Learning Outcomes
After studying this unit you should be able to:
Ÿ speak about the objectives of managing the economy;
Ÿ distinguish between government’s fiscal and monetary policies;
Ÿ define price stability and its measurements;
Ÿ speak about price trends;
Ÿ define basic terms of the unit;
Ÿ use English corpora and on-line dictionaries for skills development.
Lead-in
I. How do the following quotations characterise Economics as a science? Do you agree with the authors of these quotations?
An economist is a man who states the obvious in terms of the incomprehensible.
Alfred A. Knopf
If all economists were laid end to end, they would not reach a conclusion.
George Bernard Shaw (1856–1950)
Isn’t it interesting that the same people who laugh at science fiction listen to weath- er forecasts and economists?
Kelvin Throop III
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.
Laurence J. Peter (1919–1988)
An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living.
Nicholas Chamfort (1741–1794)
II. Statistics quiz: How much do you know about Russia and its economy?
1. Russian economy makes % of the World GDP.
2. Russia has the world’s(place) highest marriage rate. There is a baby boom. The Russians have a positive increase in population without immigration.
3. The Russian job market is so buoyant that Russia has the(place) larg- est number of illegal immigrants in the world after the USA. This is a sign of a strong economy.
4. Russia takes the place in the world in natural gas extraction and export. Western Europe currently depends on Russia for nearly a third of its domestic gas supplies; Germany depends on Russia for % of its natural gas and Bos- nia, Slovakia and Macedonia get % of their gas from Russia.
5. Russia takes the place in the world in reserves of drinking water and the
place in reserves of fresh water.
6. The President is elected for years by citizens of the Russian Federation on the basis of universal suffrage.
7. A citizen of the Russian Federation who is (age) or older and who has
resided permanently in the Russian Federation for at least
elected.
Text A
Managing the Economy: Objectives and Instruments
years may be
(1) The desire of most individuals is to live and work within an economic framework which gives them the prospect of steady employment, relatively sta- ble prices and a rising standard of living. It is usually recognized that to achieve such a situation the economy must trade and “pay its way” with other econo- mies. Politicians realize that to attract votes and gain political power they must promise that these aspirations will be met, if only in the long run. Economic objectives at the macroeconomic level are therefore set in terms of full em-
ployment, price stability and rapid economic growth, together with long-term equilibrium in the balance of payments.
Full employment
(2) Full employment is a state of economy in which all eligible people who want to work can find employment at prevailing wage rates. However, it does not imply 100% employment because allowances must be made for frictional unemployment and seasonal factors.
(3) Frictional unemployment is temporary unemployment arising out of the inevi- table time lags in the functioning of labor markets, such as the time taken in mov- ing from one job to another. Full employment is attainable within any economy, but may result in an inflationary period. The inflation would result from workers, as a whole, having more disposable income, which would drive prices upward.
Many economists have estimated the amount of frictional unemployment, with the number ranging from 2–7% of the labor force.
Stable prices
(4) The European Central Bank’s Governing Council has announced a quan- titative definition of price stability:
“ Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. ”
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to 2% over the medium term.
The ECB’s definition of price stability makes clear that the focus of its mon- etary policy is on the euro area as a whole. This reflects its euro area-wide mandate. Therefore, price stability is assessed on the basis of price develop- ments in the euro area economy.
Economic growth
(5) Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to obviate the distorting effect of inflation on the price of the goods produced. In economics, “economic growth” or “economic growth theory” typically refers to growth of potential output, i.e., production at “full employment.”
The balance of payments
(6) Balance of payments includes all payments between a country and its trading partners and is made up of the balance of trade, private foreign loans and their interest, loans and grants by governments or international organi- zations, and movements of gold (capital account). A chronically unfavorable balance of payments, when debits exceed credits, may affect the stabi’lity of the nation’s currency, particularly where exchange rates are no longer fixed.
(7) Governments would have no macroeconomic problems if market forc- es in the economy automatically led to full employment equilibrium, with stable prices, and a rapid economic growth. The bulk of the evidence seems to indicate that market forces alone have failed to achieve these objectives. Such market failure essentially constitutes the case for intervention by gov- ernments. If governments are to intervene in the economy, there still remains the problem of selecting the appropriate instruments for achieving the tar- gets they set themselves.
