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Chapter 04

International Business (Brock University)

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International Business: Environments and Operations, 16e (Daniels et al.)

Chapter 4 The Economic Environments Facing Businesses

1) Kyle, an international manager for Apex Industries, has been given the task of analyzing the
economies of three different emerging countries for the firm's potential expansion. Which of the
following questions is LEAST relevant to Kyle's assignment?
A) How much freedom will Apex have to run its foreign operations?
B) What are the current economic policies related to development?
C) What is the likelihood that Apex can fill manufacturing positions with locals?
D) What factors in the country drive or hinder economic change?
Answer: C
Diff: 3
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Application
Objective: 4-1 Explain the value of economic analysis
AACSB: Application of knowledge

2) When analyzing the key elements of a country's economic environment, it is best to apply a
systems perspective.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 4-1 Explain the value of economic analysis
AACSB: Analytical thinking

3) What issues complicate international economic analysis?

Answer: International economic analysis uses many scientific principles but still relies on a
variety of behavioral assumptions to interpret activity. Assessments are often more conditional
than universal because the complexity of even the simplest economic system defies
straightforward classification.
Stipulating indicators that definitively represent a country's economic performance and potential
is difficult. Secondly, marketplace dynamism means that today's valid measures may prove
invalid tomorrow. Third, countries are not isolated. The consequence of connections is an
integrated system of markets in which actions in one influence outcomes in others.
Interdependencies complicate interpretations. Adjusting analysis for actions and reactions across
a broad scope of markets is difficult.
Diff: 3
Learning Outcome: Define the fundamental concepts of international business
Skill: Critical Thinking
Objective: 4-1 Explain the value of economic analysis
AACSB: Analytical thinking

1
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4) History suggests that if the economic crisis worsens, we are likely to see more people question
the ________.
A) fall of communism
B) legitimacy of capitalism
C) practicality of mixed market economies
D) correlation between economic freedom and prosperity
Answer: B
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Concept
Objective: 4-2 Differentiate the types of economic environments
AACSB: Analytical thinking

5) The ________ view calls for companies to develop low-cost, high-powered, resource-
minimizing innovations that can be marketed to the billions of people living on less than a few
dollars a day.
A) Base of the Pyramid
B) Hierarchy of Needs
C) Happy Planet Index
D) Gini coefficient
Answer: A
Diff: 1
Skill: Concept
Objective: 4-2 Differentiate the types of economic environments
AACSB: Analytical thinking

6) An economic system is the set of structures and processes that ________ in a country.
A) guides the allocation of resources and shapes the conduct of business activities
B) directs the movement of specific products to specific consumers
C) sets the standards of competitive success for companies in the economy
D) stipulates the roles and responsibilities of consumers
Answer: A
Diff: 1
Skill: Concept
Objective: 4-2 Differentiate the types of economic environments
AACSB: Analytical thinking

2
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7) Pender Pharmaceuticals is considering expanding overseas and is focusing primarily on the

BRICs. Which of the following countries is one that Pender is considering?
A) Indonesia
B) Chile
C) Russia
D) Bangladesh
Answer: C
Diff: 2
Skill: Application
Objective: 4-2 Differentiate the types of economic environments
AACSB: Application of knowledge

8) The BRICs are the strongest developed economies in the world.

Answer: FALSE
Diff: 1
Skill: Concept
Objective: 4-2 Differentiate the types of economic environments
AACSB: Application of knowledge

9) Why is economic freedom an important factor to consider when analyzing a country's

economic development, performance, and potential?
Answer: Economic freedom helps explain a country's development, performance, and potential.
Higher-rated countries generally outperform laggards on a variety of measures. Countries with
high economic freedom have higher rates of growth and productivity. Income is higher in
countries with higher economic freedom; it more than doubles the worldwide average and is 7
times higher than in mostly unfree and repressed economies. Positive relationships exist between
economic freedom inflation, and employment. Economic freedom pays social dividends. Life
expectancy, literacy, political openness, and environmental sustainability show positive
relationships with economic freedom. Collectively, data indicate a positive relationship between
economic freedom and various measures of economic performance and quality of life. The data
support the argument that liberating resources from government control improves financial
performance, economic stability, and standards of living.
Diff: 3
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Synthesis
Objective: 4-2 Differentiate the types of economic environments
AACSB: Reflective thinking

