Unit 1. WHAT IS ECONOMICS?

Unit 1. What is economics?

 

TEXT A: What is economics? TEXT B: What economics isn't TEXT C: Micro, macro and fantasy economics BUSINESS COMMUNICATION: Introductions GRAMMAR: Present Tenses. The Present Simple and the Present Continuous Tenses

 

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.

John Maynard Keynes (1883 – 1946),

a British economist

 

 

 

LEAD-IN

1. The dictionary defines economics as “the study of the production of wealth and the consumption of goods and services in a society”. List five economic issues relating to production and consumption that your national or local government has to deal with today.
2. Why do you think everyone should understand basic economics?

PRE-TEXT EXERCISES

 

A.  Reading drills

Ex.1. Practice reading the following words.

tion [ʃn]:  action, nation, station, dictation, translation, position, condition

ssion, ssian [ʃ(ə)n]: session, expression, impression, permission, Prussian, Russian

cia [ʃə], cean [ʃ(ə)n]: ocean, special, especially, official, politician, musician, social

a [a:] перед  ss, sk, sp, st, ns, nd, nt, ft, th, nce: class, glass, grass, pass; after, craft, raft, daft; ask, task, answer, father, rather, bath, path; fast, faster, last, past, master, castle, can't; gasp, grasp; command, demand, plant, grant; chance, dance, glance, France.

 

Ex.2. Read the words in the following groups. Pay attention to the word stress.

a)  words with the stress on the first syllable:

answer, numbers, household, human, market, concept, actually, services, product, produce (n), surplus, previous, limit, object (n), purchase, action, labour, labourer, capital, enterprise, timber, profit, business, scarcity, satisfy, constitute, income, option, benefit, equity, issue;

b) words withthe stress on the second syllable:

economy, economist, accept, resources, statistics, specifically, behaviour, endeavour, defence, invisible, amount, variety, sufficient, incentive, produce (v), abandon, interpret, production, tentative, explain, decision, desire, consume, consumer, consumption, activity, object (v), attempt, perform, except, combine, reward, machinery, available, unlimited;

c)   polysyllabic words with the main and secondary stress:

administration, availability, economics, economic, economical, economically, complicated, constitution, constitutional, constitutionally, publication, comprehensive, influential, insufficient, definition, distribution, individual, satisfaction, satisfactory, unemployment, microeconomics, macroeconomics.

 

В.   Word formation with the help of suffixes

 

Ex.3. Explain the difference between the words in groups.

a)        act, acting, active, activity, action;

b)        consume, consumer, consumption, consumerism;

c)        economy, economics, economic, economical, economically;

d)       satisfy, satisfaction, satisfactory;

e)        product, produce, produce, productive, productivity, production.

 

Ex.4. Make up nouns as in the model:

a)   from the verbs

Model: verb + -ment → noun

e.g. govern - government

Enjoy, employ, develop, accomplish, encourage, punish, fulfil, equip, agree, adjust, acknowledge, commit, enrich, establish, move, judge, measure, recruit, manage;

 

b)   from the adjectives

Model: adjective + -ity → noun

e.g. reliable - reliability

Possible, probable, responsible, familiar, complex, hilarious, curious, prosperous, punctual, real, senior, special, able, public, similar, sensitive, active, minor, scarce.

 

Ex.5. Make up

a)      adjectives from the following nouns:

Model: noun + -ant → adjective

e.g.assistance (n)  → assistant (adj)

Distance, significance, importance, resistance, brilliance, consultancy, dependence;

 

b)     adjectives from the verbs:

Model: verb + -less → adjective

e.g. hope (v) → hopeless (adj)

End, use, care, aim, thank, fear, harm, rest, mind, brake, doubt, dream, form, love.

 

Text A: What is Economics?

