Chapter 3 Global Economy

In a market economy, what is the central coordinating mechanism?
Answer;
The price mechanism.

In a centrally planned socialist economy, what is the central coordinating mechanism?
Answer:
The central planners.

How does a market economy solve the what, how, and for whom to produce problems?
Answer:
Businesses decide what to produce based on what they think will sell and earn a profit from.

How does a market economy solve the how problem?
Answer:
Businesses decide how to produce guided by what they believe makes the largest profit.

How does a market economy solve the for whom problem?
Answer:
Those who are willing to pay for the goods at the market-determined prices will get them.

In theory, how does a centrally planned socialist economy solve the what problem?
Answer:
Central planners decide what to produce according to what they believe is socially beneficial.

In theory, how does a centrally planned socialist economy solve the how problem?
Answer:
Central planners decide how to produce guided by what they believe is good for the country.

In theory, how does a centrally planned socialist economy solve for whom problem?
Answer:
Central planners decide distribution based on their perception of individuals’ needs.

Is capitalism or socialism the better economic system? Why?
Answer:
Economics does not provide an answer to normative questions such as this

Why does an economy’s strength ultimately reside in its people?
Answer:
People choose which goods to supply and what goods to demand; they supply labor and develop new technologies.

What are the qualities of the Internet that have put competitive pressures on businesses?
Answer:
The Internet has increased available information, reduced the importance of geographic location, and lowered start-up costs.

Why is entrepreneurship a central part of any business?
Answer:
Entrepreneurship is a central part to any business because business is dynamic; it involves meeting new problems constantly, recognizing needs, and meeting those needs in a timely fashion.

You’re starting a software company in which you plan to sell software to your fellow students. What form of business organization would you choose? Why?
Answer:
Sole proprietorship or partnership because they are easy to start, require minimal bureaucratic hassle, and are  controlled by the owners.


What are the two largest categories of federal government expenditures?
Answer:
Income security and health and education.

What are the six roles of government listed in the text?
Answer:
Providing a stable set of institutions and rules.
Promoting effective and workable competition
Correcting for externalities.
Ensuring economic stability and growth.
Providing public goods.
Adjusting for undesired market results.
Determining preferences of consumers.

You’ve set up the rules for a game and started the game but now realize that the rules are unfair. Should you change the rules?
Answer:
It depends because such decisions must be made based on the marginal cost and benefit of changing the rules.

Say the government establishes rights to pollute so that without a pollution permit you aren’t allowed to emit pollutants into the air, water, or soil. Firms are allowed to buy and sell these rights. In what way will this correct for an externality?
Answer:
The creation of pollution permits with a market forces polluters to take into account the cost of their pollution and assign rights, thereby correcting for the externality.

What are two organizations that countries can use to coordinate economic relations and reduce trade barriers?
Answer:
The World Trade Organization and the United Nations.

Why are international organizations limited in their effectiveness?
Answer:
Membership is voluntary and there is no world government to enforce the laws.