English for Economics

3. People take into account the effect their actions have to themselves.

4. They like to do their own little bit, otherwise small, towards protecting the environment.

5. To rely on people's conscious may be a very unsatisfactory method of controlling pollution.

1. _____________________________________________

2. _____________________________________________

3. _____________________________________________

4. _____________________________________________

5. _____________________________________________

Strategic trade theory

An argument for protection?

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) Governments frequently adopt trade protection because it is an easy option politically.

b) These policies include quotas, exchange controls, import licensing, export taxes, tariffs.

c) Infra-industry occurs because of scale economies and consumer demand for diversity.

d) Reasons for restricting trade that have some validity in a world context include some arguments.

e) Although international trade can benefit the world as a whole, some countries will lose out until the gainers compensate the losers.

1. Lester Thurow is Dean of the Sloan School of management at the Massachusetts Institute of Technology (MIT). He is also one of the USA's best-known and most articulate advocates of “managed trade”.

2. Thurow (and others) have been worried by the growing penetration of US markets by imports from Japan, Europe and many developing countries. Their response is to call for a carefully worked-out strategy of protection for US industries. ___ (1)

The strategic trade theory that they support argues that the real world is complex. It is wrong, they claim, to rely on free trade and existing comparative advantage. Particular industries will require particular policies of protection or promotion tailored to their particular needs: ___ (2)

3. Some industries will require protection against unfair competition from abroad - not just to protect the industries themselves, but also to protect the consumer from the oligopolistic power that the foreign companies will gain if they succeed in driving the domestic producers out of business.

· Other industries will need special support in the form of subsidies to enable them to modernize and compete effectively with imports.

· New industries may require protection to enable them to get established - to achieve economics of scale and build a comparative advantage.

· If a particular foreign country protects or promotes its own industries, it may be desirable to retaliate in order to persuade the country to change its mind.

4. Thurow claims that Japan has been following a policy of managed trade for years - and look how successful it has been!

5. But, despite the enthusiasm of the strategic trade theorists, their views have come in for concerted criticism from economic liberals. If the USA is protected from cheap Japanese imports, they claim, all that will be achieved is a huge increase in consumer prices. The car, steel, telecommunications and electrical goods industries might find their profits bolstered, but this is hardly likely to encourage them to be more efficient.

6. Another criticism of managed trade is the difficulty of identifying just which industries need protection, and how much and for how long. Governments do not have perfect knowledge. What is more, the political lobbyists from various interested groups are likely to use all sorts of tactics - legal and illegal - to persuade the government to look favourably on them. In the face of such pressure will the government remain “objective”? No, say the liberals. ___ (3)

7. So how do the strategic trade theorists reply? If it works for Japan, they say, it can work for the USA. What is needed is a change in attitudes. ___ (4) Rather than industry looking on the government as either an enemy to be outwitted or a potential benefactor to be wooed, and government looking on industry as a source of votes or tax revenues, both sides should try to develop a partnership - a partnership from which the whole country can gain.

8. But whether sensible, constructive managed trade is possible in the US democratic system, or the UK for that matter, is a highly debatable point. “Sensible” managed trade, say the liberals, is just pie in the sky.

II. For each statement 1-3, mark one for the answer you choose.

1. Managed trade relies on:

A. free market.

B. existing comparative advantage.

C. government intervention.

2. Industries might find their profit bolstered because:

A. They are protected from export.

B. They are protected from importation of cheap goods.

C. They are very efficient.

3. The liberals are convinced that sensible constructive managed trade is:

A. possible in the US democratic system.

B. possible in the UK.

C. hardly possible.

III. Are sentences below “right” or “wrong”? If there is not enough information to answer, choose “Doesn't say”.

1. Advocates of managed trade claim that governments may intervene in trade.

A. Right B. Wrong C. Doesn't say

2. Economic liberals argue that free trade may allow the importation of harmful goods.

A. Right B. Wrong C. Doesn't say

3. Supporters of managed trade insist on legal and administrative barriers.

A. Right B. Wrong C. Doesn't say

4. Critics of free trade don't believe in sensible, constructive managed trade.

A. Right B. Wrong C. Doesn't say

5. The argument for restricting trade is the danger of the establishment of a foreign-based monopoly.

A. Right B. Wrong C. Doesn't say

IV. Match each of these statements with one of the paragraphs numbered 1-8.

A. Although there are many circumstances in which international trade can make countries better off, international trade can also carry costs.

B. Countries may also promote their own industries by subsidies.

C. The government can't remain objective in the face of political lobbyists.

D. Managed trade is a debating point.

CONCENTRATION RATIOS

Measuring the degree of competition

We can get some indication of how competitive a market is by observing the number of firms: the more the firms, the more competitive the market would seem to be. However, this does not tell us anything about how concentrated the market might be. There may be many firms (suggesting a situation of perfect competition or monopolistic competition), but the largest two firms might produce 95 per cent of total output. This would make these two firms more like oligopolists.

