Chapter 18
COMPARATIVE ECONOMICS SYSTEMS AND THE ECONOMICS
OF DEVELOPING COUNTRIES
The Chapter in a Nutshell
1. Every society must make certain decisions regarding the production and distribution of goods
and services: (1) What goods will be produced and in what quantities? (2) How shall these
goods be produced? (3) For whom shall the good be produced? These questions are known as
the fundamental economic questions.
2. The manner in which the fundamental economic questions are answered depends on a
society’s economic system. There are three broad types of economies: the market economy,
the command economy, and the mixed economy. The United States has a mixed economy.
3. By the 1990’s, the centrally planned economies in the former Soviet Union and Eastern
Europe had collapsed and began switching to capitalism. Also, the Chinese economy started
embracing capitalism. These nations are known as the “transition economies.”
4. The “advanced” nations are those of North America and Western Europe, plus Australia,
New Zealand, and Japan. Most nations of the world are classified as “developing” nations.
These nations are those in Africa, Asia, Latin America, and the Middle East. Compared to
advanced countries, developing countries generally have low levels of real GDP per capita,
shorter life expectancies, and lower levels of adult literacy.
5. For developing nations, obstacles to economic growth include inadequate natural resources,
low rates of saving and investment, shortages of capital goods, low productivity levels, and
modest technological advances. Many developing nations experience a vicious circle of
poverty: They save little and thus invest little in physical and human capital because they are
poor, and because they do not invest, their outputs per capita remain low and they remain
poor.
6. Besides facing obstacles to economic development, developing countries encounter problems
in their trading relationships with advanced countries: unstable export markets, worsening
terms of trade, and limited access to the markets of advanced countries. To lessen the
burdens of developing countries, advanced countries have provided them tariff preferences,
loans and grants, food and medical supplies, and the like.
7. Developing countries have debated the merits of two strategies for industrialization: Import
substitution and export-led growth. Economists at the World Bank have found that as
developing nations move away from import-substitution growth strategies toward export-led
growth strategies, their growth rate of real output tends to increase. However, skeptics
question whether all developing countries can simultaneously increase their exports to
advanced countries.
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Chapter 18: Comparative Economic Systems and the Economics of Developing Countries
Chapter Objectives
After reading this chapter, you should be able to:
1. Discuss how a market economy, command economy, and mixed economy answer the socalled fundamental economic questions.
2. Explain why the transition economies began moving toward capitalism beginning in the
1990s.
3. Identify the obstacles to economic growth faced by developing nations.
4. Assess the economic growth strategies of developing countries.
Knowledge Check
Key Concept Quiz
1. fundamental economic
questions
2. capitalism
3. laissez-faire economy
4. command economy
5. mixed economy
6. socialism
7. advanced nations
8. vicious circle of poverty
9. primary products
10. terms of trade
11. import substitution
12. export-led growth
_____ a. is defined as the average price of a country’s
exports divided by the average price of
imports
_____ b. include agricultural goods, raw materials and
fuels
_____ c. a system in which the government has a
limited economic role
_____ d. is the industrialization strategy that became
popular in the 1950’s and 1960’s
_____ e. a free enterprise system, rooted in private
property
____ f.
is practiced in economies like Sweden and
Denmark
_____ g. combine elements of both market and
command
_____ h. includes North American and Western
European countries
_____ i. an economy where the government makes all
decisions concerning production and
distribution
_____ j. is experienced by many developing countries
______k. what, how and for whom
______l. is an outward-oriented growth strategy
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Chapter 18: Comparative Economic Systems and the Economics of Developing
Countries
Multiple Choice Questions
1. The U.S. experienced sustained growth in the 1990’s due to
a.
b.
c.
d.
freer trade
deregulation
global competition
all of the above
2. For markets to work, rules of the game have to be specified in these areas
a.
b.
c.
d.
bankruptcy
contracts
property rights
all of the above
3. One of the reasons behind the failure of the Eastern European economies was
a.
b.
c.
d.
price controls
efficient public enterprises
low barriers to competition
none of the above
4. During a transitional period, many Eastern European countries attempted to combine
economic decentralization with
a.
b.
c.
d.
partial price decontrol
perfect price control
price fixation
none of the above
5. In the late 1950’s, China departed from the Soviet model and shifted to
a.
b.
c.
d.
large-scale capital intensive industry
small-scale labor intensive industry
linking individual reward to individual effort
all of the above
6. In the 1970’s, China saw that Singapore, Taiwan, South Korea and Hong Kong
a.
b.
c.
d.
enjoyed extraordinary growth and prosperity
suffered huge economic setbacks
were performing worse than China
were suffering from severe price controls
7. China needs to institute reforms in the areas of
a.
b.
c.
d.
restructuring state-owned enterprises
state banks
social security
all of the above
Chapter 18: Comparative Economic Systems and the Economics of Developing Countries
8. China’s economy may be characterized as
a.
b.
c.
d.
dependent on foreign capital
free of large public sector enterprises
capitalist
mostly export-oriented
9. Among major developing nations, China has
a.
b.
c.
d.
the most amount of land
the least amount of land
more land than Singapore
none of the above
10. The obstacles to economic development include,
a.
b.
c.
d.
inadequate natural resources
overpopulation
shortage of capital
all of the above
11. Developing nations’ exports are often concentrated in
a.
b.
c.
d.
primary products
manufacturing products
human capital
high-tech goods
12. Terms of trade is defined as
a.
b.
c.
d.
export volume/import volume
index of export prices/index of import prices
import volume/export volume
index of import prices/index of export prices
13. Monopoly power of manufactures in industrial nations results in
a.
b.
c.
d.
lower prices
stable prices
higher prices
none of the above
14. Strategies for development include
a.
b.
c.
d.
import substitution
export-led growth
(a) and (b)
none of the above
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Chapter 18: Comparative Economic Systems and the Economics of Developing
Countries
15. Taken together, the exports of all the world’s poor and middle-income countries equal only
a.
b.
c.
d.