 

Active Vocabulary

Key terms: economics, social science, management of a household, free market, productive resources, information resources, rational human behaviour, needs and wants, surplus, market, incentives, scarcity, factors of production, economic activity, opportunity cost, minimizing costs, inflation, consumer, microeconomics, macroeconomics, unemployment, gross domestic product, taxation, government expenditures, trade-offs, "invisible hand", competing uses, variety of goods and services, production, distribution and consumption of goods and services, satisfy wants, needs and desires, expenditures. Other words and expressions: to browse, to constitute, complicated, endeavour, to abandon, action, activity, available, to satisfy, benefit, to allocate, to determine, a wide range, required, demanded, to interact, phenomena. Linking words and phrases: hence, more specifically, such as, except for, thus, therefore, though, in this connection, in order to.

 

There's no one universally accepted answer to the question "What is economics?" Browsing different information resources, you will find various answers to that question. Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behaviour in the endeavour to fulfil needs and wants.

The term economics comes from the Ancient Greek oikonomia, the word composed of oikos (“house”) and nomos ( “custom” or “law”), hence, “rules of the house (hold)”. Modern economics began in 1776, with the publication of Adam Smith's “Wealth of Nations”. This was the first comprehensive defence of the free market, and continues to be an influential work to this day. Central to the work was the concept of the “invisible hand”, the idea that the market, while appearing chaotic, is actually guided to produce the right amount and variety of goods and services. If there are insufficient goods, there will be great economic incentives to produce more; if there are surplus goods, there will be an economic incentive to produce less or different types of goods. Smith's work was so influential that previous tentative schools of economics were abandoned after its publication.

Modern definition of economics interprets it as a social science, which analyses the production, distribution, and consumption of goods and services, studies human behaviour and explains how individuals and groups make decisions with limited resources as to best satisfy their wants, needs and desires.

Wants and needs refer to people’s desires to consume certain goods and services. In economic terms, a good is a physical object that can be purchased. A service is an action or activity done for others for a fee. The term product is often used to refer to both goods and services.

Economics often uses such categories as factors of production, which are basic elements used to produce goods and services. In essence, land, labour, capital and entrepreneurship are main productive resources. Land represents all natural resources, such as timber and gold used in the production of a good. Labour is all of the work that labourers and workers perform at all levels of an organisation, except for the entrepreneur. The entrepreneur is an individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business. The capital is all of the tools and machinery used to produce a good or service.

The need for making choices arises from the problem of scarcity. Scarcity exists because people’s wants and needs are greater than the resources available to satisfy them. From here it can be easily understood that scarcity is the fundamental economic problem of having seemingly unlimited human needs and wants in the world of limited resources.  Scarcity means that people want more than is available. Thus, people must choose how best to use their available resources to satisfy the greatest number of wants and needs. Scarcity limits us both as individuals and as a society. As individuals, limited income (time or ability) keeps us from doing and having all that we might like. As a society, limited resources (such as manpower, machinery, and natural resources) fix a maximum on the amount of goods and services that can be produced. Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices. People must choose which of their desires they will satisfy and which they will leave unsatisfied.

When there is scarcity and choice, there are costs. The cost of any choice is the option or options that a person gives up. Most of economics is based on the simple idea that people make choices by comparing the benefits of options of different goods and choosing the one with the highest benefit. The opportunity cost of a particular choice is the satisfaction that would have been derived from the next best alternative foregone. It is the cost of any activity measured in terms of the value of the best alternative that is not chosen.

Economics is the study of how people choose to allocate scarce resources to satisfy their unlimited wants. In the situation of scarce resources and unlimited human needs, economics has a very important task of minimizing costs while producing different goods and services. The main problem in economics is the question of allocating scarce resources between competing uses. In this connection very significant decisions must be made about three basic economic questions: What to produce? For whom to produce? and How to produce?

What products and services should be produced? In order to answer this question we need to determine the needs of individual consumers as well as the economy in general. A wide range of goods and services needs to be produced in order to cater for many and varied needs of consumers. The demand from consumers and available resources will normally determine what products and services to produce.

