Who Will Get to Use the Goods and Services Produced by the Economy?

Since there will not be enough produced to satisfy everybody's wants, some way will have to be devised to determine how the output is divided. Who, for example, will get to ride in limousines; who will have to use public trans­portation; and who will have to walk?

Society has answered these questions in many ways. In some countries those of noble birth are entitled to a larger share of the nation's output than others. In other countries membership in a particular political party has been the key to wealth. Here, in the United States, the market system and the ownership of wealth are the key elements in determining who will be rich, middle class or poor.

Exercise . Understanding a lecture: Yates, Unit 3.

1. You are now going to hear part of a lecture, divided into sections to help you understand it. As you listen, answer the questions below.

Section 1

· Complete the following statement correctly:

The lecturer has mentioned two economic issues. In this lecture he is going to talk about

the first issue _________

the second issue _________

· Note down what the issue is: ______________________________________________________________________

Section 2

· The lecturer mentions five necessities of life. Note down as many as you can:

_____________________________________________________________________________________________

_____________________________________________________________________________________________

· Complete the following statement correctly:

By 'neighbours' the lecturer means:

people living next door to you _________

people living in the same town as you _________

people living in the same country as you ________

people living anywhere in the world _________

Section 3

Are these statements correct or incorrect? If the answer is correct put a tick. If it is wrong, put a cross.

• National income is the money received by the government. _________

• World income is the total of what every individual in the world earns. _________

Sections 4, 5 and 6

· Fill in the figures the lecturer gives you in the table below.

Table 1-1
World Population and Income in the Early 1980s
	Poor countries	Middle-income countries	Major oil countries	Industrial countries	Soviet bloc
Income per head
Percentage of world population
Percentage of world income
Source: World Bank, World Development Report

Section 7

· Complete the following statement correctly

Most of the world's goods are produced for poor countries _________

middle-income countries _________

major oil countries _________

industrial countries _________

Section 8

Are these statements correct or incorrect?

• Workers in poor countries produce less than those in rich countries.

• There is nothing governments can do about the distribution of income.

2. Write a summary of the lecture, based on your notes.

Exercise 1.5 (Study Guide) Complete the sentences below with prepositions where necessary:

How the price system answers the ‘what’ question

When buyers want more _________/1/ a product, they are willing to pay more ________/2/ it. Higher prices attract other producers. As production increases, the need ________/3/ additional workers causes wages to rise within the industry. When demand _________/4/ the product falls, the opposite happens. Prices fall, producers who can no longer operate profitably shut down, or switch ________/5/ other products, and production falls enough to meet___________/6/ the reduced demand.

Exercise 1.10 (Study Guide) Complete the text using the words in the box:

transfer payments scarcity legal framework what, how and for whom income

resources taxes borrowing allocation of resources demands

The essence of the economic problem is that ___/1/ are scarce and ___/2/ are unlimited. This ___/3/ requires every economic system to make choices as to ___/4/ to produce.

The main functions of government in modern mixed economies are to set ___/5/ for the operation of markets, to modify ___/6/, to redistribute ___/7/, and to provide stability and growth. Governments pay for the goods they buy and for the ___/8/ they make by levying ___/9/ or by ___/10/.

Exercise 1.12 (Study Guide) match the following terms with the correct definition:

1. The way in which income /in a country or in the world/ is divided between different groups or individuals	a. economics
2. Allocating resources among the various goods and services that an economy might produce	b. scarce resource
3. Money paid from insurance funds to a worker who cannot get employment	c. distribution of income
4. The social science that describes and analyzes how society chooses from among scarce resources to satisfy its wants	d. resource
5. A resource for which the demand at a zero price would exceed the available supply	e. allocation
6. Deciding which members of society will receive how much of the goods and services produced	f. the ’what’ question
7. Anything that goes into the production process	g. the ‘how’ question
8. A decision as to what is to be produced with the resources of the economy or who is to get what is produced	h. the ‘for whom’ question
9. The economy’s net national product	i. input
10. The process of determining what mix of land, labour and capital to use in production and what production methods to employ	j. output
11. Payments that represent a redistribution of wealth rather than an exchange for goods and services	k. household
12. One or more persons living in the same dwelling /such as a house or an apartment/ and functioning as an economic unit	l. national income
13. Something that is used in production, includes natural resources, labour and capital	m. transfer payments
14. Quantity of goods produced	n. unemployment benefit

Exercise 1.3 (Study Guide) Give English equivalents for the following. Consult your dictionary:

ECONOMIC

экономические ресурсы; экономическая деятельность; экономическая проблема; экономический цикл; экономическая инициатива; экономическая система; экономические переменные; экономические данные; экономическая эффективность; экономическая теория; экономическая стабильность; экономический выбор; экономический рост; экономическое регулирование; экономика услуг; экономическая политика; политическая экономия; народное хозяйство; экономика управления; денежное хозяйство

