Exercise 1. Check your understanding

Now read the text carefully, looking up any new items in a dictionary or reference book. Then answer the following questions:

1. What do you need in order to understand economics?

2. What happened to the price of oil from 1900 to 1973?

3. What did OPEC decide in 1973?

4. Why was there only a small reduction in oil sales?

5. What did the oil price shocks lead to?

6. How do people respond to a higher price for a commodity?

7. What effect do higher oil prices have on the economy?

8. What happens throughout the economy when there are high oil prices?

9. What two effects did high prices have on oil-importing countries?

10. When did oil become scarce?

Exercise 2. Increase your vocabulary

In this section you should use your dictionary to help you answer the questions about the text.

1. Look at the first paragraph and say which words correspond to these definitions:

• a book which teaches you something

• gives as a share

• supply of goods, raw materials etc.

• separation into parts by examination

2. Look at paragraph 2 again and say what words have the opposite meaning to:

• rare, scarce

• outputs

• expensive

• fell, decreased

3. Look at paragraph 3 again and say what words have the same meaning as:

• sudden

• people who used goods or services

• realising

• replacements

• large

4. Look at paragraph 4 again. Can you explain the words:

• quoted

• gradual rise

• sharp increase

5. Look at paragraph 5 again and say what these words refer to:

• line 4: it

• line 5: it

6. Look at paragraph 6 again and say what words have the same meaning as:

• as a rule

• cut down

• six times

7. Look at paragraph 7 again. Can you explain the words:

• household

• commuter

• commodities

• designer

• architect

8. Look at paragraph 8 again and say what words have the opposite meaning to:

• exports

• straightforward

• get, acquire

• didn't need

• getting smaller

• getting larger

9. Look at paragraph 9 again. Can you explain the definition of a scarce resource in your own words?

Exercise 1.2 (Study Guide, unit 1). Find in the text English equivalents to the following words and word combinations:

распределять ограниченные ресурсы; нефть и ее производные; основное сырье; предметы домашнего обихода; экономическая деятельность; страны-производители нефти; увеличить цену; экономить на потреблении нефти; сокращение величины спроса; застать врасплох; вызвать переворот в мировой экономике; реагировать на цены; производить товары и услуги; создавать искусственные заменители; производственный процесс; снизить /подавить/ спрос на; побудить потребителей покупать товары-заменители; набавлять цену; солнечная энергия; доходы от продаж; промышленно развитые страны Запада; в обмен на; с точки зрения товаров в целом; увеличить покупательную способность; создавать заменители нефти; привлечь дополнительную рабочую силу; превышать предложение

Exercise 4. Translate.

1. Решение вопроса о распределении ограниченных ресурсов в экономике (общества) зависит от того, что именно, каким способом и для кого данное общество намерено производить.

2. Цены на нефть стабильно растут и отсюда, естественно, следует, что потребители нефти пытаются более экономно ее использовать.

3. Невероятный скачок цен на нефть в 70-х годах привел к резкому изменению экономической среды в целом. Однако результатом этого было лишь несущественное снижение объема продаж.

4. Резкое снижение спроса на нефть способствовало росту производства заменителей нефти.

5. Расширяющиеся отрасли производства для привлечения дополнительной рабочей силы вынуждены повышать уровень заработной платы. Возросшие доходы поднимают покупательную способность общества.

Exercise 5. Discuss.

1. If a society was richly endowed with natural resources, would it not face the economic problem?

2. What would be the benefits and costs to the world economy of a substantial fall in the price of oil?

3. Must goods be at least temporarily unattainable to be scarce?

4. Would it ever be desirable to have total equality in an economy?

Exercise 6. Reading an article.

OPEC’s symbolic move

Jun 16th 2005 From The Economist Global Agenda

FOR years now, pessimists have been proclaiming that oil prices were about to bring a dread reckoning on a world thirsting for energy. These days, there must be more than a few red faces at the Legion of Doom. Their predictions of devastating economic effects from high oil prices came to naught as the black stuff soared past $30, then $40, then $50 a barrel, and the world economy posted the best growth rates in a generation. Even more embarrassingly, the gluttonous United States has outperformed its oil-sipping peers.

Nonetheless, even members of the Organisation of the Petroleum Exporting Countries (OPEC), whose oil wells might as well be pumping out hundred dollar bills, are looking for ways to calm prices. They fear that a sustained period of expensive oil, such as the one in the 1970s, during the cartel’s formative years, will bring about a global economic downturn that slashes demand for their product—or worse, spur consuming nations to make their economies more oil-efficient. In the latest OPEC meeting, held on Wednesday June 15th, fretful members like Nigeria overcame the resistance of hawks like Venezuela to secure an increase in official production levels. Members agreed to an immediate quota increase of 500,000 barrels per day (bpd), to 28m bpd, and said they would consider a further 500,000 bpd increase later in the year if prices stay too high.

Unfortunately for oil consumers, this is more of a symbolic effort than a real attempt to ease oil prices. Thanks to cheating by members on their quotas, OPEC is already pumping at least 28m bpd, and possibly as much as 30m. The quota increase merely legitimises activity that is already taking place. Worse, OPEC may not be twiddling its thumbs because it wants, despite the rhetoric, to keep prices high, but because its members lack the capacity to increase production.

