Improve your English. Учебное пособие по английскому языку

5. Choose the right answer.

3. Monetary policy has generally been formed separately from …………..

a) fiscal policy b) federal funds c) Federal Reserve System

6. Answer the questions.

1.What is monetary policy?

2.What tools does monetary policy use?

3.What is contractionary policy?

4.What is central bank?

5.What is the primary tool of monetary policy?

Text 7. Money

1.1. Introduction

In order to fully appreciate the importance of the banking system within the economy, it is necessary to consider the functions of money, and what constitutes money in modern society. The size of the money supply and the methods of controlling it have become highly important factors to governments in pursuing their economic policies. As we shall see, bank deposits account for the majority of the money supply, and therefore control over the ability of the banks to create new deposits is essential if the money supply is to be controlled.

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1.2. Barter and its Problems

The exchange of goods

If we were all self-sufficient and preferred not to trade with one another there would be no need for money. In a primitive society this might be possible, of course, but it is inconceivable that we could live like this today even in the small communes that are established from time to time. Some direct exchange of goods — barter — is likely to be inevitable, and if trading becomes at all extensive then barter must give way to indirect exchange involving the use of money.

Barter means the direct exchange of goods one for another, and it does not require much imagination to see that an immediate problem comes to the fore once two people decide to embark on the exchange of goods. This is the measurement of the value of one of the goods in terms of the other. How many units of Commodity A must be handed over in exchange for a unit of Commodity B? A bargain must be struck by the two parties concerned and if this is a ‘one-off’ transaction then they will no doubt haggle with one another until they reach an agreement as to what is to be the rate of exchange. If it is one of many similar transactions then the rate of exchange will have already become established by the forces of supply and demand in the market, and the two parties will tend to adhere to the market rate of exchange — the market price. If one of the people concerned holds out for a higher price for his commodity (2 sacks of potatoes for his bag of corn when the market price is 1.5 sacks of potatoes) then he is likely to find that the buyer of corn will look for another supplier.

As we shall see, this problem of the terms on which goods shall be exchanged applies not only in barter (direct exchange) but also in indirect exchange as well, when the price of a commodity is not determined in terms of another commodity but in terms of money. There are, however, some problems which apply only to barter and not to indirect exchange. These are outlined below, and it is because of them that barter rarely takes place.

Problems that arise with barter

Indivisibility Where an individual has a large indivisible commodity, such as a live cow, to dispose of he may experience difficulty in bartering it if only small commodities are offered in exchange. He may end up with a large number of small objects in exchange and then have the problem of disposing of some of them because he has far more than he needs.

Perishable commodities If an individual takes units of a commodity in exchange for his commodity in excess of his immediate needs and these units are perishable, then an obvious problem arises. How does he store them until they are required or until they can be exchanged for other goods?

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Consistency of quality The lack of quality in some goods, especially live animals, makes it difficult to arrive at a constant and recognized rate of exchange, e.g. 1 sheep equals 3 sacks of corn, so that each such transaction involves striking a fresh bargain.

Double coincidence of wants This is undoubtedly the biggest problem that arises with barter for unless the person disposing of goods can find someone who needs them and has something to offer in exchange which he in turn needs, the swap is unlikely to take place.

1.3. Functions and Characteristics of Money

Origins of money

So far we have been concerned with barter which involves the direct exchange of goods one for another and, as we have seen, barter has serious drawbacks which make it unsuitable as a method of exchange once trading becomes at all extensive. It is because of these problems with direct exchange that money originated. One commodity which was particularly sought after by community, and which was reasonably durable and divisible, came to be used as the medium of exchange. Examples of such commodities are shells, salt, spears, cloth and grain, which have all been used at times as a ‘money supply’. They were indeed money, because they were acceptable as a means of payment for goods: not ideal forms of money perhaps, but nevertheless that is what they were. Later metals — bronze and copper, followed by silver and gold — were recognized as being ideally suitable as money because they satisfied most of the characteristics of money. Because they were valuable only small quantities of these metals were required when paying for goods; they were durable; and, what is particularly important, they could be cut, weighed and marked and recognized as units of particular value.

Functions of money

There are four functions of money as distinct from the characteristics (the necessary qualities) of money and it is important that you should memorise and understand them. The functions of money are as follows:

1.Medium of exchange.

2.Unit of account.

3.Store of value.

4.Standard for deferred payments.

Medium of exchange. Money is used as a means of indirect exchange, as we have seen, and therefore one of its functions must be to act as a medium of exchange. In order to fulfill this function money must be acceptable to those who have goods

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and services to sell. To be acceptable it must be reasonably stable in value so that the holder knows that he will be able to obtain roughly the same quantity of goods and services with it when he chooses to spend it, and for this to happen it must be relatively scarce and its quantity controlled. If the money supply is acceptable then anyone who takes it in exchange for goods will do so in the knowledge that others will accept it when the time comes to spend the money. It can safely be kept in the belief that this is so, and that it can be spent as and when the holder chooses to do so.

