Text 5. Factors of Production: Natural Resources and Land - Учебное пособие для студентов лечебного и стоматологического...

^ Text 5. Factors of Production: Natural Resources and Land

Economists consider natural resources to be the third factor of production. They are a contribution to productive activity made by land (for example, a factory site or farm location), raw materials such as iron ore, timber, oil, water for crops and power production, forests and animals.

Some natural resources, wheat, for example, are renewable; others such as iron ore are non-renewable and will eventually be used up. Economists know reduced supplies of non-renewable resources to result in their higher prices, which provide an incentive to look for natural or synthetic substitutes for them. The supply of land, an essential natural resource, is limited and it cannot be easily increased to meet an increase in demand except in certain cases. For example, the Dutch have been able to reclaim from the sea some areas of low-lying land.

Another essential characteristic of land is that it is durable, that is, land is not used up in the production process, although it may be depleted by use.

Land is, in some respects', close to physical capital, though the former is supplied by nature and man produces the latter. Nevertheless, applying labour to kill weeds or fertilizer to improve the soil, farmers can "produce" better land and raise its price.

Price of or income from land, as well as from other natural resources, is called rent. Land itself has no cost of production, so rent depends on the degree of scarcity and on the demand for it.

The purposes for which land is used are due to its characteristics. Land can be used for housing or offices, for mining, or for building roads. Besides, it contributes to the production of crops, providing an environment that supplies water, air, and nutrients for plant growth.

Land as a unique agricultural resource poses management problems for the farmer. In the first place, the farmer has to make a choice between buying and leasing it. The advantages and disadvantages depend on the farmer's financial position, on the availability of land for lease and purchase and some other factors.

Because purchasing land usually requires a larger capital, farmers with limited capital lease land and use their capital for machinery and other resources.

Economists consider a satisfactory lease to be the one that is profitable both for the landowner and for the tenant. A fair lease compensates both parties in proportion to their contributions to the farm business.

Other management problems may arise due to differences in land profitability in various farming branches and other industries. Economists know different crops and classes of animals to vary in profitability. The farmer has to study thoroughly the conditions on his farm to make a correct choice between alternative uses.

Although the total supply of land is limited, its allocation between industries is not. If a government wants to stimulate, for example, either housing or afforestation, it offers a subsidy raising the rent received by owners of housing land or forests. This may create incentives for farmers to transfer land from farming to other industries.

Tasks for the Students

  1. Read the text.

  2. Say what you know about natural resources and land.



Text 1. Economic Systems

Economic systems are usually defined as capitalist, socialist or mixed. However, it is possible to classify economic systems according to the method of resource allocation and control (market economy or command economy) and to the type of property ownership (private ownership or public ownership).

The ownership of factors of production can be viewed as a continuum from complete private ownership at one end to complete public ownership at the other. In reality, no country belongs wholly at one end or the other. For example, the United States of America is considered the prime example of private enterprise, yet the government owns some factors of production and actively produces in such sectors of the economy as education, the military, the postal service and certain utilities.

Market Economy

In market economy, two societal units are very important: the individual and the firm. Individuals own resources and consume products, while firms use resources and produce products. The market mechanism involves an interaction of price, quantity, supply, and demand of resources and products.

The key factors that make the market economy work are consumer sovereignty and the freedom of the enterprise.

Mixed Economies

By definition, no economy is purely market determined or centrally planned. The United States and the former Soviet Union represent different ends of the spectrum of mixed economies. In practice, however, mixed economies generally have a higher degree of government intervention than is found in the United States and a greater degree of reliance on market forces than is found in the former Soviet Union. Government intervention can be regarded in two ways: actual government ownership of means of production and government influence in economic decision-making.

^ Tasks for the Students

1. Answer the questions:

a) What kind of economic systems do you know?

b) Give the description of the Market Economy.

c) What does Mixed Economy mean?

Text 2. Mixed Economy

There are three types of management in economies. An economy may be almost totally planned, as it was in the Soviet Union. An economy may be almost totally unplanned, as it is in the USA. On the other hand, an economy may be a combination of planning and freedom of operation. Examples of the latter are Japan and South Korea.

In a planned economy, the government decides what goods are to be produced and how they are to be marketed. Governments set all the priorities, and the producers are to follow the directions given to them.

In a partially planned economy such as Japan's, the government often encourages industry and helps it with subsidies. Government also makes investments and regulates trade.

The United States in an example of an unplanned economy. Nevertheless, it has a lot of government intervention in economic activity. As the economy of the United States grew, and as government and its importance increased, the government policy at every level acquired greater importance for the economy.