Thus even though a large number of producers may make the market seem highly competitive, this could be deceiving. Another approach, therefore, to measuring the degree of competition is to focus on the level of concentration of firms.

The simplest measure of industrial concentration involves adding together the market share of the largest so many firms: e.g. the largest three or the largest five. This would give what is known as the “3-firm” or “5-firm concentration ratio”.

The table (Fig. 1) shows the 5-firm concentration ratios of selected industries in the UK. As you can see, there is an enormous variation in the degree of concentration from one industry to another.

One of the main reasons for this is difference in the percentage of total industry output at which economies of scale are exhausted. If this occurs at a low level of output, there will be room for several firms in the industry which are all benefiting from the maximum economies of scale.

Differences in the economies of scale are not the only cause of differences in concentration. The degree of concentration will also depend on the barriers to entry of other firms into the industry and on various factors such as transport costs and historical accident. It will also depend on how varied the products are within any one industrial category. For example, in categories as large as “clothing” and “toys and sports goods” there is room for many firms, each producing a specialized range of products. Within each sub-category, e.g. tennis racquets, there may be relatively few firms producing.

So is the degree of concentration a good guide to the degree of competitiveness of the industry? The answer is that it is some guide, but on its own it can be misleading. In particular it ignores the degree of competition from abroad, and from other areas within the country. Thus the five largest UK motor vehicle manufacturers may produce 82.9 per cent of UK vehicle output, but these manufacturers face considerable competition from imported cars and lorries. On the other hand, the five largest water suppliers may account for only 49.7 per cent of UK output, but within their own regions of the country they have a monopoly.

Figure 1

Industry	5-firm concentration ratio
Tobacco products	99.5
Iron and steel	95.3
Asbestos goods	89.8
Motor vehicles and engines	82.9
Cement, lime and plaster	77.7
Grain milling	62.3
Water supply	49.7
Footwear	48.2
Bread, biscuits, etc.	47.0
Carpets	21.8
Clothing	20.7
Bolts, nuts and springs	11.4
Processing of plastics	8.8

I. Are the sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn't say”.

1. The more the firms, the more concentrated the market is.

A. Right B. Wrong C. Doesn't say

2. The simplest measure of industrial concentration involves summing up the market share of the largest companies existing on the market.

A. Right B. Wrong C. Doesn't say

3. The degree of concentration only varies from one industry to another because of the differences in the extent of economies of scale.

A. Right B. Wrong C. Doesn't say

4. In such categories as “clothing” and “toys and sports goods” there is not much room for many firms.

A. Right B. Wrong C. Doesn't say

5. The degree of concentration on its own can't reflect the situation in the market.

A. Right B. Wrong C. Doesn't say

II. For each question, mark one for the answer you choose.

1. We can get some indication of how competitive a market is by

A. observing the number of firms.

B. analyzing activities of the companies in the market.

C. measuring the degree of competition.

2. The degree of concentration doesn't depend on

A. barriers to entry of other firms into the industry.

B. transport costs.

C. history of the company.

3. Within each industrial sub-category

A. the number of companies increases.

B. there may be fewer companies producing similar goods.

C. there is enough space for many companies.

III. In most of the lines below there is one extra word. It is either grammatically incorrect or doesn't fit in with the sense of the text. Some lines, however, are correct. If there is an extra word, write it out in CAPITAL LETTERS.

00 So is the degree of firm concentration a good guide to

01 the degree of competitiveness of the industry? The

02 answer is that it is some guide, but on its own it can be

03 misleading. In some particular it ignores the degree of competition

04 from abroad, and from others areas within the

05 country. Thus the five largest UK motor car vehicle manufacturers

06 may have produce 82.9 per cent of UK vehicle output,

07 but these manufacturers may face much considerable competition

08 from imported cars and lorries. On the other hand, the

09 five largest water suppliers may to account for only 49.7

10 per cent of UK production output, but with their own regions of the

11 country they should have a monopoly.

COMPETITIVE ADVANTAGE AND THE SMALL FIRM SECTOR

The fact that many small businesses do survive, and some manage to grow, suggests that they must have some edge over their larger rivals. The following have been found to be the key competitive advantages that small firms might hold.

___ (1)

Small firms are more able to respond to changes in market conditions and to meet customer requirements effectively. For example, they may be able to develop or adapt products for specific needs. Small firms may also be able to make decisions quickly, avoiding the bureaucratic and formal decision-making processes that typify many larger companies.

Quality of service. Small firms are more able to deal with customers in a personal manner and offer a more effective after-sales service.

Production efficiency and low overhead costs. Small firms can avoid some of the diseconomies of scale that beset large companies. A small firm can benefit from: management that avoids waste; good labour relations; the employment of a skilled and motivated workforce; lower accommodation costs.

