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Consumer Price Index Criticism





Just as there is criticism of the unemployment rate, the CPI is not a perfect measure of inflation, and it has recently been the subject of much public debate. There are four key reasons for this criticism.

First, changes in the CPI are based on a typical market basket of products purchased that does not match the actual market basket purchased by many consumers.

Second, there are some difficulties in adjusting the CPI for changes in quality. Compare a personal computer made in the past with a new personal computer. The new computer may cost somewhat more, but it is much better than the old computer. If the quality of items improves, increases in the CPI overstate inflation.

Third, the use of a single base-year market basket ignores the law of demand. If the price of a product rises, consumers purchase substitutes, and a smaller quantity is demanded.

Finally, there have been made numerous changes in the methodology used to calculate the CPI during the 1990s. For example, now more consume substitution of goods in response to rising prices is allowed.

 

B.Translate from Russian into English into English.

Инфляция – это ситуация, при которой имеет место падение покупательной способности денег, результатом чего является рост общего уровня цен. Инфляция измеряется на основе относительных измерений за определенный период времени соответствующего индекса цен, обычно индекса цен на потребительские товары или дефлятора ВВП.

Инфляция, вызванная ростом издержек производства, начинается с роста некоторых элементов издержек, например бурный рост цен на нефть в 70-х годах.

Инфляция, вызванная превышением спроса над предложением, возникает из-за слишком высокого совокупного спроса.



Гиперинфляция – это исключительно высокая инфляция, когда цены растут настолько быстро, что деньги в значительной степени теряют свою функцию средства обращения.

Галопирующая инфляция – инфляция, при которой цены начинают удваиваться, утраиваться ежегодно.

 

LISTENING

 

A.Make sure that you understand the following words and word combinations.

to boost multiplier effect information flow fiscal deficit fiscal policy to dispose business cycle to accentuate cycles

B.Listen to the interview and decide whether the following statements are true or false (T or F).Give the reasoning.

1. Keynesians believe that if the government borrows and spends more money, economic activity will increase.

2. Keynesians want to boost domestic demand, meaning spending by households rather than businesses.

3. If the government borrows more money, this affects interest rates and business investment.

4. Monetarists say that the only result of increasing the money supply is to raise prices.

5. Keynesians believe that a government can increase the money supply without people noticing it, so that they spend more, and business invest more.

6. The goal of Keynesianism is to eliminate recessions.

7. Monetarists see neither economic advantages nor disadvantages in increasing the amount of money in circulation.

 

SPEAKING

 

A.

Read the dialogue and practice the conversation between a journalist and a Finance Minister.



Journalist: Has the policy of the government changed?
Minister: No, we are looking towards increasing the quality of services and making the economy strong.
Journalist: What do you predict as a level of inflation over the next 12 months?
Minister: Inflation will continue at present levels – about 2.5 per cent.
Journalist: Are you confident that economic growth will remain strong?
Minister: Economic growth is now at 2 per cent and should rise to 4 per cent over the coming year.

 

Task:Make dialogues according to the model discussing the level of inflation and the rate of economic growth for the coming year in Belarus, the European Community and the USA.

B.

Dwell on:

– Inflation and hyperinflation. Their effects on economy and well-being.

– The current level of inflation in the USA, EU and Belarus.

– Consumer Price Index.

– Demand-pull inflation. Why does it become a problem when the economy approaches full employment?

– Cost-push inflation. How does it differ from demand-pull inflation?

– Inflation and the real and nominal interest rates.

 

VOCABULARY

 

boost v – стимулировать, повышать

borrow v – брать взаймы

borrower n – должник, дебитор, заёмщик

borrowingn – заем, кредит

capacity n – мощность

productive ~ – производственная мощность

consumer n – потребитель

~ price index (CPI) – индекс потребительских цен

credit n – кредит, доверие, репутация

creditors n – кредиторы, кредиторская задолженность

curve n – кривая (линия)

cutback n – сокращение, уменьшение

debt n – долг

bad ~ – безнадёжный долг

debtors n – дебиторы, дебиторская задолженность

disinflationn – дисинфляция; замедление темпов инфляции

hyperinflation n – гиперинфляция

inflation n – инфляция

cost-push ~ – инфляция, обусловленная ростом издержек

demand-pull ~ – инфляция, вызванная превышением спроса над предложением

lend v – давать в займы, одалживать

lender n – кредитор, заимодавец

~ of last resort – кредитор последней инстанции

loan n – заём, суда, кредит

loan v – одалживать, давать в займы

~ out – выдавать заём

multiplier n – мультипликатор, коэффициент



recipient n – получатель

surplus n – избыток, профицит

GLOSSARY

 

· GDP chain price index is a measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year.

· The consumer price index (CPI) is the most widely known price-level index. It measures the cost of purchasing a market basket of goods and services by a typical household during a lime period relative to the cost of the same bundle during a base year.

· Inflation is a situation in which a decline in the purchasing power of money results in a rise of the general price level.

· Cost-push inflation is an increase in the general price level resulting from an increase in the cost of production.

· Demand-pull inflation is caused by pressure on prices originating from the buyers' side of the market. In contrast, cost-push inflation is caused by pressure on prices originating from the sellers' Side- of the market.