OPEC members, particularly Saudi Arabia, the cartel’s swing producer, have historically maintained a buffer of spare production capacity which could be brought online if prices surged. In recent years, however, that buffer has been run down, in part due to soaring demand and in part thanks to the bitter memory of $10-a-barrel oil, which has made oil producers leery of ramping up production capacity too quickly.

Non-OPEC sources of oil are even tighter. Russia, which has been growing its production rapidly in recent years, has seen output stagnate over the past few months. Its oil-transport infrastructure may be close to capacity, and government interference in the energy sector has had the effect of lowering output. Elsewhere, the big oilfields that were developed in the wake of the 1970s oil crises have begun to decline, and oil companies are having to look to undeveloped regions where big investments in technology are needed to get the oil out of the ground, and political and legal risks are often high. For these reasons, global spare capacity has dropped close to a 20-year low.

But this does not mean, as some alarmists are arguing, that world oil production is nearing its peak. There is room for OPEC’s members to increase the amount they pump; it is the memory of $10 oil, not physical limits, that is holding them back. And constantly improving technology is not only raising yields in oilfields everywhere, but also opening up new sources of oil. Companies are going after the stuff under deep water, or locked in unconventional sources, such as oil shale or Canada’s tar sands.

Refining their thinking

However, the fact that there are additional sources of oil to be exploited does not necessarily mean that oil will be cheap. Already, many — including OPEC — are warning that tight refining capacity is an even bigger problem than oil production. Any extra oil that OPEC produces right now will be heavy, high-sulphur crude, which requires high-tech refineries to make the end products meet western environmental standards. But that sort of refinery capacity is already stretched. OPEC ministers have essentially admitted that the current round of quota increases will have no effect on price, saying that until there is more refinery capacity, there is little they can do. The market seems to agree. The price of West Texas crude rose sharply in New York on Wednesday, topping $56 at one point, thanks in part to news that oil inventories had declined by more than expected as America heads into the summer driving season.

There is fierce resistance to building new refineries in rich-world, oil-consuming nations. Moreover, in America subtle differences between the states’ oil-composition standards mean that refiners are forced to make large numbers of small production runs. This not only limits their efficiency but also sometimes causes price spikes as consumers are left stranded, unable to buy “foreign” petrol that does not meet their local standards. Technological advances have so far enabled refiners to eke out more production from existing facilities. But the potential bottlenecks leave consumers vulnerable to price swings.

So far, however, consumers don’t seem to care. High oil prices have had little noticeable impact on world demand—even for oil itself—leaving analysts scrambling for an explanation. Some look to governments, which in the 1970s took vigorous action to improve the energy efficiency of their economies by enacting things like gas taxes and fuel-efficiency standards. There has been little such activity this time around.

Others think that price increases up to a certain point may have little effect, but that even moderate increases after that point (whatever it is) might produce sharp changes in consumers’ behaviour. And still others argue that consumer reaction has been muted because the latest round of price increases, unlike past rounds, has been driven by increasing demand, rather than a sudden contraction in supply. The economic growth driving the higher demand, they argue, may be offsetting the negative effects of high oil prices. Or it may simply be that demand-driven increases are more gradual than those following a supply shock, giving consumers, and economies, time to adjust gracefully.

But now that the world economy is bumping up against short-term supply limitations, that may change. Saudi Arabia seems to be in the process of rebuilding OPEC’s buffer, but this will take time. In the meantime, even if prices fall, they are likely to remain volatile, as even small shocks to supply (a few exploded refineries in Iraq, say) will be able to produce a sudden sharp mismatch between supply and demand. Until the world develops some spare capacity, the road ahead looks sure to be bumpy—particularly if you are driving an SUV.

Exercise 7. Case study.

Collect additional information concerning the world demand for and supply for oil. Exchange your findings with the group and discuss the current oil market situation.

Write a short essay describing the current trends in oil prices:

• What political or economic factors stand behind the high/low price.

• How the current price affects the world distribution of income.

• How it impacts the Russian economy.

Optional: Extract from Videotape “Introduction to Macroeconomics” - oil price shocks of the 70’s

I-3. Types of Economic Systems

Every society has worked out a way to answer the question of What, How and Who. These economic systems, as they are called, generally fall into one of three categories: traditional, command and market economies.

The Traditional Economy.

As the name implies, the answers to the What, How and Who questions are decided by tradition in these economies.

Traditional economic systems are usually found in the more remote areas of the world. Such systems may characterize isolated tribes or groups, or even entire countries. They are less common today than they were in earlier decades. Typically, in a traditional economy, most of the people live in rural areas and engage in agriculture or other basic activities such as fishing or hunting. The goods and services produced in such a system tend to be those that have been produced for many years or even generations. They are produced as they always have been. In short, the questions of what the traditional society produces and how it is produced are determined by very slowly changing traditions.

Who gets to keep what is produced in such an economy? Since there is little produced, there is little to go around. Most individuals live near a subsistence level: They have enough to sustain them but little more than that. In some years, when the harvest is poor, some will not be able to subsist and will either leave the society or die. In better years, when the yield is high, there may be more than enough to allow subsistence. When such a surplus exists, it will be distributed traditionally. For example, the bulk of the produce might go to a tribal chief or large landholder, while the balance is distributed according to custom.

The Command Economy.