Product development. As we have seen, many small businesses operate in niche markers, offering specialist goods or services. The distinctiveness of such products gives the small firm a crucial advantage over its larger rivals. A successful small business strategy, therefore, would be to produce products that are clearly differentiated from those of large firms in the market, thereby avoiding head-on competition - competition which the small firm would probably not be able to survive.

___ (2)

Small businesses, especially those located in high-technology markets, are frequently product or process innovators. Such businesses, usually through entrepreneurial vision, manage successfully to match such innovations to changing market needs. Many small businesses are, in this respect, path breakers or market leaders.

Small businesses do, however, suffer from a number of significant limitations.

Problems facing small businesses

The following points have been found to hinder the success of small firms.

___ (3)

Small firms face many problems in selling and marketing their products, especially overseas. Small firms are perceived by their customers to be less stable and reliable than their larger rivals. This lack of credibility is likely to hinder their ability to trade. This is a particular problem for “new” small firms which have not had long enough to establish a sound reputation.

Funding R&D. Given the specialist nature of many small firms, their long-run survival may depend upon developing new products and processes in order to keep pace with changing market needs. Such developments may require significant R&D investment. However, the ability of small firms to attract finance is limited, as many of them have virtually no collateral and they are frequently perceived by banks as a highly risky investment.

___ (4)

A crucial element in ensuring that small businesses not only survive but grow is the quality of management. If key management skills, such as being able to market a product effectively, are limited, then this will limit the success of the business.

___ (5)

Small firms will have fewer opportunities and scope to gain economies of scale, and hence their costs are likely to be somewhat higher than their larger rivals. This will obviously limit their ability to compete on price.

I. Match each of these headlines with one of the texts above.

A. Innovation _______________

B. Management skills _______________

C. Flexibility _______________

D. Economies of scale _______________

E. Selling and marketing _______________

II. Look at statements 1-3. In each statement, which phrase or sentence is correct?

1. Small firms must have some edge over their larger rivals.

A. Small firms are far ahead of their large rivals.

B. Small firms have to be better than their large rivals to compete with them.

C. All small firms will soon fail.

2. Small firms are perceived by their customers to be less stable and reliable than their larger rivals.

A. Small firms are less reliable than their large rivals.

B. Small firms can't find their customers.

C. Customers think that small firms are less reliable than their large rivals.

3. This lack of credibility is likely to hinder their ability to trade.

A. Customers' faith in small firms is low which limits their sales.

B. Customers of small firms are lucky.

C. Customers will stop small firms from getting credits.

III. Are sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn't say”.

1. Small firms offer better maintenance support.

A. Right B. Wrong C. Doesn't say

2. A small firm can benefit from lower prices.

A. Right B. Wrong C. Doesn't say

3. Small firms have less problems selling abroad.

A. Right B. Wrong C. Doesn't say

4. Small firms are unable to get credits in the bank.

A. Right B. Wrong C. Doesn't say

GROWTH THROUGH DIVERSIFICATION

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) There are three principal factors which might encourage a business to diversify.

b) Alternatively, the business might be in a market where demand is stagnant or declining.

c) Such products need not cover similar activities.

d) As a result, control over market share is becoming even more crucial.

e) Diversification therefore enables the business to spread risk.

Diversification is the process whereby a firm shifts from being a single-product to a multiproduct producer. ___ (1) We can in fact identity four directions in which diversification might he undertaken:

· Using the existing technological base and market area.

· Using the existing technological base and new market area.

· Using a new technological base and existing market area.

· Using a new technological base and new market area.

Categorising the strategies in this way would suggest that the direction of diversification is largely dependent upon both the nature of technology and the market opportunities open to the firm. But the ability to capitalise on these features depends on the experience, skills and market knowledge of the managers of the business. In general, diversification is likely to occur in areas where the business can use and adapt existing technology and knowledge to its advantage.

The diversification of Amstrad, the personal computer manufacturer, into the mobile telephone market is a good example of where a business's current technology and market knowledge are being applied to a distinct new product.

Why diversification?

___ (2)

Stability. So long as a business produces a single product in a single market, it is vulnerable to changes in that market's conditions. If a farmer produces nothing but potatoes, and the potato harvest fails, the farmer is ruined. If however, the farmer produces a whole range of vegetable products, or even diversifies into livestock, then he or she is less subject to the forces of nature and the unpredictability of the market. ___ (3)

Maintaining profitability. Businesses might also be encouraged to diversify if they wish to protect existing profit levels. It may be that the market in which a business is currently located is saturated and that current profitability is perceived to be at a maximum. ___ (4) In such cases the business is likely to see a greater return on its investment by diversifying into new product ranges located in dynamic expanding markets.

