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ECONOMIC FAIRNESS AND THE DISTRIBUTION OF ECONOMIC REWARDS

I. Read and memorize the following words, word-combinations and word-groups:

aggregate income

e.g. The percentage of aggregate income received by each fifth of the population is relatively consfant through time.

family's real income '

e.g. Suppose, for example, that every family's real income quadrupled in the next year.

median income

e.g. A family is in poverty if its income is less than one half the median income.

poverty

e.g. Using the U.S. Government's definition of poverty, the percentage of black persons below the poverty line, although declining since 1964, remains above 35 percent.

official poverty line

e.g. About 35 percent of those families headed by women are below the official poverty line.

lack of mobility

e.g. Earnings differ because of the lack of mobility.

progressive taxation

e.g. A tax is progressive if persons with higher incomes pay a higher fraction of their income in taxes than do persons with Sower incomes.

proportional taxation

e.g. A tax is proportional if persons with higher incomes pay the same fraction of their income in taxes as do persons with lower incomes.

in turn

e.g. Transfers, in turn, may be either progressive or regressive.

in-kind transfer

e.g. Transfers may be in cash or in goods and services.

The latter are referred to as in-kind transfers.

cash transfer

e.g. Once a society has made a decision to transfer income to the poor, it is better for the poor if the transfer is in cash rather than in-kind.

negative income tax ( )

e.g. The rate at which the transfer benefits decline is the negative income tax.

II. Give English equivalents of the following:

- -

-

-

, -


-

 

III. Fill in the blanks with appropriate words:

1. It should be clear that differences always

in individual characteristics are closely distributing

connected with ... in income. differences

Lack of mobility may occur because indivi- to increase
duals choose not to make changes in order intensive
... their earnings. difficult

There is an ... network of transfers to income
those with lower incomes. money

That is much of the welfare system in the inequality
U.S. is based on ... goods and services. different

... in income is about the same now as it
was just following World War II.

Making the market ... more fair also makes
it less efficient.

Comparing the distributions of income among
economies is ... because each country defi
nes income in a ... way.

Give ... and give it in such way that the reci
pient ... has an incentive to work.

 

IV. Read and translate the text:

The central task of any economy is providing for and enhancing the material well-being of those who live within it. There are two aspects to this task: the production of more and better goods and services, and the distribution of those goods and services in a fair manner.

In a market economy some are rewarded handsomely while others are perhaps not rewarded at all. How a society is to deal with those who are, in a sence, outside of the economic system is one of the pressing problems of our era, our economy, and our society.

Notice that the percentage of aggregate income received by each fifth of the population is relatively constant through time. This stability or constancy is one of the surprising facts about the U.S. economy: the distribution of income has been relatively stable for a long time. Indeed, inequality in income, as measured this way, is about the same now as it was just following World War II.

France and the United States appeared to have the greatest inequality in the distribution of income when compared with other industrialized nations.

There will, of course, always be bottom 20 or 10 or 5 percent of any distribution. Suppose, for example, that every family's real income quadrupled in the next year. Would it be useful to think of the bottom of the distribution as a group in poverty? For example, A family is in poverty if its income is less than one-half the median income.

Who are the poor? Using the U.S. Government's definition of poverty, the percentage of black persons below the poverty line, although declining since 1964, remains above 35 percent. Similarly, about 35 percent of those families headed by women are below the official poverty line.

It should be clear that differences in individual characteristics are closely associated with differences in income.

Earnings differ because of the lack of mobility. Lack of mobility may occur because individuals choose not to make changes in order to increase their earnings; because individuals are not allowed to make changes in order to increase their earnings (for instance, discrimination); or because individuals have abilities that differ which cannot be easily obtained by others who would like to increase their earnings (special talents).

A tax is proportional if persons with higher incomes pay the same fraction of their income in taxes as do persons with lower incomes. A tax is progressive if persons with higher incomes pay a higher fraction of their income in taxes than do persons with lower incomes.

Transfers, in turn, may also be either progressive (transfers to those lower incomes) or regressive (transfers to those with higher incomes). In addition, transfers may be in cash or in goods and services. The latter are referred to as in-kind transfers.