Countries such as the Soviet Union, Albania, and China are examples of command economies. Groups of high-level technicians, made up of engineers, economists, computer experts and industry specialists known as "planners," advise political leaders who develop and implement a plan for the entire economy.

Essentially, it is the planners who decide what goods and services will be produced. If they want ship production expanded and mining operations cut back, they issue the orders to do so. If more food is needed, the planners might direct tractor production to be increased or fertilizers to be imported from the West. Those same plans might also encourage labor to remain on the farms and direct that transportation and storage facilities be made available to move and hold farm products.

How are goods produced in a command economy? The planners decide which products will be made. They decide where to locate a new truck assembly plant and whether the factory will use more labor or more modern machinery.

It is the planners, too, with guidance from the country's political leadership, who decide who will receive the goods and services produced. By setting wage rates for everyone, as well as interest rates, profits and rents, the planners directly answer the question: Who will receive the goods and services produced?

The Market Economy.

When the fastest-rising young rock group, the And-So-Forths, appeared recently in a televised concert, they wore old-fashioned saddle shoes. That week shoe stores around the country reported receiving calls for saddle shoes "like the And-So-Forths wear." Although some of the storekeepers thought the first customers to ask for the strange shoe style were joking, they soon got the message. Before long, saddle shoes could be seen in most of the nation's shoe stores.

The events described in the paragraph above probably would not have taken place in a traditional or a command economy. Changes in clothing styles in a traditional society could occur only over a period of many years. Those who make the decisions in a command economy might give in to public pressure and produce saddle shoes, but it is their decision to make. In a market economy, or free enterprise system as it is sometimes called, it is likely that if consumers really want saddle shoes, they will get them.

A market, or free enterprise, economy is one in which the decisions of many individual buyers and sellers interact to determine the answers to the questions of What, How and Who.

In addition to buyers and sellers, there are several other essential elements in a market economy. One of these is private property. By "private property" we mean the right of individuals and business firms to own the means of production. Although markets exist in traditional and command economies, the major means of production (firms, factories, farms, mines, etc.) are usually publicly owned. That is, they are owned by groups of people or by the government. In a market economy the means of production are owned by private individuals. Private ownership gives people the incentive to use their property to produce things that will sell and earn them a profit.

This desire to earn profits is a second ingredient in a market economy. Often referred to as the profit motive, it provides the fuel that drives sellers to produce the things that buyers want, and at a price they are willing to pay.

The profit motive also gives sellers the incentive to produce at the lowest possible cost. Why? Because lower costs enable them to (1) increase their profit margins, the difference between cost and selling price, or (2) reduce prices to undersell the competition, or (3) both.

Economists often compare markets to polling booths. However, unlike the booths in which people vote for politicians, markets provide a kind of economic polling booth for buyers to cast their votes (in the form of purchases) for the goods and services they want. Producers who interpret the votes correctly by producing the things that buyers demand can earn profits. Those who interpret the voting incorrectly, producing too much or too little, or charging a price that is too high or too low, do not earn profits. In fact, they often lose money.

As hundreds of thousands of followers of the And-So-Forths descended upon their local shoe stores in search of saddle shoes, the store managers did their best to find the hot new item. They did this because they knew that the sales of these shoes would add to their profits. Manufacturers soon learned about the calls for the new shoe style from their wholesale customers and did their best to satisfy the requests because they too were interested in profits.

Mixed Economies.

What most distinguishes command economies from market economies is the role of government and the ownership of the means of production. We have seen that in command economies factories, farms, stores, and other productive resources are government owned. We have also noted that the economic questions of What, How, and Who are answered by government planners. In contrast, market economies look to the decisions of individual buyers and sellers to answer the same questions, and the means of production are privately owned. Government plays a relatively minor part in this model.

There are, however, no "pure" market economies in the world today. While we can say that markets account for most economic decisions in this country, government has been playing an ever-widening and important role. For example, 50 years ago, government purchased 15 percent of all American goods and services. It now purchases 20 percent.

This blend of market forces and government participation has led economists to describe our economic system and those of most other democratic countries as mixed economies.

Recent changes in the economies of the Soviet Union, China, and certain other communist countries, have served to bring elements of the market into those command economies. As the number of privately owned businesses has increased, economists have begun to refer to those nations as having “mixed economies.”

Exercise 1. Translate from English into Russian and back:

1. The free market allows individuals to pursue their self-interest without any government restrictions.

2. The command economy allows little scope for individual economic freedom since most decisions are taken centrally by the government.

3. In a mixed economy the government and private sector interact in solving economic problems. The government controls a significant share of output through taxation, transfer payments and the provision of goods and services such as defence and the police force. It also regulates the extent to which individuals may pursue their own self-interest.

Exercise 2. Discuss.

1. Most economists would prefer to categorize the U.S. economy as a mixed economy. Why don’t they call it a market economy?

2. Suppose in your previous life you were an economic advisor to Nikita Khrushchev of the Soviet Union. How did you, as a central planner, decide what, how and for whom to produce goods and services in a country of roughly 123 million people at the time?

3. What is the meaning of “free” in free market?

4. Proponents of free market systems argue that free enterprise leads to more efficient production and better response to changing consumer preferences. But others point to the fact that markets are not perfect. Why aren’t markets perfect?

Exercise 3. Write a short essay on one of the following topics:

1. The strength of the marketplace and motivations for government involvement.

2. Russia – from plan to market.

Exercise 4. Understanding a lecture: Yates, Unit 3.