How much of each product and service should be produced? The amount of each product to produce will be determined by the demand for the various products as well as the availability of the resources required to produce those goods and services.

For whom should goods and services be produced? The demand for goods and services will largely determine for whom they will be produced. Goods are therefore produced for those consumers who demand the goods, and have the ability to pay for the goods demanded.

Two main branches of economics are: microeconomics and macroeconomics. Microeconomics examines the actions of individuals and firms, and how they interact. Macroeconomics studies the economy at large, examining such phenomena as inflation, unemployment and gross domestic product.

No aspect of life is untouched by economics - though it can be hard to convey its central importance in human lives. Economics has things to say, and to teach, about the importance of education, about taxation and government expenditures, about why some companies succeed and others go bust. It teaches why some countries grow rapidly and others struggle to grow at all.

 
Language notes:

great economic incentives – великі економічні стимули;

surplus goods – надлишкові товари;

tentative schools of economics – експериментальні економічні школи;

opportunity cost – альтернативний вибір;

economic activity would not exist if scarcity did not force people to make choices – не існувало б господарської діяльності, якби дефіцит не змушував людей робити вибір;

to take risks and rewards – йти на ризик і заробляти винагороди;

to go bust – збанкрутувати, розоритися;

rational judgments – обґрунтовані судження;

trade-off –альтернатива, компроміс.

 

VOCABULARY FOCUS

 

Ex.1. Find the English equivalents in the text.

Економічна діяльність; дефіцит; обмежені ресурси; управління господарством; вивчати складні таблиці та графіки; недостатньо товарів; виробляти більше; сучасне визначення економіки; бажання споживати певні товари та послуги; ризики та винагороди бізнесу; задовольняти необмежені людські потреби та бажання; розподіл дефіцитних ресурсів; широкий асортимент товарів та послуг; попит на різну продукцію; основні питання, що впливають на нас.

 

Ex.2. Give Ukrainian equivalents of the following words and phrases.

To allocate scarce resources between competing uses; government expenditures; demand from consumers; rational human behaviour in the endeavour to fulfil needs and wants; the first comprehensive defence of the free market; an economic incentive to produce less or different types of goods; production, distribution, and consumption of goods and services; to produce the right amount and variety of goods and services; inflation; unemployment; gross domestic product; taxation; the best alternative foregone; minimizing costs; available resources; unlimited human needs and wants; force people to make choices; to satisfy wants, needs, and desires; to consume certain goods and services.

 

Ex.3. Give three forms of the following verbs. Find the sentences with these verbs in the text.

Find, come, begin, be, do, take, make, arise, keep, leave, give, choose, have, teach, say, go, grow.

 

Ex.4. Match the words on the left with the definitions on the right.

1	scarcity	a	the study of the way in which money and goods are produced and used
2	consumer	b	a continuing increase in prices, or the rate at which prices increase
3	economics	c	a subject or problem that is often discussed or argued about, especially a social or political matter that affects the interests of a lot of people
4	demand	d	a situation in which there is not enough of something
5	distribution	e	the number of people in a particular country or area who cannot get a job
6	inflation	F	a balance between two opposing things that you are willing to accept in order to achieve something
7	unemployment	g	someone who buys and uses products and services
8	issue	h	all the people who live together in one house
9	costs	I	an advantage, improvement, or help that you get from something
10	GDP	J	the need or desire that people have for particular goods and services
11	trade-off	k	the money that you must regularly spend in order to run a business, a home, a car, etc
12	surplus	L	the act of sharing things among a large group of people in a planned way
13	benefit	m	the total value of all goods and services produced in a country in one year, except for income received from abroad
14	income	n	an amount of something that is more than what is needed or used
15	household	o	the money that you earn from your work or that you receive from investments, the government, etc

 

Ex.5. Make up verb+noun collocations (there may be several variants).

to satisfy	scarce resources
to make	economics
to allocate	answers
to provide	wants and needs
to produce	tools
to determine	products
to find	decisions
to study	demand for goods
to design	goods and services
to purchase	rational judgements

 

Ex.6. Choose an appropriate word or phrase to complete the following sentences.

