Classification of Countries

Since the break-up of the Soviet block at the end of the 1980s, the so-called transition economies have faced the task of moving from a centrally-planned system of resource allocation towards a more market-oriented approach. This has proved a challenging and difficult period for the countries concerned, both those that were part of the Soviet Union and other countries in Eastern Europe that were allies and trading partners.

To outside observes, it has sometimes been difficult to know how to classify these countries. In the days of the Cold War, there seemed to be three groupings in the word. There was a group of industrial market economies that had reached a high level of “development” – this was the “First World”. Then there was the Soviet block, which comprised the countries of the Soviet Union and Eastern Europe. There shared a history that overlapped with countries in Western Europe, but had taken such a different path since 1917. This was the “Second World”. And then there was the rest – the “Third World”, most of which had remained undeveloped.

The collapse of the Second World led to classification problems. The term “Third world” no longer made sense.

At present the countries of the world are usually classified into three major groups: advanced economies, developing countries and countries in the transition.

B. Translate the text from Russian into English.

Экономика стран переходного периода характеризуется рядом закономерностей, независимо от уровня их развития. Переход к рыночной экономике сопровождается неизбежными трудностями как для экономики страны, так и для ее населения. Наблюдается очень резкий спад промышленного производства, ведущий к безработице.

В этих условиях государство должно взять курс на активную стабилизацию: проведение умеренно жесткой финансовой политики, обуздание инфляции экономическими методами, выборочная поддержка наиболее перспективных отраслей экономики.

SPEAKING

A.

Study the interview with Denis MacShane, a British Member of Parliament for the Labor Party.

Act out the interview of MacShane with Mr Brown, Daily News correspondent. Use the questions of the latter for reference.

1. Why do you think that manufacturing has a future?

2. Why do you think that manufacturing has a future in the advanced countries?

3. Why, however, is this manufacturing unlikely to solve the problem of unemployment?

4. What do you mean by “in theory there should be no more manufacturing in Switzerland?” (It is this theory that makes many people argue that manufacturing must move to “less-developed” countries.)

5. Why do you say it is surprising for a British company to be buying Swiss goods?

6. What is the reason you give for the United States still being the richest nation in the world?

B.

Discuss the following issues

1. What kind of system is traditional economy? What areas of the world are they primarily found nowadays? The basic economic questions What, How and For whom in these economies are based on tradition, aren’t they?

2. Who are the basic economic questions answered in command economies by? Why are they called planned economies? What is the role of individuals in this type of economies?

3. What economy is the opposite to command economy? What is the core idea of this type of economy? What are the examples of countries with market economy?

4. All major economies in the world are mixed ones, aren’t they? What are mixed economies characterized by?

5. Are there any purely capitalist or socialist states in the world?

C.

Summarize the information from the Unit and be ready to speak on Economic Systems. Use the following prompts as a plan.

1. The definition of an economic system. Its interaction with a political system.

2. Three basic economic questions.

3. Basic kinds of economic systems.

4. The responsibilities of the state in managing the society.

5. The main task of transition economies.

6. The type of the economic systems Great Britain / the USA / Belarus belong to.

VOCABULARY

collapse n – обвал, падение, крах

command economy – командная экономика

fluctuate v – колебаться, быть неустойчивым

fluctuation n – колебание, неустойчивость

household n – домохозяйство

impose v – облагать, налагать

incentive n – стимул

involvement n – вовлечение, затруднительное положение

market economy –рыночная экономика

mixed economy – смешанная экономика

overlap v – частично совпадать, частично покрывать

ownv – владеть

owner n – собственник

ownership n – право собственности

restrictionn – ограничение

suppress v – сдерживать, подавлять, запрещать

traditional economy –традиционная экономика

transition economy –переходная экономика

GLOSSARY

· Traditional economy is an economic system using social customs to answer the basic economic questions.

· In command economies, the basic economic questions are answered by government officials.

· In a market economy, basic economic questions are answered by individual households and businesses through a system of freely operating markets.

· In mixed economies, a distinction is usually made between the private sector, in which decisions are made primarily by individual households and businesses, and the public sector, in which decisions are made by the government.

· Transition economies face the task of moving from a centrally-planned system of resource allocation towards a more market-oriented approach.

THE MACROECONOMY

GROSS DOMESTIC PRODUCT

DISCOVERING CONNECTIONS

Have you ever thought about the economic activity that goes on in an economy? Firms hire labour and use capital goods to produce goods and services. People sell their labour to earn income so they can spend on goods and services and become consumers. The government intervenes in various ways, with taxes and transfers and with ensuring the provision of nonmarket services such as health, law and order, and education. People buy goods from abroad – and firms sell some of their output overseas. Or to put it in another way, output is produced, and income is earned and spent.

Is it possible to measure the overall performance of the economy? Is there such a measure? What is a key way in which the performance of an economy can be monitored?

