THE BASIC ECONOMIC PROBLEM Business activity involves satisfying consumers’ needs and wants. Businesses aim to satisfy these wants and needs by producing goods and services. When food is produced or a bus service is provided, resources (land, labour, capital and enterprise) are used up. These resources are scarce relative to needs and wants. In other words, these are not enough resources to satisfy all consumers’ needs and wants. This is known as the BASIC ECONOMIC PROBLEM. This means businesses, individuals and the government must make choices when allocating scarce resources between different uses. For example, a printer may have to choose whether to buy a new printing press to improve quality or some new computer software to improve administrative efficiency. Economics is the study of how resources are allocated in situations where they have different uses. The choices faced by decision makers can be placed in order of preference. For example, a business may be considering three investment options but can only afford one. The decision makers might decide that the order is: 1. a new computer system; 2. a fleet of cars for the sales force; 3. a warehouse extension. The business will allocate resources to the purchase of the new computer system. The other two options are foregone or given up. The benefit lost from the next best alternative is called the OPPORTUNITY COST of the choice. In this example it would be the benefit lost by not having a fleet of new cars. What is an economy? An ECONOMY is a system which attempts to solve the basic economic problem. In the national economy the resources in a country are changed by business activity into goods and services which are bought by individuals. In a household economy the family budget is spent on a range of goods and services. Local and international economies also act in the same way, but at different levels. The function of an economy is to allocate scarce resources amongst unlimited wants. The basic economic problem is often broken down into three questions. What should be produced? In developed economies the number of goods and services produced from resources is immense. The economic system must decide which resources will be used to produce which products. For example, what proportion of resources should be used to produce food, housing, cars, cigarettes, cosmetics or computers? Should resources be used for military purposes? Should resources be used to generate wealth for the future? In less developed countries the decision about what to produce may be simpler. This is because the choices available are limited. For example, a very poor African village might be faced with the decision whether to produce wheat or maize. However, this is still a question about resource allocation and what to produce. How should it be produced? The way in which goods and services are produced can vary. Decisions have to be made about such things as where production will take place, the method of production and the materials and labour that will be used. For whom should it be produced? An economy has to determine how the final goods and services will be allocated amongst competing groups. For example, how much should go to students, should the unemployed receive a share of output, should Ethiopia receive a proportion of total UK output, should managers get more than workers? How the above questions are answered will depend on the type of economic system. It is usual to explain how resources are allocated in three types of economy – the free market economy, the planned economy and the mixed economy. The way business activity is organized will be different in each of these systems. PLANNED ECNOMIES Until the late 1980s and early 1990s many Eastern European countries such as Romania, Poland and Russia could be described as PLANNED or COMMAND ECONOMIES. Today, examples might include Cuba and North Korea. Government has a vital role in a planned economy. It plans, organizes and co-ordinates the hole production process. This is unlike a market economy, where planning and organizing is carried out by firms. Another difference is that resources in planned economies belong to the state. Individuals are not permitted to own property, land and other non-labour means of production. What to produce. This decision is made by government planners. They decide the type and mix of goods and services to be produced. Planners make assumptions about consumers' needs. For example, they decide how many cars, how much milk, how many shirts and how much meat should be produced. Planners then tell producers, such as farms and factories, exactly what to produce. How to produce. Government also tells producers how to produce. Input-output analysis is often used to make plans. For example, with a given level of tehnology, the state may know the land, labour, tractors and fertilizer (inputs) needed to make 1 million tones of wheat (the output). If an area needs 20 million tones, it is possible to work out the inputs needed. A complex table is drawn up which helps planners calculate the resources needed to meat the various output targets. Plans are often for 5,10 or 15 years. How are good and services allocated? Goods and services are distributed to consumers through state outlets. People purchase goods and services with money they earn. Prices are set by the planners and cannot change without state instruction. Sometimes there are restrictions on the amount of particular goods and services which can be bought by any one individual, cars for example. Some goods and services, like education and health care, are provided free by the state. MIXED ECONOMIES In reality, no country has an economy which is entirely planned or free market. Most economic systems in the world have elements of