There are two ideas behind the negative income tax proposed to which economists are strongly attached. First, once a society has made a decision to transfer income to the poor, it is better for the poor if the transfer is in cash rather than in-kind. Second, once a society has made the decision to transfer income to the poor, it is better for the poor if the transfer system provides positive incentives to increase transfer plus market income in the market. Put simply, Give cash and give it in such a way that the recipient always has incentive to work (pp. 413437).

 

V. Answer the following questions:

What is the central task of any economy?

How is the society to deal with those who are outside of
the economic system?

What is the definition of the word poverty?

What is a lack of mobility? When may if occur?

What is the way to change distribution in the society?

Is there any difference between cash transfers and in-kind
transfers?

What can you say about the poorest recipient?

 

VI. Define the terms:

median income proportional taxation

welfare programme cash transfer

official poverty line lack of mobility

poverty network of transfers

 

VII. Translate into English:

1. , . 2. , , 䳭 . 3. ' . 4. , , . 5. , . 6. , , , .

 

VIII. Read and dramatize the following dialogue:

A.: Tell me please, why do we know much less about the

distribution of wealth than we do about the distribution

of income? D.: We know much less about it because the data on wealth

holdings are not readily available. Indeed, most of the

evidence we have on wealth distribution for the U.S.

economy is based on work done in the early 1960s. A.: Subsequent calculations based on data available in 1969

provide essentially the same picture of the distribution of

wealth. The top 0,5% of the population held about 23%

of the wealth and the top 1% of the population about

30% of the wealth. D.: What is the situation in the U.S. economy concerning the

effects of sex discrimination? A.: On average, working women earn only $ 0.70 for every

$ 1.00 earned by working men. What accounts for this

difference? D.: Two economists studied this question using data from the

mid 1970s. At that time, the differences could be accounted

for in the following way. First, the work history of women

differs considerably from that of men. A.: Yes, it does. It's a fact of common knowledge that while

most men enter the work force shortly after completing

school and continue to work full time thereafter, women

have more varied work experience. D.: The average white male has spent only six months out of

the labor force, most of that time immediately after

completing school; in contrast, the average white female

takes almost a six-year break in mid-career, usually to

raise children. A.: All of these and other factors combined still leave women

with wages $ 174 lower than men. D.: What does this mean? A.: It suggests that markets do not necessarily reward workers

just on the basis of productivity and that some sort of

discrimination may exist.

 

IX. Make up your own dialogue using the following expressions:

median income to be rewarded

aggregate income to be headed by

in-kind transfer to be referred to

distribution of goods official poverty line

 

X. Paraphrase the sentences using Subjunctive II as in the model:

Model: A family is not in poverty if its income is more than one-half the median income. If a family were in poverty, its income wouldn't be more than one-naif the median income. 1. Individuals choose not to make changes in order to increase their earnings, so lack of mobility occurs. 2. They don't earn a lot of money, so they are given a cash transfer. 3. There is sex discrimination, so men and women don't receive the same amount of money. 4. People have no wide range of possibilities to obtain a job, so many families live below the official poverty line.

 

XI. Complete the following sentences:

1. If all workers were rewarded handsomely ... . 2. The transfer would be in-kind if ... . 3. If they had lower incomes ... . 4. A society would not make a decision to transfer income to the poor if .... 5. If the distribution of income had been relatively stable ... .

 

XII. Translate into English:

1. , . 2. , , . 3. , . 4. , , , .

 

XIII. Communicative situations:

Should people who work in riskier jobs earn higher incomes?
If your answer is yes, is the inequality necessarily bad.
Explain why.

What does it mean to say that a person is living in po
verty? Explain your reasoning.

If luck were more important than education in determining
one's income, would the distribution of income be fair?
Discuss it.

What can you say about cash transfer in this country?