(8) In general terms the policy instruments available to the government are fis- cal and monetary policies.
Fiscal policy
(9) In economics fiscal policy is the use of government revenue collection (taxa- tion) and expenditure (spending) to influence the economy. The two main in- struments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors.
The three main stances of fiscal policy are:
Ÿ neutral fiscal policy is usually undertaken when an economy is in equilib- rium. Government spending is fully funded by tax revenue and the budget out- come has a neutral effect on the level of economic activity;
Ÿ expansionary fiscal policy involves government spending exceeding tax rev- enue, and is usually undertaken during recessions;
Ÿ contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt. [1]
Monetary policy
(10) Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose
of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides in- sight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the to- tal supply of money in the economy more rapidly than usual, and contraction- ary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice busi- nesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. [2]
Vocabulary
| asset value | the net market value of a company’s assets divided by the number of outstanding shares of that company’s stock. Investors often use the asset value of a company when determining if the company’s shares are overvalued or undervalued Another possibility for the rise could be a general re-rating of the company on the basis of its net asset value. |
| disposable income | the amount of income left to an individual after taxes have been paid, available for spending and saving Over the last decade, the upper disposable income limit rose by about 50%, but earnings rose by 135% and prices by 93%. |
| distortion /n/ | the alteration of the original shape (or other characteristic) of smth, such as an object, image, sound or waveform Distortion is usually unwanted, and so people strive to eliminate distortion, or minimize it. |
| equilibrium /n/ | balance, for example when demand equals supply It is clear that the equilibrium depends on the method of finance. |
| GDP (Gross Domestic Product) | the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports GDP per head in each region |
| government intervention | actions on the part of government that affect economic activity, resource allocation, and esp. the voluntary decisions made |
| through normal market exchanges. Government, by its very nature, is designed to intervene in voluntary market activity Speculative investors have watched the deals closely for signs of financial trouble and potential government intervention. | |
| labour force | all the employees in a company or in an area Women form 43% of the labour force, and women’s incomes from employment are a major part of most family incomes. |
| mandate /n/ | the authority given to an elected group of people, such as a government, to perform an action or govern a country The President must offer the three main party leaders in turn a three-day mandate to try to form another government based on the present parliament. |
| market failure | a case in which prices are unable to adequately adjust to reflect changes in supply or demand Market failures may occur due to unexpected disruptive events such as wars or natural disasters, or due to economic barriers such as trade restrictions or monopolies. |
| money demand | is the desired holding of financial assets in the form of money: that is, cash or bank deposits Control over aggregate money demand is necessary if the government is to achieve all or some of economic objectives. |
| money supply | is the total amount of monetary assets available in an economy at a specific time In the same period Japan’s broad money supply grew by 5.1%, compared with growth of 13% a year earlier. |
| recession /n/ | a period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. |
| standard of living | the financial health of a population, as measured by the quantity of consumption by the members of that population The measure most frequently used to estimate standard of living is gross national income per capita. |
| surplus /n/ | the amount of money you have left when you sell more than you buy, or spend less than you own Accordingly their annual surplus is understated by almost £200,000. |
I. Read the sentences paying attention to the way the words in italics are pro- nounced.
1. There were signs of an increase in consumer and business confidence accom- panied by a rebound in global trade.
In the late 10th and early 11th centuries the volume and range of goods that entered Europe began to increase.
2. Between the beginning of the 11th century and 1800 Britain’s import of tea increased from 400,000 lb per annum to 23,000,000 lb per annum.
The United Provinces of Northern India, for example, was able to import roughly 725,000 tons of grain to lessen the catastrophic effects of a severe famine in 1907.
3. The Senator’s conduct is being investigated by the Ethics Committee.
We are conducting a survey to find out what our customers think of their local bus service.
4. Marx points out the potential conflicts below the surface of society.
If the two sides conflict with each other again, it will be disastrous for party unity.
5. The contest for deputy leadership of the party is gathering speed.
We will certainly contest any claims made against the safety of our products.