a favorable environment
within which international business can thrive.
A. collectivism
B. socialism
C. individualism
D. communism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
54. (p. 46) Which of the following is the political system in which government is by the people,
exercised either directly or through elected representatives?
A. Despotism
B. Democracy
C. Totalitarianism
D. Collectivism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-18
55. (p. 46-47) _____ is a form of government in which one person or political party exercises
absolute control over all spheres of human life, and opposing political parties are prohibited.
A. Capitalism
B. Totalitarianism
C. Democracy
D. Collectivism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
56. (p. 47) A political system in which citizens periodically elect individuals to represent them is
referred to as a:
A. pure democracy.
B. totalitarian democracy.
C. representative democracy.
D. socialist democracy.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
57. (p. 47) To guarantee that elected representatives can be held accountable for their actions by
the electorate, an ideal representative democracy has a number of safeguards. Which of the
following is NOT an example of a safeguard in an ideal representative democracy?
A. A fair court system that is independent from the political system.
B. Universal adult suffrage.
C. An individual's right to freedom of expression, opinion, and organization.
D. Unlimited terms for elected representatives.
AACSB: Reflective thinking

BT: Comprehension
Difficulty: Medium
2-19
58. (p. 47) In a totalitarian country:

A. free and fair elections are inhibited.
B. media has full liberty.
C. an individual has basic civil rights.
D. an individual has a right to freedom of expression and organization.

BT: Comprehension
Difficulty: Medium
59. (p. 47) _____ is a form of totalitarianism that advocates achieving socialism through
totalitarian dictatorship.
A. Tribal totalitarianism
B. Democratic totalitarianism
C. Communist totalitarianism
D. Collective totalitarianism
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
60. (p. 47-48) All of the following are forms of totalitarianism EXCEPT:
A. right-wing.
B. democratic.
C. theocratic.
D. tribal.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-20
61. (p. 48) Which of the following countries would most likely adhere to tribal totalitarianism?
A. Iran
B. China
C. Canada
D. Uganda
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
62. (p. 48) _____ totalitarianism generally permits individual economic freedom, but restricts
individual political freedom on the grounds that it would lead to a rise of communism.
A. Theocratic
B. Right-wing
C. Capitalist
D. Tribal
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
63. (p. 48) The fascist regimes that ruled Germany and Italy in the 1930s and 1940s were:
A. right-wing totalitarian.
B. left-wing totalitarian.
C. communist.
D. democratic.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-21
64. (p. 48) In which countries are we likely to find free market economies?
A. Where collective goals are given preeminence.
B. Where individual goals are given primacy over collective goals.
C. Where the state may have taken control over many enterprises.
D. Where the state decides the demand and supply of produce.

BT: Comprehension
Difficulty: Medium
65. (p. 49) In what kind of economy is production determined by the interaction of supply and
demand and signaled to producers through the price system?
A. Mixed economy
B. Command economy
C. Market economy
D. Trade economy

BT: Comprehension
Difficulty: Medium
66. (p. 49) Which of the following is an advantage of private ownership?

A. It helps pass on cost increases to consumers in the form of higher prices.
B. It helps restrict output and lets prices rise, thus allowing taking a greater profit margin on
each unit it sells.
C. It has no competitors and hence does not need to search for ways to lower production costs.
D. It ensures that entrepreneurs have a right to the profits generated by their own efforts.