3
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10) The recent global financial crisis has led to which of the following?
A) governments seeking to impose more constraints on capitalism
B) governments seeking to eliminate constraints on capitalism
C) governments seeking to increase the interdependence of developing economies
D) governments seeking to eliminate the interdependence of developing economies
Answer: A
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

11) Which of the following is most likely a true statement about the global economy since the
1980s?
A) Socialist governments are intervening more in global exchanges.
B) Wealthy countries are exercising total control over emerging markets.
C) Developing countries are losing growing shares of their foreign-exchange reserves.
D) Emerging economies are adopting the principles and practices of free markets.
Answer: D
Diff: 3
Learning Outcome: Discuss trends in and the debate over globalization
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

12) Managers at Morrison Manufacturing are considering expanding the firm's production
overseas and want to ensure that the firm is located in a country with a high degree of economic
freedom. Presently, which of the following locations would most likely offer Morrison the
highest economic freedom?
A) Bolivia
B) Hong Kong
C) Venezuela
D) North Korea
Answer: B
Diff: 2
Skill: Application
Objective: 4-3 Explain the idea of economic freedom
AACSB: Application of knowledge

4
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13) Since the late 1980s, the growing emergence of freer markets has been powered by the
realization that ________.
A) economic growth is directly related to economic freedom
B) economic growth has a limited effect on the standard of living
C) adoption of free market principles contributes to social injustices
D) centrally planned economies are best designed to deliver progress
Answer: A
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Application
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

14) The Economic Freedom Index indicates that economic freedom is positively correlated with
all of the following EXCEPT ________.
A) life expectancy
B) literacy
C) environmental sustainability
D) diversity
Answer: D
Diff: 2
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

15) The recent global financial crisis has interrupted the trend of national economies ________.
A) rapidly adopting the command market model
B) steadily adopting the free market model
C) moving from the mixed to the command model
D) turning away from the mixed model
Answer: B
Diff: 2
Learning Outcome: Discuss trends in and the debate over globalization
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

5
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16) In a command economy, ________.

A) businesses and consumers are assumed to be the best judges of how resources should be
allocated
B) the government sets goals and determines the price and quantity of what is produced
C) different economic sectors coordinate the activities of the federal government
D) each enterprise sets its goals before making reports to the central government
Answer: B
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Application of knowledge

17) Taylor Enterprises wants to expand its operations into Asia. Managers are focusing on
countries with high degrees of economic freedom most likely because the firm is interested in a
country with ________.
A) minimal government intervention
B) standardized minimum wages
C) laws favoring sustainability
D) state-run corporations
Answer: A
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Application
Objective: 4-3 Explain the idea of economic freedom
AACSB: Application of knowledge

18) Tatum Manufacturing recently opened a new facility in Hong Kong. The firm can most
likely expect the Hong Kong government to ________.
A) monitor market prices
B) control natural resources
C) ensure fair competition
D) provide innovation incentives
Answer: C
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Application
Objective: 4-3 Explain the idea of economic freedom
AACSB: Application of knowledge

6
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19) In the aftermath of the recent global financial crisis, there has been a significant reduction in
the level of government involvement in economic affairs.
Answer: FALSE
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Application of knowledge

20) In response to the global financial crisis, the United States government took actions that
increased economic freedom.
Answer: FALSE
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Application of knowledge

21) There is a positive correlation between economic freedom and economic growth.
Answer: TRUE
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