READING

Text 1

As you read the text, analyze the definition of GDP.

Gross Domestic Product

The total amount of goods and services produced, or the total amount of income earned, or the total amount of expenditure undertaken, all tell us something about the overall performance of the economy in providing resources for the members of the society. If we could measure these totals, we could examine whether the resources available to the residents of a country were changing through time, or try to compare the country’s situation with that in other nations. Of course, there is such a measure. It is called GDP and it is a key way in which we try to monitor the performance of an economy.

Here is a definition of GDP:

Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. Let's consider each phrase in this definition with some care.

"GDP is a Market Value ..." You have probably heard the adage, “You can't compare apples and oranges”. Yet GDP does exactly that. GDP adds together many different kinds of products into a single measure of the value of economic activity. To do this, it uses market prices. Because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods. If the price of an apple is twice the price of an orange, then an apple contributes twice as much to GDP as does an orange.

"Of All . . ." GDP tries to be comprehensive. It includes all items produced in the economy and sold legally in markets. GDP measures the market value of all the goods. GDP also includes the market value of the housing services provided by the economy's stock of housing. For rental housing, this value is easy to calculate – the rent equals both the tenant's expenditure and the landlord's income. Yet many people own the place where they live and, therefore, do not pay rent. The government includes this owner-occupied housing in GDP by estimating its rental value. That is, GDP is based on the assumption that the owner, in effect, pays rent to himself, so the rent is included both in his expenditure and in his income.

There are some products, however, that GDP excludes because measuring them is so difficult. GDP excludes items produced and sold illicitly, such as illegal drugs. It also excludes most items that are produced and consumed at home and, therefore, never enter the marketplace. Vegetables you buy at the grocery store are part of GDP; vegetables you grow in your garden are not.

"Final. . ."When International Paper makes paper, which Hallmark then uses to make a greeting card, the paper is called an intermediate good, and the card is called a final good. GDP includes only the value of final goods. The reason is that the value of intermediate goods is already included in the prices of the final goods. Adding the market value of the paper to the market value of the card would be double counting. That is, it would (incorrectly) count the paper twice.

An important exception to this principle arises when an intermediate good is produced and, rather than being used, is added to a firm's inventory of goods to be used or sold at a later date. In this case, the intermediate good is taken to be “final” for the moment and its value as inventory investment is added to GDP. When the inventory of the intermediate good is later used or sold, the firm's inventory investment is negative, and GDP for the later period is reduced accordingly.

"Goods and Services . . ."GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). When you buy a CD by your favorite singing group, you are buying a good, and the purchase price is part of GDP. When you pay to hear a concert by the same group, you are buying a service, and the ticket price is also part of GDP.

"Produced . . ."GDP includes goods and services currently produced. It does not include transactions involving items produced in the past. When General Motors produces and sells a new car, the value of the car is included in GDP. When one person sells a used car to another person, the value of the used car is not included in GDP.

"Within a Country . . ."GDP measures the value of production within the geographic confines of a country. When a Canadian citizen works temporarily in the United States, his production is part of U.S. GDP. When an American citizen owns a factory in Haiti, the production at his factory is not part of U.S. GDP. (It is part of Haiti's GDP.) Thus, items are included in a nation's GDP if they are produced domestically, regardless of the nationality of the producer.

". . . In a Given Period of Time." GDP measures the value of production that takes place within a specific interval of time. Usually that interval is a year or a quarter (three months). GDP measures the economy's flow of income and expenditure during that interval.

When the government reports the GDP for a quarter, it usually presents GDP “at an annual rate”.

In addition, when the government reports quarterly GDP, it presents the data after they have been modified by a statistical procedure called seasonal adjustment. The unadjusted data show clearly that the economy produces more goods and services during some times of year than during others. (As you might guess, December's Christmas shopping season is a high point.) When monitoring the condition of the economy, economists and policymakers often want to look beyond these regular seasonal changes. Therefore, government statisticians adjust the quarterly data to take out the seasonal cycle. The GDP data reported in the news are always seasonally adjusted.

Economists distinguish between nominal GDP and real GDP. Nominal GDP is the value of all final goods based on the prices existing during the time period of production. Real GDP is the value of all final goods produced during a given time period based on the prices existing in a selected base year. In other words, the prices in the base year provide the basis for comparing quantities in different years.

As we have just seen, nominal GDP reflects both the prices of goods and services and the quantities of goods and services the economy is producing. By contrast, by holding prices constant at base-year levels, real GDP reflects only the quantities produced. From these two statistics, we can compute a third called the GDP deflator, which reflects the prices of goods and services but not the quantities produced. The GDP deflator is calculated as follows:

Vocabulary Focus

Ex. 1. Match the words from A with their synonyms from B.

Ex. 2.Match the verbs and nouns below to make verb-noun partnerships that are found in the text.

Ex. 3. Make the opposite to the following words by adding negative prefixes: il-; ex-; in-; non-; un-.Use the dictionary if necessary.