BT: Comprehension
Difficulty: Medium
2-22
67. (p. 50) In a _____ economy, certain sectors of the economy are left to private ownership and
free market mechanisms, while in other sectors there is significant state ownership and
government planning.
A. command
B. combined
C. mixed
D. political
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
68. (p. 50) What kind of economies were once very common throughout much of the world,
although they are becoming less so?
A. Mixed
B. Command
C. Democratic
D. Market
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
69. (p. 50) The _____ of a country defines the legal framework within which firms do business.
A. economic system
B. government
C. market economy
D. command economy
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
2-23
70. (p. 50) The _____ of a country refers to the rules that regulate behavior, along with the
processes by which the laws of a country are enforced and through which redress for
grievances is obtained.
A. political system
B. administrative system
C. economic system
D. legal system
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
71. (p. 51) Common law is based on all of the following EXCEPT:
A. religion.
B. tradition.
C. precedent.
D. custom.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
72. (p. 51) A _____ law system is based on a very detailed set of laws organized into codes.
A. civil
B. theocratic
C. common
D. traditional
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-24
73. (p. 51) Judges in a(n) _____ law system have the power to interpret the law.
A. Islamic
B. civil
C. theocratic
D. common

BT: Comprehension
Difficulty: Medium
74. (p. 51) A law system that is based primarily on religious teachings refers to a:
A. civil law system.
B. theocratic law system.
C. common law system.
D. traditional law system.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
75. (p. 51) The most widely practiced theocratic legal system in the modern world is:
A. American law.
B. Islamic law.
C. Jewish law.
D. Hindu law.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-25
76. (p. 52) The parties to an agreement normally resort to _____ when one party feels the other
has violated either the letter or the spirit of the agreement.
A. property law
B. arbitration
C. private action
D. contract law
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
77. (p. 52) The body of law that governs contract enforcement is called:
A. property law.
B. capital law.
C. civil law.
D. contract law.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
78. (p. 52) The _____ establishes a uniform set of rules governing certain aspects of the making
and performance of everyday commercial contracts between sellers and buyers.
A. United Nations Convention on Contracts for the International Sale of Goods
B. Foreign Practices Act
C. Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions
D. International Court of Arbitration
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-26
79. (p. 52) When firms do not wish to accept the rules of the Convention on Contracts for the
International Sale of Goods, they usually rely on _____ to settle contract disputes.
A. UN involvement
B. arbitration
C. local codes
D. U.S. law

BT: Comprehension
Difficulty: Medium
80. (p. 52) The bundle of legal rights over the use to which a resource is put and over the use
made of any income that may be derived form that resource are called _____ rights.
A. statutory
B. asset
C. taxable
D. property
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
81. (p. 53) The theft, piracy, or blackmail by private individuals or groups violating property
rights refers to:
A. extortion.
B. individual action.
C. public action.
D. private action.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-27
82. (p. 53) After the collapse of communism in Russia, successful business owners often had to
pay "protection money" to the Mafia or face violent retribution. This is an example of:
A. rights corruption.
B. public action.
C. private action.
D. property corruption.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
83. (p. 53) When public officials such as politicians and government bureaucrats extort income
or resources from property holders, this can be described as a:
A. patents violation.
B. public action.
C. warrants action.
D. private action.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
84. (p. 53) According to Transparency International, which country is the most corrupt?
A. New Zealand
B. Finland
C. Somalia
D. India
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-28
85. (p. 54) Economic evidence suggests that high levels of _____ significantly reduce the
foreign direct investment, level of international trade, and economic growth rate in a country.
A. policing
B. corruption
C. transparency
D. capitalism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
86. (p. 54) In the United States, the Foreign Corrupt Practices Act was passed during the _____
following revelations that U.S. companies had bribed government officials in foreign
countries in an attempt to win lucrative contracts.
A. 1990s
B. 1980s
C. 1970s
D. 1960s
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
87. (p. 54) Which of the following does the U.S. law and OECD convention allow as an
exception?
A. To bribe a foreign government official.
B. To obtain or maintain business over which that foreign official has authority.
C. To allow grease payments.
D. To keep no records that would reveal whether a violation of the act has occurred.

