Английский язык экономика. Учебно-методическое пособие по научно-техническому переводу, аннотированию и реферированию

UNIT 7

Part 1. Text. Macroeconomic Data

Microeconomics magnifies the detail in order to analyse particular markets. In contrast, macroeconomics simplifies the building blocks in order to focus on how they fit together as a whole. The media are always discussing problems of slow growth, inflation, unemployment, and the future of national currencies. These issues help determine the outcome of elections, and make some people interested in learning more about macroeconomics.

Macroeconomics studies the economy as a whole.

Table 5 shows both national income and income per person in the Group of Seven or G7, the largest of the rich industrial countries.

In total, Americans earned $9.6 trillion in 2000, or about $34000 a person. Japanese national income was $3.3 trillion, which implied about $26000 a person. Although China, India and Russia are much less developed, and thus have lower incomes per person, they have such large populations that their total incomes are large. Tab. 5 shows that China now has the second largest national income in the world, despite the fact that its citizens each earn only a tenth as much as the average American.

We now explain what the concepts of national income and national output mean, and how they are measured.

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Households and firms

Households own land, labour and capital, whose services they rent to firms as production inputs. Households spend this income buying the output of firms.

The circular flow is the flow of inputs, outputs and payments between firms and households.

In Figure 12, the inner loop shows the flows of real resources between the two sectors, and the outer loop shows the corresponding flows of payments.

Fig. 12. The circular flow between firms and households

This suggests three ways to measure the amount of economic activity in an economy: (a) the net value of goods and services produced; (b) the value of household earnings; and (c) the value of spending on the final output of firms. Whether we measure net output, incomes (including profit) or final spending, we get the same answer for GDP.

Gross domestic product (GDP) measures an economy’s output. However, there are several complications. First, the output of firms

is not all sold to households. The concept of value added avoids double counting the output that some firms buy from other firms.

Value added is net output, after deducting goods used up during the production process.

From gross output we deduct the use of raw materials and partly finished goods, but not the cost of labour or capital. The steel in a car door was already counted as the output of the steel producer, and must not be counted again as part of the output of the car producer.

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We do not deduct the labour of car workers from car output, since car workers were not produced and measured elsewhere in the economy. Nor do we deduct the cost of using the assembly line that made cars. Provided this capital input does not depreciate, it is available next period to make yet more cars, and hence was not used up.

Total value added is the net output of the economy. One way or another this is paid to households as income and profits, and this income is spent buying the final output that firms sell to end users. So far, households are the only end users.

Leakages and injections

Saving S is the part of income not spent buying output. Investment I is firms’ purchases of new capital goods made by other firms.

If households earn £7000 but spend only £5000 on consumption C, they must save the other £2000. To pay out incomes of £7000, firms must have value added of £7000 which is sold to end users. If £5000 is sold to households for consumption, the other £2000 must have been sold to firms buying new capital goods. These firms are end users because this capital is not then used up as a production input.

Saving is a leakage from the circular flow, money paid to households but not returned to firms as spending. Investment is an injection to the circular flow, money earned by firms but not from sales to households. Leakages always equal injections, as a matter of definition.

The only way to measure saving is to measure the part of income not spent on output. Since income equals output, which is either goods for households or investment goods for firms, saving must equal investment. By definition.

Similarly, suppose firms do not sell all their output. We treat the flow of unsold goods as temporary investment by firms to add to their stock of working capital. Household consumption plus total investment still equal output and spending. When stocks are run down, this is negative investment, again keeping the accounting straight.

Adding the government and foreign countries

The government is also an end user, buying the output of firms (education, health, tanks). Governments also spend money on welfare benefits В for things like pensions, jobseekers allowance and income support. Not being physical output, these subsidies or transfer payments are not part

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of GDP. They get counted later when spent on household consumption. However, government purchases G of final output are part of GDP. Government spending, both on physical goods and services and on monetary transfer payments, are financed by taxes T.

Finally, we add trade with the rest of the world. Net exports add to GDP.

Exports X are made at home but sold abroad. Imports Z are made abroad but bought at home.

Domestic output is bought for consumption C, investment I, government spending G, and exports X. Subtracting the import content Z in these goods, GDP = (C + I + G + X – Z).

This is paid out as incomes and profits to households, who use it for consumption, saving or paying taxes net of benefits received. Thus GDP = (C + S + T – B). These two measures of GDP must be equal. Deducting consumption from both measures (T + G + X – Z) = (S +T – B). Hence

Total leakages Total injections

S + (T – B) + Z = T + G + X

Total leakages from the circular flow (saving, net tax payments and imports) are money from domestic firms that households do not recycle to domestic firms again. Total injections (firms’ investment, government purchases and exports) are sources of firms’ revenue not originating from households. Total leakages still equal total injections.

Saving need no longer equal investment. But we recover that special case if all transactions with government and foreigners are zero.

From GDP to GNP

To complete the national accounts, we deal with two final problems. First, foreigners own some of our capital and land, and we own some assets abroad. These assets or property earn income unconnected with domestic output.

Gross National Product GNP is the total income of citizens wherever it is earned. It is GDP plus net property income from abroad.

If the UK has an inflow of £2 billion from foreign assets, but an outflow of £1 billion in property income to foreigners, UK GNP, the income of UK citizens, is £1 billion more than UK GDP, the value of output in the UK. The final complication is depreciation.

