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THE
ESSENTIALS 7 "f;.— •

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OF
ECONOMICS
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QUYEN 2

NUA XI:aT ban KHOA HQC' VA KY "niUAT

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 TS.d6 thi loan
. (Chu biin)

The Essentials of Economics

KINH TE HOC CAN bAn
f

Quyen 2

nhA xuat ban khoa hqc vA k?thuAt

HA NOI • 2004

-J
 ^1. thayl6i tua

vdi B$ sach "Kinh te h9C c&n ban"(g6m 2 quyin) dU(?c bi6n ao^n d^a trSn cu6h
"Economica" cua tAc gia Christopher St J Yates, Nh& xuSit ban Cassell, Lu&n
D6n, 1989.
Sau m$t qu& trinh dxing cu6i sach n6i trSn giang d^y t^i tracing D^i hqc
Ngo^i thUdng, chdng t6i thtfy cfia ph&i biSn so^ m^t b6 s&ch phi h^p hdn
v6i ngit&i hqc Vi|t Nam.
a&ch niy dU(?c biSn so^ui d$c bi§t cho sinh viSn cdc tnidng thu^c nh6m
ng&nh kinh nhi D^i hqc Ngo^i thitdng, Dfd hpc Kinh Quffc dfin, D^i
hqc Thddng m?ii, D?ii hpc Quan Kinh doanh, v.v... vli nhflng ngicd quan
t&m dfih kinh hqc vi tdJfng Anh ding trong kinh ttf.
B$ sAch ngoAi vi§c giip ngicJi hqc nim ving nhing khAi ni$m cd ban vA
kinh thi tridng, n6 cdn nhlm nfing cao cAc ky ning ng6n ngO, d$c bi^t lA
I tiAhg Anh ding trong Vinh hqc. B§ sAch chi f nAng cao ca bon ky n&ng:
nghe, n6i, dpc, viSt, d^c bi^t 16 ky nAng doc. Ngoai ra, ky nAng dich ti tiSng
Anh sang tiAhg vA ti ti6ig Vi§t eang tdShg Anh cung dii?c dia vAo.0
cu6i mSi bAi khoA diu c6 pbAn giai thlch ti. CAc khAi niAm mdi vA kinh tA
dAu di<?c djch ra tiAng Vi^t dA ngucii hqc c6 nhing thu^t ngi tiAng Vi^t
tudng dildng. d ph&n E mSi bAi, phAn dqc m5 r^ng du^c dila vAo nhAm giip
ngudi hqc c6 thAm kiAn thic kinh tA vA chu dilm dang hqc. CuAi cing lA.cAc
chu diAm n6i nhlm nAng cao ky nAng trinh bAy nhing vAn dA kinh tA ngidi
hqc via diqc hoc sau mSi bAi.
Quyin 2(Unit 9-16) chu yAu lA vA cAc vfo dA nhi co dAn cAu theo giA, ly
thuyAt hAnh vi cua ngudi tiAu ding,ngAn hAng,tAi chinh kA'toAn, tiAn tA vA
thidng mai v.v... ,
So^n gia xin cam dn Ban GiAm hifu Tridng D^i hqc Ngofi thidng, Ban chu
nhiAm Khoa THAng Anh vA tA't ca cAc thfiy, cd giAo trong Khoa cing b^n bA,
dAng nghiAp, cAc em sinh viSn da hAt ling giip d8 dA bA sAch nAy diyc ra
ddi. Soan gia cing mong nh^n du^c si d6ng g6p y ki^i xAy ding cua cAc
nhA khoa h<?c vA cAc d^c gia dA bA sAch dupe hoAn chinh v6 bA Ich v&
sinh viAn hqc tiAng Anh kinh tA vA thuong mai.
TS.DSTh}Loan
H6N^i.2004

vlNe-_
 ''M ■

in'

CONTENTS
HOW TO WORK WITH THE BOOK

This book Introduces to you not only the basic concepts of economics but also
How to work wHh tht book. authentic texts written in the language typical of the subject It alms to Improve all
the four language skills: listening, speaking, reading and writing with much
Unit9 ' Prtco, Income and demand....^ attention paid to reading skill. It also alms to Improve translation skill.
.... 9

Unit 10 Consumer choice. A. Understanding a printed text(1)