BT: Comprehension
Difficulty: Medium
2-29
88. (p. 56) Suppose 3-M Corporation develops a new type of adhesive tape. 3-M can protect its
invention for a defined period to the manufacture, use, or sale of that invention through what
kind of protection?
A. Warrant
B. Patent
C. Copyright
D. Trademark

BT: Comprehension
Difficulty: Medium
89. (p. 56) A composer is able to protect an original musical score from being copied and sold
by someone else through _____ protection.
A. patent
B. warrant
C. trademark
D. copyright

BT: Comprehension
Difficulty: Medium
90. (p. 56) As a result of _____ protection, the Nike "swoosh" logo is protected from being used
by any other shoe manufacturer.
A. trademark
B. copyright
C. patent
D. warrant

BT: Comprehension
Difficulty: Medium
2-30
91. (p. 56) Patents, copyrights, and trademarks are examples of _____ property laws.
A. intellectual
B. administrative
C. official
D. central
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
92. (p. 56) According to Business Software Alliance, which region had the highest piracy rates
in 2006?
A. Western Europe
B. North America
C. Eastern Europe
D. South America
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
93. (p. 57) _____ set certain safety standards to which a product must adhere.
A. Product violation laws
B. Product liability laws
C. Product safety laws
D. Contract liability laws
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-31
94. (p. 57) Which country has the most extensive civil and criminal liability laws?
A. Australia
B. India
C. USA
D. Finland
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
95. (p. 57) Which of the following describes a council that was provided to oversee enforcement
of much stricter intellectual property regulations?
A. PPP
B. TRIPS
C. WTO
D. UN
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
96. (p. 58) _____ is regarded as a yardstick for the economic activity of a country, and it
measures the total annual income received by residents of a nation.
A. HDI
B. GDP
C. GPI
D. GNI
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-32
97. (p. 60) _____ allows for a more direct comparison of living standards in different countries.
A. PPP
B. TRIPS
C. CIGS
D. WTO
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
98. (p. 60) The base for adjustment of purchasing power parity is the cost of living in:
A. China.
B. Great Britain.
C. Australia.
D. the United States.
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
99. (p. 60) Which of the following countries had the highest GNI per capita in 2006?
A. Germany
B. The United States
C. The United Kingdom
D. Switzerland
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
2-33
100. (p. 62) The United Nations _____ index is based on life expectancy, literacy rates, and
whether average incomes are sufficient to meet the basic needs of life in a country.
A. Human Development
B. Standard of Living
C. Quality of Life
D. Economic Development
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
101. (p. 65) There is fairly wide agreement that _____ is the engine of long-run economic
growth.
A. political economy
B. labor
C. innovation
D. capital
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
102. (p. 65) It has been argued that the economic freedom associated with a _____ economy
creates greater incentives for innovation.
A. planned
B. market
C. commercial
D. mixed

BT: Comprehension
Difficulty: Medium
2-34
103. (p. 65) Which of the following is an advantage of a market economy?

A. Any individual who has an innovative idea is free to try to make money out of that idea by
starting a business.
B. The state owns all means of production.
C. Entrepreneurial individuals have few economic incentives to develop valuable new
innovations.
D. It is the state, rather than the individual, that captures most of the gains.

BT: Comprehension
Difficulty: Medium
104. (p. 66) A study of 102 countries found that the more _____ a country had between 1975
and 1995, the more economic growth it achieved and the richer its citizens became.
A. political freedom
B. economic freedom
C. innovation
D. trade
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
105. (p. 66) The influential Peruvian economist Hernando de Soto has argued that much of the
developing world will fail to reap the benefits of _____ until property rights are better defined
and protected.
A. capitalism
B. communism
C. collectivism
D. individualism

BT: Comprehension
Difficulty: Medium
2-35
106. (p. 67) Which of the following is NOT one of the five fastest growing economies in the
past 30 years?
A. China
B. India
C. Hong Kong
D. South Korea
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
107. (p. 68) According to economist Jeffrey Sachs, which type of nation-state is most likely to
support market institutions?
A. Coastal state
B. Landlocked state
C. Mountainous state
D. Tropical state

BT: Comprehension
Difficulty: Medium
108. (p. 69) Since the late 1980s, which of the following trends has emerged in the political
economies of many of the world's national states?
A. A wave of communist revolutions has swept the world.
B. Totalitarian governments have resurfaced.
C. A wave of democratic revolutions has swept the world.
D. A strong move toward centrally planned and mixed economies.