However, the economy of the United States may be called unplanned because the government does not regulate what will be produced and how it will be marketed. These decisions are left to the producers. Even the great amount of government regulation that has emerged since the Great Depression has not turned the economy of the United States into a planned economy

The name of the American economic system is capitalism. Another name for it is the free market economy.

Tasks for Independent Work

  1. Read the text.

  2. Give a shot summery of the text.

Text 3. Market Schema

Market structure – conduct – performance schema is an analytical framework to investigate the operation of market processes.

Markets are ultimately judged in terms of their economic performance, that is, how well they have contributed to the achievement of optimal economic efficiency. Market performance is determined fundamentally by the interaction of market structure and market conduct. The schema attempts to identify those structural and conduct parameters, which have a strategic influence on market performance.

The schema is useful to public-policy makers to improve market performance. Such measures can operate on market structure, for example, to prohibit mergers, which increase market concentration, or to encourage mergers in industries suffering excess capacity. Alternatively, such measures may operate on market conduct, for example, to eliminate excess profits if price-fixing agreements between firms are prohibited. Additionally, the authorities may operate directly on market performance and regulate the prices charged by monopolistic suppliers.

Tasks for the Students

    1. Read the text.

    2. Describe the market's schema.

Text 4. Allocation of Products and Resources

The pure market economy, without any government control whatsoever, allocates products and resources in the way, which, in the most simplified manner, can be shown by the figure below.

As to the command economy, practically speaking, it allows the government to act as a dictator.

Fortunately, a community or a country does not have to make a complete choice between the two extremes: the market economy and the command economy. Instead, it can compromise and have a mixed economy.

In a mixed economy three quarters of production is carried out by I he private sector through the market, though subject to varying degrees of government control. For the other quarter, the government is directly responsible through the public sector. Thus, the government influences the allocation of the goods and services produced.

Even in the USA, a stronghold of free enterprise, it has been found necessary to control or regulate national income conditions.

As to Britain, today it has a mixed economy. In the public sector of British economic life are the nationalized industries like coal and steel, British Rail and BOAC. In the private sector are the majority of the nation's industries, both large and small, from giants like ICI and BP to small family businesses.

^ Tasks for Independent Work

1. Mark the right statements:

– The item starts with describing the market economy.

– The market economy allocates products and resources through the market without any government control.

– Then the picture relating to the mixed economy is given.

– The command economy is not mentioned at all.

– A mixed economy is a compromise between the two extremes.

– In a mixed economy one-half of the production is carried through the market with a certain government control. For the other half the government itself is responsible through the public sector.

2. Fill in the gaps with the words from the text:

Thus, the government ... the allocation of the goods and services produced.

Even in the USA, a ... of free enterprise, controls or ... national income conditions.

As to Britain, today it has a ... economy.

In the public sector of Britain are the nationalized industries like...

In the private sector of Britain are the ... of the industries.

In the private sector of Britain are both large and small enterprises, from giants like ... to small...

3. Answer these questions:

  1. How does the market economy work, judging by the figure?

  2. What are the features of a mixed economy?

  1. How are the USA and Britain characterized in terms of the economy?

  1. What countries, if any, have a command economy now?

Text 5. The Sources of Economic Health

In 1776, new technologies were being invented and applied to the manufacture of cotton and wool, iron, transportation and agriculture in what came to be called the "Industrial Revolution".

Adam Smith was keenly interested in these events. He wanted to understand the sources of economic wealth, and he brought his acute powers of observation and abstraction to bear on this question.

His answer was:

– The division of labour.

– Free domestic and international markets.

Smith identified the division of labour as the source of "the greatest improvement in the productive powers of labour". The division of labour became even more productive when applied to creating new technologies.

Scientists and engineers, trained in extremely narrow fields, became specialists at inventing. Their powerful skills speeded the advance of technology. Machines started performing repetitive operations faster, and more accurately than people did.

Nevertheless, said Smith, the fruits of the division of labour are limited by the extent of the market. To make the market as large as possible, there must be no impediments to free trade both within a country and among countries.

Smith argued that when each person makes the best possible economic choice based on self-interest that choice leads as if by an invisible hand to the best outcome for society as a whole.

Tasks for Independent Work

      1. Read the text.

2. Agree or disagree:

  1. It is very easy to define most economic terms.

  2. There are many specialized dictionaries on economics available.

  3. The same term is interpreted in every dictionary in the same way.

Text 6. Glimpses of History of Money

At different periods of time and in different parts of the world, many commodities have served as money.

These commodities were cattle, sheep, furs, leather, fish, tobacco, tea, salt, shells etc. The illustration shows shell money used in North America. The shells were threaded into strings or belts called wampum. The experts underline that to serve effectively as money; a commodity should be fairly durable, easily divisible, and portable. None of the above-mentioned commodities possessed all these qualities, and in time, precious metals superseded them. First, they were superseded by silver and later by gold.