Lesson 25

AGGREGATE SUPPLY

I. Read and memorize the following words, word-combinations and word-groups:

aggregate supply

e.g. We begin our analysis of macroeconomic fluctuations by examining the determinants of potential real output and aggregate supply.

potential real output

e.g. Potential real output is determined by the natural resources available to an economy, the technologies that it has developed or acquired, the amount of capital that it has accumulated, and the amount of labor it has available.

to fully employ labor resources

e.g. Labor resources are fully employed when there is an equilibrium in each labor market.

the real wage

e.g. The real wage is the purchasing power of the wage payment, which is in turn the amount of money paid to workers per hour, week, or month of work.

equilibrium in the labor market

e.g. Equilibrium in the labor market, as in any market,

occurs when the amount willingly supplied is equal to the

amount willingly demanded. unemployment e.g. Unemployment occurs, because the real wage does not quickly adjust to a new equilibrium when the demand or supply of labor changes.

true unemployment e.g. Another part of unemployment is true unemployment there are no job openings corresponding to those who are without work.

cycle unemployment

e.g. The lack of jobs is a consequence of the business cycle unemployment.

structural unemployment e.g. The lack of jobs may also correspond to a problem with skills and training (structural unemployment).

frictional unemployment

e.g. Frictional unemployment results when individuals leaving one job (or looking for a first job) do not immediately find a new job, even though there are vacancies in the economy.

recession

e.g. A recession will be accompanied by declining prices and nominal wages, but the economy will eventually tend toward full employment and the production of potential real output.

 

II. Give English equivalents of the following:

,

 

III. Fill in the blanks with appropriate words:

If these productive ... are fully and underestimate efficiently employed, there is a ... no corresponding amount that the economy can produce. vacancy

Frictional unemployment ... when indi- looking for viduals leaving one job (or looking for declining

a first one) do not immediately find a maximum new job, even though there are increase

vacancies in the economy. inputs

... a job does not solve this unemp- results loyment problem this is ... .

Published unemployment data will ... the true unemployment rate because discouraged workers will have quit looking for jobs out of frustration.

As real wages fall, firms will increase their employment of workers and real output will ... .

A recession will be accompanied by ... prices and nominal wages.

 

IV. Read and translate the text:

We begin our analysis of macroeconomic fluctuations by examining the determinants of potential real output and aggregate supply. This potential real output is determined by

the natural resources available to an economy, the technologies that it has developed or acquired, the amount of capital that it has accumulated, and the amount of labor it has available. If these productive inputs are fully and efficiently employed, there is a maximum amount that the economy can produce its production possibilities.

Potential real output is the output that would be produced if all resources, including labor, were fully employed. Labor resources are fully employed when there is an equilibrium in each labor market. That is, when everyone who wants to work at the prevailing wage is able to work, labor is fully employed.

Full employment is associated with the amount of labor firms want to employ labor demand and the amount of time that individuals want to supply to the market, given the other uses to which these individuals can put their time labor supply.

The real wage is the purchasing power of the wage payment, which is in turn the amount of money paid to workers per hour, week, or month of work.

Equilibrium in the labor market, as in any market, occurs when the amount willingly supplied is equal to the amount willingly demanded, that is, when the number of persons willing to work at a particular real wage is exactly equal to the number of persons that firms want to employ.

Unemployment occurs, because the real wage does not quickly adjust to a new equilibrium when the demand or supply of labor changes.

Frictional unemployment results when individuals leaving one job (or looking for a first job) do not immediately find a new job, even though there are vacancies in the economy.

Not all unemployment is frictional, however. Another part of unemployment is true unemployment there are no job openings corresponding to those who are without work. Looking for a job does not solve this unemployment problem there is no corresponding vacancy. Sometimes the lack of jobs is a consequence of the business cycle unemployment, but the lack of jobs may also correspond to a problem with skills and training (structural unemployment). For example, someone who doesn't have a high-school education may be willing to work but will probably have fewer job-related skills and thus fewer employment opportunities.

Published unemployment data will underestimate the true unemployment rate because discouraged workers will have quit looking for jobs out of frustration.

60-193 161

When labor is unemployed, however, nominal wages will eventually begin to decline. As they do, real wages will fall. As real wages fall, firms will increase their employment of workers and real output will increase. Thus a recession will be accompanied by declining prices and nominal wages, but the economy will eventually tend toward full employment and the production of potential real output (pp. 464486)*.