PRODUCTION

процесс производства; средства производства; производство и потребление; повысить производительность; расширить производство; издержки производства; производство на душу населения; общий объем произведенной продукции; товарное производство

REGULATION

государственное регулирование; правила безопасности; частное регулирование; таможенные инструкции; финансовый регламент; регулирование рынка

GOVERNMENT

государственная политика; государственное вмешательство; государственные доходы; государственные пенсионные программы; государственный долг; государственные закупки

I-2. Two Economic Issues

Trying to understand what economics is about by studying definitions is like trying to learn to swim by reading an instruction manual. Formal analysis makes sense only once you have some practical experience. In this section we discuss two economic issues to show how society allocates scarce resources between competing uses. In each case we see the importance of the questions what, how, and for whom to produce.

The Oil Price Shocks

Oil is an important commodity in modern economies. Oil and its derivatives provide fuel for heating, transport, and machinery, and are basic inputs for the manufacture of industrial petrochemicals and many household products ranging from plastic utensils to polyester clothing. From the beginning of this century until 1973 the use of oil increased steadily. Over much of this period the price of oil fell in comparison with the prices of other products. Economic activity was organized on the assumption of cheap and abundant oil.

In 1973-74 there was an abrupt change. The main oil-producing nations, mostly located in the Middle East but including also Venezuela and Nigeria, belong to OPEC - the Organization of Petroleum Exporting Countries. Recognizing that together they produced most of the world's oil, OPEC decided in 1973 to raise the price for which their oil was sold. Although higher prices encourage consumers of oil to try to economize on its use, OPEC correctly forecast that cutbacks in the quantity demanded would be small since most other nations were very dependent on oil and had few commodities available as potential substitutes for oil. Thus OPEC correctly anticipated that a substantial price increase would lead to only a small reduction in sales. It would be very profitable for OPEC members.

Oil prices are traditionally quoted in US dollars per barrel. Figure 1-1 shows the price of oil from 1970 to 1986. Between 1973 and 1974 the price of oil tripled, from $2.90 to $9 per barrel. After a more gradual rise between 1974 and 1978, there was another sharp increase between 1978 and 1980, from $12 to $30 per barrel. The dramatic price increases of 1973-74 and 1978-80 have become known as the OPEC oil price shocks, not only because they took the rest of the world by surprise but also because of the upheaval they inflicted on the world economy which had previously been organized on the assumption of cheap oil prices.

FIGURE 1-1. The Price of Oil. 1970-86. (Source: IMF, International Financial Statistics.)

1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86

Much of this book teaches you that people respond to prices. When the price of some commodity increases, consumers will try to use less of it but producers will want to sell more of it. These responses, guided by prices, are part of the process by which most Western societies determine what, how, and for whom to produce.

Consider first how the economy produces goods and services. When, as in the 1970s, the price of oil increases sixfold, every firm will try to reduce its use of oil based products. Chemical firms will develop artificial substitutes for petroleum inputs to their production processes; airlines will look for more fuel-efficient aircraft; electricity will be produced from more coal-fired generators. In general, higher oil prices make the economy produce in a way that uses less oil.

How does the oil price increase affect what is being produced? Firms and households reduce their use of oil-intensive products which are now more expensive. Households switch to gas fired central heating and buy smaller cars. Commuters form car pools or move closer to the city. High prices not only choke off the demand for oil related commodities; they also encourage consumers to purchase substitute commodities. Higher demand for these commodities bids up their price and encourages their production. Designers produce smaller cars, architects contemplate solar energy, and research laboratories develop alternatives to petroleum in chemical production. Throughout the economy, what is being produced reflects a shift away from expensive oil using products towards less oil-intensive substitutes.

The for whom question in this example has a clear answer. OPEC revenues from oil sales increased from $35 billion in 1973 to nearly $300 billion in 1980. Much of their increased revenue was spent on goods produced in the industrialized Western nations. In contrast, oil-importing nations had to give up more of their own production in exchange for the oil imports that they required. In terms of goods as a whole, the rise in oil prices raised the buying power of OPEC and reduced the buying power of oil-importing countries such as Germany and Japan. The world economy was producing more for OPEC and less for Germany and Japan.

Although this is the most important single answer to the 'for whom' question, the economy is an intricate, interconnected system and a disturbance anywhere ripples throughout the entire economy. In answering the 'what' and ‘how' questions, we have seen that some activities expanded and others contracted following the oil price shocks. Expanding industries may have to pay higher wages to attract the extra labor that they require. For example, in the British economy coal miners were able to use the renewed demand for coal to secure large wage increases. The opposite effects may be expected if the 1986 oil price slump persists.

The OPEC oil price shocks example illustrates how society allocates scarce resources between competing uses. A scarce resource is one for which the demand at a zero price would exceed the available supply. We can think of oil as having become more scarce in economic terms when its price rose.