22) The collapse of communism in the late 1980s and early 1990s led to a more widespread
adoption of the principles of capitalism.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

23) A market economy gives individuals the freedom to decide where to work doing what, how
to spend or save money, and whether to consume now or later.
Answer: TRUE
Diff: 1
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

7
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24) What is state capitalism? Why do you think state capitalism is becoming increasingly
popular around the world?
Answer: State capitalism is an economic system whereby the state decides how, when, and
where assets will be valued and resources allocated. The state develops national champions,
manages trade relations and exchange rates to promote exports and punish imports, leverages
control of the financial system to provide low-cost capital to domestic industries, and maintains
accommodative legal and regulatory systems. The global credit crisis has expanded the scale and
scope of state capitalism. Countries that favored a larger state presence, higher taxes, heavier
regulation, tougher job-protection laws, and more generous social safety programs dealt more
successfully with market disruptions than did their free-market counterparts. More
fundamentally, state capitalism professes to better protect social values, equalize income
distribution, and prevent the accumulation of vast wealth and powerful self-interests that threaten
social harmony.
Diff: 3
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Critical Thinking
Objective: 4-3 Explain the idea of economic freedom
AACSB: Reflective thinking

25) What is the difference between a command economy and state capitalism?
Answer: State Capitalism is an economic system whereby the State decides how, when, and
where assets will be valued and resources allocated. The State develops national champions,
manages trade relations and exchange rates to promote exports and punish imports, leverages
control of the financial system to provide low-cost capital to domestic industries, and maintains
accommodative legal and regulatory systems. In a command economy, the government owns and
controls resources, commanding the authority to decide what products to make, in what quantity,
at what price, and in what way. Unlike the command economy, State Capitalism is a system
whereby the government explicitly manipulates market outcomes for political purposes. Politics
has a profound and pervasive impact on the performance of markets. The government uses
markets to promote stability and growth, thereby creating the prosperity and wealth that
maximize state power and supports its continued rule. State Capitalism does not have an
ideological component—the government manages markets for long-term political survival and
power projection, not to enforce an abstract ideal or promote the cult of personality as with the
command economy.
Diff: 3
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Synthesis
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

8
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26) What is meant by the idea of economic freedom? What factors are used in the Economic
Freedom Index? For managers, what role does the Economic Freedom Index play in analyzing
the potential of a country?
Answer:
a. Economic freedom is the "absolute right of property ownership, fully realized freedoms of
movement for labor, capital, and goods, and an absolute absence of coercion or constraint of
economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself."
Rather than the state, individuals decide how they wish to work, produce, consume, save, and
invest. Importantly, that freedom is both protected by the state as well as unconstrained by the
state.
b. The economic factors on which the Economic Freedom Index is based are trade freedom,
business freedom, monetary freedom, investment freedom, freedom from corruption, freedom
from government, property rights, financial freedom, and labor freedom.
c. The study is helpful in that it identifies ways that governments control economic activity and
the degree to which they do so. Operationally, this index helps managers understand the degree
to which the government of a country intervenes with the principles of free choice, free
enterprise, and free prices for reasons that go beyond the basic need to protect property, liberty,
citizen safety, and market efficiency. This information helps managers make better plans to
invest funds and run operations in a particular country.
Diff: 3
Learning Outcome: Define the fundamental concepts of international business
Skill: Synthesis
Objective: 4-3 Explain the idea of economic freedom
AACSB: Analytical thinking

27) Which of the following is NOT a characteristic of capitalism?

A) private ownership of assets
B) right to profit from individual effort
C) state control of factors of production
D) private control of investment
Answer: C
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

9
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28) Communism primarily relies on a system of ________.