 

V. Answer the following questions:

What is frictional unemployment?

Is it possible to eliminate frictional unemployment?

If the population in a country increases at a moderate rate through time, what will happen to potential real output?

To what extent is unemployment voluntary?

Why should a market economy move toward full employment in the longrun?

What is full employment associated with?

 

VI. Define the terms:

real wage structural unemployment

recession frictional unemployment

true unemployment nominal wage

cyclical unemployment aggregate supply

 

VII. Translate into English:

1. , , , . 2. - . 3. , , . 4. , . 5. , . 6. .

7. .

 

VIII. Read and dramatize the following dialogue:

A.: Unemployment can only result if there is less-than-perfecf adjustment of nominal wages to the price level changes. That is unemployment is a consequence of sticky nominal wages. And, if nominal wages are sticky, real output will change when aggregate demand changes.

8.: Why should nominal wages be sticky?

A.; One answer is that nominal wages might be sticky because firms and indiviluals have different expectations about what is happening to the price level and real wages or because firms and individuals have different abilities to respond to changes in nominal wages.

8.: Why would firms and individuals have different expectations?

A.: If information about the real wages is costly to obtain because individuals must search over different job opportunities and wage offers, simultaneously trying to decide what is happening to the price level, then individuals may have expectations about what is happening to the real wages that differ from firms.

B.; For example, if your expenditures for groceries increased this week how would you determine whether the change was because of a general inflation instead of a change in the relative price of the particular things you bought?

A.; This is not a simple question to answer. Changes in prices in particular markets are relatively easy to observe. But deciding what this means in terms of price-level changes is a much more difficult matter. When you shop one week, chicken will be 1.30 dollar per pound; the next week it could be 0.95 dollar per pound. Week to week, some prices go up, other prices go down. Most of these changes are relative-price changes that occur in response to changes in market supply and market demand.

8.: Sure, but they do not indicate that the price level is going up or down. However, during an inflation, on average, prices will creep up; during a deflation, on average, prices will creep down.

A.: There is no easy way to quickly tell if the price changes that we all observe are relative-price changes, or part of a broader pattern of price changes associated with a price-level change.

B.: Yes, I agree with you. It is difficult to know whether, on average, the price level has gone up or down. Even in periods of inflation when we have become used to price-level changes, it is difficult to know whether the rate of inflation is increasing or decreasing. Thank you for your competent answers.

A.: You're welcome.

 

IX. Make up your own dialogue using the following expressions:

equilibrium in the labor market to increase

to decline full employment

to be accompanied unemployment

purchasing power nominal wages recession

 

X. Replace the attributive clauses by the Infinitive:

Model: This is the real wage which must be paid to workers per hour, week, or month of work. This is the real wage to be paid to workers per hour, week or month of work.

1. These are macroeconomic fluctuations which will be examined by experts. 2. The question of full employment which will be discussed later is rather difficult. 3. This is potential real output which must be determined by the natural resources available to an economy. 4. The data about unemployment which must be obtained are of great importance. 5. This is recession which will be accompanied by declining prices and nominal wages.

 

XI. Make sentences with seem and appear according to the model:

Model: Are they discussing equilibrium in the labor market?

They seem to be discussing equilibrium in the labor market.

V. Does the lack of jobs affect unemployment? It seems .... 2. Have they received their wages? They seem ... . 3. Has he lost his job recently? He appears ... . 4. Are they discussing the problem of full" employment? They seem ... . 5. Is he looking for a job now? He appears ... .

XII. Translate info English:

1. , - . 2. , . 3. ³ . . ³ , . 5. , -.

 

II. Communicative situations:

Economists have suggested that the frictional rate of employment has increased during the past two decades. Why might this have occurred?

Would the costs associated with unemployment be the same for a teenager as for a head of a household?

Do the unemployment statistics treat these two persons differently? Should they?