When a payment was made the metal was first weighed out. The next stage was the cutting of the metal into pieces of definite weight and so coins came into use.

Paper money first came into use in the form of receipts given by goldsmiths in exchange for deposits of silver and gold coins. After goldsmiths became bankers, their receipts became banknotes. That is how the first banknotes came into existence.

At first coins were worth their face value as metal. But later token coins of limited value as legal tender were issued. Now smaller denomination coins are made from bronze and are often referred to as coppers. Bigger denomination coins are made from cupronickel and are usually called silver.

^ Tasks for the Students

  1. Read the text.

  2. Answer the questions:

a) What are the requirements of a commodity to serve as money?

b) Why did precious metals start to serve as money?

c) What precious metal was used first to serve as money?

d) How did coins come into existence?

e) How did paper banknotes come into existence?

^ Text 7. Money and its Functions

Money has four functions: a medium of exchange or means of payment, a store of value, a unit of account and a standard of deferred payment.

When used as a medium of exchange, money is considered distinguished from other assets.

Money as the medium of exchange is believed to be used in one-half of almost all exchange. Workers exchange labour for money, people buy or sell goods in exchange for money as well.

People do not accept money to consume it directly but because it can subsequently be used to buy things, they wish to consume. To see the advantages of a medium of exchange, imagine a barter economy, that is, an economy having no medium of exchange. Goods are traded directly or swapped for other goods. The seller and the buyer each must want something the other has to offer. Trading is very expensive. People spend a lot of time and effort finding others with whom they can make swaps. Nowadays, there exist actually no purely barter economies, but economies nearer to or farther from the barter type. The closer is the economy to the barter type, the more wasteful it is.

Serving as a medium of exchange is presumed to have been for centuries an essential function of money.

Money is a store of value, for it can be used to make purchases in future. For money to be accepted in exchange, it has to be a store of value. Unless suitable for buying goods with tomorrow, money will not be accepted as payments for the goods supplied today. However, money is neither the only nor necessarily the best store of value.

^ Tasks for Independent Work

      1. Read the text.

2. Answer the questions.

a) What are the main functions of money?

b) How important is the function of money as a medium of exchange?

c) Why do people accept money as a medium of exchange?

d) What is barter economy?

e) Why are barter economies wasteful?



Text 1. The discoverers of the laws of Demand and Supply

The law of demand was discovered by A.A.Cournot (1801-1877), a professor of mathematics at the University of Lyon, France, and he was who drew the first demand curve in the 1830s.

The first practical application of demand theory, by ^ Jules Dupuit (1804-1866), a French engineer and economist, was the calculation of the benefits from building a bridge and, given that, a bridge had been built of the correct toll to charge for its use.

Dionysius Lardner (1793-1859), an Irish professor of philosophy at the University of London, first worked out the laws of demand and supply and the connection between the costs of production and supply.

Dionysius Lardner showed railway companies how they could increase their profits by cutting rates on long-distance business, where competition was fiercest. In addition, how they could raise rates on short-haul business, where they had less to fear from other suppliers.

Economists working for the major airline companies today to work out the freight rates and passenger fares that will give the airline the largest possible profit now use the principles first worked out by Lardner in the 1850s. Moreover, the rates that result have a lot in common with those of the nineteenth century in principle.

Tasks for Independent Work

1. Read the text.

2. Sum up what the text said about:

  1. A. A. Cournot;

  2. J. Dupuit;

  3. D. Lardner;

  4. An example of the application of the principles at present.

3. Agree or disagree:

  1. It is very easy to calculate such rates knowing the law of demand and supply.

  2. This principle of calculation is also applied to hotel charges for accommodation.

  3. This principle is applied in very many cases.

Text 2. Demand and Supply Curves

Demand is the total quantity of a good or service which buyers are prepared to purchase at a given price. Demand is always taken to be effective demand, backed by the ability to pay, and not just based on want or need.

^ Demand curve is a line showing the relationship between the price of a product or factor of production and the quantity demanded per period, as in the figure be low.

The typical market demand curve slopes downwards from left to right, indicating that as the price falls more is demanded (that is, a movement along the existing demand curve). Thus, if price falls from OP1 to PP2 the quantity demanded will increase from OQ1 to OQ2.

The demand curve interacts with the supply curve to determine the equilibrium market price. Supply curve is a line showing the relationship between the price of a product or factor of production and the quantity supplied per time period. "Supply" means the total quantity of a product or factor that firms or factor owners are prepared to sell at a given price.