Economic profit, factors of production, fee, goods and services, Nations, needs and wants, option or options, products and services, resources, unlimited wants.

 

1. Economics is the study of what constitutes rational human behaviour in the endeavour to fulfil _________.
2. Modern economics began in 1776, with the publication of Adam Smith's Wealth of _________.
3. Modern definition of economics interprets it as the social science, which analyzes the production, distribution, and consumption of _________.
4. A service is an action or activity done for others for a _________.
5. _________are basic elements used to produce goods and services.
6. The entrepreneur is an individual who takes an idea and attempts to make an _________from it by combining all other factors of production.
7. Scarcity exists because people’s wants and needs are greater than the _________available to satisfy them.
8. The cost of any choice is the _________that a person gives up.
9. Economics is the study of how people choose to allocate scarce resources to satisfy their _________.
10.  The demand from consumers and available resources will normally determine what _________to produce.

 

Ex.7. Fill in the gaps with appropriate prepositions or adverbs.

1. Browsing different information resources, you will find various answers ______ that question.
2. Economics is the study ______ what constitutes rational human behaviour.
3. Modern economics began ______ 1776.
4. Central ______ the Adam Smith’s Wealth of Nations was the concept ______ the “invisible hand”.
5. If there are surplus goods, there will be an economic incentive to produce ______ or different types of goods.
6. Modern definition ______ economics interprets it as a social science.
7. A service is an action or activity done ______ others ______ a fee.
8. The need ______ making choices arises ______ the problem of scarcity.
9. Scarcity means that people want ______ than is available.
10. The cost ______ choice is the option or options that a person gives up.
11. Most ______ economics is based ______ the simple idea that people make choices.
    1. Economics has a very important task ______ minimizing costs ______ producing different goods and services.
    2. Very significant decisions must be made _____three basic economic questions.
    3. The demand _____ consumers and available resources will normally determine

what products and services to produce.

1. Goods are produced ______ those consumers who demand the goods, and have the ability to pay ______ the goods demanded.

 

Ex.8. Combine two parts logically to make complete sentences.

1	Economics may appear to be the study of complicated	a	the production, distribution, and consumption of goods and services.
2	Economics is the study of what constitutes rational human	b	allocating scarce resources between competing uses.
3	Modern economics began in 1776, with the	c	limited resources as to best satisfy their wants, needs, and desires.
4	Modern definition of economics interprets it as the social science, which analyzes	d	an economic profit from it by combining all other factors of production.
5	Economics studies human behaviour and explains how individuals and groups make decisions with	e	the benefits of options of different goods and choosing the one with the highest benefit.
6	Economics is called the study of scarcity because economic activity	f	scarce resources to satisfy their unlimited wants.
7	The entrepreneur is an individual who takes an idea and attempts to make	g	publication of Adam Smith's Wealth of Nations.
8	The main problem in economics is the question of	h	tables and charts, statistics and numbers.
9	Most of economics is based on the simple idea that people make choices by comparing	i	behaviour in the endeavour to fulfil needs and wants.
10	Economics is the study of how people choose to allocate	j	would not exist if scarcity did not force people to make choices.

 

Ex.9. Look through the text again and replace the words/phrases in italics with similar ones.