5 percent of world output
50 percent of world output
28 percent of world output
10 percent of world output
16. All economic systems must answer fundamental economic questions which include all of the
following except
a.
b.
c.
d.
what goods will be produced and in what quantities?
how shall goods be produced?
for whom shall goods be produced?
all of the above are fundamental economic questions
17. Which economic system is essentially a free-enterprise system, with minimal government
intervention in the economy, that is rooted in private property and markets?
a.
b.
c.
d.
market economy
command economy
socialistic economy
mixed market economy
18. The economy of the former Soviet Union most closely approximated a
a.
b.
c.
d.
command economy
market economy
mixed market economy
socialistic economy
19. Developing economies tend to be characterized by all of the following except
a.
b.
c.
d.
they emphasize the production of primary products
their manufactured goods have limited access to the markets of industrial countries
they realize relatively high levels of income per capita
they have high rates of population growth
20. Which economic growth strategy involves extensive use of trade barriers to protect
developing country industries from the rigors of foreign competition
a.
b.
c.
d.
lower prices
stable prices
higher prices
none of the above
Chapter 18: Comparative Economic Systems and the Economics of Developing Countries
185
21. The _____is an international organization that provides loans to developing countries for
projects such as hospitals, schools, and dams.
a.
b.
c.
d.
World Bank
International Monetary Fund
NAFTA
United States
22. To help some developing countries gain better access to their markets, industrialized nations
have extended _____ to their exports
a. value-added taxes
b. national sales taxes
c tariff preferences
d. import quotas
23. All of the following are economically advanced countries except
a. Switzerland
b. Japan
c. Canada
d. India
True-False Questions
1.
T
F
Central planning was the primary method of organization in the former
Soviet Union, and Eastern Europe, prior to 1990.
2.
T
F
Cuba and North Korea no longer make use of central planning.
3.
T
F
Central planning never created an elite class of government bureaucrats.
4.
T
F
In a mixed economy, the most important decision mechanism is the
market.
5.
T
F
Denmark and Sweden are socialist economies.
6.
T
F
World Bank economists agree that export-led growth strategies
encourage inefficient firms.
7.
T
F
Import substitution allows a developing nation to protect it’s
manufacturers against foreign competitors.
8.
T
F
Import-substitution is an outward looking strategy for growth.
9.
T
F
The world’s poor face tariffs, that are, on average, roughly twice as high
as those imposed on the non-poor.
10.
T
F
Global protectionism is an advantage for the developing countries.
11.
T
F
Compared with the advanced nations, the value of manufactured goods
produced by developing nations is low.
12.
T
F
Developing countries experience a vicious circle of poverty.
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Chapter 18: Comparative Economic Systems and the Economics of Developing
Countries
13.
T
F
Worsening terms of trade has been a serious disadvantage to the
industrialized world.
14.
T
F
Institutional and cultural factors can hinder economic development.
15.
T
F
Insufficient amounts of capital goods contribute to low levels of labor
productivity.
16.
T
F
None of the developing countries has been able to improve its economic
conditions over time.
17.
T
F
In the next decade, China will experience severe economic dislocation.
18.
T
F
China became a member of the WTO in 2003.
19.
T
F
In trade, China has never followed a pattern consistent with the principle
of comparative advantage.
20.
T
F
The economic policies pursued in Eastern European countries failed
because they were unable to provide adequate incentives for producers to
supply efficiently goods and services that consumers wanted.
21.
T
F
Mixed market economies essentially constitute laissez-faire capitalism.
22.
T
F
In a market economy, the questions what, how, and for whom to produce
are determined by a system of prices and markets, with profits and
losses.
23.
T
F
A command economy, also termed communism, is one in which
government makes all decisions concerning production and distribution.
24.
T
F
Sweden and Denmark tend to embrace market economies as economic
systems.
25.
T
F
For developing countries, obstacles to economic growth include limited
access to foreign markets.
26.
T
F
Many developing countries save little and thus invest little in physical
and human capital because they are poor.
27.
T
F
In recent decades, China, South Korea, and Malaysia have primarily
relied on import substitution policies to promote economic growth.
28.
T
F
The World Bank is an international organization that primarily makes
short term loans to developing countries experiencing financial crises.
29.
T
F
All loans made by the International Monetary Fund are subject to
conditionality, meaning that to obtain a loan a country must agree to
implement economic policies as mandated by the IMF.
30.
T
F
The United States has essentially a socialistic economy.
Chapter 18: Comparative Economic Systems and the Economics of Developing Countries
Answers to Knowledge Check Questions
Key Concept Answers
1.
k
7.
h
2.
e
8.
j
3.
c
9.
b
4.
i
10. a
5.
g
11. d
6.
f
12. l
Multiple Choice Answers
1.
d
5.
b
2.
d
6.
a
3.
a
7.
d
4.
a
8.
a
9.
10.
11.
12.
c
d
a
b
13. c
14. c
15. a
16. d
17.
18.
19.
20.
a
a
c
a
21.
22.
23.
a
c
d
True-False Answers
1.
T
6.
F
2.
F
7.
T
3.
F
8.
F
4.
T
9.
T
5.
T
10. F
11.
12.
13.
14.
15.
T
T
F
T
T
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
F
T
T
F
T
26.
27.
28.
29.
30.
T
F
F
T
F
F
T
F
F
T
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