The above typical market supply curve for a product slopes upwards from left to right, indicating that as the price rises more is supplied (that is, a movement along the existing supply curve). Thus, if the price rises from OP1 to OP2 in the above figure, the quantity supplied will increase from OQ1 to OQ2.

The figure shows the supply curve for the market as a whole. This curve is derived by aggregating the individual supply curves of all of the producers of the goods, which in turn are derived from the producers’ cost curves.

Tasks for the Students

1. Read the text.

2. Write out the definition of the terms:


demand curve;


supply curve;

3. Imagine you at a seminar. Describe the two figures given in the text.

4. Find the terms in the text:

...? – a line which shows the cost of production at different levels of output. The curve might relate to average cost and marginal cost, or total cost.

...? – the inputs of resources used in production.

...? – the price at which the quantity demanded of a good is exactly equal to the quantity supplied.

^ Text 3. Demand and Supply

Demand is the quantity of a good that buyers wish to buy at each price. Other things equal, at low prices the demanded quantity is higher.

Supply is the quantity of a good that sellers wish to sell at each price. Other things equal, when prices are high, the supplied quantity is high as well.

The market is in equilibrium when the price regulates the quantity supplied by producers and the quantity demanded by consumers. When prices are not as high as the equilibrium price, there is excess demand (shortage) raising the price. At prices above the equilibrium price, there is excess supply (surplus) reducing the price.

There are some factors influencing demand for a good, such as the prices of other goods, consumer incomes and some others.

An increase in the price of a substitute good (or a decrease in the price of a complement good) will raise at the same time the demanded quantity.

As consumer income is increased, demand for a normal good will also increase but demand for an inferior good will decrease. A normal good is a good for which demand increases when incomes rise. An inferior good is a good for which demand falls when incomes rise.

As to supply, some factors are assumed as constant. Among them are technology, the input price, as well as degree of government regulation. An improvement in technology is as important for increasing the supplied quantity of a good as a reduction in input prices.

Government regulates demand and supply, imposing ceiling prices (maximum prices) and floor prices (minimum prices) and adding its own demand to the demand of the private sector.

^ Tasks for the Students

  1. Read the text.

  2. Answer the questions in written form:

a) What is demand?

b) What is supply?

c) How are prices and the supplied and demanded quantities regulated by the market?

d) Which factors influence demand?

e) How do they work?

f) How can governments regulate demand and supply?

^ Text 4. The Law of Demand

Demand is a key concept in both macroeconomics and microeconomics. In the former, consumption is mainly a function of income; whereas in the latter, consumption or demand is primarily, but not exclusively, a function of price. This analysis of demand relates to microeconomic theory.

The theory of demand was mostly implicit in the writings of classical economists before the late nineteenth century. Current theory rests on the foundations laid by Marshall (1890), Edgeworth (1881), and Pareto (1896). Marshall viewed demand in a cardinal context, in which utility could be quantified. Most contemporary economists hold the approach taken by Edgeworth and Pareto, in which demand has only ordinal characteristics and in which indifference or preferences become central to the analysis.

Much economic analysis focuses on the relation between prices and quantities demanded, the other variables being provisionally held constant. At the various prices that could prevail in a market during some period of time, different quantities of a good or service would be bought. Demand, then, is considered as a list of prices and quantities, with one quantity for each possible price. With price on the vertical axis and quantity on the horizontal axis, the demand curve slopes downward from left to right, signifying that smaller quantities are bought at higher prices and larger quantities are bought at lower prices. The inverse relation between price and quantity is usually called the law of demand. The law rests on two foundations. One is the theory of the consumer, the logic of which shows that the consumer responds to lower prices by buying more. The other foundation is empirical, with innumerable studies of demand in actual markets having demonstrated the existence of downward-sloping demand curves.

Exceptions to the law of demand are the curiosa of theorists. The best-known exception is the Giffen effect – a consumer buys more, not less, of a commodity at higher prices when a negative income effect dominates over the substitution effect.

Another is the Vehien effect – some commodities are theoretically wanted solely for their higher prices. The higher these prices are, the more the use of such commodities fulfills the requirements of conspicuous consumption, and thus the stronger the demand for them.

^ Tasks for Independent Work

1. Read the text.

      1. Which is not true about the law of demand:

a) Consumption is the key concept of microeconomics.

b) Classical economists contributed a lot to the development of the theory of demand.

      1. Questions for discussion:

a) Do you agree that "conspicuous consumption" plays the great role in the economy?

b) Do you think it is logical that "consumer responds to lower prices by buying more"? Think of an example when consumer believes that prices would go even lower and does not react immediately in the expected way.