1. You are now going to hear part of a lecture, divided into short sections to help you understand it. As you listen, answer the questions below.

Section 1

Complete the following statement with the words the lecturer uses:

• Markets are _________________through which prices influence how we ____________________.

• Note down how many kinds of economy the lecturer is going to talk about.

Section 2

• Note down the first kind of economy.

________________________________________________________________________________

• Is this statement correct or incorrect?

In this kind of economy the government decides what should be produced and what should be consumed.

Section 3

• Is this statement correct or incorrect?

To plan this kind of economy is very simple.

• Note down the country that is an example of this kind of economy.

________________________________________________________________________________

• Is this statement correct or incorrect?

In this kind of economy the government does not own factories or land.

Section 4

• Note down the kind of economy the lecturer is talking about.

________________________________________________________________________________

• Is this statement correct or incorrect? “You cannot become a millionaire in this kind of economy.”

• Note down the country that is an example of this kind of economy.

________________________________________________________________________________

Section 5

• Note down the kind of economy the lecturer is talking about.

________________________________________________________________________________

• Which two sections of society interact in this kind of economy?

________________________________________________________________________________

• Is this statement correct or incorrect? “Most countries have economies of this kind.”

2. Make sure you know the English equivalents to the collocations below:

• командная экономика

• планирующий орган

• центральное планирование и руководство

• свободный рынок

• вмешиваться

• преследовать собственные интересы

• превышать благосостояние

• создавать новые рабочие места

• государственное вмешательство

• смешанная экономика

• государственные ограничения

3. You should also write a summary of the lecture, based on your notes.

Exercise 5. Listening (from Guide to Economics, unit 3 C, F and unit 4 C, F) –

Track 08 – Traditional society

• Pygmies live in ………………………………. They are known for their …………………………

They live in societies that …………………………..

• The Mbuti live in ……………………………..… They live in houses made ………………………………

Describe their way of life.

Track 09 – Market economy

Adam Smith’s invisible hand theory:

1. People are naturally selfish / helpful.

2. The free market only demands what is good for society/ producers.

3. When people work for their own good, they do good for consumers/ society also.

In the real economy

4. In the free market there is demand for goods which are not expensive/ necessary.

5. There is also demand for goods which …………………

6. The market/Advertising can create demands that do not normally exist.

Track 11 – Command economy in Rita’s story

Track 12 - Mixed economy through discussion

Here is a list of arguments against state-run hospitals and arguments against private hospitals. After your first listening, try to fill in the table yourself. After the second listening, check your answers with the help of the statements given, which have to be properly classified.

Against state-run hospitals	Against private hospitals

1. Long waiting lists for patients

2. Only the rich can afford health care

3. Staff are poorly paid

4. Taxpayers support everyone

5. Badly organized

6. Creates a class of poor, unhealthy people

7. Hospitals in bad condition

8. Hospitals will reduce costs to make money

9. Is bad for society in general

Exercise 3.10 (Study Guide). Complete the text using the words in the box.

An invisible hand

adjustment in prices

command

a central planning office

markets

mixed

government

free market

private sector

self-interest

Industrial Western countries rely extensively on ___/1/ to allocate resources. It is the process by which production and consumption decisions are coordinated through ___/2/.

In a ___/3/ economy, government makes all decisions about production and consumption. Typically, ___/4/ draws up a plan, which is then put into effect by regional and local government agencies.

A ___/5/ economy has no government intervention. Resources are allocated entirely through markets in which individuals pursue their ___/6/. Adam Smith argued that ___/7/ would nevertheless allocate resources efficiently.

Between these two extremes lies ___/8/ economy. Both ___/9/ and ___/10/ play important roles in answering the “what”, “how”, and “for whom” questions for society as a whole.

Exercise 3.12 (Study Guide). Say whether the following statements are true or false. Explain.

1. Society allocates its scarce resources exclusively through markets.

2. A market exists only if there are buyers and sellers.

3. Markets can resolve all basic questions.

4. In a free market economy, resources are allocated through the “invisible hand” of government planning.

5. In command economies, economic resources are not scarce because they are not privately owned.

6. In a free market economy, all markets are organised in the same way.

7. In a command economy, the government decides what and for whom to produce, but the resolution of the “how” question lies with the private sector.

Exercise 3.13 (Study Guide). Choose the right answer and comment on your choice.

1. In order to have a market, you must have:

1. a building that contains retail establishments;

2. buyers and sellers;

3. a high degree of competition;

4. brokers and financial institutions

2. The question of what, how, and for whom to produce are fundamental economic problems of:

1. mixed economies;

2. market economies;

3. planned economies;

4. all economies

3. A pure market economy allocates its resources primarily through:

1. central planning;

2. the price system;

3. legislation;

4. government regulation

4. The “for whom” question in a market economy is answered by allocating goods:

1. to those who are willing and able to pay;

2. on an equal, per capita level;

3. according to consumer needs;

4. on a first come, first served basis

5. Which of the following government functions would not be normal in a mixed economy:

1. antitrust activity;

2. public utility regulation;

3. comprehensive planning of the economy’s output;

4. antipollution standards

Exercise 3.14 (Study Guide). Translation

1. В командной экономике все решения о том, что, как и для кого производить, должны были бы приниматься государством.

