Transition Economies

Question 1

Key aspects of the transition process

Answer 1

• liberalisation of markets
• privatisation (transferred to the private sector)
• reduction in protectionism
• reduced government subsidies
• legal reforms
• banking reforms

Question 2

Problems transition economies face: removal of subsidies

Answer 2

Rise in unemployment as unprofitable businesses shed thousands of jobs

Question 3

Problems transition economies face: removal of subsidies and price ceilings

Answer 3

Inflation (sometimes hyper-inflation)

Question 4

Problems transition economies face: what often occurs in the early stages of transition

Answer 4

Recession

Question 5

Problems transition economies face: underlying lack of cost and no-price competitiveness

Answer 5

Large trade deficits

Question 6

Problems transition economies face: wealth and income

Answer 6

Inequalities - Gini coefficient increased

Question 7

Advantages of free market competition

Answer 7

• efficiency allocation of scarce resources (they tend to do where the market return is highest)
• competitive prices
• innovation
• investment
• international trade = reduce monopoly power

Question 8

Disadvantages of centrally planned economies

Answer 8

• costs of planning
• problems in fixing the prices of goods and services
• absence of incentives = reduced productivity
• no incentive to innovate
• state slow to react to changing preferences
• information failures

Question 9

Disadvantages of centrally planned economies: problems in fixing the prices of goods and services

Answer 9

Central planners are unlikely to be as accurate as the market in determining suitable equilibrium prices