1.4.4 Transition Process

Question 1

Meaning of transition economies

Answer 1

Refers to ac economy that is shifting from a centrally planned economic system to a more market oriented economy

Question 2

The transition process

Answer 2

1. Creation of the private enterprises
   - Promoting entrepreneurship , privatisation of state owned companies
2. Liberization of foreign trade
   - Reduction in tariff and other trade barriers so
   that the economy becomes open
3. Creation of institutions to support functioning of the private enterprises
   - bank, securities markets etc
4. Adoption and enforcing legislation to secure private property rights

Question 3

Difficulties faced by transition economies

Answer 3

1. Sharp fall in GDP
   - reduction in output
2. Lack of entrepreneurship abilities
   - lack of experience
   - wrong production methods
   - workers may be dogmatic of wage levels and relations with employers may deteriorate
3. High rate of unemployment
   - workers are laid off to reduce cost of production and remaining workers may work more efficiently
4. High inflation
   - free market price are inevitably higher than planned market
   - goods and services are allocated by price mechanism
   - Price will rise until demand equals to supply