92) In a short essay, define GNI and describe how it is calculated.

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: 2 Page Ref: 137 Skill: Application Objective: STUDY QUESTION 4.2: What are GNI and GDP? AACSB: Analytic Skills

93) Describe the different measures managers can use to improve the usefulness of GNI in analyzing the economic environment of a country. Answer: 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: 2 Page Ref: 137-141 Skill: Application Objective: STUDY QUESTION 4.2: What are GNI and GDP? AACSB: Analytic Skills 94) An economic factor that management needs to consider is inflation. In a short essay, define inflation and discuss the effects of inflation on international business. 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: 2 Page Ref: 144-147 Skill: Application Objective: STUDY QUESTION 4.4: What do we mean by inflation? How does it affect the business environment? AACSB: Analytic Skills 95) What is a balance of payments, and what are its major components? Answer: The balance of payments records a country's international transactions. These can be transactions between companies, governments, or individuals. The balance of payments is divided into the current account and the capital account. The current account tracks all trade activity in merchandise. The capital account shows transactions in real or financial assets between countries, including both loans given to foreigners and loans received by citizens. Diff: 2 Page Ref: 154-155 Skill: Application Objective: STUDY QUESTION 4.7: What is the balance of payments? What is the current account component of the balance of payments? What is the capital account component of the balance of payments? AACSB: Analytic Skills

96) A useful way to classify countries is by economic system. In a short essay, describe and discuss 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: 2 Page Ref: 157-159 Skill: Application Objective: STUDY QUESTION 4.8: What is meant by an economic system? AACSB: Analytic Skills 97) Each year, the Heritage Foundation and the Wall Street Journal publish an index of economic freedom in which they rate countries according to 50 variables organized into 10 economic factors. In a short essay, define the idea of economic freedom, identify the factors that make up the index, and explain what this interpretation means to day-to-day market activity. Answer: a. Officially, the Heritage Foundation and the Wall Street Journal define economic freedom as the "absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, people are free to work, produce, consume, and invest in the ways they feel are most productive." b. The economic factors on which the index of economic freedom is based are trade freedom, business freedom, monetary freedom, investment freedom, freedom from corruption, freedom from government, property rights, financial freedom, and labor freedom. The study is helpful in that it identifies ways that governments control economic activity and the degree to which they do so. c. 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 Page Ref: 161-163 Skill: Application Objective: STUDY QUESTION 4.12: Describe the idea of economic freedom and what it means to the economic development of a country.

AACSB: Analytic Skills 98) Many economies are in the process of transition. In a short essay, identify the key means that would power a transition from a command economy to a market economy. Answer: In general, transition to a market economy involves elements of the following: Privatization the sale and legal transfer of government-owned resources to private interests is vital to creating a market economy. Transferring ownership and control of factors of production from the state to private owners via the process of privatization improves general market efficiency. Deregulation Relaxing or removing restrictions on the free operation of markets and business practices represents the idea of deregulation. This allows businesses to be more productive by saving the time and money previously spent complying with regulations. Property Right Protection The protection of property rights means that entrepreneurs who come up with an innovation can legally claim the present and future rewards of their idea, effort, and risk. This protection also supports a competitive economic environment by assuring investors and entrepreneurs that they, not the state, will prosper from their hard work. Put differently, improving the rewards of hard work essentially makes people more willing to work hard. Fiscal and Monetary Reform In general terms, economic decision making by political officials often leads governments to adopt tax or spending policies that slow growth and increase interest rates, inflation, and unemployment. Adopting free-market principles requires a government to rely on market-oriented instruments for macroeconomic stabilization, set strict budget limits, and use market-based policies to manage the money supply. Antitrust Legislation Left to their own devices, markets can create situations in which a single seller or producer supplies a good or service. When one company is able to control a product's supply and, therefore, its price, it is considered a monopoly. The anticompetitive practices of monopolies are antithetical to a free market. Consequently, liberalizing an economic system requires a government to legislate antitrust laws that encourage the development of industries with as many competing businesses as the market will sustain. Diff: 2 Page Ref: 167-169 Skill: Application Objective: STUDY QUESTION 4.14: What are the means of a transition to a market economy? AACSB: Analytic Skills

99) In response to the recent global economic crisis, many governments of nations with market economies have shifted economic practices toward some of the principles of mixed economies. Give three examples of this shift in the United States. Answer: The United States government has expanded its involvement in the country's economic affairs. The acquisition of a 60 percent government stake in failing General Motors, for example, contradicts the market economy principle of privatization. Some have argued that the government violated creditors' property rights when Chrysler filed for bankruptcy and creditors received only 28 cents per dollar of their investment. The United States has also moved away from restrained fiscal measures and monetary discipline, rescuing American financial institutions through the sale of U.S. Treasury bills. Diff: 2 Page Ref: 173 Skill: Concept Objective: STUDY QUESTION 4.14: What are the means of a transition to a market economy?