· Deflation is a decrease in the general level of prices. During the early years of the Great Depression, there was deflation, and the CPI declined at about a double-digit rate.

· Disinflation is a reduction in the inflation rate. Between 1980 and 1986, there was disinflation. This does not mean that prices were falling, but only that the inflation rate fell.

· Hyperinflationis an extremely rapid rise in the general price level.

· Nominal income is income measured in actual money amounts. Measuring your purchasing power requires converting nominal income into real income, which is nominal income adjusted for inflation

· Nominal interest rate is the annual percentage amount of money that is earned on a sum loaned or disposed in a bank.

· The real interest rate is the nominal interest rate adjusted for inflation. If real interest rates are negative, lenders incur losses.


ECONOMIC BUSINESS CYCLES AND UNEMPLOYMENT

 

DISCOVERING CONNECTIONS

 

1. Are there any jobs in your country which are in constant demand?

2. In which economic sectors have jobs disappeared / have been created?

3. What is the most difficult job you can imagine? And the most pleasant?

4. If you could choose any job in the world, what would it be? Why?

5. Are you optimistic or pessimistic about your own future? Do you expect the qualification you are currently studying for to get you a permanent job?

6. Do you see any areas in which a large number of jobs might realistically be created?

7. In your opinion, when there is high unemployment during a recession, should the government intervene in the economy to create jobs?

 

READING

 

Text 1

As you read the text, focus on various theories of business cycle.

Economic Business Cycles

The business cycle or trade cycle is a permanent feature of market economies: gross domestic product (GDP) fluctuates as booms and recessions succeed each other. During a boom, an economy (or at least parts of it) expands to the point where it is working at full capacity, so that production, employment, prices, profits, investment and interest rates all tend to rise. During a recession, the demand for goods and services declines and the economy begins to work at below its potential. Investment, output, employment, profits, commodity and share prices, and interest rates generally fall. A serious, long-lasting recession is called a depression or a slump.

The highest point on the business cycle is called a peak, which is followed by a downturn or downswing or a period of contraction. The lowest point on the business cycle is called a trough, which is followed by a recovery or an upturn or upswing or a period of expansion. Economists sometimes describe contraction as 'negative growth'.

There are various theories as to the cause of the business cycle. Internal (or endogenous) theories consider it to be self-generating, regular, and indefinitely repeating. A peak is reached when (or just before) people begin to consume less, for whatever reason. As far back as the mid-nineteenth century, it was suggested that the business cycle results from people infecting one another with optimistic or pessimistic expectations. When economic times are good or when people feel good about the future, they spend, and run up debts. If interest rates rise too high, a lot of people find themselves paying more than they anticipated on their mortgage or rent, and so have to consume less. If people are worried about the possibility of losing their jobs in the near future they tend to save more. A country's output, investment, unemployment, balance of payments, and so on, all depend on millions of decisions by consumers and industrialists on whether to spend, borrow or save.

Investment is closely linked to consumption, and only takes place when demand and output are growing. Consequently, as soon as demand stops growing at the same rate, even at a very high level, investment will drop, probably leading to a downturn. Another theory is that sooner or later during every period of economic growth – when demand is strong, and prices can easily be put up, and profits are increasing employees will begin to demand higher wages or salaries. As a result, employers will either reduce investment, or start to lay off workers, and a downswing will begin.

External (or exogenous) theories, on the contrary, look for causes outside economic activity: scientific advances, natural disasters, elections or political shocks, demographic changes, and so on. Joseph Schumpeter believed that the business cycle is caused by major technological inventions (the steam engine, railways, automobiles, electricity, microchips, and so on), which lead to periods of 'creative destruction'. He suggested that there was a 56-year Kondratieff cycle, named after a Russian economist. A simpler theory is that, where there is no independent central bank, the business cycle is caused by governments beginning their periods of office with a couple of years of austerity Programmes followed by tax cuts and monetary expansion in the two years before the next election.

 

Vocabulary Focus

 

Ex. 1.Match the Russian words and word combinations in column A with their English equivalents in column B.

A B
работать на полную мощность boom
платежный баланс/ сальдо to work at full capacity
влезать в долги peak
отрицательгный рост balance of payments
экономический подъем tax cut
пик, высшая точка цикла recession
низшая точка цикла negative growth
экономический спад trough
снижение налогов to work at below potential
работать ниже потенциальных возможностей to run up debts

 

Ex. 2. Express in one word.

Beliefs about what will happen in the future.

1. Money borrowed in order to buy a house or flat (GB) or apartment (US).

2. Money paid for the use of a house or flat owned by somebody else.

3. The amount of something produced by a company, a country, and so on.

4. Spending on new machines, factories, and so on.

5. Owners or managers of manufacturing companies.

6. Spending on goods and services.

7. To dismiss employees.

8. Concerning the number of births, deaths, population movements, and so on

9. An absence of luxury and comfort.

 

Words for reference: mortgage, investment, lay off, expectations, rent, demographic, consumption, austerity, industrialist, output.

 

Ex. 3.Complete the sentences using the words given below.