23
1. Improve your skimming
Check your progress 2 The first five questions are designed to improve your skimming skill In reading. You
just skim through the passage, looking at the way It Is set out In paragraphs, with
Unit 11 Output supply side headngs, marginal notes, etc. You do not have to understand everything you
read to answer the questions.
Unit 12 National income accounting. 64
8. Improve your intensive reading
Unit 13 Money and banking These questions help you Improve your intensive reading skill (reading for study).
. 78
You are supposed to read the text carefully word by word, One by Ine and look up
Unit 14 Central thanking any new Items you do not tx>derstar>d In a dictkmaryto answer the 10 questions.
.93
III. Improve your scanning
Unit 18 International trade
109 This part helps you improve scanning skill and also widen your vocabulary. For
scanning skill, you have to move your eyes very quickly through the passage In
(xder to pick up the wanted Information to answer the questions.
IV. Glossary
This section provides you with Vietnamese equivalents to some useful words and
phrases In the texts.
.
B. Understanding a lecture/ D. Understanding discourse
Sections B and D are for you to improve your Bstenirig skffl. They also akn to
improve your writing skill through writing summaries out of the notes taken. Several'
Rstenmg skiffs could be practised: ffstening comprehension (through answering the
questions), listening and note-taking, listening and summary-writing, etc. More
advanced students should do listening and note-taking. You should play the tape
twice or three times to perform the activities given in the book.

N.
 c Undflrelandlng ■ *•**(2)
•no.<«dion hdiides 2 mhor parts:(I) Chtck your undaiatandlno and 01) Olottary.
E.Exlenslva rwdinfl- EnoHsh-VIetnamasa tninalatlon
Section E helps you Improve extensive raadtng aklH (reading for pleasure) and
Enobh-VIetnamese translation skilL You should read through the passage to get
(he mam idea fUsL Then, you read again sentence by sentence and translate them
mto Vietnamese through your understanding. Remember,do not translate word for
vvord.
F. Vietnamese-English translation
In this section, you can put useful new words and phrases you have learned Into
practice. Here,again,remember, do not translate word for word. Read VIetnamesa
tantenoas or passages first In order to ght the main ideas, then translate them
choosing the right words, phrases end expressions used In the language of
ecorxxnics.
G. Talidng points
This section aims to niprove your speaking skill. You are supposed to use'the
kno««tedge of economics and the language you have acquired to present your talks
as naturaBy as you can h a dassroom context You may discuss a topic using the
for and against technique. Doing well In'these laBdng points wll surely Improve
your Engfisb speaking.
To learn how far you have gone In learning Economics and what progress you
have made,please do "Check your prospess" after Unit5 and UnR 10.
Wa wish you every success In doing this course and hope you wll enjoy working
wRh R snd through H
Do ThI Loan. Ph.D.
HUdNG dAn sCtdi^ng sAch
DO sfich nky khOng nhOng dt/a ra nhOng khAI nl^m oa bin vi kkih ttf hT?c mh edn
cung cSp nhOng bil khoi tliu bidu lien quan ddn cic chfi 66 khic nhau. Sich
r^&m myc dfch ning cao bdn k9 nSng: rnihe, n6i. dgc vi viA, trong d6 k9 nSng dge
dih;c chO trpng hon ci. Bin canh d6. ky nfing d{ch cOng dtigc quan lim.
Mil bdl6ci hal quy^n gdm nhOng phin ngi dung rthu sau:
A. Understanding a printed text(1)
1. Improve your skimming {Ning cao kf ning dpe /udl)
Nam cAu hdl diu tlin trong phin niy nhim gk^ sinh viin ndng cao ky nAng dgc
tui9t (d^ hlAi y chfnh cOa bai)> SInh vMn chi cin dgc hidt qua bii khoi. xem cich
phAn chia thinh tCmg doen cfia bil cung vdl nhOng 66 myc nhi, nfning hiu y bin
cenh mil doyn v.v.. tri Idl cic cAu hdl. khfing cAn phil dye ky toAn bSl khoA.
n. Improve your Intensive reading {Ning cao kf ning dgesiu)
MudI cAu hi! trong phIn nAy tfCip sinh vIAn nAng cao ky nAng dye sAu (dye vdi
myc dich hyc hay nghlAn c6u). OA tri Idl dUye cAc cAu h6l nAy. sInh vlAn cin dye
ky bAt khoA tOhg Uf m^t, tOng dOng myt. vA tra tCr dlAn 66 hlAu nghla nhung t£r mdl
trong bit
III improve your scanning {Ning cao kf ning dpc quA)
PhAn nAy glOp nAng cao ky nAng dye quit(dA tim Ihteg tin cy thA). dAng thdl gUp
md r^ng v<^ tfr vyng cho sinh viAn. 061 vtf ky nflng dye quAL dd cAn nhh kfflt
nhanh qua bAI khda dA Um ra nhGng thOng tin cAn thlAt,(pOp iri Idf cAc cAu t^
IV. Glossary {Phin gtil thkh fO)
PhAn nAy dua re nghTa UAng Vl|t tuong duong cho mOi sA ttr vA cgm lllr quan tryng
trong bAI.
B. Understanding a lecture/ D. Understanding discourse
PhAn B vA D glOp sinh vlAn nAng cao ky nAng nghe. €)Ang thM. ky nAng vlA cOng
duyc nAng cao nhd vlAc vlAt tAm tAt dya trAn nhOng nyi dung ghl chip dupe Irong
phAn nghe. M^t s5 ky nAng nghe duyc hAnh bao gAm: nghe.hlAu (thdng qua
vj^e trl Idl cAu h&l). nghe vA ghl chip lyl, rtghe vA vlAi t6m tAt v.v.. NhOng sinh
viAn c6 trtnh d^ cao nAn lAm phAn nghe vA vlAl tim tAt. 06 thA ngha bAng hal hoAc
ba lAn dA lAm cAc bA( tip trong sAch.
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 C, Understahdlna ■ printed text(2) {■ifj. •fit fe'iiai-', »(ri ' .{

