Unit 13
Reading I: Circular Flow of Payments. National Income.
In every economy there are lots of households to supply labour and capital to firms that use them to produce goods and services. Firms provide incomes for households, and they use this money to purchase the goods and services which are produced by firms. This process is called the circular flow of payments.
The gross domestic product (GDP) is the total money value of all final goods, produced in the domestic economy over a year-period. It can be measured in several ways. First of all, GDP is the sum of incomes received from producing the year’s output. Secondly, it is the sum to spend on the year’s domestic output of goods and services. And lastly, GDP is the sum of the value added in the production within a year. All these sums should coincide, and the minimal differences could appear only from statistics.
The total money value of all goods and services in an economy over a one-year period (GDP) plus property income from abroad –make the gross national product (GNP). Property income from abroad goes from interest and rent,dividends and profits. The GNP is an important measure of countries’ economic wealth.
The GNP per head is a measure of the average standard of living of the people of a particular country. But this is only an average measure. The goods and services available to exact individuals depend on the income distribution within the economy.
It is understandable that assets wear out in the production process either physically or they become obsolete. This process is called depreciation. There has to be special part of the economy output – in order to replace existing capital. This part of gross output is not available for consumption or investment, exports or government spending. So, depreciation has to be subtracted from the GNP – to arrive at the national income.
National income measures the amount of money in the economy, available forspending on goods and services after setting aside money enough for replacing recourses which are used up in the production process.
Aggregate demand is the amount to be spent by firms and households on goods and services. We know that output is determined by this demand. This way, the aggregate demand determines the level of the produced output which, in turn, makes up the income available to households and firms.
Governments intervene in the circular flow of income and payments. They buy a large part of the total output of goods and services adding their demand to the demand of the private sector. Since that government purchase is a considerable component of the aggregate demand, and since taxes affect the amount that households and companies have for spending, government spending and taxation decisions (which are referred to as fiscal policy) have major effects on aggregate demand and output.
Vocabulary
household – (условная) семья; хозяйство
circular flow of payments – кругооборот платежей (процесс движения денег и товаров между отдельными субъектами экономики)
gross domestic product (GDP) – валовой внутренний продукт (ВВП)
final goods – готовые изделия (продукция)
depreciation – износ (оборудования), амортизация
value added – добавленная стоимость
property – собственность, имущество
abroad – заграницей (-у)
gross national product (GNP) – валовой национальный продукт (ВНП)
average standard of living – средний жизненный уровень
wear out – изнашиваться
obsolete – устаревший
replace – заменять (что-л. чем-л.)
exist – существовать; быть
spending – расходы
subtract – вычитать
arrive – прибывать, появляться
after setting aside money – после того, как отложены деньги
aggregate demand – совокупный спрос
make up – зд. составлять intervene – вмешиваться
total – всеобщий; полный; суммарный output – выпуск (продукции)
since – так как; поскольку
considerable – значительный; весомый; большой are referred to as – называются
fiscal policy – налоговая, фискальная, бюджетная политика
Assignment 1
Answer the questions, according to the text.
1. What process is called the circular flow of payments?
2. What is the gross domestic product?
3. How can the gross domestic product be measured?
4. What is the gross national product?
5. What does the gross national product indicate?
6. What process is called depreciation?
7. How is the national income determined?
8. What is aggregate demand?
9. How do governments intervene in the circular flow of income and payments?
10. What do they affect this way?
Assignment 2
Give the Russian equivalents to the expressions from the text.
Lots of households; to produce goods and services; provide incomes for households; to purchase the goods which are produced by firms; the circular flow of payments; the gross domestic product and the gross national product; total money value of all final goods; produced over a year-period; the domestic economy; the sum of the value added in the production within a year; receive from producing; the year’s domestic output of goods and services; property income from abroad; it goes from interest and rent, dividends and profits; an important measure of countries’ economic wealth; per head; the average standard of living of the
people of a particular country; available to exact individuals; the income distribution within the economy; assets wear out in the production process; they become obsolete; special part of the economy output; in order to replace existing capital; gross output; available for consumption government spending; depreciation has to be subtracted from the GNP; national income; after setting aside money; enough for replacing; recourses which are used up in the production process; the amount to be spent by firms and households; the aggregate demand determines the level of the produced output; to make up the income available to households; intervene in the circular flow of income and payments; the demand of the private sector; government purchase is a considerable component of the aggregate demand; government spending and taxation decisions have major effects.
Assignment 3
Try to find English word combinations among the Russian ones given below.
Крупная собственность, обложение собственности налогом, средняя семья, отечественное производство, расходы семьи, собственность за рубежом, амортизация фондов, средняя заработная плата, экономика в целом, существующие фонды, крупная безработица, теневая экономика.
Domestic production, household property, underground economy, considerable property, production abroad, economy as a whole, property abroad, average wage, home production, taxes imposed on households, marginal product of labour, average household, household spending, circular flow of payments, depreciation measure, depreciation of assets, property taxation, considerable unemployment, fiscal policy, to replace assets, taxation of assets abroad, existing assets, labour-intensive technology.
Assignment 4
Think and answer the questions:
1. Can the average standard of living reflect the actual way in which people of all social groups live?
2. Does close relationship between minimum wages and standard of living exist?
3. Is there unequal income distribution within each country? Could any government do something to change the situation?
Reading II: 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. Pension contributions to state-run social security funds are also included in revenue, because state provision of retirement pensions is included in government expenditure. Government spending consists of spending on goods and services and transfer payments.