BT: Comprehension
Difficulty: Hard
2-36
109. (p. 69) Freedom House classified some _____ countries as free in 2007, accounting for
some 47 percent of the world's population.
A. 69
B. 60
C. 90
D. 121
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
110. (p. 71) What accounts for the spread of democracy?

A. Many totalitarian regimes failed to deliver economic progress to the vast bulk of their
populations.
B. A strong correlation between vibrant and wealthy economies and communism.
C. New information and communication technologies have helped the state's ability to control
access to uncensored information.
D. In many countries, the economic downfall of the past quarter century have led to the
decline of prosperous middle and working classes.

BT: Comprehension
Difficulty: Medium
111. (p. 72) Which of the following theories was propounded by Fukuyama?
A. The future is a world dominated by a universal civilization characterized by democratic
regimes and free market capitalism.
B. While many societies may be modernizing, they are not becoming more Western.
C. Modernization in non-Western societies can result in a retreat toward the traditional.
D. The world is split into different civilizations, each of which has its own value systems and
ideology.

BT: Comprehension
Difficulty: Medium
2-37
2-38
112. (p. 73) Which of the following is the world's freest economy according to the 2008
Heritage Foundation index?
A. Hong Kong
B. Ireland
C. Singapore
D. Australia
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
113. (p. 75) Which country among the following cannot be considered as a politically free
country?
A. India
B. Singapore
C. Brazil
D. Canada

BT: Knowledge
Difficulty: Easy
114. (p. 75) Which of the following 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. Simplification
C. Deregulation
D. Innovation

BT: Comprehension
Difficulty: Medium
2-39
115. (p. 75) _____ transfers the ownership of state property into the hands of private
individuals.
A. Privatization
B. Simplification
C. Deregulation
D. Socialism
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
116. (p. 76) Which of the following ways can make privatization work?
A. By simply selling state-owned assets to private investors.
B. By continuing to give subsidies from the state to newly privatized firms.
C. By protecting from foreign competition by barriers to international trade and foreign direct
investment.
D. By a more general deregulation and opening of the economy.

BT: Comprehension
Difficulty: Medium
117. (p. 79) The advantages that accrue to early entrants into a business market referred to as:
A. standard-class advantages.
B. first-mover advantages.
C. prime-mover advantages.
D. first-stage advantages.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
2-40
118. (p. 79) Handicaps suffered by late entrants into a business market are referred to as:
A. late-mover disadvantages.
B. last-class disadvantages.
C. standard-class disadvantages.
D. prime-mover disadvantages.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
119. (p. 80) _____ is the likelihood that economic mismanagement will cause drastic changes in
a country's business environment that adversely affect the profit and other goals of a business
enterprise.
A. Industrial risk
B. Political risk
C. Legal risk
D. Economic risk
AACSB: Analytic
BT: Knowledge
Difficulty: Medium
120. (p. 81) The likelihood that a trading partner will opportunistically break a contract or
expropriate property rights is called:
A. political risk.
B. economic risk.
C. corruption.
D. legal risk.
AACSB: Analytic
BT: Knowledge
Difficulty: Easy
Essay Questions
2-41
2-42
121. (p. 44-46) Describe the difference between collectivism and individualism. Are these two
ideologies compatible or in direct conflict? Explain your answer.
The term collectivism refers to a political system that stresses the primacy of collective goals
over individual goals. The general ideal is that the needs of society as a whole are more
important than individual freedoms. As a result, in a collectivist society, an individual's right
to do something may be restricted because it runs counter to "the good of the society" or the
"common good."
Individualism refers to a philosophy that an individual should have freedom in his/her
economic and political pursuits. Moreover, individualism stresses that the interests of the
individual should take precedence over the interests of the state.
The ideals exposed by individualism and collectivism are in direct conflict with one another.
Over the past two decades, collectivism has been waning and individualism has been gaining
steam. A wave of democratic ideals and free market economics is currently sweeping away
socialism and communism worldwide. Evidence of this can be seen in Eastern Europe and the
republics of the former Soviet Union.