Growth. If the current market is saturated, stagnant or in decline, diversification might be the only avenue open to the business if it wishes to maintain a high growth performance. In other words, it is not only the level of profits that may be limited in the current market, but also the growth of sales.

II. The mistakes in the sentences below have been underlined. Correct them.

1. Diversification is the process whereby a firm shifts to being a single-producer.

2. Although a business produces a single product in a single market, it depends on that market.

3. Diversification enable the business to spread risk.

4. Businesses might also have encouraged to spread risk.

5. In other words, it is not only the current markets that may be limited in the level of profits, but also the growth of sales.

1.

2.

3.

4.

5.

THE FIRM AS A LEGAL ENTITY

The legal structure of the firm is likely to have a significant impact on its conduct, and subsequent performance, within the market place. There are several types of firm, each with a distinct legal status.

___ (1)

This is where the business is owned by just one person. Usually such businesses are small, with only a few employees. Retailing, building and farming are typical areas to find sole proprietorships. Such businesses are easy to set up and may require only a relatively small initial capital investment. They may well flourish if the owner is highly committed to the business, and they can be very flexible to changing market conditions. They suffer two main disadvantages, however:

· Limited scope for expansion. Finance is limited to what the owner can raise personally. Also there is a limit to the size of an organisation that one person can effectively control.

· Unlimited liability. The owner is personally liable for any losses that the business might make. It could result in the owner's house, car and other assets being seized to pay off any outstanding debts.

___ (2)

This is where two or more people own the business. In most partnerships there is a legal limit of 20 partners. Partnerships are common in the same fields as sole-proprietorships. They are also common in the professions: solicitors, accountants, surveyors, etc. With more owners, there is more scope for expansion. More finance can be raised and the partners can each specialise in one aspect of the business.

Partners, however, still have unlimited liability. This problem could be very serious. The mistakes of one partner could jeopardise the personal assets of all the other partners.

Where large amounts of capital are required and/or when the risks of business failure are relatively high, partnerships are not an appropriate form of organisation. In such cases it is best to form a company (or “joint-stock company” to give it its full title).

___ (3)

A company is legally separate from its owners. This means that it can enter into contracts and own property. Any debts are its debts, not the owners.

Each owner has a share in the company. The size of their share holdings will vary from one shareholder to another and will depend on the amount they invest. Each shareholder will receive his or her share of the company's distributed profit. The payments to shareholders are called “dividends”.

The owners have only limited liability. This means that, if the company goes bankrupt, the owners will lose the amount of money they have invested in the company, but no more. Their personal assets cannot be seized. This has the advantage of encouraging people to become shareholders, and indeed large companies may have thousands of shareholders - some with very small holdings and others, including institutional shareholders such as pension funds, with very large holdings. Without the protection of limited liability, many of these investors would never put their money into any company that involved even the slightest risk.

Shareholders often take no part in the running of the firm. They may elect a board of directors which decides broad issues of company policy. The board of directors in turn appoints managers who make the day-to-day decisions. There are two types of companies: public and private.

Public limited companies. Don't be confused by the title. A public limited company is still a private enterprise: it is not a nationalised industry. It is “public” because it can offer new shares publicly: by issuing a prospectus, it can invite the public to subscribe to a new share issue. In addition, many public limited companies are quoted on the Stock Exchange. This means that existing shareholders can sell some or all of their shares on the Stock Exchange. The prices of these shares will be determined by demand and supply. A public limited company must hold an annual shareholders' meeting.

Private limited companies. Private limited companies cannot offer their shares publicly. Shares have to be sold privately. This makes it more difficult for private limited companies to raise finance, and consequently they tend to be smaller than public companies. They are, however, easier to set up than public companies.

___ (4)

It is common, especially in large civil engineering projects that involve very high risks, for many firms to work together as a consortium. The Channel Tunnel and Thames Barrier are products of this form of business organisation. Within the consortium one firm may act as the managing contractor, while the other members may provide specialist services. Alternatively, management may be more equally shared.

I. Match each of these headlines with one of the texts above.

A. Consortia of firms ________________

B. The sole proprietor ________________

C. The partnership ________________

D. Companies ________________

II. Which text reports on these items?

A. Personal liability for all losses ________________

B. Company's distributed profit ________________

C. High risk projects ________________

D. Jeopardy of personal assets ________________

III. In most of the lines below there is one extra word. It is either grammatically incorrect or does not fit in with the sense of the text. Some lines, however, are correct. If there is an extra word in the line, write out the extra word in CAPITAL LETTERS.

00 Co-operatives. These are of two types.

01 Consumer co-operatives. These, like the old high street Co-ops, are

02 officially owned by the consumers. Consumers in a fact play no part in

03 the running of these co-ops. They are run by various professional

04 the managers.

