12. Why does supply rise as the price rises and fall as the price

falls?

13.Why do critics argue that rising prices of goods whose supply is fixed serve no economic purpose?

14.What is the main argument for fixing prices?

Unit 4. ECONOMIC PROBLEMS

Text A. Inflation

Inflation is the loss in purchasing power of a currency unit usually expressed as a general rise in the prices of goods and services. In modern times inflation continues to be blamed on private greed, and governments still seek to restrain it by laws and regulations, sometimes even devaluating their currencies as they do so. The United States has experienced much inflation during the twentieth century, especially since official efforts to maintain the gold price at thirty-five dollars an ounce did not succeed during the presidencies of Lyndon Johnson and Richard Nixon.

There are many measures of inflation. The most widely watched measure is the consumer price index (CPI). Other popular indicators of inflation include producer prices and unit-value indexes for imports and exports. As we move back through the distribution chain from the consumer toward the supplier of raw materials, a more complicated picture of inflation is revealed at each step. Commodities, which prices can be monitored continuously on centralized exchanges, and which are easy to measure, are the most volatile indicators of all. An index of commodity prices, when plotted on a graph, looks much like an index of stock prices.

Still more difficult than measuring inflation is the problem of identifying its causes. In spite of its long and rich history, few subjects in the field of economics are more confused. Professional economists have not reached agreement as to the origins of the inflation process. Two camps

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dominate the debate. Some see inflation as a malady of the currency. In the words of Milton Friedman, "Inflation is always and everywhere a monetary problem." Others see non-monetary forces at work, such as monopolies, union demands for higher wages, or the wage-price policy.

Non-monetary theories of inflation traditionally separate "demandpull" factors from "cost-push" factors like oil, monopoly power, or wages. A surge in the demand for goods and services in general (aggregate demand) is thought to "pull" prices up across the board, especially when aggregate supply is held back by inertia or capacity limitations. Skeptics rightly question how demand could constantly outstrip supply. Surely, demand must originate from purchasing power, purchasing power from wealth, wealth from income, and income from the ability to produce goods and services.

Other logical objections to the idea of demand-pull inflation center on the importance of money. How could prices rise without a commensurate increase in the quantity of money in private hands? If such a thing happened, the purchasing power of the quantity of money would have declined involuntarily, and that would not be consistent with market equilibrium.

The monetarist argue that increases in the quantity of money cause inflation. Critics of this view point out that the quantity of money is difficult to define, especially when funds can be transferred electronically and credit cards can substitute for cash.

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Questions to the Text

1.What is inflation?

2.What is it usually blamed on?

3.How do governments seek to restrain inflations?

4.What is the most widely watched measure of inflation?

5.What are the most volatile indicators of inflation?

6.Is it easy to define the root causes of inflation?

7.What are the two camps of professional economists which dominate the debate on the root causes of inflation?

8.What explanation of the causes of inflation do the nonmonetary theories suggest?

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9.What are the objections to the non-monetary explanation of inflation causes?

10.How do the economists of the monetarist school explain

inflation?

Text В. Unemployment in the USA

Few economic indicators are of more concern to Americans than unemployment statistics. Each month, the federal government's Bureau of Labour Statistics surveys sixty thousand individuals around the nation. If respondents say they are both out of work and seeking employment, they are counted as unemployed members of the labour force. Jobless respondents who have chosen not to continue looking for work are considered out of the labour force and therefore are not counted as unemployed. Often unemployment figures decrease because people leave the labour force. Those who leave the labour force actually make unemployment rates look better; the unemployment rate includes only people within the labour force who are out of work.

Not all unemployment is the same. Unemployment can be long- or short-term. Unemployment can be frictional, meaning someone is between jobs. Unemployment is called structural when someone's skills are no longer demanded because of a change in technology or an industry downturn.

Some economists say there are reasons to think that unemployment in the United States is not a big problem. In 1991 32.8 percent of all unemployed people were under the age of twenty-four and presumably few of these were the main source of income for their families. One out of six unemployed people is a teenager. Moreover, the average duration of a spell of unemployment is short. In 1991 it was 13.8 weeks.

On the basis of these numbers many economists have thought that unemployment is not a very large problem. A few weeks of unemployment seems to them like just enough time for people to move from one job to another. Yet these numbers are misleading. Much of the reason why

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unemployment spells appear short is that many workers drop out from the labour force at least temporarily because they cannot find attractive jobs.

To fully understand unemployment, we must consider the causes of long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways. First, government assistance increases unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labour force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labour force even though these people are better described as nonemployed. The second way government assistance programs contribute to long-term unemployment is by providing an incentive not to work. Each unemployed person has a "reservation wage" — the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Consider, for example, an unemployed person who is used to making $ 10.00 an hour. On unemployment insurance this person receives about 55 percent of normal earnings, or $5.50 per lost work hour. If that person pays 15 percent federal tax, and a 3 percent state tax, he or she pays $0.99 in taxes per hour not worked and nets $4.51 per hour after taxes as compensation for not working. If that person took a job that paid $10.00 per hour, governments would take 18 percent for income taxes and 7.5 percent for Social Security taxes, leaving him or her $7.45 per hour of work. Comparing the two payments, this person may decide that a day of leisure is worth more than the extra $2.94 an hour the job would pay. If so, this means that the unemployment insurance raises the person's reservation wage to above $10.00 per hour.

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It is a great mistake to attribute most unemployment to government interventions in the economy or to any lack of desire to work on the part of the unemployed. Unemployment was a serious economic problem in the late nineteenth and early twentieth centuries. The Great Depression, when unemployment in the United States reached 25 percent, is the classic example of the damage that collapses in credit can do. Since then, most economists have agreed that cyclical fluctuations in unemployment are caused by changes in the demand for labour, not by changes in workers" desires to work, and that unemployment in recessions is involuntary.

Moreover, a large part of unemployment is due to demand factors rather than supply. High unemployment in Texas in the early eighties, for example, was due to collapsing oil prices. Therefore, most economists who study unemployment support an active government role in training and retraining workers and in maintaining stable demand for labour.

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Questions to the text

1.How is unemployment measured in the USA?

2.Who is counted as an unemployed member of the labour

force?

3.What jobless people are not counted as unemployed?

4.What are the types of unemployment?

5.What is frictional unemployment?

6.What is structural unemployment?

7.Why do many economists think that unemployment in the USA is not a big problem?

8.Why are some optimistic numbers on employment

misleading?

9.What are the causes of long-term unemployment?

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