1. Recurrent rises and falls in real GDP over a period of years is called the _________ .

2. A (an) __________ is officially defined as two consecutive quarters of real GDP decline.

3. ____ is measured by the annual percentage change in real GDP in a nation.

4. The _______ is the difference between full-employment or potential real GDP and actual real GDP.

5. The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery is called a _______ .

6. A _______ is a phase of the business cycle during which real GDP reaches its minimum after falling during a recession.

7. An upturn in the business cycle during which real GDP rises is called a ___.

 

Words for reference: recovery; peak; trough; economic growth; GDP gap; business cycle; recession.

 

Comprehension

 

Ex. 1. Match up the following half sentences:

A B
1) Companies may have to reduce investment or the size of the work force 2) Companies only invest 3) During a period of economic growth 4) External theories of the business cycle 5) Governments often stimulate the economy 6) Increases in interest rates 7) Internal theories of the business cycle 8) People can demand higher pay 9) People tend to spend less a) consumers borrow a lot of money. b) if labour costs increase too much. c) if their company's sales are increasing. d) include psychological factors. e) include technological and population changes. f) prior to general elections. g) result in higher rents and mortgages. h) when they are afraid of becoming unemployed. i) while consumption is increasing.

 

Ex. 2. Choose the right answer.

1. The _______ phase of the business cycle follows a recession.

a. recovery;

b. recession;

c. peak;

d. trough.

2. The GDP gap is the difference between:

a. frictional unemployment and actual real GDP;

b. unemployment rate and real GDP deflator;

c. full-employment real GDP and actual real GDP;

d. full-employment real GDP and real GGDP deflator.

3. A recession is a business contraction lasting at least:

a. one years;

b. six months;

c. three months;

d. one month.

4. When is the GDP gap largest?

a. During peak periods in the business cycle;

b. During trough periods in the business cycle;

c. When unemployment rates are relatively low;

d. When cyclical unemployment is close to zero.

Ex. 3.Answer the questions on the text.

1. What is a business cycle?

2. Which of the various theories of the business cycle mentioned in the text do you find the most convincing?

3. What is the current economic situation in your country? Why?

4. Are most of the people you know currently optimistic or pessimistic about the future? Would you say that they are saving money for bad times ahead, or spending and borrowing without worrying too much about the future? Either way, can you see anything coming that might cause them to change their behaviour?

 

Text 2

Skim the text to define unemployment, its negative and positive sides.

Unemployment

Unemployment is the number of adult workers who are not employed and are seeking jobs. To be classified as unemployed, a person must be able and willing to work, be actively seeking work, and be without a job. Everyone who fits this description is unemployed. The labour force is the total number of employed and unemployed workers. The unemployment rate is unemployment expressed as a percentage of the labour force.

Try to imagine a world in which there is no unemployment. The world that we've just considered would clearly not be a nice place in which to live and work. Workers and jobs would be badly mismatched, productivity would probably not be very high, and there would be a good deal of unhappiness and lack of job satisfaction. The world that we live in differs from this fictional world in many respects, and we'll focus on two of them.

First, in the real world, people don't usually take the first job that comes their way. Instead, they spend time searching out what they believe will be the best job available for them.

Second, the real world is dynamic and ever-changing. Production and consumption change as new technologies are developed and exploited. The rapid expansion of jobs in the high-tech computer-oriented sectors and the loss of jobs in traditional sectors such as automobiles and steel making have resulted in a large rate of labour turnover, which has resulted in workers moving not only from one sector of the economy to another but from one region of the country to another.

Unemployment has negative sides. The most obvious cost of unemployment is the loss of output and the loss of income. How big this cost is depends on the natural rate of unemployment.

Besides prolonged unemployment seriously lowers the value of a person’s human capital, i.e. the value of a person’s education and acquired skills. When unemployment is prolonged, human capital depreciates or deteriorates – skills lose their value.

A rise in the unemployment rate also causes an increase in the amount of crime. When people cannot earn an income from legitimate work, they sometimes turn to crime. A high crime rate is also one of the costs of high unemployment.

A final cost that is difficult to quantify is the loss of self-esteem that is human dignity, which afflicts people.

 

Text 3

To check your comprehension do the tasks that follow.

Types of Unemployment

The unemployment rate is determined by three different types of unemployment: frictional, structural, and cyclical. Understanding these conceptual categories of unemployment aids in understanding and formulating policies to ease the burden of unemployment. In fact, each type of unemployment requires a different policy prescription to reduce it.

For some unemployed workers, the absence of a job is only temporary. At any given time, some people with marketable skills are fired, and others voluntarily quit jobs to accept or look for new ones. And there are always young people who leave school and search for their first job. Workers in industries, such as construction, experiencing short periods of unemployment between projects and temporary layoffs are common. Other workers are seasonally unemployed. For example, ski resort workers will be employed in the winter but not in the summer, and certain crops are harvested “in season.” Because jobs requiring their skills are available once the unemployed and the job vacancies are matched, such workers are considered “between jobs.” This type of unemployment is called frictional unemployment, and it is not of great concern.