05 Producer co-operatives. These are firms that are owned by their workers,

06 who share in the firm's profit according to some agreed formula. They are

07 sometimes formed by people in the same trade coming together: in

08 example, producers of handicraft goods. At an other times they are formed

09 by workers buying out their factory from the owners; this is most likely if

10 it is due to close, with a resultant loss of jobs. Producer co-operatives,

11 although still relatively few in number, have grown in recent years.

IV. Choose the best answer to complete each gap in the text.

Public corporations

These are state-owned enterprises such as the BBC, the Bank of England and nationalised industries.

They have a legal identity separate ___ (1) the government. The corporation is run ___ (2) a board, but the members of the board are ___ (3) by the relevant government minister. The boards have to act within various ___ (4) of reference laid down by Act of Parliament. Profits of public corporations that are not reinvested accrue to the ___ (5). Since 1980 many public corporations have been “privatised”: that is, they have been sold directly to other firms in the ___ (6) sector (such as Austin Rover to British Aerospace) or to the general public through a public issue of shares (such as British Gas).

1. a) in	b) from	c) away	d) out of
2. a) with	b) that	c) those	d) by
3. a) appointed	b) managed	c) controlled	d) run
4. a) terms	b) conditions	c) items	d) notes
5. a) Central Bank	b) Foreign Office	c) Treasury	d) Cabinet
6. a) industry	b) commerce	c) private	d) manufacturing

SHOULD CENTRAL BANK BE INDEPENDENT OF GOVERNMENT?

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) An independent central bank is free from political manipulation.

b) But the Bundesbank was concerned to dampen the inflationary pressures caused by German reunification.

c) The advocates of independence frequently cite the experience of Germany.

d) Technology provides both opportunities and threats to the banking community.

e) But with an independent central bank committed to monetary stability, it may be difficult for the government to achieve such economic policy goals.

In recent years there has been much discussion among both economists and politicians as to whether the Bank of England should be independent. ___ (1). The Bundesbank, Germany's central bank, is fiercely independent, and is credited with being instrumental in Germany's economic success. The Bundesbank's philosophy is simple: Monetary and price stability are of overriding importance in the pursuit of growth. Inflation should be tightly controlled at all times.

The arguments in favour of an independent central bank are strong.

- ___ (2) It can devote itself to attaining long-run economic goals, rather than to helping politicians achieve short-run success in time for the next election.

- Independence may strengthen the credibility of monetary policy. This may then play an important part in shaping expectations: workers may put in moderate wage demands and businesses may be more willing to invest.

- An independent central bank has a clear legal status and set of responsibilities. It is the “protector of the currency” and as such it is not subordinate to government. This is important given the political nature of economic policy making in both a domestic and an international context. The Bundesbank's policy concerning the ERM (European Monetary System) is a good example. In 1992, international pressure mounted on Germany to cut interest rates as other ERM members faced a deeping recession. ___ (3). It stuck firmly to its statutory obligations and refused to cut interest rates, except when the domestic economy allowed.

The statistics show that the greater the independence of a country's central bank, the lower and more stable is its rate of inflation. If this is the goal of economic policy, it seems that more rather than less independence is desirable.

One of the major arguments against having an independent central bank is that it makes it more difficult to integrate monetary management into wider economic objectives. On some occasions it may be desirable to accept a higher rate of inflation - if this were the consequence of a growth stimulus aimed at reducing unemployment. ___ (4).

II. Are sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn't say”.

1. Monetary policy does not influence the economic growth.

A. Right B. Wrong C. Doesn't say

2. The trustworthiness of monetary policy often depends on the level of independence of a central bank.

A. Right B. Wrong C. Doesn't say

3. Monetarists believe that controlling money is the only essential function of governments.

A. Right B. Wrong C. Doesn't say

4. An independent bank should have a clearly set of objectives defined by the government.

A. Right B. Wrong C. Doesn't say

5. There might be situations when a sustained rise in the average prices of goods could lead to reduced unemployment.

A. Right B. Wrong C. Doesn't say

6. It should be noted that central banks ordinarily do not provide commercial banking services for the general public.

A. Right B. Wrong C. Doesn't say

III. The mistakes in the sentences below have been underlined. Write the corrections in the spaces provided.

1. To achieve such goals may be difficult with a central bank committing to monetary stability.

2. In the early 1990s international pressure has mounted on the
country.

3. Recently it has been much discussion of this issue.

4. The Bundesbank is crediting with being helpful in Germany's
success.

5. The greater the independence of a country's central bank, lower and more stable is the rate of inflation.

1. _____________________________________________

2. _____________________________________________

3. _____________________________________________

4. _____________________________________________

5. _____________________________________________

ARE THE DAYS OF CASH NUMBERED?