PWh nSy pim h«i phfin nhS:0)Check your undentendlng vft (11) Gloesary. cQng
hiong i\f nhi/c4c A-llI v4 A-W. Unit9
E. Extensive reidlng - Engilsh-Yletnamese transWMon (Wdng cao kp
ndflff dpc mdrtfng-d^:/i Anft-W^O
Phin E giiip shh vi4n ning cao k? nang flpc md r^g (dgc Ui^ thteh) vft k? nSng PRICE, INCOME AND DEMAND
djdi Anh-VI^L Shh viftn nin dpc loin lAI khoa Ci nim dupc $ chlnh, sau d6 mdl
dpc lai tdng cAu vi dt/a tr«n cich hi^u c^a mhh dd sang tidng VI^L NAn nhd'
kMng dtipe dieh tCing ^
A. Understanding a printed text (1)
F. Vietnamese-EngDsh translation {Dfch VI^-Anh)
TrangphdnnSy. slnhvtdncd thd(hi,fchAnh nhOng t^rvicgmU/mdH quan trpng vOta 1 improva your skimming
dupe hoc Irong tkL M$( lin nOa.cdn nhO U khdng dis^c djch<C(ng (tf Tru6c hit
dnh vidn phii dpc cdc cflu ho^ cdc dogn bdng fldng ndm 6iiqc^ chhti,. The foOoving text vQl Now look at diese questions:
sau d6 mOi sang fl£ng Anh, si> dyng nhOng tfr y4 egm tCf trong/ introduce you to the tt^ of 1. From the heading, what do you acpcct
ngfinngi^kinhtd. > / the effect of pace and this ten to be abou^
income on demand 2. Do Tsble 9-1 and Figure 9-1 die
G. Talking points quantities. Look at the vay k same infoxmadoa?
Phin nly nhdm ning cao k9 ndng n6L Sinh vldn cdn sd'dgng nhOng Mdn thOc yd ii divided into puagniphs. Piy 5. What example has the water dioscn to
kinh td vS ngdn ngilia hgc doge dd trinh bdy mgt cdch th|t hhMn trodc Idp. Stfih ttcentioa to the table, figuro IQusctate his points?
and notes in the maxgin.

f
vidn c6 ihd ihio iufn vd mgt cM dd. s£r dyng phoong phdp dog hg hay phiit dd) 4. Hew many kinds of elasticity does the
(far and against] mgi vdn dd. LAm Idt phdn ndy chdc chdn slnh ad nAng cao water mention?
doge ky n£ng n6( eda mbih. 5. Which kind of eUsncity does the vtitet
e^lainin dus text?
bil "Check yourpfogrest-sau Bil 5 vd BAi 10 $« gWp sWi vidn dinh gl4 dogc
kidn ihte vd kinh td cCng nho nhOng tidn bg dS dgt dupe sau kW hgc cudn sdch Read the passage through and find the answers to those questions. Remember,
ndy. you do not have to uodexitand cvciy woxd to answer them.

