16 Economic Texts for Reading

14 Pages·0.556 MB·English

TEXTS FOR READING
TEXT I
Most people work to earn a living, and produce goods and services. Goods
are either agricultural, or manufactured. Services are such things as education, V
medicine and commerce. Some people provide goods, some people provide ser­
vices. Other people provide both goods and services. For example, in the same
garage a man may buy a car or some service which helps him maintain his car.
The work people do is called economic activity. All economic activities
taken together make up the economic system of a town, a city, a country or
the world. Such an economic system is a sum-total of what people do and
what they want. The work people do either provides what they need or
provides the money with which they can buy essential commodities. Of
course, most people hope to have enough money to buy commodities and
services which are non-essential but which provide some particular per­
sonal satisfaction such as toys for children, visits to the cinema and books.
The science of economics is based upon the facts of our everyday
lives. Economists study our everyday lives and the general life of our
communities in order to understand the whole economic system of
which we are part. They try to describe the facts of economy in which we
live, and to explain how it works. The economist’s methods should of
course be strictly objective and scientific.
We need food, clothes and shelter. We probably wouldn't go to work if we
could satisfy these basic needs without working. But even when we have satisfied
such basic needs, we may still want other things, such as the toys, visits to the cin­
ema and books mentioned above. Oiir livw mi^hf be more enioynhb if we had
such things. Human beings undoubtedly have a wide and very complex range of
wants. The science of economics is concerned with all our needs: with the desire
to have a radio as well as the basic necessity of having enough food to eat.
Not all economic systems are the same everywhere. Britain is similar to
the USA It has an economic system based on private enterprise and pri­
vate supplies of capital. An important form of capital is surplus income
available for investment in new business activities. Property in both the US
and Britain can be and is owned by individual citizens and these citizens
exercise considerable economic freedom of choice. They can choose what
they want to do and how they want to earn their living, but are not of
course entirely free to do as they wish. They must obey the law. Otherwise,
however, they can use their time, money and energy as they wish. If a per­
son can do this, then economists say that he is economically free. In all
communities of course, limits are imposed upon personal freedom.
TEXT 2
' Basic human needs are simple, but every individual has additional per­
sonal wants which may be very complex. These complex personal wants
are satisfied in different ways by different things. A car, a bottle of whisky *
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and a newspaper satisfy very different wants and the whisky is not a close
substitute for the car. This special characteristic of satisfying a want is
known in economics as its "utility". Utility is not the same as usefulness. A
submarine, for example, may or may not be useful in peacetime, but it sat­
isfies a want. Many nations want submarines. Economists describe this
kind of utility as "the relationship between a consumer and a commodity".
Utility varies between different people and between different nations.
A vegetarian doesn't want meat, but may rate bananas very highly. A
mountain republic like Switzerland has little interest in submarines, while
maritime nations rate them highly. Utility also varies with time. In time of
war, the.utility of bombs is high and that of pianos is low. Utility is there­
fore related to our sense of priorities.
The utility of a commodity is also related to the quantity which is avail­
able to the consumer. If men buy a large quantity of paper, they will lose in­
terest in buying more paper. The demand for paper will go down. The utility
of a commodity consequently decreases as the consumer's stock increases.
In most economic systems the prices of the majority of goods and ser­
vices are fixed. The individual cannot change the prices of the commodities
he wants, and when planning his expenditure, he must accept these prices. A
consumer will go on buying cigarettes as long as his satisfaction continues
and they render utility. If he continues to pay the current price, his satisfac­
tion is greater than his financial sacrifice. With each purchase, however, his
satisfaction decreases, although the prices remain the same. If a consumer’s
supply of money is limited, a point will come when the financial sacrifice is
greater than the satisfaction of smoking cigarettes. He will stop buying the
commodity. The cigarettes are the same, but their utility has changed. If the
nrice': rosp. ho would buy fewpr: if they fell, he mirM tviv more
We can see that the nature of a commodity' remains the same, but its utility
changes. This indicates that a special relationship exists between goods and ser­
vices on the one hand and consumer and his money on the other hand. The con­
sumer's desire for a commodity tends to dimmish as he buys more units of that
commodity. This tendency is called the Law of Diminishing Maiginal Utility.