EFTPOS versus ATMs

I. Read the text. Some parts of the texts have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) But under some circumstances cheques are more efficient than cash.

b) Subsequently your account will be automatically debited and the retailer's account automatically credited.

c) So are we using more cash or less cash?

d) So are we moving towards a cashless society? Probably not.

e) This is where you pay for goods in the shops by means of a card - either a credit card (like Access or Visa) or a debit card (like Switch or Connect).

f) Banking is becoming increasingly automated, with computer debiting and crediting of accounts replacing the moving around of pieces of paper.

___ (1) What was once done by a bank clerk is often now done by computer.

One possible outcome of this replacement of labour by computers is the gradual elimination of cash from the economy - or so some commentators have claimed.

The most dramatic example of computerisation in recent years has been EFTPOS (electronic funds transfer at the point of sale). ___ (2) The card is simply “swiped” across a machine at the till which may then require you to enter your PIN (personal identification number). The details of the transaction (the amount, the retailer and your card number) are then transmitted down the line to the EFTPOS UK processing centre. If necessary, the information is then directed down the line to the card issuer for authorisation. If the card is valid and the transaction acceptable, then within seconds the machine will issue a slip for you to sign and the purchase is complete. ___ (3)

The advantage of this system is that it does away with the processing by hand of pieces of paper. In particular it does away with the need for (a) credit-card slips when used in conjunction with credit cards and (b) cheques. Both cheques and credit-card slips have to be physically moved around and then read and processed by people. If this EFTPOS system were to become widely used for small transactions, it could well reduce the need for cash. But reducing the need for cash is not the prime purpose of EFTPOS. Its prime purpose is to do away with cheques and credit-card slips.

____ (4) Cash is still the simplest and most efficient way of paying for a host of items, from your bus ticket to a newspaper to a packet of mints. What is more, another technical innovation is moving us in the direction of using more cash, not less! This is the cash machine - or ATM (automated teller machine), to give it its official title.

____ (5) The evidence suggests a gradual decline in cash in circulation as a proportion of GDP. It fell from just over 5 per cent of GDP in 1980 to just over 2% per cent in 1997.

But although the effects of EFTPOS and ATMs may be quite different in terms of the use of cash, they both have the same advantage to banks: they reduce the need for bank staff and thereby reduce costs.

II. Look at statements 1-4. In each statement, which phrase or sentence is correct?

1. One possible outcome of the replacement of labour by computers is the gradual elimination of cash from the economy - or so some commentators have claimed.

A. It is suggested that cash should be removed from the economy.

B. It is supposed that computers will deal with cash rather than people.

C. It is stated that the economy might get rid of cash as a result of computerisation.

2. If necessary, the information is then directed down the line to the card issuer for authorisation.

A. If there is a need the card issuer is addressed for user identification.

B. If necessary, local authorities are addressed to confirm the information.

C. Every time the card is used, it should be checked by the card issuer.

3. The advantage of this system is that it does away with the processing by hand of pieces of paper.

A. The system has stopped the processing by hand of pieces of paper and this is its advantage.

B. There is not much paperwork with the introduction of the system.

C. The system has the advantage of completing manual processing of pieces of paper.

4. If this EFTPOS system were to become widely used for small transactions, it could well reduce the need for cash.

A. The application of the EFTPOS system to a greater number of small transactions is likely to reduce the need for cash.

B. Cash will no longer exist, if the EFTPOS system is used for small transactions.

C. Making small transactions people would avoid using cash if the EFTPOS system were introduced.

III. Choose the best answer to complete each gap in the text.

The ___ (1) of cash machines to virtually ___ (2) bank and building society branch and to many larger stores has been ___ (3) in recent years. The sheer simplicity of ___ (4) cash at all hours from these machines, not only from your ___ (5) account but also on your credit card, is obviously a huge encouragement to the use of cash.

1. a) use	b) development	c) spread	d) set-up
2. a) each	b) every	c) either	d) all
3. a) intermediate	b) rapid	c) instantaneous	d) temporary
4. a) achieving	b) reaching	c) accepting	d) obtaining
5. a) current	b) every day	c) daily	d) flow

IV. Are sentences below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn't say”'.

1. In practice people use a cheque when they want to give a direction to a bank to pay money on demand to a named person or organization.

A. Right B. Wrong C. Doesn't say

2. Every time you pay by means of a card you should enter your PIN.

A. Right B. Wrong C. Doesn't say

3. Though there are several purposes of the EFTPOS system, the main one is elimination of cheques and credit-card slips.

A. Right B. Wrong C. Doesn't say

4. Cash still is used to pay for various items and its use has even grown.

A. Right B. Wrong C. Doesn't say

5. Both EFTPOS and ATMs despite their differences might make the activity of banks more economical.

A. Right B. Wrong C. Doesn't say

REGULATION US-STYLE

In the USA, utilities such as electricity, gas, water and telecommunications have for the most part always been private companies (although a few are state owned). To prevent the abuse of monopoly power, the utilities are regulated by federal or state governments through regulatory commissions. Unlike in the UK, where prices are regulated according to an “RPI minus X” formula, the prime focus of US regulation is the company's “rate of return” (i.e. its rate of profit).