^ Text 5. Law of Supply

Supply is a fundamental concept in both macro-and microeconomic analysis. In macroeconomic theory, aggregate supply is mainly a function of expected sales to consumers, businesses, and governments. In microanalysis, supply is mainly a function of prices and costs of production. A more complex view of the supply curve for a commodity is its relation between quantities forthcoming and the possible current prices of that commodity, its expected future prices, the prices of alternative goods and services, the costs of the producer, and time.

Opportunity Costs

Incorporated in the supply curve of goods and services are opportunity costs. Economists differ from accountants and from the Internal Revenue Service by including both explicit and implicit costs, and opportunity costs. Implicit costs are mainly business costs for wages, rents, and interest, whereas opportunity costs are the alternative costs of doing something else. A sole proprietor or the owners of businesses should calculate what they forgo in wages, rents, and interest by not working for someone else, or by renting the property they use to others, or by the possibility of converting plant and equipment to alternative investment projects.

The Shape and Position of Supply Curves

In competitive markets the shape, or elasticity of supply, reflects time in the production process, such as the immediate or market period, the short run, and the long run. Elasticity of supply is the relative change in price that induces a relative change in quantity supplied. The supply curve is a line on a diagram where the vertical axis measures price and the horizontal axis is quantity. Usually the coefficient of elasticity is positive, meaning that a rise in price induces an increase in the quantity supplied. In the immediate or market period, a given moment, time is defined as too short to allow for a change in output. The supply curve is vertical, and the coefficient of elasticity is zero.

The short run is defined as a period sufficiently long to permit the producer to increase variable inputs, usually labor and materials, but not long enough to permit changes in plant and equipment. The supply curve in the short run is less inelastic or more elastic than in the immediate period. The long run permits sufficient time for the-producer to increase plant and equipment. The longer the time, the greater the elasticity of supply.

Changes in supply are shifts in the position of supply curves. An increase in supply is a rightward movement of a supply curve, with more of the commodity being offered for sale at each possible price. Conversely, a decrease in supply shifts the supply to the left. An increase in supply can occur because sellers expect lower prices in the future, or, as in the agricultural sector, because of bountiful crops. The reverse is true of a decrease in supply. Over periods long enough for production processes to change, improvements in technology and changes in input prices and productivities are the main causes of changes in supply.

^ Tasks for Independent Work

  1. Answer the questions:

a) What is the difference of the concept of supply in macro- and microeconomics?

b) What are opportunity costs?

c) What are implicit costs?

d) What, according to the text, a sole proprietor or the owners should do?

e) What does the elasticity of supply show?

f) What is the difference between the short-time and long-time supply?

g) Why do changes in the supply affect the position of the supply curve?

2. Which of the following is not true?

a) Supply is a concept of macroeconomics.

b) Economists differ from bookkeepers and tax-gatherers because they include also opportunity costs.

c) The shape of the supply curve provides specialist with the information on elasticity of supply and the reflection of the shareholder.

d) The supply curve is a line on a diagram where the vertical axis measures price and the horizontal axis is quantity.

e) Bountiful crops are a cause of increase in supply.

f) Improvements in technology and changes in input prices and productivities are the main causes of the changes in elastic demand.

^ Text 6. Price Elasticity of Demand and Supply

There is a relationship between demand and price. How much demand for a commodity is affected by a change in prince is called elasticity of demand. If a small change of price results in a large change in demand, the demand is called elastic, if the demand changes only a little, it is called inelastic. The price elasticity of demand coefficient is negative as demand usually falls with a rise in price.

The price elasticity of supply shows the percentage change in the quantity supplied resulting from a one-percent change in price.

As an increase in the quantity supplied is normally a result of a rise in price, the coefficient is usually positive. We have a "0" (zero) elasticity when a price change results in no quantity supplied change. This is called a perfectly inelastic supply. Provided the elasticity varies between zero and one, the supply is called inelastic. With coefficients greater than one, the supply is called elastic. The percentage change in quantity is larger than the corresponding percentage change in price.

Agricultural supply is mostly inelastic because of the high proportion of such inputs as land, buildings, and machinery. The elasticity of agricultural commodities (potatoes, wheat, fruits, eggs and milk) varies greatly. Because of increasing specialization of production, of farm animal products, in particular, elasticity for such commodities as pigs or broilers have decreased in recent years.

^ Tasks for the Students

  1. Read the text.

2. Answer the questions:

a) Which demand is called elastic?

b) In what units is elasticity of supply shown?

c) Why is the price elasticity of demand coefficient negative and the corresponding coefficient for supply positive?

d) What supply is called inelastic?

e) What is the difference between the inelastic and the perfectly inelastic supply?

f) Why is agricultural supply usually inelastic?

g) What is the tendency of agricultural supply development?

