Chapter 2 Assignments
1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Discuss. In a free market economy, individuals/corporations are allowed to own property and other assets. Ownership provides incentive for people to work hard, be innovative and creative; all while hoping to attain additional wealth. Sequentially, the desire from individuals/corporations to accumulate wealth enhances the whole economy and generates economic growth. In contrast, in a state-directed economy, individuals/corporations are not allowed to own substantial quantities of property and other assets. The objective of a state-directed economy is for everyone to work for “the good of the society.” Although this seems like an honorable ideal, a system that asks individuals to work for “the good of the society” rather than allowing individuals to gain wealth does not provide a great incentive for people to work hard, be innovative and creative. This leads to state-directed economies typically generating less innovation and less efficiency than free market economies.
2. A democratic political system is an essential condition for sustained economic progress. Discuss. Even though totalitarian regimes have achieved rapid economic growth, it seems that sustained, decades-long periods of economic growth are not common under totalitarianism and democratic principles are more conducive to long-term economic growth than are totalitarian ones. A contributing aspect is that democratic systems permit for the steady transfer of power through elections, and thus imparts political constancy; which is an essential prerequisite for rapid economic growth.
3. What is the relationship between corruption in a country (i.e., government officials taking bribes) and economic growth? Is corruption always bad? The United States shows public contempt for bribery although evidence proposes that bribery is not uncommon in the United States. Government officials put the interest of their country second to their own personal gain when they participate in corruption and in turn lower the level of transparency in business interactions. Many nations with extensive bribery appear to be among the most economically underdeveloped; however, the unbending generalization that corruption is always bad takes a broad view of the role of the culture. Many cultures accept the role of bribes far more openly than the United States. Some countries – France, Germany and Japan for example – recognize that bribes play an important role in some parts of the world and allow their corporations to expense bribes.
4. You are the CEO of a company that has to choose between making a $100 million investment in Russia or Poland. 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? When assessing the risks of investment, one should consider the political, economic, and legal risks of doing business in both Russia and Poland. The political risk in Russia is still high but it is undergoing continual governmental changes under Putin’s leadership, and courting foreign investment. Comparatively, Poland is more stable, nonetheless it may have less potential. As for the economic front, both countries have inflation and economic turmoil as unproductive factories are still struggling in Russia, and migrant workers returning from Western Europe are expanding Poland’s ranks of the unemployed. From the legal perspective, Poland is steadily progressing, while the conditions in Russia are uncertain. Therefore at this time, Russia would riskier. 5. Read the Country Focus on Venezuela under the leadership of Hugo Chavez; then answer the following questions: a.
Under Chavez’s leadership, what kind of economic system was put in place in Venezuela? How would you characterize the political...
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