^(ing 161 *in didc c4c bgn hgc ld( mdn hgc ndy vi hy vgng cftc bgn sft thdy hCmg ■ THE PRICE RESP0N8IVEMESS OF DEamTP
Wi vA Tha Eswitlala of Economics.
1 The downward slope of the demand curve ahowi that
»4
quantity demanded increases as the price of a good Calls.
TS.Oi Th} Loan
Frequently we need to know by how much the quantity -S
II

demanded will increase. Table 9-1 presents some

il
hypothetical numbera for the relation between ticket price
IV
and quantity demanded, other things cquaL Figure 9-1 plots 1=

the demand curve, which happens to be a,straight line in this

example.

.€5)
Unit 9

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 table 9-1:Th.de»>»d for foolb.lt tickets
PRICE
QUANTITY OF TICKETS DEMANDED 3 In Chapter 2 we ax^ed that when commodities are
(thousands/gtme) measured in different units it is often best to examine the
(Wicket)
1150
0
ftrcmloff*
percenUge change, which is unit-free. This suggests that we
20
to.oo €hang» think about the efl'ect of a 1 per cent price cut on the
40
7^0 quantity of cars and football tickets demanded. Similarly, It
<0
5.00
150 10 is not the absolute number of cars or tlckeU we should
100 examine but the percenUge change in quantity demanded.
0
Not only does this solve the problem of comparing thinp
2 How should we measure the responslvcncsa of the quantity measured in diflerent qusnUty uniu. it also takes account of
of tickeU demanded to the iwice of tidcets? One obvious the size of the market. Presumably an extra sale of 8000
measure is the sl<¥>e of the demand curve. Each price cut of
tStdtnand
tickeU is more important when ticket sales are 4 000 than
£1 leads to 8000 extra tideet sales per game. Suppose,
oirvt when they number 40 000.
however, that we wish to compare the price responsiveneas of
football tidcrt sales with the price responsiveness of the 4 Thus we reach the definition of the price elastidty of
quantity of can demanded; dearly, £1 is a trivial cut In the demand, which economisU use to measure responsiveness to
;nice of a car and will have a negligible efiect on the quantity price changes.
of cars demanded. PHe* The price eLutidty o/dtmand is the percentage change in
ekuUcUy cf the quantity of a good demanded divided fay the
dtmand
FIGURE 9-!: The demaad for fodbsD tickets. corresponding percentage chsnge in its price.
For pva pica of ichied foodi ud eatmmer kncemei, hl^icr ticket pkts
rakice the quntty ofti^eU denaded
Although we shall shortly introduce other demand elasticities
- the cross price elastidty and the-income elastidty - the
(own) price elastidty is perhaps the most frequently used of
the three. Whenever economisU speak of the demand
1150
elastidty th^ mesn the price elastidty of demand as we have
defined It above.

Hou/lp 5 If a 1 per cent price iruTease reduces the quantity demanded

dsmond
by 2 per cent, the demand elastidty is -2 . Because the
7J0 Mattieity quantity /alls 2 per cent, we express this as a ehanp of -2 Hi
Mir
per cent, then divide by the price change of 1 per cent (a^' ^
5M price rise) to obtdn -2. If a price fall of 4 per cent increase^
the quantity ddnanded by 2 per cent, the demand elasticity kit
150 is since the quantity change of 2 per cent is divided
the price change of -4 per cent. Since demand curves slopt^
down, we are dther dividing a positive percentage chsnge ir^
40 M to 100 quantity (a quantity rise) by a negative percentage cbaixge
Quantity ofUckets price (a price foil), or dividing a negative percentage changgj^j
In quantity (a quantity fall) by a positive percentage chsngiir^
10 Ualt$
Unit 9

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 ta Pric.(. pri« Tht price elartlcity of demand lelh u.
.bout uunementa along a demand curve and the demand
elaiUdty mu« be a negadye number.i the opposite meaning to: include
• posiuve length
I c hmitT (KSMMU WMIWO OUlU Uw WdW SlffL ll il CUiCt lO Mjr tfi, • implicit
■Brtbw. * OmM be miitrpooi (wlm ibcre h n ciplwii mntlni m
»r^tcv) eliTtuew i«i *bouM be Mei. OC*fwi$c, «t should be Implyinc Hw tV. Gloaaary