3. What does the equilibrium in the labor market depend on? Why?

 

Lesson 26

AGGREGATE DEMAND

I. Read and memorize the following words, word-combinations and word-groups:

aggregate demand

e.g. When price and nominal-wage adjustments are slow, changes in aggregate demand will lead to changes in actual real output.

to employ fully productive resources

e.g. Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

individual consumption

e.g. Individual consumption is directly influenced by individual income.

to save income

e.g. Individuals (and economies that are not engaged in international trade) can only do two things with their income: they can consume it or save it.

to smooth consumption

e.g. Aggregate consumption may differ from aggregate real output because individuals want to save in order to smooth consumption relative to income.

life-cycle consumption behavior

e.g. In part, current consumption will be based on our best estimate of our lifetime income and how long we expect to live. This kind of smoothing behavior is a life-cycle consumption behavior.

saving

e.g. Saving allows people to transfer consumption from the present to the future.

investment

e.g. If desired investment exceeds desired saving, firms will find that their inventories are lower than they want them to be.

inventories ; (-)

e.g. If desired aggregate saving exceeds desired aggregate investment, firms will accumulate unwanted inventories.

adjustment

e.g. Many different kinds of adjustment might occur. Prices may change. Interest rates may change.

fiscal policy (activities) (); -

e.g. Government spending, taxes, and subsidies are the fiscal activities of government.

marginal propensity to consume

e.g. Economists define the marginal propensity to consume (MPC) as the change in consumption per dollar change in income.

capital stock

to offset depreciation

e.g. Investment occurs when real output is used to increase the existing capital stock or offset depreciation.

 

II. Give English equivalents of the following:

-


-

- -

 

III. Fill in the blanks with appropriate words:

Saving allows people to ... consumption from current the present to the future. transfer

We also save because of uncertainty about adjustment our future ... and about how long we will lower live. income

... consumption will not be based solely demand on current income. increase

Investment occurs when real output is used to ... the existing capital stock.

If desired investment exceeds desired saving, firms will find that their inventories are ... than they want them to be.

Increased government expenditure increases aggregate ....

Many different kinds of ... might occur. Prices may change. Interest rates may change.

 

IV. Read and translate the text:

Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

Supply and demand help us organize the way we think about these markets because each directly corresponds to the intentions of self-interested firms or individuals.

Individuals (and economies that are not engaged in international trade) can only do two things with their income: they can consume it or save it.

Individual consumption is directly influenced by individual income.

While consumption is undoubtedly related to income, it is unlikely that consumption will vary exactly as income varies.

Saving is foregone consumption. Essentially, saving allows people to transfer consumption from the present to the future.

When a person's income fluctuates from month to month, he or she can smooth consumption by saving and dissaving and consumption will be based on some expected or average monthly income rather than on actual monthly income.

Aggregate consumption may differ from aggregate real output because an individual wants to save in order to smooth consumption relative to income.

What determines current consumption if we save for retirement? In part, current consumption will be based on our best estimate of our lifetime income and how long we expect to live. This kind of smoothing behavior is known as life-cycle consumption behavior.

We also save because of uncertainty about our future income and about how long we will live. We may get sick or injured in some way or we may become unemployed. If we do, our income will fall, perhaps dramatically.

Saving is a way of transferring current income into future consumption. Because of fluctuating incomes associated with our jobs, declining incomes with retirement, and uncertainties about length of life, sickness, incapacitation, or unemployment, individuals will choose to consume some of their current income and save or dissave, thereby smoothing consumption through time.

Current consumption will not be based solely on current income.

Investment occurs when real output is used to increase the existing capital stock or offset depreciation.

If desired aggregate saving exceeds desired aggregate investment, firms will accumulate unwanted inventories. Conversely, if desired investment exceeds desired saving, firms will find that their inventories are lower than they want them to be.

Many different kinds of adjustment might occur. Prices may change. Interest rates may change. The production of real output may change. It turns out that with sticky prices, output changes occur before prices fully respond.

Individuals make consumption and saving decisions. Firms make investment decisions. But there is another participant in the economy the government. Government activities may affect the economy in one of two ways, First, government spending directly affects aggregate demand. Second, government taxes and subsidies directly affect consumption, saving, and investment and, hence, indirectly affect aggregate demand. Government spending, taxes, and subsidies are the fiscal activities of government.