Unit of account. As a unit of account money acts as a measuring rod, and without this it would be impossible for a modern community to function. It must be possible to measure the value of goods and services in terms of a common unit, in order to establish prices, and in order to record transactions. We must be able to compare the value of the commodity with that of another, and thus to establish which goods we will buy with our limited supply of money. With a unit of account it becomes possible to measure the value of production, and of the national wealth. We have already considered the problems of barter where there is no common unit of account, and it does not require much imagination to understand the difficulties that would ensue if all of our output of goods and services and our total wealth involved adding up a wide range of goods rather than their monetary value. Our gross national product (GNP) would be quoted as so many cars plus many ships, and so on, instead of so many millions of pounds. Banking would certainly be impossible in such circumstances.

Store of value. The value of money must remain relatively constant, otherwise people would not wish to hold it. That is what is meant by a store of value. Even during periods of rather severe inflation, however, when the value of money has fallen quite rapidly, it has continued to function as money. But there is a limit beyond which confidence in a currency drops so much that the holders of it switch out of money and into commodities as soon as possible. When such a situation gets out of hand, a country is said to have hyperinflation and the consequence is certain to be that the money will have to be replaced. This happened in Germany in 1922-23 and in Hungary after the Second World War, and there have been other examples more recently. Until a new form of money is issued, the community will devise its own form of money by using such things as cigarettes as the medium of exchange and unit of account. There may also be a different unit of account for some purposes during such a period in that a foreign currency, e.g. US dollars, may be used as the unit of account for some contracts.

Standard for deferred payments. Money must be a means whereby debts may be measured and recorded and without which all transactions would have to be for cash and there would be no need for banks and other financial institutions. In other words money must be a standard for deferred payments. The majority of transactions

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between business are on credit terms: the supplier sends the goods to the buyer and records the transaction in his books and sends an invoice to the buyer. When the invoice is paid the book debt is paid off. Similarly if an individual buys a car he may pay a deposit and take credit for the remainder under a hire-purchase agreement or maybe a loan from his bank. He then pays off the debt on monthly installments. Such credit transactions would be possible if money was not acting as a standard for deferred payments.

You will realize, that this function is closely allied to the store of value function in that credit is unlikely to be given if the value of money is depreciating rapidly.

Characteristics of money

Money must have certain characteristics if it is to overcome the difficulties of barter. The characteristics of money are as follows:

1.Scarcity.

2.Uniformity and recognisability.

3.Divisibility.

4.Portability.

5.Durability.

6.Acceptability.

Scarcity. This characteristic has already been referred to when considering the function of money as a store of value. The money supply must be relatively scarce, and to this end it is usually controlled by a central authority, i.e. a government department (the Treasury) and/or the central bank. Unless money is limited in supply the community will be able to demand goods and services in excess of their supply and inflation will result. This means that prices will rise in an attempt to equate the demand for goods with the supply, and if prices are rising the value of money is falling. If the value of money falls it is not fulfilling its function as a store of value and therefore may no longer be acceptable as money. Price stability is also of importance in that the lack of it could affect our competitiveness abroad. If our rate of inflation is greater than that of other countries we will find it more difficult to sell our goods in those countries unless we allow the exchange rate (the rate at which our currency is exchanged for that of another country) to fall.

Uniformity and recognisability. Each unit of money must be the same in size and appearance and thus recognized for what it is. Hence, these days, coins for the same amount are uniform (sometimes referred to as homogeneous), i.e. identical, and are marked with their value, and similarly bank notes are readily identifiable by their size and what is printed on them.

Even intangible forms of money, such as bank and building society deposits, must be uniform in that they must be on a current or cheque-bearing account and

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must be with a reputable and recognizable deposit-taker, if they are to be acceptable as a means of payment.

Divisibility. The unit of account, for example the pound sterling, must be easily divisible in order that change may be given for transactions involving odd amounts. For this reason coins, or possibly bank notes, are issued for various small amounts such as the 1p, 2p, 5p, 10p, 20p, 50p and ₤1 coins with which we are familiar. Similarly notes are issued for larger sums than the ₤1 unit of account, so that payments can be more easily made for varying amounts of money. In some countries such as Italy the value of the unit of account is so small (the Italian lira) that it is not necessary for coins or notes to be issued for small amounts.

Portability. In modern times it would not be convenient for large forms of money to be used, such as the bags of grain used under the barter system, because they are not portable. All modern forms of money are easily portable, though even today we hear complains about the inconvenience of carrying more than a small number of the ₤1 coins about. If a unit of account depreciates rapidly there will possibly come a time when it will need to be replaced with a new unit (the new franc or the new lira) worth maybe 10 times or 100 times the value of the old unit. Otherwise considerable quantities of notes have to be carried about in order to pay even relatively small amounts.