A) private business ownership
B) competitive pricing and marketing
C) market-generated supply and demand
D) government-controlled economic activity
Answer: D
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

29) In a market economy, the patterns of resource allocation are most directly influenced by
________.
A) government administrators who monitor the equilibrium of supply and demand
B) industry coalitions that strive to improve the efficiency of production and service
C) consumer group alliances that negotiate with firms to improve product quality
D) consumers who "vote" by their personal decision to buy or not buy products
Answer: D
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

30) A system in which individuals, rather than the government, make the majority of economic
decisions is commonly referred to as a ________.
A) command economy
B) market economy
C) private economy
D) mixed economy
Answer: B
Diff: 1
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

10
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31) Market economies are primarily characterized by ________.

A) formal cooperation among government, companies, and workers to achieve stable growth
B) heavy government spending and high taxation to pay for a range of social services
C) minimal governmental participation
D) restricted consumer powers
Answer: C
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

32) 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 planned by ________.
A) government officials
B) private industries
C) individual entrepreneurs
D) local trade associations
Answer: A
Diff: 1
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

33) In Country X, all dimensions of economic activity, including pricing and production
decisions, are determined by the central government. Which term best describes Country X?
A) market economy
B) mixed economy
C) command economy
D) democratic economy
Answer: C
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Application
Objective: 4-4 Differentiate the types of economic systems
AACSB: Application of knowledge

11
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34) Which of the following is most typical of a command economy?

A) Consumers have choices of many substitutes for any given product.
B) Quality of products and services tends to be consistent.
C) The prices of goods and services frequently change.
D) Many products are usually in short supply.
Answer: D
Diff: 2
Learning Outcome: Describe how differences in political economy influence economic
development
Skill: Application
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

35) In a ________ economy, certain sectors of the economy are left to private ownership and
free market mechanisms, while other sectors have significant state ownership and government
planning.
A) state-directed
B) market
C) command
D) mixed
Answer: D
Diff: 1
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

36) Some countries opt for a mixed economic system in the belief that although an economic
system should aspire to achieve the efficiencies created by free markets, it must also support
policies to ________.
A) destabilize poverty rates
B) achieve low unemployment
C) restrict economic growth
D) inequitably distribute wealth
Answer: B
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

12
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37) In the Economic Freedom Index, ________ exhibit high economic freedom whereas
________ exhibit little to no economic freedom.
A) mixed economies; market economies
B) command economies; market economies
C) market economies; command economies
D) centrally planned economies; command economies
Answer: C
Diff: 2
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

38) Which of the following countries is the best example of a mixed economic model?
A) United States
B) France
C) United Kingdom
D) Australia
Answer: B
Diff: 2
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

39) Country X is in the process of transforming from a command economy to a market economy.
This process most likely involves ________.
A) standardized procedures implemented by the state
B) high economic growth rates for the long term
C) privatization of many factors of production
D) violent political and legal upheaval
Answer: C
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Application
Objective: 4-4 Differentiate the types of economic systems
AACSB: Application of knowledge

13
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40) In a country that practices state capitalism, all of the following are most likely to be handled
by the state EXCEPT ________.
A) leveraging control of the financial system
B) developing national corporations
C) supporting the local activities of foreign competitors
D) systematically managing trade relations
Answer: C
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

41) Presently, which of the following countries is BEST characterized as a pure example of a
command economy?
A) Russia
B) North Korea
C) China
D) Vietnam
Answer: B
Diff: 2
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

42) An economic system is the set of structures and processes that guides the allocation of
resources and shapes the conduct of business activities within a country.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

43) The range of economic systems in the world today, when represented on a spectrum, has one
end anchored by the idea of capitalism, the other with that of socialism.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Reflective thinking

14
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44) A market economy is one in which resources are primarily owned and controlled by
individuals and companies.
Answer: TRUE
Diff: 1
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

45) 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.
Answer: TRUE
Diff: 1
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

46) The government considers itself a better judge of resource allocation than businesses or
citizens in a market economy.
Answer: FALSE
Diff: 2
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Application of knowledge

47) A mixed economy is a system where economic decisions are largely market driven and
ownership is largely private, but the government intervenes in many private economic decisions.
Answer: TRUE
Diff: 1
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept
Objective: 4-4 Differentiate the types of economic systems
AACSB: Analytical thinking

15
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48) Describe the three ways economies can be categorized.