TEXT 3
Money may be regarded as the lubricant of the economic system. It
not only facilitates trade and exchange, but the amount and flow of money
also affect the circular flow of economic activity and the price level.
For many years economists held that money was passive and that it
had no substantial effect on the economy. They maintained that one must
remove the veil of money to understand how the economy really operated.
For this reason they frequently gave explanations of the economic system
in terms of barter economy. The classical economists endeavored to show
the passive nature of money by the following types of explanation. As­
suming full employment, they asked what would happen to the economy if
everyone woke up some morning to find double the amount of money in
their pockets, cash registers, and vaults. Since people could not buy any
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more goods and services because of the full employment conditions, they
held that the value of goods in terms of money would double but that the
total real purchasing power of each individual would remain the same. Al­
though this is a simplified version of their concept, classical economists
truly underemphasized the role of money in the economy.
On the other hand, some economists today reverse the situation for
they visualize money as a panacea for most of the ills of the economic
system. Thus, they advocate manipulation of the money supply to rem­
edy many undesirable economic situations.
What is the effect of money on an economy? From observation and analysis
it is evident that changes in the volume of money can have a definite effect on the
level of economic activity and on the price level depending on the conditions ex­
isting in the economy. It is also quite tme, however, that the money cannot cure
all or even most of the weaknesses of a particular economy. Changes in the
money supply, however, can cause an acceleration or deceleration in the circular
flow of economic activity. An increase in the money supply in period ofless than
full employment will tend to bring about an increase in the level of economic ac­
tivity. During fuD-employment periods, however, increases in the money supply
will lead to inflation. A decrease in the money supply will bring about a decrease
in the level of economic activity and/or a decrease in prices.
Changing price levels bring about a redistribution of income. Those
whose incomes increase faster than does the price level will experience an
increase in real income. Individuals with stable incomes, however, will ex­
perience a decrease in purchasing power as the price level rises faster than do
their money incomes. Changing price levels also affect creditors and debtors.
TEXT 4
In addition to being a means of exchange money is also a means of
measuring the value of human labour. Labour, in economic theory, is
any work undertaken in return for a fixed payment. A mother may
work very hard in caring for her children, but she receives no fixed pay­
ment. It is not therefore labour in strict economic sense.
Economists are interested in measuring the services which people render to
each other. Although aware of the services which people provide for nothing, they
are not concerned with such services. In economics, money is the standard by
which the value of thing? is judged This is an objective, scientific standard and not
in any way related to standards of a religious, ethical or subjective nature.
Human labour produces both goods and services. The activities of a
farm worker and a nurse are very different, but each is measurable in
terms of payment received. If, however, a farmer is self-employed and
doesn't receive a fixed wage from anyone else, he is in a different category
from a nurse and from his own farm workers. His activities are not wholly
labour. His workers receive their wages, but he receives whatever surplus
(large or small) emerges from his farming. This suiplus, like any surplus
in industry or commerce, is what we usually call "profit".
Employers obtain their net profits only after they have paid all expenses
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arising out of their business activities: interest, rentals, payments for machin­
ery, wages and overheads generally The surplus is not usually available only
for employers and their families. Normally part of it goes to those who have
provided the initial capital needed to start a business. There is always an ele­
ment of risk in providing capital for new businesses. Such business may fail.
But those who provide the capital and those who run the businesses agree to
bear the risk, but employees of such businesses are not expected to bear any
risk. If the business is successful, the risk-taking has been justified, and in­
vested capital earns part of the profits as a return on the investment and the
period during which the capital was at risk Capital in this instance is simply
the accumulation of previous surpluses on previous business activities. In this
way the past is used to finance the future. The accumulation of capital is al­
most always deliberate either on the part of individual citizens or on the part
of the state. A certain part of the surplus achieved in any enterprise is
"ploughed back" into the system in order to promote further growth.