Legally; comprehensive; include; market; tangible; available; adjusted.

Ex. 4. Match the words in column A with their English equivalents in column B:

Ex. 5.Match the words from A with their definitions from B.

Comprehension

Ex. 1.Complete the following sentences, use the prompts below:

1. ________________ is the most widely used measure of a nation’s economic performance and is the market value of all final goods produced in the country during a period of time.

2. To avoid double counting. GDP does not include _________________.

3. The ___________________ sums the four major spending components of GDP consisting of: consumption, investment, government, and net exports.

4. GDP less depreciation of fixed capital equals __________________.

5. _______________ is total income received by households and is calculated as national income less corporate taxes, retained earnings, Social Security taxes plus transfer payments and net interest from government securities.

6. ________________ is personal income minus personal taxes.

7. ________________ measures all final goods produced in a given time period valued at the prices existing during the time period of production.

8. ________________ is the value of all final goods and services produced during any time period valued at prices existing in a base year.

9. ________________ is the market value of all final goods and services produced by a nation’s residents no matter where they are located.

10. A government payment to individuals not in exchange for goods or services currently produced is called a _____________.

11. ________________ are finished goods and services produced for the ultimate user.

Words for reference: gross domestic product (GDP); intermediate goods; expenditure approach; net domestic product; personal income; disposable personal income; nominal GDP; real GDP; gross national product (GNP); transfer payment; final goods.

Ex. 2. Based on your understanding of the text, are the following TRUE or FALSE?

1. Gross domestic product is the market value of all intermediate and final goods and serviced produced within a country in a given period of time.

2. Market prices measure the amount people are willing to pay the different goods and reflect the value of those goods.

3. GDP includes all items produced in the economy and sold both legally and illegally in the markets.

4. GDP does not include the market value of the housing services.

5. GDP excludes most items that are produced and consumed at home.

6. The value of intermediate goods is not included into the value of the final goods.

7. GDP excludes intangible services.

8. GDP is the market value of all final goods and services produced by nation’s residents no matter where they are located.

9. GDP measures the value of production that takes place within a specific integral of a time, which is usually a month.

10. How do nominal and real GDP differ?

11. What is the GDP deflator?

Ex. 3. Answer the questions.

1. What factors are taken into account to describe the overall performance of the economy?

2. How can Gross Domestic Product be defined?

3. How do they manage to compare the value of absolutely different goods?

4. How do you understand the fact that GDP tries to be comprehensive?

5. Does GDP include the value of intermediate good?

6. What are the tangible goods and intangible services that GDP includes?

7. Does GDP include transactions involving items produced in the past?

8. Are items produced abroad by subsidiaries included in a nation’s GDP?

9. What are most common intervals for measuring GDP?

10. How do real and nominal GDP differ?

Text 2

The text is followed by a set of questions. Read the text and answer the accompanying questions, basing your answers on what is stated or implied in the text.

Spending in the economy takes many froms. At any moment, the Smith family may be having lunch at Burger King; Genaral Motors may be building a car factory; the Navy may be procuring a submarine; and British Airways may be buying an airplane from Boeing. GDP includes all of these various forms of spending on domestically produced goods and services.

To understand how the economy is using its scarce resources, economists are often interested in studying the composition of GDP among various types of spending. To do this, GDP (which we denote as Y) is divided into four components: consumption (C), investment (I), government purchases (G), and net exports (NX):

We have just seen an example of each component. Consumption is spending by households on goods and services, such as the Smiths' lunch at Burger King. Investment is the purchase of capital equipment, inventories, and structures, such as the General Motors factory. Investment also includes expenditure on new housing. (By convention, expenditure on new housing is the one form of household spending categorized as investment rather than consumption.) Government purchases include spending on goods and services by local, state, and federal governments, such as the Navy's purchase of a submarine. Net exports equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). A domestic firm's sale to a buyer in another country, such as the Boeing sale to British Airways, increases net exports.

Questions

1. What forms does spending in the economy take?

2. What are the components of GDP?

3. What is (are) consumption (investment, government purchases, net exports)?

4. The “net” in “net exports refers to the fact that imports are subtracted from exports, doesn’t it”?

5. Where are imports of goods and services included into?

6. Where does the salary of an Army general belong to?

7. Why don’t transfer payments reflect the economy’s production?

Ex. 1.The best title for the text is:

– Transfer payments.

– The Components of GDP.

– Consumption.

– Net Exports.

Ex. 2. Based on your understanding of the text, are the following TRUE or FALSE?

1. GDP consists of 6 components.

2. Each dollar of expenditure is placed into one of the four components of GDP.

3. Consumption is spending by households on goods and services.

4. Expenditure on new housing is the one form of household spending categorized as consumption.

5. When a domestic household, firm, or government buys a good or service from abroad, it doesn’t affect GDP.

Text 3

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