each system. They are known as MIXED ECONOMIES. In mixed economies some resources are allocated by the government and the rest by the market system. All Western European countries have mixed economies. The public sector in mixed economies is responsible for the supply of public goods and merit goods. Decisions regarding resource allocation in the public sector are made by central or local government. In the private sector production decisions are made by firms in response to the demands of consumers. In the public sector, public goods and merit goods are provided free when used and are paid for by taxes. Examples might be roads, health care and street lighting. In mixed economies the state usually provides a minimum standard of living for those unable to work. In the UK the Welfare State provides benefits, such as unemployment benefit and sickness benefit. In the public sector the state will own a significant proportion of production factors. In the private sector individuals are also allowed to own the means of production. Businesses are set up by individuals to supply a wide variety of goods and services. Competition exists between these firms. As a result, there will tend to be choice and variety. One of the roles of the government is to ensure that there is fair competition in private sector. All private sector goods and services are allocated as in the market system described earlier. What should be the 'degree of mixing' in this type of economy? The government will decide how much business activity there will be in the private sector and how much in the public sector. Some countries, like Sweden, allow the government to play a major role in the supply of goods and services than others, like the UK. For example, in Sweden the government spends around 60 per cent of national income, whilst in the UK the government spends around 40 per cent. In countries where the government plays an important economic role, social provision will tend to be greater, taxes higher and the distribution of wealth and income more equal. In countries where the private sector plays the most important economic role, social provision will tend to be lower with fewer free goods and services at the point of sale. Also, taxes will be lower and the distribution of wealth and income less equal. For example, in the last decade, income tax rates have fallen in the UK and fewer services have been supplied by the state. The distribution of income has changed in favour of the 'wealthy' during this time MICROECONOMICS AND MACROECONOMICS 1. Many economists specialize in a particular branch of the subject. For example, there are labour economists, energy economists, monetary economists, and international economists. What distinguishes these economists is the segment of economic life in which they are interested. Labour economics deals with problems of labour 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 microeconomics and macroeconomics 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 behaviour 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. 2. If you think this sounds very complicated you are correct. For many purposes, the analysis becomes so complicated that we tend to loose track of the phenomena in which we were interested. The interesting task for economics, a task that retains an element of art in economic science, is to devise judicious simplifications which keep the analysis manageable without distorting reality 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 behaviour 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. 3. 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 an alternative simplification must be found. Macroeconomics studies 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. TERMS OF PAYMENTS Payment in foreign trade may be made in cash and on credit. There are different methods of cash payment: 1) By cheque (but it is not practicable as a cheque is payable in the country of origin and its' use is time-wasting to say the least. That's why cheques are mostly used for payment in home trade.) 2) By telegraphic or telex transfers or post (mail) remittance which is made from the Buyers' bank account to the Sellers' in accordance with the Buyers' letter of instruction. Actually this method of cash payment may sometimes take several months, which is naturally very disadvantageous to the Sellers. The transfer is carried out at current rates of exchange. 3) By letter of credit (or just by credit) - L/C - (In our commercial practice the following types of letters of credit are usually used: irrevocable, confirmed and revolving. An irrevocable L/C is one which can neither be modified nor cancelled without the consent of the party in whose favour it has been opened. A confirmed L/C is an irrevocable L/C, payment under which is guaranteed by a first class bank in case the opener of the L/C (i.e. the Buyers) or the bank effecting payment defaults, or is unable to make payment. A revolving L/C is one under which its value is constantly made up to a given limit after payment for each shipment, which saves the charges on multiple letters of credit.) The Letter of Credit is the most frequently used method of cash payment because it is advantageous and secure both to the Exporter and to the Importer though it is more expensive than payment by transfer. It overcomes the gap between delivery and payment and gives protection to the Sellers by making the money available fof them on the fulfilment of the transaction and to the Buyers because they know that payment will only be made against shipping documents giving them the title for the goods. This method of payment is often used in dealings with developing countries. For collection (Payment for collection does not give any advantages to