TEXT 5
Small business owners are called entrepreneurs. One definition of
an entrepreneur is someone who organizes, manages and assumes the
risks of a business or enterprise. Other experts say an entrepreneur is a
person who can "create out of nothing" a viable business.
There are a number of myths and misconceptions about what it takes to be
an entrepreneur. One misconception is that people who go into business for
themselves are naturally high risk-takers. Of course, there are risks in business,
but real entrepreneurs aren’t gamblers who depend solely on chance to succeed.
Tn fact, just the opposite is true: successful entrepreneurs do evervrhine
possible to minimize the real risks associated with starting a company by
studying and organizing information, people and materials they will need
to succeed. They manage risk by setting reasonable and obtainable goals -
then work to exceed them. In short, the successful small business owner
works hard and intelligently.
Despite what many think, starting a successful small business does
not always require a lot of formal education or prior management experi­
ence. Certain basic skills will be needed, plus some background in the
business being contemplated. Just as important as formal education is the
willingness to learn and improve the skills needed to succeed in business.
One of the biggest misconceptions about entrepreneurs is that they
are only interested in making money. Entrepreneurs certainly like and
respect money, but money is only a byproduct of an even bigger goal
for many very successful entrepreneurs.
As one U.S. expert on entrepreneurial management observed: "Many
businesses fail because their owners were only interested in money. Most re­
ally successful companies are founded by someone with an idea and dream.
Whatever money and wealth they accumulated is the result of them being
willing to work day and night to make this dream reality. If you want to be
really successful, know what your dreams are before going into business”.
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Successful entrepreneurs share a number of common traits: a great deal of
energy; ability to make decisions; ability to deal effectively with a wide variety of
people, such as customers, employees, suppliers, possible investors and lenders;
ability to communicate cleaily and effectively, familiarity with customers and
with the products or services to be sold; ability to work with numbers and so oa
Becoming an entrepreneur is a way of looking at the world seeing
opportunity where others see problems. ■
TEXT 6
One of a small business owner's biggest assets is his willingness to
dream. However, it is organization that turns dreams into a real business.
Start your business by asking yourself some basic questions, and an­
swering them honestly.
1. Why do 1 want to go into business for myself?
Your first step in business is to clarify your personal goals and prior­
ities. This might not seem to have anything to do with running a busi­
ness, but it is essential. It makes you think about what you really want
from life, and how your business will help you achieve it.
2. What business do I want to be in?
Whether you have already picked the business you want to start or are
still looking - you probably have more options than you realize. Make a
list of all the ideas and businesses that appeal to you. Instead of just one or
two ideas, allow yourself to consider all kinds of possibilities. Next, take
this list and evaluate each possibility based on the following criteria:
3. Is it something I would like doing?
Since running a business involves lots of time and work, it might as well be
somethim you enjoy. After all. the more you like an activitv. the more enthu­
siastic you’ll be about doing it every day. if you love flowers, for instance, you
could consider opening a flower shop, nursery or gardening business.
4. Do I have enough experience, or the kinds of skills necessary? If
not,, can I acquire them?
One of the key elements for succeeding in business is knowing as
much as possible about the field. If you are especially interested in
business you haven't worked in before, learn eveiything you can about
it before starting your company.
5. Does this fill a customer need?
Businesses exist to satisfy customer needs. Therefore, you must
know who your potential customers are, what their needs are and if you
can fill these needs based on your interests and experience.
6. What size business do I want?
Would you like to own a one-person business, a shop with a few
employees or a chain of stores? A focal business, or a company which
sells and ships goods across the country, or internationally/ How big a
business do you need to satisfy your personal goals? What kind of man­
agement skills will you need to achieve these goals?
Starting a business you should follow four rules:
1. Choose an activity you understand.
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2. Start smaller rather than larger.