The system involves limiting prices to a level which will give a normal rate of profit. In other words, the company will be allowed to charge a price equal to the average cost of production, where average cost includes a “fair rate of return on capital”. The actual calculations are normally done using total revenue and total cost according to the following formula: TR = TVC + K, where TR is the maximum permitted total revenue for that year (known as the “revenue requirement”), TVC is total variable costs (known as “operating expenses”), K is the total replacement cost of capital (known as the “rate base”) and is the permitted annual rate of return, as a percentage of the rate base.

To give an example: if a firm's variable costs (TVC) were $4 million, the rate base (K) were $20 million and a normal rate of return () were judged by the regulatory commission to be 10 per cent, then according to the formula, the firm would be permitted to charge a price that would yield a revenue requirement (TR) of:

$4m + 0.1($20m) = $6m.

There has been growing concern in the USA over the effects of using rate-of-return regulation. The argument is that it encourages inefficiency.

First there is the problem of allocative inefficiency. The US system will entail the company setting a price equal to long-run average cost. The socially efficient position, however, is where price equals long-run marginal cost.

Then there is the potentially more serious problem of productive or technical inefficiency (not using factors in the way that maximises output) and X inefficiency (lack of motivation to cut wasteful expenditure and to introduce cost-cutting measures). What is the incentive for a regulated firm to produce at a lower cost? If it introduces new technology or improved working practices that have the effect of increasing profit, the regulator will insist on a lower revenue requirement and hence a lower price. The extra profit will simply be taken away.

In fact, there is an incentive for the firms to let costs rise. The costs of higher salaries and more luxurious offices, for example, can simply be passed on to the consumer in higher prices!

With unregulated monopolies, at least there is pressure from shareholders for the firms to be efficient. There is also competition on the market for corporate control: managers are afraid that if their firm is inefficient, other firms may mount a takeover bid. With the regulated utilities in the USA, however, these pressures are absent. Shareholders have nothing to gain from increased efficiency if profits are not allowed to increase as a result. Also there is no benefit to other firms in mounting a takeover bid. If they were successful, they would merely find themselves the subject of regulation.

Then there is the problem of regulatory lag. In periods of rapidly rising costs, it may take some time before the regulatory commission sanctions a price increase (through a higher revenue requirement). In the meantime the firm may be forced to operate at a loss.

I. For each question 1-5, mark one for the answer you choose.

1. Utilities in the USA are regulated in order to

A. improve their efficiency.

B. raise their profits.

C. restrict monopoly power.

2. Rate-of-return regulation suggests that

A. companies are likely to be in a socially efficient position.

B. resources are used in the way that maximizes output.

C. there is no incentive for companies to cut expenditure.

3. If a regulated company introduced advanced technology or better working practices,

A. its profit would go up.

B. it would make no extra profit.

C. the revenue requirement would be higher.

4. The regulated utilities in the USA

A. are under pressure from shareholders.

B. are not exposed to competitive pressures.

C. are often taken over by other firms.

5. The regulatory lag leads to

A. delays in setting higher prices.

B. rapidly rising costs.

C. an increase in the revenue requirement.

II. Are sentence below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn't say”.

1. State owned utilities in the USA are regulated.

A. Right B. Wrong C. Doesn't say

2. Rate-of-return regulation induces companies to set a price equal to long-run marginal cost.

A. Right B. Wrong C. Doesn't say

3. Regulated companies are not encouraged to maximise output.

A. Right B. Wrong C. Doesn't say

4. Competition in the market for corporate control has increased.

A. Right B. Wrong C. Doesn't say

5. Firms may have to operate at a loss due to bureaucratic intervention.

A. Right B. Wrong C. Doesn't say

III. Find the mistakes in the sentences below and write the corrections in the spaces provided:

1. Most of the utilities in the USA had been private companies.

2. The actual calculations are usually used total revenue and total cost.

3. There has been growing concern in the USA on the effects of rate-of-return regulation.

4. If a company will pay higher salaries, its costs can simply be passed on to the consumer.

5. The firm may be forced to operate for a loss.

1. ___________________________________________

2. ___________________________________________

3. ___________________________________________

4. ___________________________________________

5. ___________________________________________

THE POLITICAL BUSINESS CYCLE

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) It is less easy in countries like the USA where elections are at fixed times.

b) That would not help the government's election prospects.

c) Inflation takes a time to build up.

d) This is a reduction in frictional unemployment.

e) This “window of opportunity” for the government is in the middle of phase 2 - the period of rapid expansion.

f) It can then claim to the electorate that its economic policies have been a success.

g) A recession is likely to follow.

