Economic Policy

The overall performance of the economy is now gener­ally accepted as a major responsibility of the government. That branch of economics which deals with the economy as a whole is known as macro-economics, while the study of the 'parts' of the economy is known as micro-eco­nomics. Thus, the examination of the forces which deter­mine the price of beef, or the wages of miners, or the size of the firm, would be an example of micro-economic analysis, whereas a study of the forces determining the general price level, or the general level of wages, or the balance of pay­ments would be classified as macro-economic analysis.

Economic analysis is concerned with the means of achieving particular economic objectives. The choice of the objective — how people want economic resources to be used in order to satisfy their wants — is a matter of political deci­sion. While governments will differ in the emphasis they give to particular objectives and in the ways in which they try to achieve them, there seems to be broad general agreement on marry aims. They are:

1. A high and stable level of employment.

2. Price stability.

3. A satisfactory balance of payments position.

4. An acceptable rate of economic growth.

5. An equitable distribution of income and wealth.

It is important to note that governments have found that some of these objectives may be incompatible. In order to achieve one goal governments have often been obliged to sacrifice another. Policies designed to bring about full employment have sometimes generated unacceptable levels of inflation; policies aimed at eradicating a balance of pay­ments deficit have restricted the rate of economic growth, and so on. Policymakers, therefore, are obliged to establish some priorities. If the choice is, or seems to be, between a higher rate of inflation or a higher rate of unemployment, then the issue must be solved by the value judgments of the people concerned (i.e. through the political system).

The first task is to determine the objectives. The next task is to choose the instruments of policy to be used in pursuit of the objectives and these instruments are based upon some available range of measures. For exam­ple, the government might decide that its immediate objec­tive is to reduce the level of unemployment. For this pur­pose it might choose to use the instruments of taxation and government spending. The particular measures adopted might be a reduction in income tax and an increase in pub­lic spending on housing and roads. But the essential link between the desired objective and the appropriate means of achieving it is economic analysis. The role of analysis is to provide some understanding of how the economic sys­tem works. We cannot choose the realistic objectives or design appropriate measures for attaining those objectives unless we have some knowledge of how the economy works.

A model of the economy

The circular flow of income

In order to understand how the measures of economic policy operate on the macro-economic variables (prices, out­put, employment, the balance of payments and so on), we have to make use of a fairly simple model of the economy. We begin with an economy in which there is no government and no foreign trade. There are only two sectors, firms and households. Firms are the producing units which hire ser­vices provided by the people from the households. For these services firms pay wages (for labour), rent (for land), interest and dividends (for the services of loan and risk capital). There is, therefore, a flow of income from firms to households.

But in this model, households are also the purchasers of the national output. There is a flow of spending from house­holds to firms and a flow of goods and services from firms to households. The economy would remain in equilibrium since firms are selling their goods at prices which are made up of their various costs (including profits), and these costs represent the incomes paid to households. Thus, incomes received by households are always sufficient to buy the total output of firms. We are assuming that the economy has unemployed resources so that any change in planned spend­ing leads to changes in output and employment.

Leakages and injections

The model as it stands is very unrealistic because even in the simplest economy all the income received by households is not spent — some of it is saved. Saving represents a leakage from the circular flow of income because it is part of the income paid out by firms which is not returned to them through the spending of households. When saving takes place, firms' expenses will be greater than their receipts and some of their output will remain unsold. They will react by reducing output so that income and employment will fall. If we assume that households always save some fraction of their income and there are no other expenditures to offset this leakage, income must eventually fall to zero.

Fortunately there is an offsetting expenditure in the form of investment. Our first model of the economy assumed that firms only produced consumer goods and ser­vices which were in turn bought by households. In fact, some firms produce capital goods for sale to other firms. This expenditure on capital goods adds to the circular flow of income; it has the opposite effect to a leakage and causes output and income to expand. We can say, therefore, that investment is an injection.

1. Read and understand text A

2. Use the words to renew sentences:

matter, branch, objectives, priorities, income, circular, responsibility, appropriate, saving

1. The overall performance of the economy is now accepted as a major ... of the government.

2. This ... of economy is known as macro-economics.

3. Economic analysis is concerned with the means of achieving particular economic ... .

4. Policy-makers are obliged to establish some scale of....

5. The choice of the objectives is a... of political decision.

6. We cannot design ... measures unless we have some knowledge of how the economy works.

7. Even in the simplest economy all the ... received by household is not spent.

8. ... represents a leakage from the ... flow of income.

3. Find synonyms:

broad, overall, task, appropriate, attain, operate, pur­chase, receipt, expenditures, wide, purpose, total, cor­responding, achieve, work, buy, revenue, expenses

4. Are there any antonyms:

always, save, opposite, general, high, widen, loss, leak­age, simple, same, never, particular, spend, low, reduce, sophisticated, profit, injection

5. Make antonyms:

agreement, available, realistic, acceptable, satisfactory, stable, compatible, fair, sufficient

6. What is the English for

основні обов’язки уряду, заробітна платня шахтарів, розмір фірми, загальний рівень цін, платіжний баланс, вибір цілей, щоб задовольнити власні потреби, темпи економічного зростання, справедливий розподіл доходів, рівень інфляції, знизити рівень безробіття, з цією метою, достатньо проста модель

7. Remember 3 forms of the verbs:

deal, know, give, have, be, bring, seem, choose, mean, understand, make, begin, pay, spend, buy, sell, lead, stand, fall

8. Put the words in the correct order:

1. several, of, expenditure, consists, total, elements.

