Econ 372

Problem Set 3 Answers

1. An elite class of Communist Party members who held positions of power with special rights and privileges.

2.  This is in your notes.

3. Agricultural price controls ultimately took its toll on the Soviet people in the form of food shortages and poor quality products. Soviet distribution and transportation systems were severely outmoded and prone to failure. Thus, even though foodstuff could be grown and harvested, it often failed to make it to the store shelves. Collective farms were operated by members of the nomenklatura to ensure a supply of agricultural products to the state at minimum cost. They were exploited by low procurement prices and by over-charging for state-owned tractors and machinery. State farms were operated by state employees under a soft budget constraint. Private farm plots were the most efficient organizational form--accounting for only 4 percent of total farm land but around 30 to 50 percent of agricultural output.

4. Soviet economic growth was engineered primarily by adding more inputs to the production process (extensive growth) as opposed to growth due to increases in the efficiency of the inputs (intensive growth). Soviet growth was remarkable during the 1950s and 1960s as resources were channeled into the industrial sectors (and away from the agricultural sectors). However, beginning in the late 1970s Soviet growth began to show signs of a slowdown as Soviet technology began to lag behind the Western world.

5. Diminishing returns. 

6.  Think shortages and long waiting lines.

7. Perestroika refers to economic restructuring and glasnost refers to political openness. Must democracy come before market reforms? Or must market reforms come before democracy? There is no easy answer to these questions.

8.  Prices primarily served an accounting function.  Prices were also used to effect income redistribution.  Prices also provided some resource allocation functions.

9. This is for you to ponder.

10. There was no consumer sovereignty.  Production decisions depended on the preferences of central planners, not consumers.  Coupled with price controls, there was very little incentive to provide consumer goods in the Soviet economy.

11. The value of any currency depends on the forces of supply and demand.  What combination of shifts in supply and demand for rubles could explain a falling exchange value?  What might cause these shifts?

12.  Poland has engaged shock therapy through mass privatization using vouchers. Poland sharply reduced the subsidies for many SOE and decontrolled prices in a short period of time. Hungary has taken a more gradualistic approach to market reform. Hungarians privatized much in the same way that East Germany did: through an auction to the highest bidder (not the voucher system as used by the Russians and Czechs). This approach has been slower though a majority of the economy is now in private hands.

13.  The Council of Mutual Economic Assistance (CMEA) was a USSR dominated group that coerced the Soviet Bloc countries to adopt a uniform strategy of communist industrialization based on extensive development with a priority on capital goods over consumer goods and an autrakic focus on import substitution and minimal dependence on western markets.

14.  You're on your own.

15.  Russia: pace of privatization was initially slow, but has speeded up recently. Vouchers were used during initial phase: (shares in enterprises, auctions, private investment funds) and focused on small and medium sized firms. Auctions used during second phase focused on larger state enterprises. More recent privatizations have focused on the largest and most successful enterprises such as utilities and energy concerns through stock offerings. By 1996, 65% of industrial capital stock was in private hands. Compare this with the results in the Eastern European countries.

16.  You're on your own here.

17.  This is for you to ponder.

18.  Check your notes and the text.

19.  This is in your notes.

20.  TVEs are enterprises technically known as rural collectives which are owned by local units of government, but compete vigorously in markets with hard budget constraints. Some are basically subcontractors for capitalist firms in the SEZs. Laws easing privatization in 1993 have raised questions about their future as many have become privatized, although one such form, the collective shareholding cooperative is unique in China.  SEZs are special enterprise zones that They have been very important for bringing foreign investment into China and as outlets for rapidly growing exports. They have been major engines of growth as well as bases for the spread of the market economy into the rest of China.

21.  The communes, brigades, and teams were eliminated and the household responsibility system was introduced with households having considerable independence of actions in markets. Output growth accelerated in the first years of these reforms but has since slowed considerably in the face of the small size of farms, rising rural population, unfavorable terms of trade due to continuing price controls on some crops, and disinvestment in agricultural infrastructure.

22. This is for you to ponder.

23. 

24.  If the RMB is undervalued, this makes Chinese products look cheaper than they ought to be.  In this case, American imports from China will be higher and American exports (at least those that compete with similar Chinese products) will be lower.