CHAPTER19&20HOMEWORKCHAPTERQUESTIONS

1.Whatarethethreecharacteristicsofpuremarketcapitalism?Prices,profits,andprivateproperty2.Whatarethekeycharacteristicsofpuresocialism?1)MajorfactorsofproductionareownedandcontrolledbythestatePrivatepropertyrightsarestrictlylimitedtosmalltoolsthatapersonneedsforanoccupation.2)Mostpricesaresetbythestateinsteadofbytheforcesofsupplyanddemand.3)Economicdecisionsaboutwhat,howandforwhomtoproducearemadebystateofficialsthroughcentralplanningagenciesandotheradministrativeunits.4)Individualrisktakingisntallowed.Instead,thestatetakesonalloftheriskwhenitdecideswhichnewcompaniesshallbeformedCitizenshavetopayforunsuccessfulrisktaking.3.Howdidsocialismdevelop?SocialismwasdevelopedbyKarlMarxinthe1800sinresponsetotheIndustrialRevolutionandalltheproblemsitcaused.Marxobservedthestrugglebetweenthecapitalists,richownersoftheland,machines,andfactories,andtheproletariat,meaningtheworkers.Heobservedthatcapitaliststookadvantageoftheworkers.Hebelievedthatthevalueofgoodsshoulddependonhowmuchlaborisusedinproducingthegoods.Hethoughtthatwhencapitalistssoldagoodandkepttheprofitforthemselves,theywereessentiallytakingincomethatshouldgototheproletariat.MarxpublishedhisideasinabookcalledtheCommunistManifesto.4.Whatarethebenefitsofcapitalism?Capitalismallowsformoreefficiencyinthemarketplaceandformoreeconomicgrowth.Peoplewhoconsiderpersonalfreedom,initiative,andindividualitymoreimportanttothemtendtofavorcapitalism5.HowdidtheChineseeconomicsystemdevelopfollowingWorldWarII?FollowingWWII,theChinesecivilwarwaswonbytheCommunistsandanewgovernmentwasimplementedthroughfiveyearplansCentralizedplanningsystemsthatwerethebasisforChinaseconomicsystemweretransformedtoaregionalplanningsystemwhichledtolimitedfreeenterprise.In1958,theChinesereformedtheirsystemtoallowforsomedecisionstobemadebylocalgovernmentinsteadofrestrictingdecisionmakingtothecentralgovernment.In1978Chineseleadersdesignedareformtomotivatepeopletoworkharder.Privateindividualswereallowedtorentlandforupto15yearsandeachpeasanthouseholdbecameresponsibleforitsownplotofland.Between1979and1984,overallfarmproductivityincreaseddramatically.Reformssincethe80shaveresultedinmanagersinstateownedbusinessesbeingallowedmuchmoredecisionmakingpowerthanbefore.Aftertheyfulfillstateproductionrequirements,theycansetproductionaccordingtomarketdemand.6.WhathavebeentwomajorproblemsinChinasattempttomovetocapitalism?ThefirstmajorprobleminChinasattempttoremovecapitalismishowtoestablisharuleoflaw.Whennospecificpropertyrightsexistitresultsincorruption.Armyandgovernmentofficialsstillcontrolmanyresourcesandtheysometimestakebribesfromforeigninvestors.ForeigninvestorsstillinfluencethewaybusinessisconductedinanatmosphereoflawlessnessandunpredictabilityinChina.Thesecondmajorproblemisrelinquishingorthodoxcommunism.7.WhatisprivatizationandwhydidRussiamovetowardsprivatization?Privatizationisashiftfromstateownershipofbusiness,land,andbuildingstoprivateownership.TheRussianeconomydeclinedsubstantiallyin1998.Manypreviouslystateownedbusinesseshadbeensoldatbargainbasementpricestofriendsofthegovernment.Atleasthalfoftheeconomywasoperatingonabartersystem,becausebusinesseshadnofaithintheRussiancurrencyandwantedtoavoidpayingtaxes.8.HowhastheSwedisheconomybeenchanging?TheSwedishcapitalisteconomyiscombinedwithwelfaresocialism.Inthe1990s,thegovernmentstartedcuttingtaxesandeliminatingsomepublicjobs.Italsohasloosenedbusinessregulationsandapprovedforeignownershipofcertaincompanies.TheSwedishgovernmentendedthemonopolyinboththetaxicabandtheairlineindustries.Ithasplanstomovefurthertowardamarketsysteminthefuture.9.WhatchallengeshaverecentlyoccurredinLatinAmericaneconomies?AlmostallLatinAmericaneconomiesoperateunderamarketcapitalismandmosthavehadlargegovernmentsectors.However,manyLatinAmericangovernmententerpriseshavebeenprivatized.Fightingandtensionwithinmultiplepoliticalpartieshas