Answer:
a. Market economy: A market economy is one in which resources are primarily owned and
controlled by the private sector, not the public sector. The key factors that make the market
economy work are consumer sovereignty and freedom of companies to operate in the market.
Prices are determined by supply and demand.
b. Command economy: In a command economy, also known as a centrally planned economy,
all dimensions of economic activity, including pricing and production decisions, are determined
by a central government plan. The government owns and controls all resources. The government
sets goals for every business enterprise in the country by how much they produce and for whom.
In this type of economy, the government considers itself a better judge of resource allocation
than its businesses or citizens.
c. Mixed economy: In actuality, no economy is purely market or completely command oriented.
Most economies are mixed economies, falling in the middle and combining elements of both. In
a mixed economy, economic decisions are principally market driven and ownership is principally
private, but the government intervenes, from slightly to extensively, in resource allocations and
economic decisions.
Diff: 3
Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Critical Thinking
Objective: 4-4 Differentiate the types of economic systems
AACSB: Reflective thinking

49) Gross national income (GNI), the broadest measure of economic activity for a country, is
defined as the ________.
A) total of all consumption and investment that takes place in a national economy
B) income generated in one country, regardless of who owns the productive assets
C) total of all economic activity in one country less services, such as government administration,
health services, and education
D) income generated by both total domestic production and the international production
activities of national companies
Answer: D
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

16
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50) In computing GNI, the value of a Ford car that is manufactured in Mexico using capital from
the United States would ________.
A) be added to the GNI of the United States as well as to the GNI and GDP of Mexico
B) not be added to the GNI of the United States but would be added to the GNI of Mexico
C) only affect the computation of GDP and have no bearing on GNI
D) be added to the GNI of the United States but not the GNI of Mexico
Answer: D
Diff: 3
Skill: Application
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

51) The measure of the value of production that occurs within a country's borders without regard
to whether the production is done by domestic or foreign factors of production is its ________.
A) net national product (NNP)
B) gross national product (GNP)
C) gross domestic product (GDP)
D) gross national income (GNI)
Answer: C
Diff: 1
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

52) To determine whether the standard of living within a country is rising or falling, economists
would most likely use which of the following measures?
A) per capita GNI
B) GNI growth rate
C) purchasing power parity
D) degree of human development
Answer: B
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

17
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53) Eileen, a manager at an international restaurant chain, wants to know if it will be most cost
effective to buy 1,000 pounds of sugar in Country X or in Country Y using U.S. dollars. Which
of the following is Eileen most likely trying to determine?
A) purchasing power parity
B) economic growth rate
C) gross domestic income
D) gross national product
Answer: A
Diff: 2
Skill: Application
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

54) The United Nations' ________ measures life expectancy, educational attainment, and the
standard of living in a given country.
A) Human Development Index
B) Emerging Economic Stability
C) Genuine Progress Indicator
D) Net National Product
Answer: A
Diff: 1
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

55) The Human Development Index measures the average achievements in a country on three
basic dimensions of human development, including ________.
A) promotion of cultural values
B) quantity of free time
C) extent of knowledge
D) sustainability
Answer: C
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

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56) The ________ starts with the same accounting framework used to calculate GDP but then
adjusts for values assigned to environmental quality, population health, livelihood security,
equity, free time, and educational attainment.
A) Gross National Index
B) Net National Product
C) Genuine Progress Indicator
D) Human Development Index
Answer: C
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

57) According to the concept of green economics, measuring a country's economic performance
should also take into account ________.
A) market share
B) population size
C) ecological costs
D) cost-of-living increases
Answer: C
Diff: 1
Learning Outcome: Discuss the role of ethics and social responsibility in international business
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

58) During a time of reflation, the government is most likely to ________.