2. Управление такого рода экономикой было бы почти наверняка неразрешимой задачей для государства; в действительности, чисто командных экономик не существует.

3. В экономике свободного рынка государство не играло бы никакой роли в распределении ресурсов; взаимодействие решений фирм и домашних хозяйств осуществлялось бы посредством рынков для принятия решений о том, что, как и для кого производить.

4. Адам Смит утверждал, что индивиды, руководствуясь своими собственными интересами на свободных рынках, направляются как бы невидимой рукой в целях достижения интересов общества в целом.

5. Но чисто рыночных экономик также не существует; все реально существующие государства оказывают влияние на решения о распределении ресурсов различными способами и по различным причинам.

6. Все современные экономики являются смешанными - находятся в промежутке между двумя крайностями: чисто командной и чисто рыночной системами.

7. В смешанных экономиках распределение ресурсов определяют и государственные решения, и рыночные силы.

8. Действительное соотношение государства и рынка в различных странах сильно варьируется.

Exercise 3.15 (Study Guide).

Read the text attentively. Point out the essential problems touched upon. Divide the text into logical units. Render the text into English. The following word-combinations can be of use:

to pursue one’s /own/ self-interest

to argue strongly against

“The Wealth of Nations”

an invisible hand

to rest on Smith’s insight

implications and limitations

to convey the flavour

to hold down costs

to maximize profit

inherited

to accumulate through hard work or luck

СВОБОДНЫЙ РЫНОК И НЕВИДИМАЯ РУКА

На первый взгляд может показаться, что экономика, в которой каждый преследовал бы исключительно свои собственные интересы без каких бы то ни было государственных указаний, была бы по крайней мере столь же хаотичной и неэффективной, как и командная экономика. Шотландский профессор философии, один из основателей экономической науки Адам Смит /1723-1790/ решительно опроверг эту точку зрения в своем классическом труде “Богатство народов” /1776/. Смит утверждал, что в экономике свободного рынка отдельные индивиды, руководствуясь собственными интересами, направляются как бы невидимой рукой в целях реализации интересов других людей и общества в целом. Большинство современных экономистов опираются на это пророчество Смита.

Мы можем легко показать суть аргументов Смита, рассмотрев пример с рестораном быстрого обслуживания. Владелицу ресторана больше интересуют ее прибыли, нежели эффективное использование ограниченных ресурсов общества. Она руководствуется своими собственными интересами в стремлении снизить свои издержки и тем самым решает, как ей производить, чтобы не допустить растраты ресурсов. Она пытается скорректировать меню своего ресторана, с тем чтобы максимизировать прибыль, и таким образом решает, что ей производить, чтобы это отвечало потребительским запросам и желаниям. Если она изобретет новый популярный бутерброд или лучший способ приготовления гамбургеров, то она получит больше денег, но и клиенты ресторана тоже выиграют. И поле приемлемого для общества в целом выбора расширится.

Во всем этом цены играют ведущую роль: цены того, что она продает, отражают ценность ее продуктов для потребителей, в то время как цены того, что она покупает, отражают затраты ее поставщиков.

Цены в экономике свободного рынка определяют не только то, что и как производится, но также и для кого. Люди, владеющие ценными ресурсами - унаследованными, как здоровье или талант, или приобретенными в результате тяжелого труда или счастливого случая,- получат больше из совокупного общественного продукта. Те, кто на старте обладают меньшим количеством ресурсов или предпочитают работать не столь напряженно, в итоге получат меньше.

I-4. Positive and Normative Economics

In studying economics it is important to distinguish two branches of the subject. The first is known as ‘positive economics’, the second as ‘normative economics’.

Positive economics deals with objective or scientific explanations of the working of the economy.

The aim of positive economics is to explain how society makes decisions about consumption, production, and exchange of goods. The purpose of this investigation is twofold: to satisfy our curiosity about why the economy works as it does, and to have some basis for predicting how the economy will respond to changes in circumstances. Normative economics is very different.

Normative economics offers prescriptions or recommendations based on personal value judgments.

In positive economics, we hope to act as detached scientists. Whatever our political persuasion, whatever our view about what we would like to happen or what we would regard as ‘a good thing’, in the first instance we have to be concerned with how the world actually works. At this stage, there is no scope for personal value judgments. We are concerned with propositions of the form: if this is changed then that will happen. In this regard, positive economics is similar to the natural sciences such as physics, geology, or astronomy.

Here are some examples of positive economics in action. Economists of widely differing political persuasions would agree that, when the government imposes a tax on a good, the price of that good will rise. The normative question of whether this price rise is desirable is entirely distinct. Similarly, there would be substantial agreement that the following proposition of positive economics is correct: favorable weather conditions will increase wheat output, reduce the price of wheat, and increase the consumption of wheat. Many propositions in positive economics would command widespread agreement among professional economists.

Of course, as in any other science, there are unresolved questions where disagreement remains. These disagreements are at the frontiers of economics. Research in progress will resolve some of these issues but new issues will arise and provide scope for further research.