madefollowingtheMexicanmodel.However,Chilehasprivatizeditsairlines,phones,utilities,andpensionfundsandtheArgentineangovernmenthassoldstaterunoilfields,waterworks,petrochemicalplants,andevenarmyhousing.10.Whatisthedifferencebetweendevelopedanddevelopingnations?Developednationsarenationswithrelativelyhighstandardsoflivingandeconomiesbasedmoreonindustrythanonagriculture.Developingnationsarenationswithlittleindustrialdevelopmentandrelativelylowstandardsofliving.11.Whatarefiveeconomiccharacteristicsofdevelopingnations?Fiveeconomiccharacteristicsofdevelopingnationsare:1)ThepercapitaGDPandtheaverageincomeperpersoninfluencestheclassificationofdevelopingcountries.Lackofequipment,financing,andknowledgecancauseacountry'spercapitaGDPtolowerevenifthatcountryhasmanynaturalandhumanresources2)Agricultureiscentraltoeconomicdevelopmentandhighlyinfluentialinacountry'sclassification.Mostdevelopingcountriesexitthroughsubsistenceagriculture,meaningeachfamilygrowsjustenoughtotakecareofitsownneeds.Asaresult,therearenocropsavailabletoexportortofeedanindustrialworkforce.3)Poorhealthconditions(causedprimarilybylackoffoodand/orshortageofmedicalservicesandmedicine),resultinahighinfantmortalityrateandalowadultlifeexpectancy4)Theliteracyrate,meaningthepercentageofpeoplewhocanreadandwrite,islowindevelopingcountriesbecausethegovernmenthasfewresourcestobuildandmaintainschools,andbecausemanykidsmissschooltowork.Havingsomanyuneducatedworkersmakesitdifficulttotrainpeoplefortechnicalandengineeringjobs.5.Rapidpopulationgrowthleadstoshortagesoffoodandhousing.Ahighgrowthratecancauseanation'spopulationtodoublein20years.Inaddition,religionalsoinfluenceseconomicpoliciesinsomedevelopingcountries.Somedevelopingcountriesforbidlendingmoneywithinterestand,asaresult,foreigninvestmentinthesecountriesislow.12.WhyhavepoorlydefinedpropertyrightsbeenaproblemindevelopingcountriesMostgovernmentsindevelopingcountriesdonotsupportasystemofstrong,welldefinedprivatepropertyrights.Withoutspecificallydefinedprivatepropertyrights,individualscannotexchangelandand,asaresult,largescalefarmingandpeasantfamilieshavelittleincentivetoimprovethevalueofthepropertyonwhichthefarm.13.Wheredodevelopingcountriesobtainoutsidesourcesoffinancingforeconomicdevelopment?Developingcountriesobtainoutsidesourcesoffinancingforeconomicdevelopmentfromforeignbusinessesinvestments.Investorsareattractedtodevelopingcountriesbecauseoflowwagerates,fewregulations,andabundantrawmaterials.Theyalsoobtainfinancingfromforeignaidfromdevelopednations.Thegovernmentsofdevelopedcountriesandprivateorganizationsgivemoney,goods,andservicestohelpothernationsandtheircitizens.14.Listanddescribethethreetypesofforeignaiddescribed.Foreignaidismoney,goods,andservicesgivenbygovernmentsandprivateorganizationstohelpothernationsandtheircitizens.1)Economicassistanceisloansandoutrightgrantsofmoneyorequipmenttoothernations2)Technicalassistanceisaidintheformofengineers,teachers,andtechnicianstoteachskillstoindividualsinothernations3)Militaryassistanceisaidgiventoanationsarmedforces.15.Whatagencieschannelaidfrommajorindustrialnationstodevelopingnations?TheAgencyforInternationalDevelopment(AID)channelsaidfrommajorindustrialnationstodevelopingnations.Inaddition,theUnitedNationsagencies,includingtheInternationalBankforReconstructionandDevelopment(akatheWorldBank).TwoaffiliatesoftheBankaretheInternationalDevelopmentAssociation(IDA),whichlendsmoneytonationsthataretheleastabletoobtainfinancingfromothersources,andtheInternationalFinanceCorporation(IFC),whichencouragesprivateinvestmentindevelopingnations.Recently,theInternationalMonetaryFund(IMF)hasbecomeamajorforeignaidagencyaswell.16.Whydonationsgiveforeignaid?Thebenefitsofforeignaidforbothcountriesinclude:1)Economics:developednationstypicallygiveforeignaidtoencourageinternationaltrade,and,asaresultoftheforeignaid,thereceivingnationsmarketsforexportsgrowsandprovidesnewopportunitiesforprivateinvestment.2)Politicsforeignaidcanbeusedbythedevelopednationgivingtheaidtoinfluencethepoliticalsystem,viewsoridealsofthecountyinneedortodeveloppoliticalfriendshipsthatcangivethemsupportwhentheyneedit(i.e.AmericanforeignaidinColdWarusedtopromotedemocracyandstopCommunism)3)Protectionofacountryssecurity:Foreignaidisoftenusedtoformamilitaryalliancebetweenadevelopedcountryandacountryinneed(i.e.asaresultofforeignaid,theUShasmilitarybasesandobservationpointsoverseasthatitcanusetogetinformation).17.Whatarethemainobstaclestoeconomicgrowthindevelopingnations?Themainobstaclesare:1)AttitudesandBeliefs:thepeopleofmanydevelopingnationsliveandworkmuchastheirancestorsdidhundredsofyearsbeforeandinnovationisoftenviewedwithsuspicion2)ContinuedRapidPopulationGrowth:Ahighpopulationgrowthratemayreducetherateofgrowthofanationsstandardofliving3)MisuseofResources:corruptionamonggovernmentandmilitaryleadersalsoweakenstheeconomiesofmanydevelopingnationsandlocalcurrencymaybelegallyexportedorillegallysentfromthecountryintoleadersprivatebankaccounts(knownascapitalflight)and4)Trade

