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A MODEL OF THE ECONOMY
Economists spend a lot of time trying to develop models of the working of the economy. The London Business School, like many universities and also the Treasury, has a model of the economy which it has entered into a computer. The reason for this is that much of its work is concerned with forecasting future economic trends so as to aid decision-making by business and government. The London Business School's model can be fed with economic information, such as changes in tax rates, and it will then predict how the economy will behave. Such predictions are an invaluable aid to business decision-making because, for example, businesses can find out whether people's incomes are Likely to rise or not.
The complete economy comprises many millions of economic units. There are households, as one kind of unit. There are also firms, and the departments of both central and local government. These units together decide the economy's total spending. They also decide its total income and its total level of production of goods and services. But in order to develop a simple model of the economy we need to ignore the government sector and the possibility of transactions between households and foreigners. Suppose we are dealing with an isolated economy, one which has no government. Let's assume that there are two main sectors in the economy: households and firms. Households supply firms with the factors of production that firms need to carry on their concerns.
Thus, households provide labour services, both skilled and unskilled, in return for the payment of wages. They may also supply land for which they are paid rent. Finally, they might supply the finance, which is essential to the business. If the finance is in the form of a loan they receive interest payments, but if they have purchased shares in the business they may be entitled to a share of the profits. Most households provide some factor services or services of productive/actors, to a public or private business. Anyone at work is providing labour, and if you or someone in your family has bought shares in the privatization programme (in, for example, British Gas, British Telecom or the water authorities) then they have supplied share capital. Households receive payments for these factor services, that is to say, they earn factor incomes, such as wages, rents and profits.
The other part of our simple model portrays firms supplying households with all the goods and services that they require. In return for these the households pay the firms. These two sets of actions create the model of the circular flow of money, which is shown in Fig. 1.
In fact, there are two flows. One which is monetary and one comprising goods and' services. A flow of factor services from households to firms for which there is an opposite stream of factor payments and a flow of goods and services, which households pay firms. It is this monetary flow in which we are most interested.
What does the figure suggest? It suggests that there are three ways of measuring the amount of economic activity in the economy. First, we can measure the value of goods and services produced, second, we can measure the level of factor earnings. These factor earnings represent the value of factor services supplied. Third, we can measure the value of spending on goods and services. Then, economists refer to the size of the monetary circular flow as the level of national income.
If we assume that all the goods and services, which are produced are in fact sold and that households spend all their income, then we have arrived at what economists call a neutral equilibrium. The level of income, which is spent and received by the two groups will not alter since as one group receives it, they spend it with the other.
Figure 1. The Circular Flow of Income
The fact that the economy is in a neutral equilibrium means simply that the level of national income, and hence the level of economic activity, are stable and unchanging. (An equilibrium is a point of balance in which there is no inherent tendency to change). If the economy was in equilibrium it does not mean that everyone who wants a job has one or that the country is importing exactly the same value of goods and services as it is exporting.
VOCABULARY NOTES
to aid decision-making – помогать, содействовать в принятии решений
the model can be fed with economic information – в модель можно внести экономическую информацию
total income – общий, суммарный доход
total level of production of goods and services – общий уровень производства товаров и услуг
to deal with an isolated economy – иметь дело с изолированной экономикой
to carry on their concerns – продолжать свое дело
to provide labour services – предоставлять рабочую силу (труд)
to receive interest payments – получать платежи в виде процентов
shares – акции
to be entitled to a share of the profits – иметь право на долю прибыли
factor services or services of productive factors – факторы производства
the water authorities – управление водного хозяйства
to supply share capital – предоставить акционерный капитал
factor incomes – доход на факторы производства
to portray – отображать
a monetary flow – денежный поток
an opposite stream – противоположный поток (доел. течение)
factor payments – выплаты (доход) на факторы производства
to measure the amount of economic activity – измерять уровень экономической активности
the value of goods and services produced – стоимость произведенных товаров и услуг
the level of factor earnings – уровень доходов на факторы производства
the value of factor services supplied – стоимость предоставленных факторов производства
the value of spending on goods and services – размер расходов на товары и услуги
a neutral equilibrium – общее равновесие
the circular flow of income – круговой поток (круговорот) доходов
an inherent tendency to change – внутренняя тенденция к изменению
Assignments:
I. Suggest the Russian equivalents
forecasting future economic trends; to feed with economic information; factors that firms need to carry on their concerns; to provide labour services; circular flow of money; a flow of factor services; factor payments; neutral equilibrium; set of action
II. Replace the parts in italics by synonyms
the model can be filled with economic information; they have bought shares; they have the right to get a share of the profits; the flow includes goods and services; the level of income will not change; the level of income and consequently the level of economic activity
III. Fill in the gaps -with the words and expressions/ran the text
1. The model of the economy is concerned with forecasting __ so as to aid __ by business and government.
2. Such predictions are __ aid to business decision-making because businesses can find out whether people's incomes __ to rise or not.
3. These units together decide the economy's __, __ and __.
4. In order to develop a simple model of the economy we need to __ the government sector and __ between __ and __.
5. Suppose we are dealing with __, one which has no government.
6. In order to develop __ of the economy we need to __ that there are two main sectors in the economy: __ and __.
7. Households provide __, both __, in return for __.
8. If the finance is in the form of __, households receive __, but if they have purchased __ in the business they may be entitled to __.
9. Households receive payments for __, that is to say, they earn __, such as __, __ and __.
10. There are two flows: one which is __ and one ___ goods and services.
11. The model suggests that there are three ways of__ in the economy.
12. We can measure __, __ and __.
13. Economists refer to __ of the monetary circular flow as __.
14. If we assume that all the goods and services, which __ are in fact __ and that households spend __, then we have arrived at what economists call
15. The fact that the economy is in a neutral equilibrium means simply that the level of __, and hence the level of __, are .__ and __.
16. An equilibrium is a point of balance in which there is no __.
IV. Find in the text English equivalents/or the following
принятие решений; изменение ставки налогообложения; неоценимая помощь; доходы населения; необходимо допустить, что...; факторы производства; выплата процентов; купить акции; иметь право на часть (долю) дохода; акционерный капитал; денежный поток; уровень национального дохода; уровень экономической активности; внутренняя (присущая чему-либо) тенденция к изменению; следовательно; круговой поток доходов
V. Give explanations in English
to pay rent; a loan; interest payments; share capital; factor services; factor payments; factor incomes; factors of production; a neutral equilibrium in the economy
VI. Read the description of drawing a circular/low
Start with the two blocks. The one on the left should be labelled "households", and the one on the right "firms". On the top of the inner loop, circle, put "goods and services", with an arrow running from the firms block to the households block. At the bottom of the inner loop put "services of productive factors", with an arrow running from households to firms. On the outer loop, at the top, put "spending on goods and services", with an arrow running from households to firms. And finally, at the bottom of the outer loop, put "factor incomes", with an arrow running from firms to households.
Find in the text English equivalents for the following
подписать обозначения на картинке; внутренний круг (кольцо); внешний круг (кольцо); стрелка направлена от ... к ...; вверху; внизу; справа; слева
Draw the circular flow (it will be different from the one in the unit!) and describe it using all the active possible
VII. Answer the questions
1. What units does the economy comprise? What do they decide?
2. What are the two main sectors in the economy?
3. What sets of actions create the model of the circular flow of income?
4. Dwell on the monetary flow. How is the level of national income connected with it?
5. Dwell on the flow of goods and services.
6. What does the figure suggest?
7. How can the amount of economic activity be measured?
8. What's an equilibrium? a neutral equilibrium?
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