Although competent and comprehensive research can in principle resolve many of the outstanding issues in positive economics, no corresponding claim can be made about the resolution of disagreement in normative economics. Normative economics is based on subjective value judgments, not on the search for any objective truth. The following statement combines positive and normative economics: ‘The elderly have very high medical expenses compared with the rest of the population, and the government should subsidize health bills of the aged’. The first part of the proposition - the claim that the aged have relatively high medical bills - is a statement in positive economics. It is a statement about how the world works, and we can imagine a research program that could determine whether or not it is correct. Broadly speaking, this assertion happens to be correct. The second part of the proposition - the recommendation about what the government should do - could never be 'proved' to be correct or false by any scientific research investigation. It is simply a subjective value judgment based on the feelings of the person making the statement. Many people might happen to share this subjective judgment, for example those people who believe that all citizens alive today should be able to purchase roughly equal amounts of luxury and recreational goods after paying for the necessities of life. But other people might reasonably disagree. You might believe that it is more important to devote society's scarce resources to improving the environment.

There is no way that economics can be used to show that one of these normative judgments is correct and the other is wrong. It all depends on the preferences or priorities of the individual or the society that has to make this choice. But that does not mean that economics can throw no light on normative issues. We can use positive economics to spell out the detailed implications of making the choice one way or the other. For example, we might be able to show that failure to subsidize the medical bills of the elderly leads middle-aged people to seek a lot of unnecessary medical checkups in an attempt to detect diseases before their treatment becomes expensive. Society might have to devote a great deal of resources to providing check-up facilities, leaving less resources available than had been supposed to devote to improving the environment. Positive economics can be used to clarify the menu of options from which society must eventually make its normative choice.

Exercise 1. Check your understanding.

1. Look at the first paragraph. Is this statement correct or incorrect?

• Normative economics is based on personal opinion, whereas positive economics is objective.

Say which words have the opposite meaning to:

• Subjective

• Lack of interest

• Treat as the same

• Involved

Can you explain the words:

• Predicting

• Personal value judgement

• Proposition

2. Look at paragraph 2 again and say what words have the same meaning as:

• Completely

• Found over a large area

• Places … on

• Large, considerable

3. Look at paragraph 3 again and say what words have the same meaning as:

• Come up

• Provide a solution

4. Look at paragraph 4 again. Are these statements correct or incorrect?

• Research cannot bring about disagreement in normative economics.

• Positive economics is a search for objective truth.

• The statement ‘the government should subsidise health bills of the aged’ belongs within the field of normative economics.

• Research cannot prove whether this statement is right or wrong.

5. Look at paragraph 5 again and say what words have the opposite meaning to:

• Not to notice or see

• Success

• Confuse

• General

• Things with no claim to consideration

Exercise 3.9 (Study Guide). Find in the text English equivalents for the following:

различать два раздела науки; объективные или научные объяснения функционирования экономики; товарообмен; реагировать на изменения обстоятельств; предлагать рецепты; личные оценочные суждения; непредвзятый ученый; экономисты, придерживающиеся самых различных политических взглядов; позитивное утверждение; положения позитивной экономики; разрешить спорные вопросы; поиск объективной истины; предпочтения или приоритеты общества или индивида; пролить свет на нормативные вопросы; выяснить в деталях последствия того или иного выбора.

Exercise 3.11 (Study Guide). Match the following terms with the correct definition:

market	a/ the approach a country uses to deal with scarcity and achieve its economic goals
marketplace	b/an economic system in which the basic questions are resolved primarily by governmental direction
economic system	c/ a policy of minimal involvement of government in business
market economy	d/an economic system in which the basic questions are resolved primarily by buyers and sellers interacting in markets
command economy	e/ economic statements offering prescriptions or recommendations based on personal value judgements
mixed economy	f/a network of dealings between buyers and sellers of a resource or product
central planning	g/doctrine placing production decisions in the hands of government planners
laissez-faire	h/economic statements dealing with objective or scientific explanations of the working of the economy
positive economics	i/any place in which goods are bought and sold
normative economics	j/ economic system in which the basic questions are resolved by a mixture of market forces with governmental direction

Exercise 3.14 (Study Guide). Translation

9. Экономисты имеют дело с позитивными и нормативными проблемами.

10. Позитивная экономика ищет научные объяснения функционированию экономики, она имеет дело с тем, что есть или могло бы быть.

11. Нормативная экономика предлагает рецепты действий, основанные на личных оценочных суждениях, она имеет дело с тем, что должно быть.

12. Наиболее глубокие разногласия среди экономистов вызывают вопросы в рамках нормативного подхода, позитивный подход к экономике, как правило, споров не вызывает.

Exercise 3.16 (Study Guide).

Which of the following statements are positive and which are normative? Explain.

1. The rate of inflation has fallen below 10 per cent per annum.

2. Because inflation has fallen the government should now expand its activity.

3. The level of income is higher in the UK than in the Soviet Union.

4. People in the UK are happier than people in the Soviet Union.

5. People should not be encouraged to drink and taxes must be kept high on alcoholic beverages.

6. The price of oil more than tripled between ‘73 and ‘74.

7. In 1984, the poor countries of the world received less than their fair share of world income.

8. The world distribution of income is too unjust, with poor countries having 61 per cent of the world’s population, but receiving only 6 per cent of world income.