Mostly, government pays for public goods. What are they? We mean those goods, which being consumed by one person – can still be consumed by other people. Health service, national defense, fresh air and so on, these are examples of public goods. Government provides such services as police and fire-fighting, or the administration of justice. Government transfer payment is one, for which no corresponding service is given in return; for example, government provides social security, or unemployment benefits, or even food stamps (in some countries).
There are campaigns for cutting government spending, in many countries. People in these countries believe high levels of government spending to exhaust resources that can be used productively in the private sector. Lower incentives to work are also believed to result from social security payments and unemployment benefits. High tax rates are also able to reduce the incentive to work. If half of all we earn goes to the government, we may prefer not to work much and spend more time gardening or watching TV.
Public spending on goods and services directly exhausts resources able to be used elsewhere. Transfer payments do not reduce society resources, but they transfer purchasing power from one group of consumers, who pay taxes, to another group of consumers, who receive transfer payments and subsidies.
To make conditions for tax cuts is one more reason for reducing government spending. Tax policy is different indifferent countries. Some governments take a rather large share of national income, others take a smaller share. In the United Kingdom the government takes nearly 40 percent of national income in taxes.
Widely used progressive tax structure is the structure where the average tax rate rises with a person’s income level. As a result of progressive tax and transfer system most is taken from the rich and given to the poor. If governments want to reduce the deadweight tax burden and balance spending and revenue, they ought to reduce government spending in order to cut taxes.
Rising tax rates initially increase tax revenue but eventually result in such great falls in the equilibrium quantity of the taxed commodity or activity that
revenue starts to fall again. Cuts in tax rates can reduce the deadweight tax burden and reduce the amount of taxes raised but might increase the eventual revenue.
Vocabulary
direct tax – прямой налог
indirect tax – косвенный налог (на товары или услуги) levy – облагать налогом; собирать, взимать налоги sales tax – налог с оборота, налог на продажи retirement pension – пенсия за выслугу лет
a contribution to a fund – взнос в фонд
social security fund – фонд социального обеспечения revenue – доход (особ. государственный) expenditure – трата, расход
public goods – товары общественного пользования administration of justice – отправление правосудия
transfer payment – переводной платеж (пенсии, пособия, субсидии и т.п.) correspond (to) – соответствовать
in return – в ответ
food stamps – продовольственные талоны, продуктовые карточки cut – сокращать, снижать; урезывать
exhaust – истощать, исчерпывать; опустошать incentive – стимул, побуждение
tax rate – норма (ставка) налога (налогообложения)
tax revenue – налоговые поступления, доходы от налогов subsidy – субсидия, дотация
make conditions – создавать условия reason – причина (чего-л.)
share – доля, часть
progressive tax – прогрессивный налог the rich – богатые
the poor – бедные
reduce the deadweight tax burden – снизить налоговое бремя initially – с самого начала; первоначально
taxed commodity or activity – продукция или деятельность, облагаемая налогом
raise – собирать, взимать (налоги, плату) eventual – конечный, окончательный
Assignment 1
Answer the questions, according to the text.
1. How is the government spending financed?
2. What do governments pay for?
3. What is the transfer payment?
4. Does public spending on goods and services exhaust resources?
5. What are the reasons for cutting the government spending?
6. What share of national income comes from taxes?
7. What are the characteristics of the progressive tax structure?
8. What may be the result of very high tax rates?
9. What should governments do to reduce the deadweight tax burden?
10. Will cuts in tax rates increase the eventual revenue?
Assignment 2
Give the Russian equivalents to the expressions from the text.
Government revenues come from direct taxes; personal incomes and company profits; indirect taxes levied on purchase of goods and services; value added tax (VAT) and sales tax; pension contributions to state-run social security funds; state provision of retirement pensions; government expenditure; those goods, which being consumed by one person can still be consumed by other people; national defense; examples of public goods; such services as police and fire-fighting, or the administration of justice; government transfer payment; no corresponding service is given in return; social security or unemployment benefits; campaigns for cutting government spending; high levels of government spending exhaust resources that can be used productively in the private sector; social security payments and unemployment benefits; to reduce the incentive to work; we may prefer not to work much and spend more time gardening or watching TV; directly exhaust resources; able to be used elsewhere; transfer payments transfer purchasing power from one group of consumers to another; one more reason for reducing government spending; tax policy is different indifferent countries; take a rather large share of national income; progressive tax structure; the average tax rate rises with a person’s income level; to take from the rich and give to the poor; to reduce the deadweight tax burden; to balance spending and revenue; to cut taxes; falls in
the equilibrium quantity of the taxed commodity or activity; increase the eventual revenue.
Assignment 3
Compound two parts of the sentences. Translate these sentences into Russian.
1. Social security payments and unemployment benefits ….
2. A mother may work very hard caring for her children but ….
3. The private sector is normally considered to use resources ….
4. More people have been found to choose to stay unemployed in the countries
….
5. Due to the tax reform the taxed income was lowered and ….
6. High unemployment rate in Europe is assumed ….
7. Over the last 100 years real wages gave increased 5 to 15 times, ….
8. Government spending is the sum of government purchases ….
9. A state retirement pension in most European countries is paid to ….
[levying very high tax rates; to result from high unemployment benefits; of goods and services and transfer payments; are known as transfer payments; an increase in tax revenue resulted; she receives no wages for her work; whereas working time has been cut by nearly half; more productively than the government; women at the age of 60 or more and men at the age of 65]
Assignment 4
Do you think high levels of government spending exhaust resources that can be used productively in the private sector? What could be the result from social security payments and unemployment benefits?