Exercise 1.12 (Study Guide) match the following terms with the correct definition:

1. The way in which income /in a country or in the world/ is divided between different groups or individuals	a. economics
2. Allocating resources among the various goods and services that an economy might produce	b. scarce resource
3. Money paid from insurance funds to a worker who cannot get employment	c. distribution of income
4. The social science that describes and analyzes how society chooses from among scarce resources to satisfy its wants	d. resource
5. A resource for which the demand at a zero price would exceed the available supply	e. allocation
6. Deciding which members of society will receive how much of the goods and services produced	f. the ’what’ question
7. Anything that goes into the production process	g. the ‘how’ question
8. A decision as to what is to be produced with the resources of the economy or who is to get what is produced	h. the ‘for whom’ question
9. The economy’s net national product	i. input
10. The process of determining what mix of land, labour and capital to use in production and what production methods to employ	j. output
11. Payments that represent a redistribution of wealth rather than an exchange for goods and services	k. household
12. One or more persons living in the same dwelling /such as a house or an apartment/ and functioning as an economic unit	l. national income
13. Something that is used in production, includes natural resources, labour and capital	m. transfer payments
14. Quantity of goods produced	n. unemployment benefit

 

 

Exercise 1.3 (Study Guide) Give English equivalents for the following. Consult your dictionary:

ECONOMIC

экономические ресурсы; экономическая деятельность; экономическая проблема; экономический цикл; экономическая инициатива; экономическая система; экономические переменные; экономические данные; экономическая эффективность; экономическая теория; экономическая стабильность; экономический выбор; экономический рост; экономическое регулирование; экономика услуг; экономическая политика; политическая экономия; народное хозяйство; экономика управления; денежное хозяйство

PRODUCTION

процесс производства; средства производства; производство и потребление; повысить производительность; расширить производство; издержки производства; производство на душу населения; общий объем произведенной продукции; товарное производство

REGULATION

государственное регулирование; правила безопасности; частное регулирование; таможенные инструкции; финансовый регламент; регулирование рынка

GOVERNMENT

государственная политика; государственное вмешательство; государственные доходы; государственные пенсионные программы; государственный долг; государственные закупки

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.”