The fact that job market information is imperfect influences frictional unemployment in the economy. Because it takes time to search for the information required to match employer and employees, some workers will always be frictionally unemployed. Frictional unemployment is therefore a normal condition in an economic system permitting freedom of job choice. Improved methods of distributing job information through job listings on the Internet can help unemployed workers find jobs more quickly and reduce frictional unemployment.

Unlike frictional unemployment, structural unemployment is not a short-term situation. Instead, it is long-term, or possibly permanent unemployment resulting from the non-existence of jobs for unemployed workers. Structural unemployment is unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities. Note that changing jobs and lack of job information are not problems for frictionally unemployed workers. While frictionally unemployed workers have marketable skills, structurally unemployed workers require additional education or retraining. Changes in the structure of the economy create the following three causes of structural unemployment.

First, workers might face joblessness because they lack the education or the job-related skills to perform available jobs. This type of structural unemployment particularly affects teenagers and minority groups, but other groups of workers can be affected as well.

Second, the consuming public may decide to increase the demand for Mazda RX-7s and decrease the demand for Chevrolet corvettes. This shift in demand would cause U.S. auto workers who lose their jobs and find jobs in another idustry in another location.

Third, implementation of the latest technology may also increase the pool of structural unemployment in a particular industry and region. For example, the U.S. textile industry, located primarily in the South, can fight less expensive foreign textile imports by installing modern machinery.

Cyclical unemployment is directly attributable to the lack of jobs caused by the business cycle. Cyclical unemployment is unemployment caused by the lack of jobs during a recession. When real GDP falls, companies close, jobs disappear, and workers scramble for fewer available jobs. Similar to the game of musical chairs, there are not enough chairs (jobs) for the number of players (workers) in the game.

Because both frictional and structural unemployment are present in good and bad times, full employment does not mean “zero percent unemployment.” Full employment is the situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates. Full employment therefore is the rate of unemployment that exists without cyclical unemployment.

 

Ex. 1. Choose the right answer according to the text and your background knowledge. Explain your choice.

1. The number of people officially unemployed is not the same as the number of people who can’t find a job because:

a. people who have jobs continue to look for better ones;

b. the armed forces is included;

c. discouraged workers are not counted;

d. none of the above;

e. all of the above.

2. Frictional unemployment refers to:

a. unemployment related to thee ups and downs of the business cycle;

b. workers who are between jobs;

c. people who spend relatively long periods out of work;

d. people who are out work and have no job skills.

3. A mismatch of the skills of unemployed workers and the skills required for existing jobs is defined as:

a. involuntary unemployment;

b. cyclical unemployment;

c. structural unemployment;

d. frictional unemployment.

4. Unemployment caused by a recession is called:

a. structural unemployment;

b. frictional unemployment;

c. involuntary unemployment;

d. cyclical unemployment.

5. Full employment occurs when the rate of unemployment consist of:

a. seasonal plus structural plus frictional unemployment;

b. cyclical plus frictional unemployment;

c. structural, frictional, and cyclical unemployment;

d. none of the above.

 

Ex. 2. Scan the text and say:

a) what changes in the economy create structural unemployment;

b) if economists consider a certain level of structural unemployment inevitable;

c) why frictional unemployment is considered to be persistent;

d) if there is any difference between frictional and structural unemployment;

e) what is meant by cyclical unemployment;

f) if full employment means absolute absence of unemployment;

g) what professions are obsolete nowadays and why;

h) what is the goal of full employment;

i) if there any advantages and disadvantages of being unemployed.

 

Ex. 3.Present the situation in job market in your country regarding different types of unemolyment.

WRITING

 

Write an abstract of the previous text.

TRANSLATION

 

A.Translate the text into Russian.

W.H. Philips and the Philips Curve

A.W.H. Phillips was an economist whose reputation was based largely on a single paper on the right topic published at the right time. In the late 1950-s, the connection between inflation and unemployment ranked as a major unsolved problem of macroeconomic theory. The curves that Phillips drew in his famous article in "Economica" suggested a simple, stable relationship between inflation and unemployment.

The central proposition of the Phillips curve theory is: other things remaining constant, the higher the unemployment rate, the lower is the inflation rate.

Phillips's original idea was that the unemployment rate indicates the state of demand pressure in the economy. When unemployment is low, real GNP is above capacity, bottlenecks arise, and inflation accelerates. When unemployment is high, real GNP is below capacity, and inflation diminishes.

In the early 1960s, the Phillips curve became a central element of macroeconomics.

 

B.Translate into English.

Безработица – это одна из серьезных проблем, с которыми сталкивается любое общество. Как и любое явление, она не может быть оценена однозначно. С одной стороны, она дает людям время и возможность найти подходящую работу. С другой стороны, состояние безработных приводит людей к поиску незаконных заработков. Последствия безработицы весьма внушительны. Во-первых, это отсутствие заработка. Во-вторых, это потеря приобретенных профессиональных знаний и человеческого достоинства. Очевидно, что человек, разочаровавшийся найти высокооплачиваемую работу, соглашается на сомнительные предложения. Кроме того, безработица толкает людей к совершению преступлений. Если безработица длительная, она вызывает серьезные социальные и психологические проблемы не только для безработного, но и для его семьи.