1. The term “economics” comes from the Ancient Greek “oikonomia”, the word composed of “oikos” ("house") and “nomos” ( “custom” or “law”), thus, “rules of the house(hold)”.
2. Wants and needs refer to people’s wants to consume certain goods and services.
3. In economic terms, a good is a physical object that can be bought.
4. Economics often uses such categories as factors of production, which are basic elements used to manufacture goods and services.
5. Scarcity exists because people’s wants and needs are greater than the resources available to meet them.
6. The main problem in economics is the question of allocating limited resources between competing uses.
7. That’s why very significant decisions must be made about three basic economic questions: What to produce? For whom to produce? and How to produce?
8. For the purpose of answering this question we need to determine the needs of individual consumers as well as the economy in general.
9. Goods are thus produced for those consumers who demand the goods, and have the ability to pay for the goods demanded.
10. No aspect of life is untouched by economics – despite the fact that it can be hard to convey its central importance in human lives.

 

Ex.10. Translate into English.

1. Економіка - це наука, що вивчає закони і категорії суспільного виробництва, розподілу, обміну і споживання, методи і форми організації та управління виробництвом.
2. Вивчення кожної науки починається з визначення її предмета, цілей, і методів.
3. Вперше поняття "економіка" ввів грецький мислитель Арістотель (III ст. до н. е.).
4. Арістотель пояснив суть економіки як науки про домашнє господарство: грецьке "ойкос" означає дім, господарство, "номос" - вчення, закон.
5. Проте економіка як наука, як систематизоване знання про суть господарської діяльності виникла лише в ХVII-ХVIII ст., тобто в період капіталізму.
6. Щоб визначити предмет економіки, необхідно розкрити дві найважливіші категорії: "економіка" та "економічна теорія". 
7. Слід зауважити, що теорія дає уявлення про дійсність як систему.
8. Економіка – це наука про виробничу діяльність та обмін її результатами між людьми.
9. Економіка вивчає рух економічного життя - тенденції в розвитку цін, виробництва, безробіття тощо.
10. Економічна наука допомагає виробити політику, за якої уряд може впливати на економічне життя.
11. Економіка - наука вибору, яка вивчає, як люди вибирають спосіб використання обмежених виробничих ресурсів (землі, праці, обладнання, технічних знань) для виготовлення різних товарів і розподілу їх між різними членами суспільства.
12. Економіка вивчає, яким чином людина організує виробництво і споживання.
13. Економіка вивчає гроші, капітал, його форми й багатство. 
14. Економічна освіта кадрів – це процес овoлодіння економічними знаннями, уміннями і навичкамита підготовка фахівців з вищою економічною освітою.
15. Економічна освіта кадрів – це також підвищення рівня економічних знань керівних господарських та інженерно-технічних працівників.

 

LANGUAGE SKILLS

 

Ex.11. Ask questions to which the following sentences may be answers.

1. There's no one universally accepted answer.
2. In 1776, with the publication of Adam Smith's Wealth of Nations.
3. The first comprehensive defence of the free market.
4. Because previous tentative schools of economics were abandoned.
5. They are land, labour, capital and entrepreneurship.
6. It arises from the problem of scarcity.
7. Because people want more than is available.
8. Limited income (time or ability) keeps us from doing and having all that we might like.
9. The option or options that a person gives up.
10. The opportunity cost of a particular choice.
11. What to produce? For whom to produce? How to produce?
12. To determine the needs of individual consumers.
13. In order to cater for many and varied needs of consumers.
14. The demand from consumers and available resources.
    1. By the demand for the various products as well as the availability of the resources required to produce those goods and services.

 

Ex.12. Answer the following questions.

1. How can you answer the question “What is economics?”
2. What is the central concept of Adam Smith's Wealth of Nations?
3. What is the difference between a good and a service?
4. Which factors of production are there?
5. What does land represent?
6. What kind of work do labourers perform?
7.  Who can be called an entrepreneur?
8.  What is capital?
9.  Why is economics sometimes called the study of scarcity?
10. What is the cost of any choice?
    1. What is the task of economics in the situation of scarce resources and unlimited human needs?
    2. Name the main problem in economics.
    3. What are the main branches of economics?
    4. Explain the difference between microeconomics and macroeconomics.
    5. What does economics teach, provide and help to understand?