^ Text 7. Labour Market

Labour market is a factor market that provides for an exchange of work for wages. Individual workers or trade unions bargaining on a collective basis represent the supply side of the market. Firms who are requiring labour as a factor input in the production process represent the demand side of the market.

The determination of wage rates in labour markets depends upon the supply of, and demands for, labour. The supply of labour depends upon the size of the population, school leaving and retirement ages, geographic mobility, skills, training and experience, entry barriers to professions and jobs and many other things.

The demand for labour is influenced by, for example, the size and strength of demand-for the goods and services produced by workers, the proportion of total production costs accounted for by wages, and the degree of substitutability of capital for labour in the production process.

Because of these factors, the labour market cannot be regarded as a single homogeneous market but must be seen as a number of separate labour markets each with its own particular characteristics. For example, as the above figure shows, a group of workers such as surgeons, whose skills are in limited supply and the demand for whose services is high, will receive a high wage rate; by contrast, office cleaners, who require little or no training or skill, are usually in plentiful supply in relation to the demand for their services, so their wage rates are comparatively low. The wage differential between these two groups is Ws-Wo.

^ Tasks for Independent Work

1. Read the sentences paying attention to the verb "to provide":

Labour market provides for an exchange of work for wages.

These workers have large families to provide for.

They provide their children with food and clothes.

They provide food and clothes for them.

The company must provide for their visitors.

The contract provided cooperation for a few years.

A clause in the agreement provides that the tenant shall bear the cost of all repairs.

2. Complete the sentences in your own way:

As a consequence ... It cannot be regarded as ...

As a result ... They require it as ...

As the figure shows ... It must be seen as ...

As the graph shows ... Such professions as ...

As the practice shows... As the labour market shows ...

As to me I ... Such jobs as ...



Text 1. GDP and GNP

Gross Domestic Product (GDP) is the total money value of all final goods and services produced in an economy over a one-year period. Gross domestic product can be measured in three ways:

  1. the sum of the value added by each industry in producing the year's output (the output method);

  2. the sum of factor incomes received from producing the year's output (the income method);

(c) the sum of expenditures on the year's domestic output of goods and services (the expenditure method).

Gross National Product (GNP) is the total money value of all final goods and services produced in an economy over a one-year period plus net property income from abroad (interest, rent, dividends and profits). GNP is an important measure of a country's general economic prosperity. Here is a comparison of countries' general economic well-being for one of the recent years:

^ Developed countries GNP (in US$ millions)

UK 975,200

Germany 1,488,200

Japan 2,942,900

USA 5,392,300

Developed countries

Somalia 890

Mozambique 1,300

Nepal 2,900

India 254,500

Tasks for the Students

1. Answer the following questions:

  1. Which country had the highest GNP that year?

  2. Which of them ran the lowest GNP then?

  3. What was the year, to your mind?

  4. Is the GNP of a country always higher than the GDP?

  5. What makes the difference?

  6. Which of the three methods is the most often applied to measure GDP, as far as you know?

  1. Write a short summary of the text (three or four sentences).

Text 2. Government's Role in the Economy

While consumers and producers obviously make most decisions that mould the economy, government's activities have at least four powerful effects on the US economy.

Direct services

Each level of government provides direct services. The postal system, for example, is a federal system serving the nation, as is the large military establishment. By contrast, state, county or city governments primarily pay for the public education systems.

Regulation and control

The government regulates and controls private enterprise in many ways in order to ensure that business serves the best interests of the people as a whole. Regulation is usually considered necessary in areas where private enterprise has been granted a monopoly, such as in electric or local telephone service, or in any other areas where there is limited competition, as with the railroads. Public policy permits such companies to make reasonable profits, but limits their ability to raise prices "unfairly", because the public depends on their services.

Stabilization and growth

Branches of government, including Congress and such entities as the Federal Reserve System attempt to control the extremes of boom and bust, and of inflation and depression, by adjusting tax rates, the money supply and the use of credit. They can also affect the economy by changing the amount of public spending by the government itself. Normally, the aim is a balanced federal budget.

Direct assistance

The government provides many kinds of help to businesses and individuals. For example, tariffs permit certain products to remain relatively free from foreign competition; imports are sometimes taxed or limited by volume so that American products can better compete with foreign goods. Government also provides aid to farmers by subsidizing prices they receive for their crops.

In quite a different area, government supports individuals who cannot adequately care for themselves by making grants to low-income parents with dependent children, by providing medical care for the aged and indigent, and through social insurance programs that assist the unemployed and retirees. Government also supplies relief for the poor and help for the disabled.