3. Keep it simple.
4. Have a clear plan.
TEXT 7
When capital, labour and enterprise combine to make a new business
successful, the business must still continue to compete on the market with
other companies producing the same type of commodity. The term “mar­
ket", as used by economists, is a logical extension from the idea of a place
set aside for buying and selling. Formerly, part of a town was kept as a mar­
ket place, and country people would come in on market-days to buy and
sell. Markets today need not, however, be located in any fixed place: the
sugar market and the cotton market are not geographical locations, but
simply sets of conditions which permit buyers and sellers to work together.
In a free market, competition takes place among sellers in order to
sell their commodities at the best possible price, and among buyers in
order to obtain what they want at a price, wnich suits them. Such com­
petition influences prices. Changes in supply and demand have their
effects, and it is not surprising that considerable fluctuations in price
can take place over periods of weeks and months.
Since these modem markets arc not normally located in any special place, buyers
and sefleis do not alwa>s have to meet face-to-face. They may commmicaie by letter,
by cable, by telephone or through their agents. In a perfect maiket, such communica­
tions are easy, hirers and sellers are numerous and competition is completely unim­
peded In a perfect maiket there can be only one price for any given commodity: the
lowest price which seller wiD accept There arc, however, no really perfect martets, be­
cause each maiket is subject to its own peculiar conditions. It can be said, however, that
uk puce ruling m a maim indicates Uie point wheie supply and uauanu uica.
Monopoly is one of peculiar factors which can affect the sale and pur­
chase of certain commodities. In some markets there may be only one seller
or a cartel of sellers w orking very closely together to control prices. The result
of such monopolistic activity is to fix prices at a level which may bring him ar­
tificially high profits, a level suitable to the seller. Many governments dislike
this procedure and have taken legal action to restrict or halt any business ac­
tivities directed towards "cornering the market". In the US anti-trust laws op­
erate to limit cartels and mergers, while in Britain the Monopolies Commis­
sion examines all special arrangements and mergers referred to them by the
Board of Trade which appear to operate against the public interest.
.. TEXT 8
The performance of the credit system is an indicative criterium for de­
termining a country’s maturity in terms of economic relations. The most de­
veloped credit system in the world exists in the United States of America.
Consumer crediting is a vital investment field and powerful means to stimulate
the publics activity as an economic operator. A mortgage loan is the basic form of
consumer crediting widely used in the West for buying private apartments and
properties. An applicant for a laige loan from a bank is required to present collateral.
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In developed market economies, mortgage loans are issued in ex­
change for both movable and immovable collaterals. By virtue of mortgage
rights the creditor bank is entitled to make the first claim to the mortgaged
property. Loans on immovable collaterals are usually issued at low interest
rates and for long terms. The general rule is: loans on easily disposable
collaterals are issued at lower interest rates. However, in order to predict
possible damages, many banks don't issue'loans for a total value of more
than 50 per cent than that of the collateral itself.
Industrially developed countries also have a system of floating interest
rates taking into account the rate of inflation and the actual family income
growth. Mortgage loans are issued for a term of up to 30 years and are con­
sidered to be the least risky of all business operations when dealing with indi­
viduals. It is an advantage for the borrower to have a stable monthly income
which could be partly channeled into repaying the loan. Data bases are
compiled to classify the borrowers in accordance with their creditworthiness.
The word "mortgage" means borrowed credit. In other words, a loan
with interest, with the guarantee of payment in the form of a house. There
is a creditor - the bank - owning these homes until the debt is paid up.
Those who pay mortgages are people who own their homes or apartments.
Many banks offer what is called "a return mortgage". This means that the
bank starts to pay to the debtor, when he reaches a specified age, his mort­
gage to buy the house back again from him, with the idea that after a certain
number of years, the bank will own the house in full. The "return mortgage"
is really its own form of a pension which many seniors gladly participate in.
The "return mortgage" illustrates the fact-that investing in real estate is one of
the best ways to assure one's financial independence in the US.