2. in, was, this, governments, policy, adopted, the, peri­od, by, postwar, most.

3. leakage, because, are, taxes, from, the, system, power, purchasing, they, remove.

4. injection, flow, the, are, exports, an, into, circular.

5. spending, forms, several, takes, government.

6. transfer, payments, directly, do, not, output, gener­ate, income, and.

9. Find necessary prepositions:

1. The economy ... a country is affected ... political changes both at home and abroad.

2. Changes ... taste and fashion can influence the demands ... many consumer goods.

3. Such workers are especially liable ... to unemploy­ment ... a rapidly changing world.

4. The loss ...job satisfaction, particularly... manufactur­ing industries, is rising some serious social problems.

5. Most ... the larger firms offer training ... new entrants.

6. It is held ... many people that the existing class struc­ture is responsible ... some restrictions on the occu­pational mobility... labour.

7. A certain amount ... capital is required ... order to enter some occupations.

8. The length ... the training period itself may prove a deterrent... some people.

10. Put different questions to each sentence (general, alternative, tag itc.)

1. For these services firms pay wages, rent, interest and dividends.

2. Any changes in planned spending leads to changes in output and employment.

3. Saving represents a leakage from the circular flow of income.

4. Some firms produce capital goods for sale to other firms.

11. Fill in the gaps with words in brackets:

1. In the UK, public expenditure ... (to define) as that expenditure which has ... (to finance) from taxation, national insurance contributions, and government borrowings.

2. In 1987—88 about 72 per cent of total public spend­ing ... (to carry out) by the central government.

3. Public expenditure ... (to consist) of two distinct types of outlay: spending on goods and services and transfer payments.

4. The main categories of public expenditure ... (to show) in Fig. 79 which ... (to give) details of the per­centages of the total devoted to each category.

5. Public expenditure ... (to finance) in various ways.

6. The 'debt interest' item ... (to represent) the annual interest payments on the debts of the public sector.

7. Public goods must... (to supply) by the state.

8. It... (to accept) that the social benefits from educa­tion and health services are much greater than the private benefits.

12. Put 10 various questions to text A .

13. Discuss "Economic Policy".

14.Summarize text B.

Text В

For countries like the UK, which are heavily dependent on foreign trade (about 30 percent of UK output is exported directly or indirectly), the foreign balance is a critical matter. While short-term deficits might be covered by the use of official reserves and overseas borrowing, in the longer run a country must pay its way in the world. But a satisfactory balance of pay­ments position is not simply one in which income equals expen­diture on foreign account. Equilibrium should not be achieved at the expense of the other objectives of economic policy.

Policies under fixed exchange rates

When countries are operating fixed exchange rates, national economies are closely linked and economic changes in one country will transmit their effects fairly quickly to other countries. Thus, a country experiencing a higher rate of inflation than its competitors will find its balance of pay­ments position deteriorating because imports are becoming more competitive on the home market and exports less com­petitive in world markets. With a fixed exchange rate the immediate effect of any deficit falls on the official reserves of gold and foreign currency. When there is a persistent deficit, these reserves (plus borrowing facilities) will soon be exhausted so that, if the exchange rate is to be held, the gov­ernment must take steps to eliminate the deficit.

Expenditure — reducing measures are those which aim to reduce aggregate demand, and we are now familiar with the manner in which fiscal and monetary policies are used for this purpose. A fall in total planned spending must lead to a fall in the expenditures on foreign goods and services. It might also lead to an increase in exports as domestic firms find it more difficult to sell in the home market and make greater efforts to sell in overseas market.

There might, however, be an unfavorable 'feed-back' effect from abroad, because a cut-back in the country's imports reduces other countries' exports and, hence, other countries' income. The country carrying out the expenditure — reducing policy, therefore, might find that, although it has favorable effects on its imports, it also has unfavorable effects on its exports. The other major problem with these measures is that they tend to increase unemployment. If the deficit is a substantial one, expenditure — reducing measures would be very unpopular because it would require a relatively large reduction in aggregate demand in order to achieve the required cut in import expenditures. In other words, the 'cost' in terms of unemployment would be politically unacceptable. Expenditure-switching measures attempt to direct spending from foreign goods to home-produced goods. In order to deal with a deficit, steps might be taken to make imports relatively dearer in the home market and exports rel­atively cheaper in foreign markets. Devaluation would be the appropriate instrument for this purpose. Alternatively, such measures might take the form of direct controls on imports. Tariffs, quotas, and exchange control can all be used to limit imports and divert demand to home-produced goods. An incomes policy might also be regarded as an expenditure-switching policy. If it succeeds in holding down a country's rate of inflation below the rates being experienced in other countries, the prices of its products will be falling (i.e. rising more slowly) relative to those of its competitors' goods. Expenditure-switching measures will not be very effective where there is a high propensity to import and the demand for imports is very inelastic. In such circumstances the use of tariffs or devaluation could lead to cost-push inflation.

15. Find main sentences of the text C and express your mind.

Text С