BT: Comprehension
Difficulty: Medium
2-43
122. (p. 46-48) Draw a distinction between democracy and totalitarianism. What are the different
forms of democracy and totalitarianism?
Democracy and totalitarianism are at different ends of the political spectrum. Democracy
refers to a political system in which government is by the people, exercised either directly or
through elected representatives. Totalitarianism is a form of government in which one person
or political parties exercise absolute control over all spheres of human life, and opposing
political parties are prohibited.
The pure form of democracy, as originally practiced by several city-states in ancient Greece,
is based on a belief that citizens should be directly involved in decision making.
Most modern democratic states practice what is commonly referred to as representative
democracy. In a representative democracy, citizens periodically elect individuals to represent
them.
There are four major forms of totalitarianism, including communist totalitarianism, theocratic
totalitarianism, tribal totalitarianism, and right-wing totalitarianism.

BT: Comprehension
Difficulty: Medium
2-44
123. (p. 48-50) Describe the three broad types of economic systems and explain their significance
today.
The three economic systems are the market economy, the command economy, and the mixed
economy.
In a market economy, the interaction of supply and demand determines the quantity in which
goods and services are produced. For a market economy to work, there must be no restrictions
to supply. Therefore, governments have passed antitrust laws to ensure that firms do not
monopolize the market. Private ownership ensures that entrepreneurs have a right to the
profits generated by their own efforts. This gives entrepreneurs an incentive to search for
better ways of serving consumer needs. That may be through introducing new products, by
developing more efficient production processes, by pursuing better marketing and after-sale
service, or simply through managing their businesses more efficiently than their competitors.
In a command economy, the goods and services that a country produces, the quantity in which
they are produced, and the prices at which they are sold are all planned by the government.
The government's objective in a command economy is to "allocate resources for the good of
society". In a planned economy, all businesses are state owned. Historically, command
economies existed in communist countries. Since the demise of the communist regime, the
number of command economies has fallen. In a command economy, state-owned enterprises
have little incentive to control costs and be efficient because they cannot go out of business.
A mixed economy can be found in between a market economy and a command economy. In a
mixed economy, certain sectors of the economy are left to private ownership and government
planning. In mixed economies, governments tend to take into state ownership troubled firms
whose continued operation is thought to be vital to national interests. Mixed economies are
not as common now as they used to be.

BT: Comprehension
Difficulty: Medium
2-45
124. (p. 50-51) Describe the three main legal systems, and for each, give an example of a country
that uses such a system.
The three main types of legal systems are common law, civil law, and theocratic law.
Common law evolved in England and is now in use in the United States. It is based on
tradition, precedent, and custom. In a common law system, judges have the power to interpret
laws and set precedents.
Civil law is based on a detailed set of laws organized into codes. France and Germany
currently utilize civil law. Judges in civil law have the power to apply the law only, instead of
interpreting the law.
Theocratic law is a system based on religious teachings. Islamic law is the most widely
practiced theocratic law, and it is used in countries like Iran. Theocratic law tends to govern
moral rather than commercial law. As a result, many countries blend theocratic law with either
common law or civil law.

BT: Comprehension
Difficulty: Medium
125. (p. 53-54) Describe the differences of private action and public action, and give an example
of each. What is being done to combat private and public action?
Private action refers to theft, piracy, blackmail, and the like by private individuals or groups.
In contrast, public action is the extortion of income or resources from property holders by
public officials. An example of private action is the Russian Mafia. After the fall of
communism, successful business owners in Russia had to pay "protection money" to the
Mafia or face violent retribution. An example of public action is corruption. A government
official may increase taxes on a business owner to remain open, and then pocket the remains.
To combat corruption in the United States, the Foreign Corrupt Practices Act was passed.
Internationally, the OECD adopted the Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions.