 

Ex. 13. Make a presentation of the topic “What is economics”.

 

WRITING

 

Ex.14. Write a plan for a summary of Text A.

 

Ex. 15. Write a brief summary (25-30 sentences) of Text A.

 

Ex. 16. Write an essay (100 – 150 words) about:

-          the problem of scarcity and opportunity cost.

 

DISCUSSION POINTS

 

Ex.17. Answer the following questions.

1. What is economics?
2. What is scarcity? Give some examples of rich people and poor people facing scarcity.
3. Why does scarcity force us to make choices?
4. Why do we care about what goods and services are produced? Give some examples of goods that you value highly and goods on which you place a low value.
5. Why do we care about how goods and services are produced? (Think about cost.)
6. Why do we care about when or where goods and services are produced?
7. Why do we care about who gets the goods and services that are produced?
8. What do we mean by the related ideas of trade-off and opportunity cost? Give some examples of trade-offs that you have made today and of opportunity costs that you have incurred.
9. Explain why for the economy, as a whole, expenditure equals income and the value of production.
10. Why does unemployment occur? Is all unemployment a problem?

 

Ex.18. Name as many famous economists as you know. Explain their role in the development of economic science.

 

Ex.19. Economics has been called “the study of scarcity and choice”. How does this relate to your budget for the week? How does this relate to your nation’s budget?

 

Text B: what economics isn't

 

Ex.20. Scan the text below and give headlines to each paragraph.

Let's start with what economics isn't. Economics isn't a meal ticket to make lots of money in the stock market, although economics helps you understand how stock markets and other markets work. Economics also isn't a business degree, although economics teaches important business skills. (1) ____________. As such, economics helps to explain the mysteries of how people and society operate.

Economics is defined as the study of how people choose to use their scarce resources in an attempt to satisfy their unlimited wants. (2) ____________.  Think, for example, why you don't own a Ferrari or a Porsche (if you do, congratulations). You probably can't afford to purchase these expensive automobiles, or even if you can, this is not the best use of your money. You may want a Ferrari, and in fact there is no prohibition against your buying a Ferrari. But you don't have the resources - namely, money - to buy a Ferrari.

Take this one step further. Why don't you go to the movies every night, or go out dancing until 2 AM every evening? You may want to, even prefer to, but you can't because you have homework, or a job, or both. Even if you could financially afford this lifestyle, your time is a scarce resource. (3) ____________.

Economics builds scientific models to explain why people behave the way they do. And economists use these models, in conjunction with their observations of the world, to analyze and explain why things happen the way they do. 

Does this sound boring? It shouldn't. (4) ____________. Even more, economics is about finding the truth, even if the truth may go counter to what you, and most people, may intuitively believe. As one economist put it, economics is about paradoxes, about providing answers to riddles that are contrary to accepted opinion yet are true. Think about a few such paradoxes: 

Supermodels and athletes may be better off bypassing college for professional work than by attending college. Why? The potential income they forego by attending school is greater than the benefit a college degree brings to a supermodel or star athlete. This is not to say that education is bad, or supermodels can't afford college; rather, it simply says that the allocation of time is better spent working than by attending school.

(5) ____________. Traffic jams seem to be a necessary evil, right? What if drivers needed to pay a toll, say $1, during busy rush hours. This would certainly prevent some drivers who didn't need to drive from driving during rush hour, and traffic congestion would lessen. In economics, driving is a want and freeways, time, and money are resources. If we could better allocate these resources, then we could lessen traffic. 

This is what economics is all about - finding answers to problems that are not always as they seem to be.

Why major in economics? Economics teaches valuable skills and problem-solving techniques that will help you solve the mysteries life presents. But there's another reason. (6) ____________. In addition to academia and government, economists work in all facets of the business world, including manufacturing, mining, banking, insurance, and retailing. Not to mention sports, recreation, entertainment, and technology.