 

LISTENING

 

Kate Barker is the Chief Economic Adviser of the Confederation of British Industry, and a member of the panel of economic advisers to the British Treasury. You will hear her talking about the things that will need to change if labour markets become increasingly flexible.

Ex. 1. Listen to Part One of the interview and answer the questions.

1. A 'flexible labour market' is one in which:

a. workers are able to do a variety of jobs.

b. it is easy for companies to hire non-permanent staff.

c. workers arc free to choose the hours they work.

2. What is the advantage of a flexible labour market for employers?

3. What does 'the more flexible labour market is considered to have encouraged inward investment' mean?

4. Kate Barker says that three things will have to be rethought or reconsidered if the British labour force is going to remain more flexible.

Complete the gaps:

In particular, the structure of (1)…………………………needs to be revisited, if you have people moving between employments and unemployment much more quickly. The structure of (2)……………………………needs to be revisited, if you have people no longer working for a long time for the same employer, and finally in Britain we tend to have a very high level of owner-occupation – more people (3)………………………….and they borrow a great deal of money in order to pay for that. It would be much more logical to have a big (4)………………………., if you want to have a very flexible labour market.

 

Ex. 2. Listen to Part Two of the interview. According to what Kate Barker says, which is the correct answer in each case?

1. In a flexible labour market, such as that in the USA,

a. unemployment falls in a downturn or recession.

b. unemployment rises in a downturn or recession.

2. In a flexible labour market

a. unemployment rises during an economic upturn.

b. temporary employment rises during an economic upturn.

c. permanent employment rises during an economic upturn.

3. In a flexible labour market, there are

a. badly-paid workers who have frequent periods of unemployment.

b. well-paid workers who have frequent periods of unemployment.

c. 10% of earners who have frequent periods of unemployment.

4. Wages are falling

a. because of the deregulation of the labour market.

b. because there is now a kind of 'underclass' of workers.

c. because of competition from Asian countries.

Ex. 3. Listen to Part Three of the interview and answer these questions.

1. What are the two measures that Kate Barker suggests governments should take to help the long-term unemployed?

2. What, according to Kate Barker, is a common attitude among employers towards long-term unemployed people?

 

SPEAKING

 

A.

Read the dialogue in pairs and do the following exercises.

1 – I hear that Sam lost his job. Did you hear that, too?
2 – I did hear something about his job being abolished.
1 – What a terrible thing to happen now, just when he and Helen are expecting their first baby!
2 – It is a shame, I’ll admit, but I told Sam months ago to get out of that place where he works and get another job. I had a feeling that the company wasn’t very stable financially.
1 – You mean it’s not a strong company? I’d always thought it was one of the strongest around.
2 – If you’ve been reading the news in the financial section, you could see that the company was headed1 for trouble. I wouldn’t be surprised to see it go bankrupt before the end of the year.
1 – It sure is too bad. Is there anything we can do for Sam?
2 – I’m going to call him this afternoon. I heard yesterday that there’s going to be an opening2 in the section where I work. He can get his application in3 today.
1 – I’ll check things out4 with my boss, too. There may be something open in one of the departments over in Fairmont.

 

Notes:

1. to head to move or go in a certain direction;

2. opening place or position that is vacant;

3. to get in to submit;

4. to check out – to prove true.

 

Ex. 1. Conversation in context

1. What is Sam’s relationship to the speakers?

2. Where does the discussion take place?

3. Is Sam present?

4. Can the speakers help Sam?

Ex. 2. Personal application

1. Did you ever lose your job? If so, describe how it felt.

2. What are the most financially stable companies in your country?

3. Do you get along well with your boss?

4. Are there any openings where you work?

5. Would your friends help you find a job?

 

B.

Speak on:

– the basic cause of the business cycle;

– the phases of the business cycle;

– business cycle theories;

– the definition of unemployment, its types

– the reasons for unemployment;

– the impact of technology changes on unemployment;

– the geographic distribution of jobs;

– costs of unemployment;

– positive sides of frictional and structural unemployment;

– the goal of full employment;

– the Philips Curve.

 

VOCABULARY

 

boom n – экономический подъем

business cycles – экономический цикл

depreciate v – обесцениваться

depression n – экономический спад

deteriorate v – ухудшаться

employment n – занятость

full ~ – полная занятость

expansion n–расширение; распространение

gap n – разрыв

deflationary ~ – дефляционный разрыв

hinder v – препятствовать

inputs n – затраты

lay off v – увольнять

obsolete adj – устарелый

output n – выпуск (продукции)

peak n – пик, высшая точка колебания

recession n (syn. contraction, downturn) – спад производства, рецессия

recovery n (syn. upturn, expansion) – восстановление, оживление, подъем

seek v – искать

shortage n (syn. deficit) – недостаток, дефицит

switchv – изменять направление; переключать

temporary adj – временный

trough n – низшая точка, «дно» цикла

turnover n – оборот капитала

unemployment n -- безработица

cyclical ~ – циклическая безработица

frictional ~ – фрикционная безработица

structural ~ – структурная безработица

 

GLOSSARY

 

· Business cycle – alternating periods of economic growth and contraction, which can be measured by changes in real GDP.