BT: Comprehension
Difficulty: Medium
2-46
126. (p. 56) What is intellectual property? What are the different types of ownership rights?
Explain them.
Intellectual property refers to property, such as computer software, a screenplay, a music

score, or the chemical formula for a new drug that is the product of intellectual activity.
Patents, copyrights, and trademarks establish ownership rights over intellectual property.
A patent grants the inventor of a new product or process exclusive rights for a defined period
to the manufacture, use, or sale of that invention.
Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and
publishers to publish and disperse their work as they see fit.
Trademarks are designs and names, often officially registered, by which merchants or
manufacturers designate and differentiate their products.

BT: Comprehension
Difficulty: Medium
127. (p. 65-66) How important is innovation and entrepreneurship? How does it impact market
and planned economies?
There is general agreement that innovation and entrepreneurial activity are the engines of
long-run economic growth in virtually any country. Innovation and entrepreneurial activity
help to increase economic activity by creating new products and markets that did not
previously exist. Also, innovations in production and business processes lead to an increase in
the productivity of labor and capital, which further boosts economic growth rates.
In a market economy, 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). Similarly,
existing businesses are free to improve their operations through innovation. To the extent that
they are successful, both individual entrepreneurs and established businesses can reap rewards
in the form of high profits. Thus, market economies contain enormous incentives to develop
innovations.
In a planned economy, the state owns all means of production. Consequently, entrepreneurial
individuals have few economic incentives to develop valuable new innovations because it is
the state, rather than the individual, that captures most of the gains.

BT: Comprehension
Difficulty: Medium
2-47
2-48
128. (p. 69) How has political economy changed since the late1980s? What are the two trends
that have emerged?
The political economy of many of the world's nation-states has changed radically since the
late 1980s. Two trends have been evident. First, during the late 1980s and early 1990s, a wave
of democratic revolutions swept the world. Totalitarian governments collapsed and were
replaced by democratically elected governments that were typically more committed to free
market capitalism than their predecessors had been. Second, there has been a strong move
away from centrally planned and mixed economies and toward a more free market economic
model.

BT: Comprehension
Difficulty: Medium
129. (p. 75) Explain the nature of economic transformation in terms of deregulation and
privatization.
Deregulation and privatization have transformed the face of global business in recent years.
Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
Before the collapse of communism, the governments of command economies had tight control
over prices and output. Deregulation involved removing price controls, and establishing
methods that facilitated economic trade.
Privatization transfers the ownership of state property into the hands of private individuals. It
leads to increased economic efficiency by giving new private owners incentives to search for
increases in productivity, to enter new markets, and to exit losing ones. Both privatization and
deregulation have led to an increased level of international trade.

BT: Comprehension
Difficulty: Medium
2-49
130. (p. 80-81) What is the difference between political risk, economic risk, and legal risk?
Political risk is the likelihood that political forces will cause drastic changes in a country's
business environment that adversely affects the profit and other goals of a business enterprise.
In contrast, economic risk is the likelihood that economic mismanagement will cause drastic
changes in a country's business environment that adversely affects the profit and other goals
of a business enterprise. Finally, legal risk is the likelihood that a trading partner will
opportunistically break a contract or expropriate property rights.

BT: Comprehension
Difficulty: Medium
2-50

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Chapter 02 - National Differences in Political Economy

True / False Questions

3. (p. 44) The Greek philosopher Plato advocated individualism.

34. (p. 58) GNI stands for gross national income.

Multiple Choice Questions

42. (p. 43) Political systems can be assessed according to:

AACSB: Reflective thinking

58. (p. 47) In a totalitarian country:

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

66. (p. 49) Which of the following is an advantage of private ownership?

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

103. (p. 65) Which of the following is an advantage of a market economy?

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

110. (p. 71) What accounts for the spread of democracy?

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

Intellectual property refers to property, such as computer software, a screenplay, a music

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

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