Restrictions:todevelopdomesticindustries,manydevelopingnationshaveusedimportrestrictionssuchasquotasandtariffswhichpreventconsumersfrompurchasingcheaperforeignsubstitutes.18.WhydidIndonesiafailtosustainrapideconomicgrowth?Indonesiafailedtosustainrapideconomicgrowthbecauseofattitudes.Indonesianslackedasenseofnationalidentitybecausethecountryhadbeenformedfromseveralformercoloniesandpeopleweredividedbynationality,religion,andpolitics.InPresidentSukarnosregimemineralresourceswerenotdeveloped,decayingraillinesandroadswerenotmaintainedandinflationsoaredoutofcontrol.Simplypouringmoneycapitalintoadevelopingnationdoesnotalwaysguaranteeeconomicgrowth.19.Whatarefourproblemsofrapidindustrializationindevelopingnations?Fourproblemsofrapidindustrializationindevelopingnationsare:1)Unwiseinvestmentscausecitizenstoreceivelesseconomicvaluefromtheirresourcesthantheywouldhavereceivedfromotherinvestments2)Notadaptingtochange:maycausealargepercentageofanationspopulationtobecomedisplacedastheydonthaveenoughtimetoadapttonewpatternsoflivingandworking3)Usinginappropriatetechnology:theneedtousetechnologythatisappropriatetoacultureand4)Rushingthroughthestagesofdevelopment:economistsbelieveindustrializationismorebeneficialifitcomesaboutnaturally.Timeallowsnationstoadaptsuccessfullytoonestageofdevelopmentbeforemovingontothenext20.Inadditiontopoverty,whatfactorsinfluenceeconomicdevelopment?Factorsinfluenceeconomicdevelopmentare:tradewiththeoutsideworld,anappropriateincentivestructure,andasupportivepoliticalstructure.Economicdevelopmentisdependentonentrepreneurswhocanseeanopportunityandtakeadvantageofit.Thepoliticalsystemmustberewardingofrisktakingentrepreneurs.Economicdevelopmentalsorequireswellestablishedpropertyrightsandnofearofgovernmentnationalizationofbusiness.