· Cyclical unemployment – unemployment caused by the lack of jobs during a recession.

· Economic growth – an expansion in national output measured by the annual percentage increase in a nation’s real GDP.

· Frictional unemployment – unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, initially entering the labour force, re-entering the labour force, or seasonally unemployed.

· Full employment – the situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates.

· Peak – the phase of the business cycle in which real GDP reaches its maximum after rising during a recovery.

· Recession – a downturn in the business cycle during which real GDP declines.

· Recovery – an upturn in the business cycle during which real GDP rises; also called an expansion.

· Structural unemployment – unemployment caused by a mismatch of the skills required for existing job opportunities.

· Trough – the phase of the business cycle in which real GDP reaches its minimum after falling during a recession.


BANKING

 

DISCOVERING CONNECTIONS

 

1. Have you ever been to the bank? What did you go there for?

2. What different kinds of services do banks offer to the public?

3. How would you comment the saying “A banker is a man who lends you umbrella when the weather is fair, and takes it away from you when it rains”? Do you agree with it?

 

READING

 

Text 1

After reading the text choose the heading for each paragraph.

– Investment Banking

– Interest Rates

– Commercial Banking

– Universal Banking

– Central Banking

– Eurocurrency

 

1. A central bank fulfils a number of key roles in the economy, acting as a bankers’ bank and as a lender of last resort, being responsible for monetary creation, and having overall responsibility for monetary policy. The central bank can use control of interest rates, open market operations and required reserves to influence the monetary base and overall interest rates in the economy. In recent years, the interest rate has been prime instrument. By influencing the amount of real money in the economy, the central bank is able to influence aggregate demand, which in turn will influence prices. Thus the central bank has to balance the need to restrain inflation with the desire to allow economic growth.

2. Commercial or retail banks are businesses that trade in money. They receive and hold deposits, pay money according to customers' instructions, lend money, offer investment advice, exchange foreign currencies, and so on. They make a profit from the difference (known as a spread or a margin) between the interest rates they pay to lenders or depositors and those they charge to borrowers. Banks also create credit, because the money they lend, from their deposits is generally spent (either on goods or services, or to settle debts), and in this way transferred to another bank account - often by way of a bank transfer or a cheque (check) rather than the use of notes or coins - from where it can be lent to another borrower, and so on. When lending money, bankers have to find a balance between yield and risk, and between liquidity and different maturities.

3. Investment banks, often called merchant banks in Britain, raise funds for industry on the various financial markets, finance international trade, issue and underwrite securities, deal with takeovers and mergers, and issue government bonds. They also generally offer stock broking and portfolio management services to reach corporate and individual clients. Investment banks in the USA are similar, but they can only act as intermediaries offering advisory services, and do not offer loans themselves. Investment banks make their profits from the fees and commissions they charge for their services.

4. In the USA, the Glass-Steagall Act of 1934 enforced a strict separation between commercial banks and investment banks or stock broking firms. Yet the distinction between commercial and investment banking has become less clear in recent years. Deregulation in the USA and Britain is leading to the creation of 'financial supermarkets': conglomerates combining the services previously offered by banks, stockbrokers, insurance companies, and so on. In some European countries (notably Germany, Austria and Switzerland) there have always been universal banks combining deposit and loan banking with share and bond dealing and investment services.

5. A country’s minimum interest rate is usually fixed by the central bank. This is the discount rate, at which the central bank makes secured loans to commercial banks. Banks lend to a blue chip borrowers (very safe large companies) at the base rate or the prime rate; all other borrowers pay more, depending on their credit standing (or credit rating, or creditworthiness): the lender’s estimation of their present and future solvency. Borrowers can usually get a lower interest rate if the loan is secured or guaranteed by some kind of asset, known as collateral.

6. In most financial centers, there are also branches of lots of foreign banks, largely doing Eurocurrency business. A Eurocurrency is any currency held outside its country of origin. The first significant Eurocurrency market was for US dollars in Europe, but the name is now used for foreign currencies held anywhere in the world (e.g. yen in the US, euros in Japan). Since the US$ is the world’s most important trading currency – and because the US for many years had a huge trade deficit – there is a market of many billions of Eurodollars, including the oil-exporting coutries’ ‘petrodollars.’ Although a central bank can determne the minimum lending rate for its national currency it has no control over foreign currencies. Furthermore, banks are not obliged to deposit any of their Eurocurrency assets at 0% interest with the central bank, which means that they can usually offer better rates to borrowers and depositors than in the home country.

Vocabulary Focus

 

Ex. 1.The text contains a number of common verb-noun partnerships (e.g. to lend money, to finance international trade).Match up the verbs and nouns below to make common collocations. Give their Russian equivalents.

A B
1) influence 2) restrain 3) exchange 4) issue 5) make 6) offer 7) pay 8) raise 9) receive 10) underwrite 11) charge 12) do a) advice b) bonds c) business d) currencies e) deposits f) funds g) interest h) loans i) profits j) security issues k) monetary base l) inflation

 

Ex. 2.Match the definitions in A with the words from the text in B.