9. In the early 1980s, most Western economies faced sharp rises in the aggregate unemployment rate.

10. The UK government ought to introduce policies to reduce the unemployment rate.

11. Smoking is antisocial and should be discouraged.

12. The imposition of higher taxes on tobacco will discourage smoking.

13. The economy of Hong Kong is closer to a free market system than that of Albania.

I-5. Microeconomics and macroeconomics

Many economists specialize in a particular branch of the subject. For example, there are labor economists, energy economists, monetary economists, and international economists. What distinguishes these economists is the segment of economic life in which they are interested. Labor economics deals with problems of the labor market as viewed by firms, workers, and society as a whole. Urban economics deals with city problems: land use, transport, congestion, and housing. However, we need not classify branches of economics according to the area of economic life in which we ask the standard questions what, how, and for whom. We can also classify branches of economics according to the approach or methodology that is used. The very broad division of approaches into microeconomic and macro-economic cuts across the large number of subject groupings cited above.

Microeconomic analysis offers a detailed treatment of individual decisions about particular commodities.

For example, we might study why individual households prefer cars to bicycles and how producers decide whether to produce cars or bicycles. We can then aggregate the behavior of all households and all firms to discuss total car purchases and total car production. Within a market economy we can discuss the market for cars. Comparing this with the market for bicycles, we may be able to explain the relative price of cars and bicycles and the relative output of these two goods. The sophisticated branch of microeconomics known as general equilibrium theory extends this approach to its logical conclusion. It studies simultaneously every market for every commodity. From this it is hoped that we can understand the complete pattern of consumption, production, and exchange in the whole economy at a point in time.

If you think this sounds very complicated you are correct. It is. For many purposes, the analysis becomes so complicated that we tend to lose track of the phenomena in which we were interested. The interesting task for economics, a task that retains an element of an in economic science, is to devise judicious simplifications which keep the analysis manageable without distorting realm too much. It is here that microeconomists and macroeconomists proceed down different avenues. Microeconomists tend to offer a detailed treatment of one aspect of economic behavior but ignore interactions with the rest of the economy in order to preserve the simplicity of the analysis. A microeconomic analysis of miners' wages would emphasize the characteristics of miners and the ability of mine owners to pay. It would largely neglect the chain of indirect effects to which a rise in miners' wages might give rise. For example, car workers might use the precedent of the miners' pay increase to secure higher wages in the car industry, thus being able to afford larger houses which burned more coal in heating systems. When microeconomic analysis ignores such indirectly induced effects it is said to be partial analysis.

In some instances, indirect effects may not be too important and it will make sense for economists to devote their effort to very detailed analyses of particular industries or activities. In other circumstances, the indirect effects are too important to be swept under the carpet and an alternative simplification must be found.

Macroeconomics emphasizes the interactions in the economy as a whole. It deliberately simplifies the individual building blocks of the analysis in order to retain a manageable analysis of the complete interaction of the economy.

For example, macroeconomists typically do not worry about the breakdown of consumer goods into cars, bicycles, televisions, and calculators. They prefer to treat them all as a single bundle called 'consumer goods' because they are more interested in studying the interaction between households' purchases of consumer goods and firms' decisions about purchases of machinery and buildings.

Exercise 1. Check your understanding.

Now read the text carefully, looking up any new items in a dictionary or reference book. Then answer the following questions:

1. What distinguishes an energy economist from an urban economist?

2. Are the same questions asked in each area of economic life?

3. What is needed before total car purchases and production can be discussed?

4. What does the general equilibrium theory examine?

5. What can be understood from such a study?

6. What happens when an analysis becomes too complicated?

7. What can keep an analysis manageable?

8. What do most microeconomists leave out of their analysis?

9. What does partial analysis ignore?

10. Why would most macroeconomists not make a breakdown of consumer goods?

Exercise 2. Increase your vocabulary.

In this section you should use your dictionary to help you answer the questions about the text.

1. Look at the first paragraph again. What words correspond to these definitions?

• way of studying a subject

• give particular attention to

• way of looking at a subject

• quoted

2. Look at the first paragraph again and say what words have the opposite meaning to:

• beginning

• at different times

• simple and uncomplicated

3. Look at the first paragraph again. Can you explain the words:

• consumption

• exchange

4. Look at paragraph 2 and say which words have the same meaning as:

• pulling out of shape

• pay not enough attention to

• pay no attention to

• think out, plan

• keep safe

• brought about

• showing or having good sense

5. Look at paragraph 3 and say which words have the same meaning as:

• keep

• makes easier, less complicated

• as a rule, characteristically

• be sensible

Exercise 3. Understanding a lecture

1. You are now going to hear part of a lecture, divided into sections to help you understand it. As you listen, answer the questions below.

Section 1

Are these statements correct or incorrect?

• The students will not study macroeconomics at all after this lecture.

• The lecturer expects his students to have heard more about macroeconomics than microeconomics.

• Macroeconomics is of greater public interest than microeconomics.

Section 2

• How many key terms is the lecturer going to talk about?

________________________________________________________________________________________________

• Note down the first item the lecturer introduces, its abbreviation and meaning

________________________________________________________________________________________________

________________________________________________________________________________________________

________________________________________________________________________________________________

Section 3

• Note down the next term the lecturer introduces and its definition

________________________________________________________________________________________________

________________________________________________________________________________________________

________________________________________________________________________________________________

• Is this statement correct or incorrect? “Prices of different goods move inline with each other.”

• Note down the term the lecturer uses to describe an economy in which the price level is rising.