Tasks for the Students

  1. What is the government’s role in Economy?

  2. Describe the main government's activities in Economy.

  3. What does stabilization mean?

  4. Say about government's direct assistance.

Text 3. Monetary System and Monetary Policies

Today every country has a Central Bank. It acts as a lender to commercial banks and its acts as a banker to the government. It takes responsibility for the funding of the government’s budget deficit and the control of the money supply, which includes currency outside the banking system Thus, money supply is partly a liability of the Central Bank (currency in private circulation) and partly a liability of commercial banks (chequing accounts of the general public).

The Central Bank controls the quantity of currency in private circulation and the one held by the banks through purchases and sales of government securities. In addition, the Central Bank can impose reserve requirements on commercial banks, that is, it can impose the minimum ratio of cash reserves to deposits that banks must hold. The demand for money is a demand for real money, that is, nominal money deflation by the price level to undertake a given quantity of transactions. Hence, when the price level doubles, other things equal, we expect the demand for nominal balances to double, leaving the demand for real money balances unaltered. People want money because of its purchasing power in terms of the goods it will buy.

The quantity of real balances demanded falls as the interest rate rises. On the other hand, when interest-bearing assets are risky, people prefer to hold some of the safe asset, money. When there is no immediate need to make transactions, this leads to a demand for holding interest-bearing time deposits rather than non-interest-bearing sight deposits. The demand for time deposits will be larger with an increase in the total wealth to be invested.

Interest rates are a tool to regulate the market for bonds. Being sold and purchased by the Central Bank, bonds depend on the latter for their supply and price.

Interest rates affect household wealth and consumption. Consumption is believed to depend both on interest rates and on taxes. Higher interest rates reduce consumer demand.

There also exists a close relationship between interest rates and incomes. With a given money supply, higher income must be accompanied by higher interest rates to keep money demand unchanged.

A given income level can be maintained by an easy monetary policy and a tight fiscal policy or by the converse.

^ Tasks for the Students

  1. Read the text.

  2. Answer the questions:

a) How does the ratio between the amounts of money holdings and interesting deposits vary?

b) What are the responsibilities of the Central Bank?

c) How can the Central Bank regulate money supply and money market?

d) What is monetary policy?

e) In what way does consumption depend on interest rates and taxes?

f) Of what is money supply made up?

^ Text 4. Inflation

Inflation is a steady rise in the average price and wage level. The rise in wages being high enough to raise costs of production, prices grow further resulting in a higher rate of inflation and, finally, in an inflationary spiral. Periods when inflation rates are very large are referred to as hyperinflation.

The causes of inflation are rather complicated, and there is a number of theories explaining them. Monetarists, such as Milton Friedman, say that inflation is caused by too rapid increase in money supply and the corresponding excess demand for goods.

Therefore, monetarists consider due government control of money supply to be able to restrict inflation rates. They also believe the high rate of unemployment to be likely to restrain claims for higher wages. People having jobs accept the wages they are being paid, the inflationary spiral being kept under control. This situation also accounts for rather slow increase in aggregate demand.

On the other hand, Keynesians, that is, economists following the theory of John M. Keynes, suppose inflation to be due to processes occurring in money circulation. They say that low inflation and unemployment rates can be ensured by adopting a tight incomes policy.

Incomes policies, though, monetarists argue, may temporarily speedup the transition to a lower inflation rate but they are unlikely to succeed in the end.

The costs of inflation depend on whether it was anticipated and on the extent to which the economy's institutions allow complete inflation adjustment.

The longer inflation continues, the more the economy learns to live with it. Indexation is a means to reduce the costs of some inflation effects. Indexed wages or loans mean that the amount to be paid or repaid will rise with the price level. Indexation has already been introduced in countries that had to live with inflation rates of 30 or 40 percent foe years. Moreover, the more countries adjust their economies to cope with inflation, the closer they come to hyperinflation. Indexation means that high rates of inflation are much more likely to continue and even to increase.

Tasks for Independent Work

  1. Read the text.

2. Give a shot summery of the text.

3. Answer the questions:

a) What situation is described as an inflationary spiral? By what means can it be kept under control?

b) Which two schools of thought are mentioned in the text? What is the difference between them?

c) What do monetarists think to be effective in restraining inflation rates?

d) Why is aggregate demand low?

e) Do Keynesians consider incomes policies to be in good means of coping with inflation in the end?

f) What do the costs of inflation depend on?

g) By what means can the costs of inflation be reduced?

h) Does indexation help to cope with inflation?

^ Text 5. Fiscal Policy

Fiscal policy in an instrument of demand management, which is used to influence the level of economic activity in an economy through the control of taxation and government expenditure.