A B
1) buying and selling government bonds on the open market a) collateral
2) the currency supplied by the Central bank both to the commercial banks and to private circulation b) to restrain
3) to place money in a bank; or money placed in a bank c) deposit
4) the money used in countries other than ones own d) foreign currencies
5) how much money a loan pays, expressed as a percentage e) blue chip
6) available cash, and how easily other assets can be turned into cash f) conglomerate
7) the date when a loan becomes repayable g) liquidity
8) to guarantee to buy all the new shares that a company issues, if they cannot be sold to the public h) open market operations
9) when a company combines with another one i) maturity
10) buying and selling stocks or shares for clients j) portfolio management
11) taking care of all a client's investments k) monetary base
12) the ending or relaxing of legal restrictions l) to underwrite
13) a group of companies, operating in different fields, that have joined together m) merge
14) a company considered to be without risk n) takeover
15) ability to pay liabilities when they become due o) stock broking
16) anything that acts as a security or a guarantee for a loan p) deregulation
17) any currency held outside its country of origin q) solvency
18) when a company buys or acquires another one r) yield
19) to hold sth back s) Eurocurrency

 

Ex. 3. Write down the English equivalents for the following. Use the text and Ex. 1 – 2 for references.

Последний кредитор в критической ситуации; резервная норма; сдерживать инфляцию; обеспечивать экономический рост; разница между себестоимостью и продажной ценой; срок погашения платежа; погасить долги; доход по ценным бумагам с фиксированным процентом; поглощение; слияние; учетная процентная ставка; имущество; обеспечение кредита, залог; гарантировать, ручаться; кредитоспособность, платежеспособность (3 варианта); евровалюта; торговый дефицит.

 

Comprehension

 

Discuss with your partner the following questions:

1. How do you understand the role of the central bank ‘to act as a bankers’ bank’?

2. For what purposes may the central bank regulate interest rates?

3. How do the commercial banks earn money?

4. What sort of balance do bankers have to find when lending money?

5. What are the main functions of merchant banks in England?

6. How do investment banks in America differ from merchant banks in England?

7. What is the difference between an interest rate and a discount rate?

8. How are interest rates determined?

9. Why are there so many dollars deposited outside the USA?

10. Why did American legislation separate commercial and investment banking?

 

Text 2

Scan the text for the information about the functions of commercial banks, accounts and services they offer their customers.

Commercial Banks of Britain

A bank is an intermediary between a depositor will and a borrower. The interest rate which the commercial banks charge borrowers and pay to depositors will be influenced by the interest rate which is quoted from time to time by the Bank of England, which is, of course, controlled by the British government. If the Bank of England recommends that the interest rates will have to rise, then the commercial banks and most other financial institutions will also raise their interests rates.

A rise in the interest rate will make borrowing more expensive and saving more attractive. A fall in the interest rate will make borrowing cheaper, saving less attractive.

The government may use the interest rate (sometimes called the bank rate) to regulate the economic climate of the country. By this we mean that borrowing becomes more expensive, businessmen will become more reluctant to borrow and develop their business, but if it falls, then they probably become more active.

If the economy becomes too active, there is usually a tendency for inflation to occur, and this is usually caused by too many goods produced and too much money circulating in the economy.

To combat inflation the government will often raise the interest rate. If the economy was stagnant then the interest rate would probably be lowered so that to encourage it to expand and become more active. There are, of course, factors which the government must consider before it influences the institutions to raise or lower their interest rates.

Commercial banks make a profit by:

1. Making loans to businessmen and private individuals.

2. Charging interest payments on overdrawn accounts.

3. Lending to the money market.

4. Investing in sound shares and securities.

The bank's most important activity is the extension of credit. In order to provide a loan, a bank must have funds to lend. This comes from paid-in capital, earnings of previous years, borrowed funds and the bank's customers' deposits. The banker must always remember that the money he lends is not his bank's own money. It is the money deposited by the bank's customers. To evaluate the risk, a banker must first obtain certain basic information about the potential borrower. The banker must learn how much money the borrower needs, the purpose and the term of the loan, and how the borrower will repay the loan. The borrower's ability to repay depends on the purpose of the loan.

Banks will lend money in two ways:

– by a personal loan;

– by an overdraft loan arrangement.

The personal loan is charged at a fixed rate of interest repayable over a fixed period of time.

The overdraft is used mostly by businessmen. The advantage with overdrafts is that interest is repayable only on the amount owed at a particular time. Interest is calculated on a daily basis. The borrower will have to pay a lot of interest when the debt is large, but if he is able to make a good deposit and reduce the size of the overdraft then the interest charged will be lowered accordingly. Overdrafts may be recalled by the bank at a very short notice.

The commercial bank offers its customers accounts of two types: deposit account and the current account. The deposit account will probably be used to pay a fixed rate of interest, and will sometimes issue the saver with a saving book. The current account pays no interest. A cheque book is used to make payments from an account and a paying-in book is used when money is paid into the account.

Banks will normally give statements to both deposit and current holders about once every three months, or more frequently if required by the account holder. Statements give a detailed account, on a day to day basis, of all money and cheques which have either been paid into account or withdrawn from the account.

