Exercise 1. Read the text and understand it.

ECONOMIC PRACTICE AND ECONOMIC THEORY

(Экономическая практика и теория)

Exercise 1. Read the text and understand it.

The global economy consists of more than a hundred independent national systems in which people live and most of them work in order to earn their living. People are either self-employed or work for businesses or for government. They produce goods (manufactured, agricultural or public) and/or services. The work which people do is called their economic activity. They get money for their work with which they can buy either essential commodities (food, clothes, shelter), or non-essentials (like visits to the cinema or books). Every decision people make about what to buy with money is a trade-off. The economic system is the sum-total of what people do and what they want.

The science which studies the way people and businesses deal with the fact that resources are limited, but the demand for them is not, the decisions governments, business managers and individuals make is called economics. Economists study everyday life and try to explain how the system works; they study allocation of resources, production, distribution, and use of goods, money, unemployment and many other things. It deals with the activities of businesses, workers and households that produce and consume output of the country. As Adam Smith – the father of modern economics – said, economics is ‘an inquiry into the nature and causes of the wealth of nations’.

There are several key aspects of economics. First, there are two main branches of economics: microeconomics and macroeconomics. Microeconomics holds a microscope over some portion of the economy – a particular industry and kind of work or geographic area. It examines how consumers choose among jobs, how a business decides what to produce and what production methods to use, how families manage their household budgets. Macroeconomics looks at totals for the economy as a whole: total output and income, the level of employment, the amount of money in circulation, the level of prices. Microeconomics and macroeconomics must be related, since they deal with the same body of experience. The questions, which lie at the core of microeconomics, are a necessary foundation for macroeconomics as well.

Economics is a special way of thinking that uses its own terms which differ in meaning from ordinary words. Besides verbal expressions, economists use three more alternative languages: arithmetic illustration, geometric equivalent and algebraic expression. Economists do not try to deal directly with economic events because of their complexity. They work with simplified pictures of reality called economic models. The use of such models to explore reality, to explain and predict economic events is called positive economics. Economics is also a policy science with important applications to government. Positive economics can clarify policy alternatives, but choices among these alternatives involve what is called normative economics which suggests how to improve the economy.


 

MONEY AND BANKS

(Деньги и банки)

Exercise 1. Read the text and understand it.

All values in the economic system are measured in terms of money: goods and services are sold for money. But before money was invented people traded without it. That system was called bartering and implied exchange of one good for another. Bartering was very inconvenient because, on the one hand, it was difficult to achieve double coincidence of wants, and on the other hand, some goods could not hold their value. That is why after some time goods which could hold their value and were easy to carry around were used to trade with. Commodity money such as cattle, shells, salt and valuable metals appeared: things which have inherent value and can be exchanged for any good or service. But commodity money lacked liquidity, i.e. these things could not circulate easily. Besides, not all of such objects were considered valuable everywhere to represent value of other things.

To overcome this difficulty hard money – gold and silver coins which had intrinsic value – was introduced so that everyone could agree on their ability to measure the value of other things and to serve a unit of account. Currently valuable metals were replaced by fiat money – paper notes (soft money) and coins which do not have any real intrinsic value, but represent value of other things. They are issued by governments and authorized banks as national currencies and are also known as “legal tender”. Because gold has been universally regarded as a very valuable metal, national currencies were for many years judged in term of the so-called “gold standard”. Nowadays, however, national currencies are considered to be as strong as the national economies which support them.

In modern economy money has several functions: a medium of exchange, measure of value, standard of deferred payment, and store of value. Besides, money has developed the new form – substitute money consisting of bank deposits and credits transferable by cheque, bills of exchange, money orders, etc., which are not legal tender. Money and substitute money are managed by banks or other financial institutions. Bank was originally a bench set up in the marketplace for the exchange of money. Later it became a place to which people took their valuables for safe keeping. Today the bank is a business organization or establishment, usually a limited company, which trades in money.

Types of banks vary in different countries, but the most common are savings banks and commercial banks. Banks provide traditional services such as currency exchange, lending money at interest, discounting bills of exchange, buying and selling securities, transferring money securely, etc. Modern services include financial advising, investment banking, equipment leasing, customer loans, arranging travel and insurance and many others. Banks make money more accessible for customers by means of providing ATV machines so that people can get it any time of the day or night.

Banks make a living by charging interest on loans when it lends the deposited money to those who need capital. The rate the bank pays savers is less than the rate it charges borrowers. The extra money makes bank profit, while interest is a kind of security for banks. If clients do not pay back the borrowed money (i.e. defaults on a loan), the bank covers the loss with the money earned from the interest. Banks do not lend all the money deposited by customers and keep a certain amount so that they can make withdrawals. This amount is called the reserve and set by the Central bank. In this way the government can control the amount of money in circulation.