For the supermarket holding and transporting large quantities of notes and coins can be risky and also expensive in terms of labour, and therefore the use of plastic means of payment has been encouraged by them. Some supermarkets even offer to supply their customers with bank notes when they use a Switch card, or similar card, as a means of payment, i.e. they add the amount of the cash to the bill for the goods being purchase.

Durability. In contrast to some of the commodities used as money under the barter system, modern forms of money are far more durable and this must be so if the money supply is to be used to cover the very large volume of transactions that take place in our form of society. Our modern coins last for years but when they are worn down they are replaced by new ones. Bank notes are less durable but nevertheless will last for some months, or even years, before they have to be replaced, provided that they are not misused.

Bank deposits.

1. Read and translate the text.

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2. Translate into Russian.

functions of money, bank deposits account, money supply, barter, bargain, indivisibility, perishable commodities, consistency of quality, double coincidence of wants, durable and divisible, the medium of exchange, valuable, unit of account, store of value, standard for deferred payments, reasonably stable in value, hire-purchase agreement, a loan, debt, scarcity, uniformity and recognisability, divisibility, portability, durability, acceptability, supply, competitiveness, coins, cheque-bearing account.

3. Answer the questions.

1.What does barter mean?

2.How many units of Commodity A must be handed over in exchange for a unit of Commodity B?

3.What problems arise with barter?

4.What can be used as the medium of exchange?

5.What are the four functions of money? Describe each of them.

6.What are the characteristics of money? Describe each of them.

4. Make short 3 reports.

a)about the exchange of goods;

b)about origins of money;

c)about functions of money;

d)about characteristics of money.

Text 8. Budget

The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description of the expected financial results of business activities. The assets should be valued with each and every cost. All other expenses are like labour factory overhead all freshmen expenses are also included into business budgeting.

The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year. While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in

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various departments (operations, human resources, IT, etc.) to list their expected revenues and expenses in the final budget.

If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result.

A budget is a fundamental tool for an event director to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even. A budget can also be used as a pricing tool.

There are two basic approaches or philosophies when it comes to budgeting. One approach focuses on mathematical models, and the other on people.

The first school of thought believes that financial models, if properly constructed, can be used to predict the future. The focus is on variables, inputs and outputs, drivers and the like. Investments of time and money are devoted to perfecting these models, which are typically held in some type of financial spreadsheet application.

The other school of thought holds that it’s not about models, it’s about people.

No matter how sophisticated models can get, the best information comes from the people in the business. The focus is therefore in engaging the managers in the business more fully in the budget process, and building accountability for the results. The companies that adhere to this approach have their managers develop their own budgets. While many companies would say that they do both, in reality the investment of time and money falls squarely in one approach or the other.

1.Read and translate the text.

2.Match the word combinations.

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2. ……… is a fundamental tool to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even.

6. Answer the questions.

1.What is a budget?

2.What should the budget contain?

3.Who compiles the budget?

4.What two basic approaches are used in budgeting?

5.How often is budget compiled?

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Text 9. Adam Smith and the Wealth of Nations

Seventeen seventy-six marked the publication in England of one the most influential books of our time, The Wealth of Nations. Written by Adam Smith, it earned the author the title “The Father of Economics”. Smith objected to the principal economic beliefs of his day. He differed with the physiocrats who argued that land was the only sources of wealth. He also disagreed with the mercantilists who measured the wealth of a nation by its money supply, and who called for government regulation of the economy in order to promote a “favorable balance of trade”.

In Smith’s view, a nation’s wealth was dependent upon production, not agriculture alone. How much it produced, he believed, dependent upon how well it combined labor and other factors of production. The more efficient the combination, the greater the output, and the greater the nation’s wealth. The heart of Smith’s economic philosophy was his belief that the economy would work best if left to function on its own without government regulation. In those circumstances, selfinterest would lead business firms to produce only those products that consumers wanted, and to produce them at the lowest possible cost. They would do this, not as a means of benefiting society, but in an effort to outperform their competitors and gain the greatest profit. But all this self-interest would benefit society as a whole by providing it with more and better goods and services, at the lowest prices. To explain why all society benefits when the economy is free of regulation, Smith used the metaphor of the “invisible hand”: “Every individual is continually exerting himself to find the most advantageous employment for whatever capital he can command. It is his own advantage, and not that of society, which he was in mind,…but he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention, for the pursuit of his own advantage necessarily leads him to prefer that employment which is most advantageous to society”. The “invisible hand” was Smith’s name for the economic forces that we today would call supply and demand, or the marketplace. He sharply disagreed with the mercantilists who, in their quest for a “favourable balance of trade”, called for regulation of the economy. Instead, Smith agreed with the physiocrats and their policy of “laissez faire”, letting individuals and businesses function without interference from government regulation or private monopolies. In that way, the “invisible hand” would be free to guide the economy and maximize production.

The Wealth of Nations goes on to describe the principal elements of the economic system. In a famous section, Smith turned to the pin industry to demonstrate how the division of labor and the use of machinery increased output.

“On man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations …”

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