Money is the commodity that banks sell. A bank seeks to buy money cheaply and to sell it dearly. This is what the banks are busy doing. Naturally, the banks put their money where it brings the highest profit. That is why they always keep up to date with the market situation by shifting money from one geographical region to another, the banks activity stimulates progress in industry, construction and agriculture.

Banks are interested in keeping most of their money in circulation so that it should bring them profit. They seek to reduce their lending rates in order to attract buyers.

In their pursuit of high profit, the banks sometimes get involved in risky operations fraught with bankruptcy. That is why the government takes measures to minimize the danger of banks going broke. Every bank is obliged to take out insurance against robbery or bankruptcy lest the clients should lose their money in any case.

Technological innovations and increased competition in the face of deregulation are changing the face of British banking. Banks and other financial institutions are using computer technology now, that is why they can offer their clients different types of services:

1. Accept deposits from depositors.

2. Make loans to borrowers.

3. Conduct deposit and current accounts for customers.

4. Keep valuables in safe custody.

5. Give advice on income tax matters.

6. Give advice on overseas trading.

7. Buy and sell shares for customers.

8. Issue foreign currency and travellers' cheques.

9. Act as executors and trustees for deceased persons.

10. Change old bank-notes for new ones.

The commercial banks cater to big companies, small companies and to individuals.

Ex. 1.Expand the sentences.

1. The interest rate which the commercial banks charge ...

2. A rise in the interest rate will...

3. The banker must always remember that the money he lends …

4. The government may use the interest rate to ...

2. The advantage with overdrafts is that …

3. Banks will normally give statements to ...

4. To combat inflation ...

5. If the economy becomes too active ...

6. By shifting money of various costs the bank activity ...

7. Banks make a profit by...

8. The banks cater to …

Ex. 2.Are the following sentences true or false? Say why.

  True False
a. If the banks lends money to a company, the banks is one of the company’s debtors.   €   €
b. If you borrow money from the bank at a variable rate of interest, you might have to pay back more than you think you will.   €   €
c. Creditors prefer low interest rates.
d. Debtors prefer high interest rates.

 

Ex. 3.Answer the questions.

1. What is a commercial bank according to the text?

2. What does the interest rate the commercial banks offer depend on?

3. What are the ways of making a profit by banks?

4. What do the funds that banks use to provide a loan come from?

5. What factors should a banker consider to evaluate the risk when providing a loan?

6. What are the two ways that banks lend money?

7. What is the advantage with overdrafts?

8. What types of accounts do commercial banks offer to their customers? How do they differ?

9. What measures does the government take to minimize the danger of banks going broke?

10. What types of services can customers get in a bank?

 

Text 3

While reading the text focus on the information describing the procedures of the Fed and other financial institutions of the USA, put down a plan choosing key words to each point of the plan.

Banking in the USA

At the centre of the U.S. banking system is the Federal Reserve System (FRS or “the Fed”, as it is usually called) which was established in 1913. It consists of 12 regional banks and has its task in controlling the national banking system.

The Federal Reserve serves as a “banker’s bank” and the typical bank customer never enters the door of a Federal Reserve district bank or one of its branch banks.

The organization's main task is to set and implement monetary policy, which is a set of rules for handling the economy and the money supply. Following are brief descriptions of some of the principal functions of the Federal Reserve.

The Fed (1) regulates the money supply by four basic tools. It can set the discount rate and change the reserve requirements, that is the sum of money (called reserves) equal to a certain percentage of deposits that a bank must keep on hand.

Another tool the Fed uses is its power to buy and sell government bonds on the open market. These are known as open-market operations.

The last tool employed by the Fed involves selective credit controls, or the setting of credit terms on various kinds of loans.

Another function performed by the Fed includes (2) clearing checks. Banks can use the Federal Reserve's check-clearing service to clear checks drawn on banks outside their Federal Reserve districts.

One more important task of the Fed is (3) maintainingand circulating currency. Note that the FRS does not print currency – it maintains and circulates money. The Federal Reserve must be ready to ship extra money from its large vaults by armoured trucks.

The Fed also (4) supervises the activities of member banks abroad and regulates certain aspects of international finance.

Apart from that, the Fed (5) protects consumers by receiving and trying to resolve consumer complaints against banks. There are certain regulations, for example, that prohibit discrimination based on race, colour, sex, religion, or national origin in the extension of credit.

In addition, the (6) Fed maintains the federal government checking accounts and gold. The U.S. Treasury has the Fed handle its checking account. From this account, the federal government pays for such expenses as federal employees’ salaries, social security, tax funds, veterans’ benefits, defence, and highways. Gold, stored in the Fed belongs mainly to foreign governments and is one of the largest accumulations of this precious metal in the world.

Commercial banks accept deposits and use these funds to make loans. There are two types of commercial banks: national banks and state banks. National banks are chartered by the federal government, and state banks are chartered by state government. These banks are prime sources of capital for business and also provide loans as well as checking and saving accounts for consumers. Both savings banks and savings and loan associations perform many of the same functions as commercial banks (e.g., checking and savings accounts, loans) but use the majority of their assets for financing home mortgages.

Credit unions are member-owned corporations that offer checking and savings accounts, credit cards, an

 








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