Any governments standing for re-election would like the economy to look as healthy as possible. ___ (1)

Governments are able to engineer booms and recessions by the use of demand-side policies (fiscal and monetary). For example, by cutting taxes and/or increasing government expenditure, and by cutting interest rates, they can generate a period of economic expansion.

But how is this of any use politically, if the improvement in two of the objectives is at the cost of a deterioration in the other two? ___ (2)

The answer is that there is one point in the business cycle where all four objectives are likely to be looking good. ___ (3) At this point, growth is at its highest and unemployment is falling most rapidly. In fact, falling unemployment is probably more popular with the electorate than simply a low level of unemployment. Three million unemployed but falling will win more votes than one million and rising rapidly!

But what about the other two objectives? Surely, in the middle of phase 2, inflation and the balance of payments will be deteriorating? The answer is that they will probably not yet have become a serious problem. ___ (4) It will probably only really start to rise rapidly as the peak of the business cycle is approached and shortages and bottlenecks occur. As far as the balance of payments is concerned, this tends only to become a serious political issue when the current account deficit gets really severe, or if the exchange rate starts to plummet. In the middle of phase 2, it is unlikely that this stage will yet have been reached.

By careful economic management, then, the government can get the four objectives to look good at the time of the election. Of course, economic management is not perfect and policies may take longer (or shorter) to work than the government had anticipated. Things are made easier for governments in countries like the UK, however, where the government can choose when to call an election. ___ (5)

Once a government has won an election it can then deflate an economy in order to remove inflationary pressures and improve the balance of payments. ___ (6) This will probably be highly unpopular with the electorate. But no matter: the government, having created sufficient slack in the economy, can then reflate the economy again in time for the next general election!

It is thus possible to observe a political business cycle. Recessions follow elections. Rapid growth precedes elections.

II. For each question 1-4, mark one for the answer you choose.

1. The period of economic expansion is characterized by

A. a high level of unemployment.

B. increased government expenditure.

C. shortages and bottlenecks.

2. Governments are able to engineer booms and recessions by

A. raising taxes.

B. decreasing government expenditure.

C. cutting interest rates.

3. The balance of payments will not probably become a serious problem if

A. the current account deficit gets severe.

B. the exchange rate starts to plummet.

C. it is improved by the government.

4. In the middle of phase 2 inflation will be deteriorating because

A. there are no bottlenecks.

B. the peak of the business cycle is approached.

C. shortages do not occur.

III. There is one mistake in each of the following sentences (either an underlined word or a phrase); you are to find it.

1. As far as unemployment concerned, it is rapidly falling.

a b c

2. In the middle of the phase 2, inflation and the balance of payments will be deteriorating.

a b c

3. By careful economic management the government can get the economy to look as healthy as possibly.

a b c

4. In the USA the government cannot choose when to call an elections.

a b c

5. Once a government has won an election it can then deflate an economy, thus a recession will likely to follow.

a b c

6. A political business cycle include recessions following elections and rapid growth preceding elections.

a b c

MANAGERS AND OWNERS:

High Salaries and Corporate Goals

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) If the share value goes above this level, the manager makes the difference.

b) Increasingly there has been greater reliance on payouts of shares and share “options”, rather than on salaries and short-term bonuses.

c) But in doing this, they will fail to embark on projects which could potentially be very profitable (albeit risky) and thereby fail to add value to investors' shares.

d) Share option schemes are becoming less popular.

e) High rewards are likely to motivate not only top executives, but also those below them.

In 1995, Jack Welch, chief executive of General Electric, the American conglomerate, received earnings of $22 million, making him the highest-paid chief executive in the USA.

The high pay awards given to many top managers in both the USA and the UK has, in recent years, met with a storm of protest. Many have argued that such pay awards have been excessive, especially when many of the companies they work for have been cutting their workforce in a process of “rationalization” and workers' pay has been capped or has risen only slowly.

How can such high pay awards to top executives be justified? The two main arguments put forward to justify such generosity are as follows:

· “The best cost money”. Failure to offer high rewards may encourage the top executives within an industry to move elsewhere.

· “High rewards motivate”. ___ (1) Managers, especially those in the middle of the business hierarchy, will compete for promotion and seek to do well with such high rewards on offer.

In addition to using high salaries to motivate managers, shareholders, who ultimately determine the pay of top executives, have been keen to modify the manner in which top executives receive their rewards, in order to provide additional incentives. ___ (2) The justification for such a move is that giving rewards in the form of shares links an environment, a rational “reward-maximising” manager will always be seeking to enhance share value, and this will be linked to the company's success. As such, the need for monitoring managerial activity diminishes.

The drawback of simply giving shares (as opposed to share options) to top managers concerns how they might respond to risk. They might be “risk averse” and seek to protect the value of their shares, preferring to avoid risky ventures that might jeopardize profits and cause share prices to fall. ___ (3) Because of this, the giving of share options to top managers has become more prevalent.