QUESTIONSOFTHEDAY26.ListanddescribethechangefromcapitalismtosocialismaccordingtoKarlMarx.WhyhasMarxstheoryinaccuratelydepictedwhathasoccurredincapitalisteconomies?Explain.KarlMarxpredictedandoutlinedthedeclineandcollapseofCapitalismstepbystep.HesaidthefirststepwouldbethatCapitalismwouldgothroughextremerecessionsanddepressions,workerswillbenegativelyaffectedandalloftheindustrialpowerwillgotoonlyasmallamountofrichcapitalists.Secondly,theeconomicdisparitybetweentherichandpoorwouldbecomeapparenttotheproletarianworkers,intensifyingsocialunrestbetweentheworkersandtheprivateowners,a.k.atheBourgeoisie,thatwouldeventuallyleadtotheworkersjoiningtogethertooverthrowcapitalism.Aftertheworkershadsuccessfullyoverthrowncapitalism,thethirdstepwouldbethattheywouldestablishsocialism,asocioeconomicsysteminwhichtheworkerswouldownandcontrolthemeansofproductionthroughthestate,distributionwouldbebasedonone'scontributionandproductionwouldbeorganizeddirectlyforuse.Lastly,theproductionforcesandtechnologywouldcontinuetoadvanceandthesocialistsystemwouldgivewaytocommunism.Communismwouldbeaclasslessandstatelessandbasedoncommonownership.Workerswouldcontributetosocietyaswellastheyareableandtakeonlyasmuchastheytrulyneed.Marxstheoryhasinaccuratelydepictedwhathasoccurredincapitalisteconomiesbecauseinmostdevelopedcountriesamiddleclasshasdevelopedinthegapbetweentherichandthepoor.Thoughthemiddleclassgetstohavesomeofthesameluxuriesastherich,theystillmustworktomakealiving.Asaresult,insteadofimmediatelyresortingtorevolting,thepoorstrivetobecomepartofthemiddleclassthroughhardwork.IntheU.S.capitalismallowsforworkerstomoveupthroughtheeconomicclassesbyworkinghardovertime.Also,theU.S.governmentprovideswelfareprogramsforthoseinneedwhichshowsthatcapitalismisnotentirelyunforgivinganduncaringtowardsthepoor.27.Whatfactorsinfluence/determineacountryseconomicclassification?Whichofthesefactorsdoyoubelieveisthemostimportant?Explain.

Developingnationsarenationswithlessindustrialdevelopmentandarelativelylowstandardofliving.Factorsthatinfluenceacountry'seconomicclassificationare:1.ThepercapitaGDPandtheaverageincomeperpersoninfluencestheclassificationofdevelopingcountries.Lackofequipment,financing,andknowledgecancauseacountry'spercapitaGDPtolowerevenifthatcountryhasmanynaturalandhumanresources2.Agricultureiscentraltoeconomicdevelopmentandhighlyinfluentialinacountry'sclassification.Mostdevelopingcountriesexitthroughsubsistenceagriculture,meaningeachfamilygrowsjustenoughtotakecareofitsownneeds.Asaresult,therearenocropsavailabletoexportortofeedanindustrialworkforce.3.Poorhealthconditions(causedprimarilybylackoffoodand/orshortageofmedicalservicesandmedicine),resultinahighinfantmortalityrateandalowadultlifeexpectancy4.Theliteracyrate,meaningthepercentageofpeoplewhocanreadandwrite,islowindevelopingcountriesbecausethegovernmenthasfewresourcestobuildandmaintainschools,andbecausemanykidsmissschooltowork.Havingsomanyuneducatedworkers

makesitdifficulttotrainpeoplefortechnicalandengineeringjobs.5.Rapidpopulationgrowthleadstoshortagesoffoodandhousing.Ahighgrowthratecancauseanation'spopulationtodoublein20years.6.Inaddition,religionalsoinfluenceseconomicpoliciesinsomedevelopingcountries.Somedevelopingcountriesforbidlendingmoneywithinterestand,asaresult,foreigninvestmentinthesecountriesislow.Ithinkthatthemostimportantfactorisifanationhasanagriculturaleconomy.Ifacountryexiststhroughsubsistenceagriculture,meaningeachfamilygrowsjustenoughtotakecareofitsownneeds,therearenocropsavailabletoexportortofeedanindustrialworkforce.Thismakesitmoredifficultforthenationseconomytocontinuedeveloping.28.Whattypeofforeignaidisgiventocountriesinneed?Whatbenefitscomefromthisforbothcountries?Explain.

ForeignAidismoney,goods,andservicesprovidedbyacountrysgovernmentandprivateorganizationstoassistforeignnations.Typesofforeignaidthataregiventocountriesinneedare:1)EconomicAssistance:loansandoutrightgrantsofmoneyorequipmenttoothernations2)Technicalassistance:aidintheformofengineers,teachers,andtechnicianstoteachskillstoindividualsinothernations3)Militaryassistance:aidgiventoanationsarmedforces.Thebenefitsthatcomefromthisforbothcountriesinclude:1)Economics:developednationstypicallygiveforeignaidtoencourageinternationaltrade,and,asaresultoftheforeignaid,thereceivingnationsmarketsforexportsgrowsandprovidesnewopportunitiesforprivateinvestment.2)Politicsforeignaidcanbeusedbythedevelopednationgivingtheaidtoinfluencethepoliticalsystem,viewsoridealsofthecountyinneedortodeveloppoliticalfriendshipsthatcangivethemsupportwhentheyneedit(i.e.AmericanforeignaidinColdWarusedtopromotedemocracyandstopCommunism)3)Protectionofacountryssecurity:Foreignaidisoftenusedtoformamilitaryalliancebetweenadevelopedcountryandacountryinneed(i.e.asaresultofforeignaid,theUShasmilitarybasesandobservationpointsoverseasthatitcanusetogetinformation).