Why do businesses need economists? First, economists are trained to think analytically and critically to solve complex problems. Second, and relatedly, (7) ____________, and as such economists are trained to recognize human behaviour in relation to work, production, distribution and consumption, the fundamental operations of most businesses.

Businesses began to hire economists in increasing numbers shortly after World War II, and the economics profession has grown rapidly ever since. Both large and small firms hire economists. Large firms tend to have whole divisions dedicated to economic research, with a number of economists addressing specialized areas. Smaller firms, on the other hand, tend to hire only one or two economists to address a number of general areas: planning, forecasting, finance, and other duties.

(8) ____________. Economists analyze data and provide information; the manager uses this information to make decisions. The public profile may not be there, but the power of the information is great. This may explain why so many corporate CEOs rose to their positions through the economics division.

 

Ex.21. Read the text. Choose the best sentence A-G to fill each of the gaps 1-8.  Do not use any of them more than once.

A  Again, economics is about solving problems.

B  Economics is a social science

C  In other words, we have unlimited possibilities in life to do whatever we want, but we are limited by the resources we have to do these things.

D  Namely, jobs, and decent-paying ones at that.

E  The role of the economist may differ from that of the manager.

F  Traffic jams can be prevented.

G  You need to spend time studying or working which prevents you from movie watching and dancing.

H  Economics, first and foremost, is a social science.

 

Ex.22. Read the text and decide whether the following statements are true or false. Correct the false statements.

1. Economics helps you understand how stock markets and other markets work.
2. Economics is a business degree.
3. Economics teaches important business skills.
4. Economics helps to explain the mysteries of how people and society operate.
5. Economics is defined as the study of how people choose to use their unlimited resources in an attempt to satisfy their scarce wants.
6. Economics builds scientific models to explain why people behave the way they do.
7. In economics, driving is a resource and freeways, time, and money are wants.
8. Economists work in all facets of the business world, including manufacturing, mining, banking, insurance, and retailing.
   1. Economists are trained to think analytically and critically to solve complex problems.
   2.  Only large firms hire economists.
   3.  Large firms tend to have whole divisions dedicated to economic research, with a number of economists addressing specialised areas.

                                                              

Ex.23. Read text B again and answer the following questions.

1. What is not economics?
2. How is economics defined?
3. Why does economics build scientific models?
4. How do economists use these models?
5. What is economics about?
6. Why do businesses need economists?
7. When did businesses begin to hire economists?
8. How do large and small firms hire economists?
9. What is the role of the economist?
10.  What does the manager use to make decisions?

 

Text C: Micro, Macro and Fantasy Economics          

 

Ex.24. Before reading

Can you anticipate what ‘fantasy economics’ is about?

 

Ex.25. Reading

(1) There are two branches of genuine economics, the micro and the macro, and a third and phoney one, the fantasy economics that feeds on wishful thinking demagogy and the rantings of pretentious charlatans. As micro and macro are tangled up in one of their periodic conflicts of mutual misunderstanding, the hour is to the fantasy economics "new order," "need, not greed," "equitable distribution," "stability," and so forth. None of this rhetoric is harmless, and the seductive apple-pie-and-motherhood language it uses makes it difficult to combat. Micro-economics finds support in common sense, the lessons of everyday life and perhaps also in inherited instincts that favoured genetic survival in evolutionary selection. Micro-economics teaches that no sane man will try to increase his income by borrowing more heavily on his credit card so that his increased consumption should stimulate consumption, fill factory order books, and permit him to earn more by doing overtime. Yet macro-economics suggests that something of the sort is a quite plausible sequence of events. Plausible, however, is sometimes mistaken for necessarily true. "It all depends"; macro-economic plausibility may or may not point to correct conclusions.