________________________________________________________________________________________________

Section 4

• Note down the next term the lecturer introduces and its definition

________________________________________________________________________________________________

________________________________________________________________________________________________

• Is this statement correct or incorrect? “The labour force includes those people who don’t have to work but are of working age.”

  2. You should also write a summary of the lecture, based on your notes.

Exercise 4.2 (Study Guide, unit 4). Find in the text English equivalents for the following:

землепользование; перенаселенность; подразделять в соответствии с применяемым методом или подходом; обобщить поведение всех домохозяйств и фирм; довести до логического завершения; сохранять элемент искусства; найти разумные упрощения; искажать действительность; идти разными путями; не учитывать взаимодействия; цепь косвенных последствий; воспользоваться прецедентом; гарантировать высокую оплату труда; преднамеренно упрощать отдельные составляющие элементы; деление товаров на /категории/; потребительские товары.

Exercise 4.3 (Study Guide, unit 4). Fill in the blank spaces with prepositions where necessary:

Microeconomics and macroeconomics differ .../1/ the questions each asks and .../2/ the level of aggregation each uses. Microeconomics deals .../3/ the determination .../4/ prices and quantities in individual markets and .../5/ the relations .../6/ markets. Thus it looks .../7/ the details of the market economy. It asks, for example, .../8/ the determinants .../9/ the output of pocket calculators, automobiles, and Domino’s pizzas. It asks, too, .../10/ the prices of the things - why some prices go up and others down.

Economists interested .../11/ microeconomics analyse how prices and outputs respond .../12/ exogenous shocks caused .../13/ events in other markets or .../14/ government policy. They ask, for example, how a technical innovation, a government subsidy, or a draught will affect .../15/ the price and output of beet sugar and employment of farm workers.

.../16/ contrast, macroeconomics focuses .../17/ much broader aggregates. It looks .../18/ such things as the total number of people employed, the average level of prices and how it changes .../19/ time. Macroeconomics asks what determines these aggregates and how they respond .../20/ changing conditions. Whereas microeconomics looks .../21/ demand and supply .../22/ regard .../23/ particular commodities, macroeconomics looks .../24/ aggregate demand and aggregate supply.

Exercise 4.4 (Study Guide, unit 4).

Give English equivalents for the following. Consult the Economic dictionary.

Analysis

сравнительный анализ; анализ затрат и эффективности; факторный анализ; макроэкономический анализ; метод предельных показателей; анализ сезонных изменений; анализ краткосрочных изменений; экспертный анализ рыночных тенденций; анализируемая проблема; анализ издержек

equilibrium

равновесие рынка; точка равновесия; равновесная цена; конкурентное равновесие; равновесный уровень цен; подвижное равновесие; равновесие в мировой торговле; равновесное количество; находиться в равновесии; достичь равновесия; восстановить рыночное равновесие

behaviour

поведение покупателя; динамика цен; состояние рынка; поведение/реакция/ деловых кругов; динамика производства

household

предметы домашнего обихода; расходы домашних хозяйств; потребительские товары длительного пользования; продукция домашних хозяйств; сектор домашних хозяйств

aggregate

общая сумма; общий подход; совокупный спрос; общий объем продукции; совокупный продукт; совокупный уровень цен; укрупненный базисный показатель; денежная масса; совокупные расходы на потребление; сводить в единое целое поведение деловых кругов

total

совокупные издержки; совокупный продукт; общий доход; общие издержки; валовый выпуск; суммарные прибыли; общая выручка; общий экспорт/импорт; подводить итог/подсчитывать

Exercise 4.11 (Study Guide, unit 4). Translation

1. В экономике существуют два основных раздела.

2. Микроэкономика сосредоточена на изучении функционирования отдельных рынков и их взаимодействия.

3. Упор делается на цены и объемы выпуска конкретных товаров и услуг и на то, как в результате взаимодействия рынков формируется распределение ограниченных ресурсов по миллионам альтернативных направлений использования.

4. Макроэкономика, наоборот, изучает функционирование экономики в целом.

5. В макроэкономике акценты делаются на общий объем производства товаров и услуг в экономике и на изменения среднего уровня цен.

Exercise 4.13 (Study Guide, unit 4)

Which of the following statements are the concern of microeconomics and which of macroeconomics?

1. Along with other Western economies, the UK faced a sharp rise in the unemployment rate in the early 1980s.

2. The imposition of higher taxes on tobacco will discourage smoking.

3. Unemployment among building labourers rose sharply in the early 1980s.

4. An increase in a society’s aggregate income is likely to be reflected in higher consumer spending.

5. A worker who has received a pay rise is likely to buy more luxury goods.

6. A firm will invest in a machine if the expected rate of return is sufficiently high.

7. High interest rates in an economy may be expected to discourage aggregate investment.

8. The level of gross national product in the UK is higher this year than in 1981.

9. The inflation rate is lower than in the 1970s.

10. Food prices have fallen this month.

11. Favourable weather conditions will mean a good harvest this year.

12. Unemployment in the London area is lower than the national average.

13. The oil price shock in 1973-74 led to a great deal of inflation and unemployment in the UK.

14. A drought causes an increase in the price of wheat.

15. Increased consumer spending results in inflation.

16. An automobile manufacturer cuts costs by purchasing new machinery and substituting it for labour.

17. Consumers buy more beef and less pork.

18. Government reduces the corporate income tax to stimulate business investment.

19. The nation’s unemployment rate rises by 1 percent.