A) lower taxes
B) print money
C) reduce interest rates
D) support infrastructure
Answer: B
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

59) Gross domestic product is the value of production that takes place within a nation's border,
without regard to whether the production is done by domestic or foreign factors of production.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

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60) A car manufactured in the United States by Toyota would be included in the calculation of
the GDP for the United States.
Answer: TRUE
Diff: 2
Skill: Application
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

61) The calculation of GNI per capita takes into account the differences in the cost of living from
one country to another.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

62) The Human Development Index measures the average achievements in a country on three
basic dimensions of human development: mortality, knowledge, and standard of living.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

63) Economic indicators such as GNI, and its expression in terms of per capita, growth rate, and
PPP, are not sufficient to develop a clear picture of the overall quality of life in a country.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

64) The so-called "misery index" is the sum of a country's inflation and unemployment rates.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

65) The Happy Planet Index measures well-being and perceptions of living conditions by
assessing areas such as housing, incomes, security, and work-life balance.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

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66) In most cases, if the misery index of a country is high, then consumers and businesses are
less likely to spend and invest.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Application of knowledge

67) What general characteristics of a country should managers consider when analyzing an
economic environment? What specific indicators help managers measure the economic
development, performance, and potential of a country?
Answer: Managers apply three perspectives to help make sense of the economic environments
of various countries. First, they estimate how much freedom they will have to make investments
and run operations as they see fit. Second, they evaluate the type of economic system in the
country, studying how current policies shape development and performance. The third
investigates the points of change that drive economic change, assessing the conditions that
moderate economic freedom as well as move a country from one economic system to another.
Collectively, the insights help managers pinpoint where investments should go and, perhaps
more importantly, where they should not. The key dimension used to distinguish one country
from another is the gross national income (GNI). In particular, countries are classified according
to per capita GNI, or the size of GNI of a nation divided by its total population. Those countries
with high populations and high per capita GNI are generally most desirable in terms of market
potential. A country's GNI growth rate also indicates its economic potential. Businesses
comparing markets will also likely examine the purchasing power parity (PPP) of a possible
foreign market.
Diff: 3
Learning Outcome: Define the fundamental concepts of international business
Skill: Synthesis
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

68) What is gross national income? How is it calculated? Illustrate your answer with a specific
example.
Answer: Gross National Income is the broadest measure of economic activity. It is the market
value of final goods and services newly produced by domestically owned factors of production,
which includes the international production activities of national companies. For example, the
value of a Ford car manufactured in the United States and the portion of the value of a Ford
manufactured in Mexico using U.S. capital and management counts in U.S. GNI. However, the
portion of the value of a Japanese Toyota manufactured in the United States using Japanese
capital and management would not be counted in U.S. GNI, but it would be counted in Japanese
GNI.
Diff: 3
Learning Outcome: Define the fundamental concepts of international business
Skill: Critical Thinking
Objective: 4-5 Interpret indicators of economic development, performance, and potential
AACSB: Analytical thinking

21
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69) ________ is a general, sustained rise in prices measured against a standard level of
purchasing power.
A) Deflation
B) Inflation
C) Expansion
D) Reflation
Answer: B
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

70) What is the most likely reason that a universal scheme for assessing the performance and
potential of a country's economic environment does NOT exist?
A) difficulties of identifying a definitive set of predictive economic indicators
B) a lack of reliable economic data from most developed economies
C) the isolation of most markets from each other
D) static nature of the marketplace
Answer: A
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

71) A worrisome outcome of chronic inflation is that it tends to ________.