The government can use a number of taxation measures to control aggregate demand or spending: direct taxes on individuals (income tax) and companies (corporation tax) can be increased if spending has to be reduced, for example, to control inflation. Spending can also be reduced by increasing indirect taxes: an increase in the VAT on all products or excise duties on particular products such as petrol and cigarettes will result in lower purchasing power.

The government can change its own expenditure to affect spending levels as well: a cut in purchases of products or capital investment by the government can reduce total spending in the economy.

If the government is to increase spending, it creates a budget deficit, reducing taxation and increasing its expenditure.

A decrease in government spending and an increase in taxes (a withdrawal from the circular flow of national income) reduce aggregate demand to avoid (избегать) inflation. By contrast, an increase in government spending and/or decrease in taxes – an injection (денежное вливание) into the circular flow of national income stimulates aggregate demand and creates additional jobs to avoid unemployment.

In practice, however, a number of problems can reduce the effectiveness of fiscal policy. Taxation rate changes, particularly changes in income tax, take time to make; considerable proportion of government expenditure on, for example schools, roads, hospitals and defense cannot easily be changed without lengthy political lobbying.

^ Tasks for the Students

  1. Read the text.

2. Answer the questions:

a) What is the effect of reduced aggregate demand in an economy?

b) How can aggregate demand be reduced?

c) What is the effect of higher aggregate demand?

d) How can aggregate demand be increased?

e) What can decrease the effectiveness of fiscal policy?

3. Give a shot summery of the text.

Text 6. Taxes and Public Spending

In most economies, government revenues come mainly from direct taxes on personal incomes and company profits as well as indirect taxes levied on purchase of goods and services such as value added tax (VAT) and sales tax. Since state provision of retirement pensions is included in government expenditure, pension contributions to state-run social security funds are included in revenue, too. Some small component of government spending is financed through government borrowing.

Government spending comprises spending on goods und services and transfer payments.

A transfer is a payment, usually by the government for which no corresponding service is provided in return. Examples are social security, retirement pensions, and unemployment benefits and, in some countries, food stamps.

In most countries, there are campaigns for cutting government spending. The reason for it is that high levels of government spending are believed to exhaust resources that can used productively in the private sector Lower incentives to work are also believed to result from social security payments and unemployment benefits

Whereas spending on goods and services directly exhausts resources that can be used elsewhere, transfer payments do not reduce society’s resources. They transfer purchasing power from one group of consumers, those paying taxes, to another group of consumers, those receiving transfer payments and subsidies.

Another reason for reducing government spending is to make room for tax cuts.

Government intervention manifests itself in tax policy, which is different in different countries. In the United Kingdom, the government takes nearly 40 percent of national income taxes. Some governments take a larger share, others a smaller share.

The most widely used progressive tax structure is the one in which the average tax rate rises with a person's income level. Because of progressive tax and transfer system most is taken from the rich and most is given to the poor.

Rising tax rates initially increase tax revenue but eventually result in such large falls in the equilibrium quantity of the taxed commodity or activity that revenue starts to fall again. High tax rates are said to reduce the incentive to work. If half of all we earn goes to the government, we may prefer to work fewer hours a week and spend more time in the garden or watching television.

Cuts in tax rates will usually reduce the deadweight tax burden and reduce the amount of taxes raised but might increase eventual revenue.

If governments wish to reduce the deadweight tax burden and balance spending and revenue, they are supposed to reduce government spending in order to cut taxes.

^ Tasks for the Students

1. Read the text.

2. Answer the questions:

a) How is government spending financed?

b) What do governments pay for?

c) What are the three reasons for cutting government spending?

d) Which share of national income comes from taxes?

e) What are the characteristics of the progressive tax structure?

f) What may be the result of very high tax rates?

3. Give a shot summery of the text.



Text 1. Types of Businesses in the UK and the USA

A business may be privately owned in three different forms. These forms are the sole proprietorship, the partnership and the corporation. The sole proprietorship is the most common in many western countries. For example, more than 80 per cent of all businesses in the United States are sole proprietorships.

However, it is evident that sole proprietorships do not do the greatest volume of business. They account for only 16 percent of all business receipts, for example, in America. What kind of business is likely to be a sole proprietorship? First, service industries such as beauty shops, different repair shops, restaurants.

Most businesses in the United Kingdom operate in one of the following ways:

– Sole trader;

– Partnership;

– Limited Liability Company;

– Branch of a foreign company.

The sole trader is the oldest form of business. There are many one-man owners, for example: a farmer, doctor, solicitor, estate agent, garage man, jobber, builder, hairdresser etc.


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