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Depreciation is the fall in value of the capital stock during the period through use and obsolescence.

Depreciation is an economic cost, reducing net output in any period. Deducting depreciation from GNP yields net national product NNP or national income.

National income is GNP minus depreciation during the period.

Our national accounts are now complete, but can you remember them? Fig. 13 will help to keep you straight.

Fig. 13. National income accounting: a summary

What GNP measures

Depreciation, being hard to measure, is treated differently in different countries. Most international comparisons use GNP, which avoids the need to argue about depreciation.

Nominal GNP is measured at the prices when income was earned. Real GNP adjusts for inflation by valuing GNP in different years at the prices prevailing at a particular date.

Since it is physical quantities of output that yield utility or happiness, it is misleading to judge economic performance by nominal GNP. GNP in the UK rose from £25 billion in 1960 to over £935 billion in 2001. Yet prices in 2001 were 15 times higher than in 1960. The rise in real GNP was much less dramatic than the rise in nominal GNP, much of which reflected inflation.

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What GNP omits

In practice, GNP omits some things that ideally should be included. First, some outputs, such as noise, pollution and congestion, reduce true economic output and should be deducted from the usual GNP measure. This is logically correct but hard to implement. These ‘bads’ are not traded in markets, so it is hard to quantify them or value the costs they impose.

These activities include work at home and unreported jobs. Moreover, deducting environmental depreciation from measures of national output and income would radically alter our view of how well different countries are doing, and might affect the political incentives to pay more attention to such issues.

Leisure is also a valuable commodity. If two countries make the same output of consumer goods but one delivers more leisure for its residents, its net output of relevant economic goodies is higher. Yet conventional measures of GNP and GDP ignore leisure completely. Standard measures are confined to what is easily measured. Often national statistics are the byproduct of tax collection or other government activities. As macro-econ- omists, we have to deal in the statistics that we have, which are not always the ones we would like to have.

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Exercises

Exercise 1. Suggest the Russian equivalents for the words and word-combinations given below.

National currencies, circular flow, inner/ outer loop, Gross Domestic Product (GDP), value added, net output, end users, temporary investment, Gross National Product (GNP), national income.

Exercise 2. Match the words with their definitions.

Exercise 3. Choose one of the words from Exercise 2 to make the sentences complete.

1.She made an ... of $1000 in the new firm.

2.The drug is taken by ... .

3.The bank charges a fixed rate for each ... .

4.What are your take-home ... after tax and deductions?

5.... of cars was caused by creation of new cheap models.

6.How long will coal ... last?

7.The British teachers in China were paid in local ... .

8.The company’s liquid ... are enormous.

Exercise 4. The table shows how words are formed around the word to employ.

Use these words in the suitable blanks in the sentences below.

1.The number of people in ... has fallen.

2.This firm’s staff is great: 200 ... and 500 workers.

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3.The new contract will enable us ... 50 extra people.

4.In this period ... reached record levels.

5.The word ... means to be suitable to work.

6.The car industry is one of the biggest ... in our country.

7.The number of ... is rising all the time.

Exercise 5. Increase your vocabulary

Make some sentences of your own with the above expressions. Exercise 6. Describe the chart given in Fig. 12.

Exercise 7. Do the written translation of the passage

“In practice, GNP omits ... which are not always the ones we would like to have”.

Exercise 8. Review questions.

1. The table shows final sales and purchases of intermediate goods in car production. What is the industry’s contribution to GDP?

2.GNP is 300 pounds. Depreciation is 30 pounds and net property income is – 3 pounds. Find the values of national income and GDP.

3.The output of the police is not marketed. GDP statistics use police wages to measure their output. If crime falls, we need fewer police. What happens to measured GDP? Is the country better off?

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4. Should the following ideally be in GNP?

a)time spent by students in lectures;

b)the income of muggers;

c)time spent watching football;

d)the salary of traffic wardens.

Exercise 9. Look through the text once more, find key-words in it and write an abstract of the text using the key-words.

Part 2. An insight into how economics applies to the real world

How Big Is the Hidden Economy?

The gangster Al Capone, never charged with murder or gun running, was eventually convicted of income tax evasion. Taxes are evaded not only by smugglers and drug dealers but also by gardeners, plumbers, street vendors, and others working ‘for cash’. Since estimates of GNP are derived from tax statistics, the ‘hidden’ economy is omitted from GNP (Fig. 14).

Fig. 14

To estimate the size of the hidden economy we can keep track of what people spend. Maria Lacko used the stable relationship between household consumption of electricity and its two main determinants – income and weather temperature – to estimate incomes by studying available data on electricity consumption and the weather. The hidden economy is large both in the former communist economies, where the new private sector is not

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yet part of official statistics, and in several Mediterranean countries with a long history of tax evasion.

Source: M. Lacko, The Hungarian Hidden Economy in International Comparisons, Institute of Economics, Budapest, 1996

Assignments

1.Mind the famous film of 1950s “Some like it hot” where the conflicts between bootleggers and the police were shown. The main reason of these conflicts was in income tax evasion, wasn’t it?

Give your pros and cons.

2.Write an essay about the hidden economy in our country (with examples) in about 15–20 sentences.

3.Why is this statement wrong? «Unemployment benefit raises national income in years when employment is low.» Discuss in your group.

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