A) erode confidence in a country's currency
B) give central banking officials excessive flexibility to manage monetary policy
C) increase the real income of people, thereby inflating their spending and borrowing levels
D) lower consumer demand for foreign goods, which triggers lower prices and eventually lower
employment
Answer: A
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

72) ________ typically results when demand decreases and supply increases.
A) Inflation
B) Chronic inflation
C) Reflation
D) Deflation
Answer: D
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

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73) In the United States, the unemployment rate indicates the ________.
A) percentage of the labor force that wants to work full-time but can only find part-time
employment
B) number of people who have stopped looking for work because full-time jobs are unavailable
C) percentage of unemployed workers seeking paid work relative to the total labor force
D) number of workers eligible for government services and unemployment benefits
Answer: C
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

74) The so-called "misery index" is the sum of a country's ________.

A) foreign and national debt
B) inflation and unemployment rates
C) unemployment level and total debt
D) trade deficit and long-term inflation rate
Answer: B
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

75) Uneven income distribution ________.

A) exists in almost every country
B) is largely a problem for poorer nations
C) primarily affects people in urban settings
D) is limited to a small share of the world population
Answer: A
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

76) Which of the following is most likely a FALSE statement about income inequality?
A) The richest 1% of the world's population claims as much income as the bottom 57%.
B) GNI is the most effective tool for estimating the relative wealth of a nation's citizens.
C) Among industrialized nations, the United States has the largest inequality gap between rich
and poor.
D) Income inequality between metropolitan and rural areas threatens a country's social stability.
Answer: B
Diff: 3
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

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77) The Gini coefficient estimates a country's ________.

A) gross national product
B) economic development
C) political and legal risk
D) income inequality
Answer: D
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

78) Which of the following is a statement that summarizes all economic transactions between a
country and the rest of the world during a given period of time?
A) trade deficit
B) Gini coefficient
C) balance of payments
D) purchasing power parity
Answer: C
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

79) The two main categories in the balance of payments are the ________.
A) merchandise exchange account and the services account
B) external debt and the unilateral transfers account
C) merchandise trade account and the capital account
D) current account and the capital account
Answer: D
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

80) In a country's balance of payments, the ________ tracks all trade activity in merchandise.
A) capital account
B) current account
C) payment account
D) deficit account
Answer: B
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

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81) Which of the following calls for economic activity that meets present needs without
hindering the future needs of society?
A) privatization
B) state capitalism
C) economic freedom
D) sustainable development
Answer: D
Diff: 1
Learning Outcome: Discuss the role of ethics and social responsibility in international business
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

82) Which of the following ideas calls for assessing a country's performance based on factors
such as life expectancy, leisure time, and income equality?
A) microeconomics
B) happynomics
C) macroeconomics
D) green economics
Answer: B
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

83) Which of the following governmental actions is LEAST likely to increase national debt?
A) macroeconomic stimulus plans
B) unemployment benefits
C) corporate bailouts
D) T-bond sales
Answer: D
Diff: 2
Skill: Application
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

84) Inflation occurs because aggregate demand is growing as fast as aggregate supply.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

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85) Inflation affects interest rates, exchange rates, the cost of living, general economic
confidence, and the stability of the current political system.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Application of knowledge

86) Uneven income distribution is largely a problem confined to poorer nations.

Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

87) The balance of trade is a record of a country's international transactions that take place
among companies, governments, or individuals.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Analytical thinking

88) In a country's balance of payments, the current account and the capital account represent
equal values.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4-6 Profile elements of economic analysis
AACSB: Application of knowledge

89) What is inflation?

Answer: Inflation means that prices are going up as measured against a standard level of
purchasing power. The inflation rate is the percentage increase in the change in prices from one
period to the next, usually a year. Economists use different types of indices to measure inflation.
In the United States, the Consumer Price Index is the official measure of inflation. The CPI
measures a fixed basket of goods and compares their prices from one period to the next. A rise in
the index results in inflation. Inflation affects interest rates, exchange rates, the cost of living,
and the general confidence in a country's political and economic system.
Diff: 3
Learning Outcome: Define the fundamental concepts of international business
Skill: Critical Thinking
Objective: 4-6 Profile elements of economic analysis
AACSB: Reflective thinking

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