TEXT 9
Four special economic zones in the south of China have been given
special rights in developing foreign economic ties. The purpose is to attract
foreign investments into the economy and introduce modem technology
and equipment, along with new methods of management. Initially, the
most active investors were rich Chinese from Hongkong and Macao. Of
the new economic zones, Shenzhen, which borders on Hongkong is the
biggest and fastest growing. Its area is 327.5 square kilometres.
Capital construction in the zone is at present financed by the zone itself,
as well as by bank loans and foreign capital· State allocations are negligible.
Construction work is being carried out by more than 100 building organiza­
tions from nine provinces of the republic and Hongkong. As for industrial
enterprises, the construction of most of them is financed by foreign capital.
Special attention is being paid to financing export industries. Initially, it
was believed that the entire output of the factories built on foreign capital
would be exported. In practice this did not work out for a number of reasons,
and at present up to two thirds of the output is sold on the domestic market.
There is no single system of industrial management in Shenzhen At
state-run factories the laws and system of the Chinese People's Republic operate,
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while at factories built exclusively on foreign capital the system of the creditor
country prevails, but the owners are obliged to abide by the laws local. The Chi­
nese side plays no part in running these factories. Mixed companies have a joint
management with a Chinese representative at its head. The number of the mem­
bers of the board from each side depends on their respective capital contributions.
Special economic zones are playing a leading role in China's policy of
reviving the economy and expanding its ties with the rest of the world.
They could be described as testing grounds for the new ideas and political
principles of foreign economic activity. It is there that the search is being
carried out for the best ways of attracting foreign investments, importing
advanced technology and testing new methods of management.
What is borrowed from other countries is tested, adjusted and as­
sessed in the zones - and only then passed on to other parts of the coun­
try. The wide use of foreign capital began in China after 1980. And by the
end of October 1986 foreign investments (without loans) amounted to $
5.9-biUion, 80 per cent of them are sited in coastal provinces and cities.
China has already signed agreements that will bring $ 25 billion to
the Chinese economy abroad.
TEXT 10
The decisions of what and how much to produce that are made by
millions of consumers and business firms generate a circular flow of eco­
nomic activity. According to this pattern, as consumers express their de­
mands, the entrepreneurs utilize the factors of production to produce the
desired goods and services. Incomes are spent either for consumer goods
and services, or are invested in capital goods. When any saving takes
places in ilic economy, it disiupli. uic circulai Cow unless the saving it,
offset by an equivalent amount of borrowing and investment.
Whenever planned investment is equal to planned saving, total actual
spending is equal to actual income, demand is equal to supply and all the
goods and services are moved off the markets. This induces business to pro­
duce a like amount of goods and services in the subsequent period. Thus,
whenever planned investment is equal to planned saving, equilibrium in the
level of economic activity results, and prices tend to remain stable. If
planned investment is less than planned saving, however, a decrease in the
level of economic activity and/or a decline in the price level results. On the
other hand, if planned investment is greater than planned saving, an increase
in the level of economic activity results if the economy is in a state of less
than full employment. Otherwise this situation leads to higher prices.
Government spending also can have an influence on the level of eco­
nomic activity and the price level. A balanced government budget tends
to have a neutral effect on economic activity and prices, whereas a sur­
plus budget can lead to a decrease in business activity and/or lower prices.
A deficit budget can lead to an increase in the level of economic activity
or higher prices, depending on the employment status in the economy.
Higher prices, or inflation, result from several causes. Demand-pull in-
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flation arises when the total demand for goods and services is greater than
the available supply of goods and services. It usually occurs during periods of
full employment when we are unable to increase the output of goods and*
services in the short run. Cost-push inflation results when businesses in­
crease their prices to offset an increase in the cost of labour and materials or
for some other reason. Price increases lead to further increases in wages and*,
materials, which bring about further increases in prices. Structural inflation
is a combination of demand-pull and cost-push. Cost-push, structural and
social inflation may occur in an economy at full employment and less.