(2) When in 2000 France's socialist government reduced the "legal" work week to 35 hours the main plea was that this will spread the available work among more people, i.e. reduce unemployment, which of course it did not. It increased costs and caused much disruption. On the other hand, when in 2008-2009 a large proportion of German employers reduced both the work week and wages, the result was that German unemployment rose significantly less than that in neighbouring countries. Could this be a negation of the French experience? It was nothing of the sort; it was simple that other things were not equal, in one experience labour costs increased, in the other they did not. Micro and macro are fairly unanimous that you do not increase the demand for labour by making it more expensive. Higher unemployment pay has no direct incidence on wage cost, because it is paid out of general tax revenue and leaves unemployment insurance rates (a kind of payroll tax) unchanged. However, wherever the incidence of a higher cost first hits the economy, the indirect incidence will inevitably work through to labour cost, too.

(3) The contemporary quarrel between micro and macro rages around the sustainability of growing government debt, the potential of the fiscal stimulus to induce growth and create jobs, and the risks of unorthodox central banking. In all these areas, the instinctive, micro-oriented "know-nothings" confront the educated Keynesians. The latter keep desperately trying to hammer into the thick skulls of the former the basic blueprint of John Maynard Keynes's system. More government spending (i.e. dissaving) generates income that is greater than the spending itself, with part of the income being consumed and part saved to generate the saving that matches the government dissaving. In Keynesian parlance there is the multiplier effect and it is greater than 1. As long as there is spare capacity (unemployment) in the economy, the government ought to go on spending more, working through the multiplier, because the extra private saving takes care of the government dissaving and the extra consumption is, so to speak, a welcome windfall gain. Timidly refusing to generate it is criminal waste.

(4) Fantasy economics as a study of warfare or at best a bitterly fought football game helps to understand the self-inflicted pain most of Europe is currently suffering in the "crisis" of the euro - a "crisis" that is increasingly looking like a quasi-permanent state of affairs. The euro replaced national currencies in 1999 partly because it was promised to raise economic growth rates "in the region by 5 per cent or more, and partly because it would enable Europe "to look the dollar in the face" or, better still, to become its equal as a global reserve currency. Milton Friedman was convinced that, failing fiscal unification, the euro experiment will collapse in a matter of months. Instead, it is still subsisting, though it has signally failed to fulfil the promises of growth and especially of prestige that had been made for it. It is being maintained by the Herculean efforts of the more solvent of the member states that seem determined to throw good money after bad to save their nearly insolvent fellow members without admitting that at least some of this money can be regarded as already gone down the drain. The mystery is that doing this is unanimously acclaimed as wise, constructive and necessary because it preserves the integrity of the Eurozone. There is ominous talk of "fragilisation" and "contamination" from Greece to Ireland, Ireland to Portugal, Portugal to Spain and so on, ending in some unspecified but catastrophic collapse. Nobody feels the need to ask why such language is the right one to use, and why the "integrity" of the zone and its common currency is so precious as to warrant the most painful economic and political contortions. Heavily loaded metaphors suffice to convince us that Greece, Portugal, Spain or Italy reverting to their own separate currencies would be a bad thing for anyone, let alone (as is being asserted) for everyone.

(5) What is saddening is that it is not solid understanding of micro and macro theory, the depressing history of exchange controls, fixed rates and commodity price stabilisation schemes, not the vacuity of fantasy economics that will preserve us from these hoary panaceas, but rather the sheer unlikelihood of reaching unanimous agreement among sovereign states on anything substantive, however foolish it may be.                                                    

 

Task 1. Discuss how micro and macro are tangled up in conflicts of mutual misunderstanding. (para.1)

Task 2. Explain why higher unemployment pay has no direct incidence on wage cost. (para.2)

Task 3. If something is constructive (para.4), is it

a) involving the use of imagination to produce new ideas or things;

b) useful and helpful, or likely to produce good results;

c) designed for building?

Task 4. What way out of the crisis does the author see? (para.5)

Task 5.  What does the author mean by “hoary panaceas”? (para.5) Which of them does he focus on in the above text?