the Exporter because it does not give any guarantee that he will receive payment in time or at all. That's why the Exporter usually requires that the Importer presents a guarantee of a first class bank that payment will be effected in due time. Also, there is a long period of time between the delivery of the goods and actual payment. But it is advantageous to the Importer because there is no need to withdraw from circulation big sums of money before actually receiving the goods). Payment for collection against documents (with subsequent acceptance or very often telegraphic collection with subsequent acceptance) is mostly used in trade with East European countries. The costs involved in effecting payment for collection are twice or three times lower than those by letter of credit. Most modern business is done on a credit basis which may be: by drafts (by Bills of Exchange - B/E) - the Exporter credits the Importer which is advantageous to the latter. A draft (a bill of exchange) is an order in writing from a Creditor to a Debtor to pay on demand or on a named date a certain sum of money to a company named on the Bill, or to their order. It is drawn by the Sellers on the Buyers and is sent through a bank to the Buyers for acceptance (i.e. for acknowledging the debt). The draft becomes legally binding when signed and dated by the Buyers on its face (front) and is to be met when due, i.e. 30, 60 or 90 days after presentation. The draft may be negotiable, i.e. it may be used by the Sellers to pay their own debts, but in this case the Sellers are to endorse it by signing it on its back, then they can pass it on to the new holders. If the exporter wants immediate payment, he can discount the draft in return for a cash advance with a bank for a commission, i.e. sell it to a bank for its face value less interest, and by supplying a document (a letter of hypothecation) giving the bank the legal right to claim the goods if necessary. Besides, he may leave it with a bank as security for a loan. All this makes the Draft a very practical method of payment in foreign trade. To sum up its advantages one should say that it simplifies the financing of export and import foreign trade and cuts down innumerable movements of currency. There may be two main types of drafts: Sights Drafts, which are payable on presentation (at sight) or on acceptance and Term Drafts, which are drawn at various periods (terms) and are payable at a future date and not immediately they are accepted. Term drafts may pass through several hands before maturity and require endorsement by the Sellers. In advance (the Importer credits the Exporter, for example, the contract may stipulate a 10 or 15 % advance payment, which is advantageous to the Sellers). This method is used when the Buyers are unknown to the Sellers or in the case of a single isolated transaction or as part of combination of methods in a large-scale (transaction) contract. On an open account. Open account terms are usually granted by the Sellers to the regular Buyers or customers in whom the Sellers have complete confidence, but sometimes they are granted when the Sellers want to attract new Buyers then they risk their money for that end. Actual payment is made monthly, quarterly or annually as agreed upon. This method is disadvantageous to the Exporter, but may be good to gain new markets. Переведите на английский язык следующие предложения, грамматических временах, используемых при переводе: 1. Вам нравится испанский? 2. Они любуются на море. 3. Она никогда не видела моего брата. 4. Он работал на этом заводе. 5. Она переводила текст, когда я пришел. 6. Он говорит по-английски хорошо? 7. Они все работают в лаборатории. 8. Сколько вы заплатили за билет? 9. Студенты говорили только по-английски. 10.Он заканчивал доклад, когда его прервали. 11.Они начинают занятия в 9. 12.Кто там говорит так громко? 13.Ты уже выучил это стихотворение? 14.Они не купили машину в тот раз. 15.Они ждали нас там. 16.Где ты делаешь свои уроки? 17.Я веду урок английского языка. 18.Где ты нашел такие туфли? 19.Сколько времени у тебя заняло доехать до института? 20.Он разглядывал прохожих. 21.Какие иностранные языки они изучают в этом колледже? 22.Кому ты посылаешь телеграмму? 23.Какую комнату вы сняли? 24.Он читал по 20 страниц каждый день. 25.Собака сильно лаяла, когда кто-то подошел. 26.Кто говорит по-французски в этой группе? 27.Что он покупает? 28.Ты сварил обед? 29.Мы часто работали вместе. 30.Дул холодный ветер. 31.Как часто вы пишете на уроках? 32.Когда ты едешь в Париж? 33.Она ушла? 34.Почему они не поняли это? 35.Что они считали? 36.Чей друг посещает Вас? 37.Что он так шумит? 38.Ты проветрил комнату? 39.Он помогал тебе? 40.Она вела детей в парк. 41.Когда Вы просыпаетесь? 42.Я обдумываю этот вопрос. 43.Она закрыла дверь? 44.Кто дал тебе эту возможность? 45.Кто знает, что они тогда думали? расскажите о 46.В какой стране он работает? 47.Он ждет тебя внизу. 48.Кто выключил свет? 49.Кто изобрел телефон? 50.Машина блестела на солнце. 51.Он занимается бизнесом? 52.Ты читаешь или спишь? 53.Я всегда это понимал. 54.Лев Толстой умер в 1910 году. 55.В машине кто-то сидел. 56.Какую страну вы мечтаете посетить? 57.На каком языке они говорят сейчас? 58.Я всегда писал ему письма. 59.Они не ездили в Италию летом. 60.Дети сидели на кухне, а мама разговаривала с их учительницей. 61.Чья сестра знает испанский? 62.Он проживает в отеле сейчас. 63.Она всегда его ненавидела. 64.Когда ты родился? 65.Шел дождь, когда мы вышли. 66.Кто помогает Вам по дому? 67.Я собираюсь выучить это стихотворение наизусть. 68.Я уже купил билет. 69.Я его встретила в институте. 70.Он что-то писал за столом. 71.Они живут в Лондоне. 72.Они беседуют? 73.Он уже побывал в Лондоне. 74.Кто построил статую свободы? 75.В это время он выступал.