TEXT 11
Different economists have exposed four views of the world :
1. The textbook version of classical economics.
The real world conforms to the ideal picture of an economic system
p
in which there is perfect competition and perfect information, and r
which natural private forces lead to the best possible volume and compo­
sition of output, produced by the most efficient methods, and to the best
possible distribution of the resulting income among the population. Since
everything is already as good as it can be, there is nothing to be done.
2. The positive programme for laissez-faire.
The real world does not match the ideal picture. Competition is not per­
fect; information is not complete; the system is subject to fluctuations in
output and to involuntary unemployment; private decisions may not be op­
timum because individuals don't have incentives to take account of all the
consequences of their actions; and the distribution of income may be “un­
just”. These conditions could be corrected in part bv government policies.
3. The negative programme tor laissez-faire.
The real world would conform to the ideal picture to a satisfactory degree if the
government did not intervene, but it departs substantially from the ideal picture be­
cause of unwise government policies. Although competition would not be perfect,
effective competition would emerge if government did not create or protect mo­
nopolies. Private forces would generate all the information that is worth the cost to
produce. The market would develop a monetary standard that would lead to rea­
sonable economic stability. The distribution of income would be fere in the sense
that people would get the income they earned and that no different meaning of
fairness could be objectively determined This view leaves much room for improv­
ing conditions by government action, but all the required action is negative. The
government can improve conditions by not protecting monopolies, regulating the
market, manipulating the currency, or interfering with the distribution of income.
4. The hopeless government.
Although the government could improve conditions by positive or negative
action, that is not possible. The government is part of the real world, and the
people in it who make decisions are motivated by the same desire to maximize
their private welfare. Presumably their policies already reflect this, and they can­
not be expected to behave differently, because they are told that would improve
conditions in society. In this view, as in the first, there is nothing to be done.
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The first view seems to be highly optimistic. Many would say, of
course, that it is also highly unrealistic; what people want is not just the
satisfaction of their wants but better wants and the economists' optimum
says nothing about the quality of wants or about their development.
The fourth view is a picture of a world that is unbelievably dismal;
the world in which there is no point in striving to make it better.
But the second and third views are optimistic ones. They give the picture of
the worid in which there is a possibility of making conditions better by public
policy. In either view, there is something to think about, aigue about and do.
TEXT 12
The discipline of management science is generally recognized as having
been established during the early 1940s. Largely developed from the analysis
of militaiy operations during World War II, management science was initially
called operations research. Operations research was originally developed to
assist field commanders in solving complex strategic and tactical problems
ranging from equipment and troop movements to the evaluation of the cost
and effectiveness of entire military defence systems. The wartime applications
of operations research were so successful that, after the war, a number of in­
dustries - oil, paper, and steel, for example - implemented similar techniques
in their managerial planning and decision making. In recent years, manage­
ment science has been most widely applied to production and operations
management, and in particular, to the design, operation, and control of
workflows and the materials, equipment, finances, human resources, and in­
formation needed to achieve specific organizational objectives.
Before the development of management science, the decision-mak-
ing process was often considered more of an art than a science. However,
the need for more scientific approaches to decision making has grown
steadily in recent years. Several reasons for this growth are apparent.
First, the managerial decision-making process has become much more
complicated. New technologies and advances in computers, information sys­
tems, and other areas have greatly increased not only the amount of informa­
tion available to management, but also the number of options or alternative
courses of action that management must evaluate when making a decision.
Second, because of the rapidly changing and uncertain environments in
which many of today's businesses operate, the consequences of management
decisions have become more difficult to forecast with certainty. Finally, as the
size and complexity of organizations has grown, the cost of making mistakes
or wrong business decisions has become greater and greater.
Dunng the period since Worid War П, the complexity and variety ofbusiness
problems addressed by management science have increased significantly, and the
use of management science techniques has now spread to almost all industries
and services. Today, management science is recognized as a popular discipline in
the field ofbusiness management The current popularity of management science
is evidenced by the number of colleges and universities offering courses and de­
gree programmes in this field. Management science has become an invaluable aid
in solving problems in a multitude of decision-making environments.
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