Increased government expenditure (like increased desired consumption or increased desired investment) increases aggregate demand. Decreased government expenditure (like decreased desired consumption or decreased desired investment) decreases aggregate demand.

Since consumption expenditures are determined by income, albeit in complex ways, changes in income will also affect consumption. How individuals respond to changes in income turns out to be important. Economists define the marginal propensity to consume (MPC) as the change in consumption per dollar change in income.

 

V. Answer the following questions:

What is individual consumption influenced by?

What phenomenon is known as life-cycle consumption behavior?

What is the consequence, when desired saving is not equal

to desired investment?

4. What is referred to as fiscal policy?

What can individuals do with their income?

Why may aggregate consumption differ from aggregate

real output?

7. What can you say about government expenditures?

 

VI. Define the terms:

fiscal activities of government aggregate demand

life-cycle consumption behavior aggregate supply

marginal propensity to consume (MPC) saving

 

VII. Translate into English:

1. Գ , . 2. . 3. , 䳿 - . 4. , , , . 5. , . 6. . 7, ' , , 䳿 - .

 

VIII. Read and dramatize the following dialogue:

Banker: Mrs. West, I was sorry to hear of your husband's death. Mrs. West: Thank you. I'm pleased that the bank was named executor of the estate.

B.; We'll help you in every way we can. We've looked

through the contents of the safe-deposit box and made an inventory. Everything seems to be in good order.

Mrs. W.: I know so little about my husband's affairs.
B.: Our counseling service is for people in just your

position. Mrs. W.; I'm most concerned about my immediate expenses.

.: Well, we're empowered under the terms of the will

to provide you with an allowance until the estate has been probated.

Mrs. W.: Oh, that's fine.

6.; And there are three life insurance policies. You are

the beneficiary in each of them.

Mrs. W.: Yes, I knew about those.

6.: The benefits from these policies will be paid directly

to you within the next two weeks.

Mrs. W.: Oh, ! don't have to worry, then.

B.: No. The income from your inheritance is going to

be quite sizable. Of course, we don't know yet what demands will be made against the estate.

Mrs. W.: As far as I know, there are no large creditors.

6.:We hope not. You understand, also, that this bank

is named trustee under the will. This means that we will take care of the portfolio of an annual report of all transactions.

Mrs. W.: Yes, I understand that. I feel much better about the future now.

 

IX. Make up youp own dialogue using the following expressions and word-combinations:

aggregate demand to employ fully productive resources

aggregate income to smooth income

fiscal policy to offset depreciation

desired investment desired saving

 

X. Combine the given two sentences into one using the Objective Infinitive Complex:

Model: They will tell us about Trust Services. I expected.

I expected them to tell us about Trust Services. 1. Firms made investment decision. ! heard it. 2. Increased government expenditure increases aggregate demand. We consider it. 3. We save because of uncertainty about our future income and about how long we shall live. The life caused it. 4. Individual consumption is directly influenced by individual income. We think so. 5. Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate. We know it. 6. Saving is a way of transferring current income into future consumption. I suppose it.

 

XI. Change the following complex sentences into simple ones using the Objective Infinitive Complex:

Model: We expect that firms produce goods of high

quality.

We expect firms to produce goods of high quality. 1. People expect that saving allows them to transfer consumption from the present to the future. 2. We think that the firms accumulate unwanted inventories, if desired aggregate saving exceeds desired aggregate investment. 3. We consider that government spending, taxes and subsidies are the fiscal activities of government. 4. Consumers believe that they purchase goods of high quality. 5. We know that changes in aggregate demand lead to changes in actual real output.

 

XII. Translate into English:

1. , . 2. , . 3. , . 4. , , . 5. , .

 

XIII. Communicative situations:

What will happen to aggregate demand if firms become more pessimistic about the future?

What will happen to aggregate demand if firms become more optimistic about the future?

Discuss the ways in which government activities may affect the economy.

 

Lesson 27

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