• the price reaponsiveneas of cross price elasticity: co giin gii

II. tmofpyt your InUntlv rtadlng
demand: ay nhfy bdn cua ciu chdo (edu ctio hAng nAy bf
Now read die text c»iefi%, loo^ up loy new items in s dicdonuy oc ddivdi gi& dnh hildng bdi gid cua nfithig
teierence book. Then toswer the foOowing questions: ■ the price elasticity of demand: mdthAngkhdc)
CO idHn ctm ciu theo gli positive number, sd duong
1. What does Table 9<1 show?
*. dastic a: co giftn - elasticity n negative number sdim
^ What is the fitst measuce the vata suggests?
*. inelastic a: khfing co giin -
3. What b the effect of a £1ptice cut on foocbtU ticket sales?
inelasticity n
4. Does dK "W" pace cut have die tame effect on car sales?
5. In udut dtaunstinffs do you examine the percentage changtf
6. What pioblem does tiussolr^ B. Understanding a lecture
7. Hnop Hr. wnfwmitH rftf prirf ylatftrily ftf rfffnofiH?
6. Can you explain in ]rottr own words,die defimdon of the pace disticiqr of 1. You ate now going to hear part of a lecture, divided bto short sections to
help you understand u. Aa you listen, snswec die questions below.
9. • Whidi b die fotnmonest of the diree dMiidties? Sictioa 1
10. Can you explain in your own wbcds how to calculate demand elastidty?
Table 9-2: TIm prlee elssticUy of demaul far ftaotbsO tkkcts
HI Improva your scanning (1) (2) (3)
PRICE QUANTmr OFTlCmS DEMANDED PRICE ELASTICITY
1. Look at the first patagtxpb sgatn you explain the following: (£/l(ckel) (thousands/asiDel OF DEMAND
\ZiO 0
and say what wotds hsTe die • difierait units XQM
JOt

20 •Axa
same meaning as: • percentage change 7.50 40 -1.50
• lately • unit-&ee
5.00 60 4U7 ^
210 60 •<u5 m
• iqniratd
• absolute number 0.00 100 aoo ^
• crooked
4. Look at paragraph 4 again. What • What is the lecturer going to talk abou^
2- It paragtaph 2 again. What wotds have die satne meaning as:
w«ds have the tame j,.
• every time that
• not s^nificant oc in^iortant • Which columns rqsreduce the data frcun Table 9-1?
• in the near future
• clear, easily seen or undetstood
• in this way
• ofttDaflvahjeotimpottancc 5. Look at paragraph 5 and the Section 2_
■ " pmgtaph 3 ggtio. Can footnote again. What words have Ace these statements correct or incorrect?
12

Unit? UnU9

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• Price eUitidty of dctnind is olculatcd by considering the effects of price
coll- ^ you have already answered will help you do this. When you have listened to
• 20.000 tickets is the qusntity that cotresponds to a price of £10.00. Q the whole of the lecture, you will be asked to give a short oral summary of it
So ™lte sure you note down the impottant points.
• In'diae«mple,a25%pikccutlesdstoal00%inaca»eindetnafld. Q 3. You should also write a summary of the lecture, based on your notes.

• Nott down bow the answer-4 is amred at

C. Understanding a printed text (2)
The sign dx lecturer explains is / Read the following text carefully, locking up anything you do not imdrntaod.
The rign / means(a) multiplied by □
ELASTIC AND INELASTIC DEMAND
mtnns
□
(c)divided by □ 1 Although elastidty typically falls as we mtive down the
(cQpbu □ demand curve, an important dividing line occurs at the
demand elastidty of -1.
Is dais statement casea or incortect? JSastic and Demand is elastic if the price elastidty is more n^^tive
iwfaulte
Other fhftirififs am not calculated in this way. • damond
than "1. Demand is indastic if the price elastid^ Uea
Nom down how odser ue ralntlar#.*! between -1 and 0.

In Table 9-2 demand ia elastic at all prices ^ £7.50 and

Stt^n 5 above and inelastic at aU prices of £5.00 and below. If the
IMMoatfc demand elastidty ia cxactfy we say that b tmft*
What is the demand ckstici^ at a price of£1250? dcmoful
dostic.

2 Later in this sectian we show that a cut in prices raises

Is diis statement conctt or incorrect? revenue from football ticket sales if for football
When yim ivide a poihive number by0you get phis infii%. tickets is elastic but lowers revenue if is
Seaiog6 Whether or not demand ia elastic is the key piece of <
Complete the defioitioa the kctuia pvcs inConnation required in setting tube bres in the of iiV'
Demand elastidty is high edieo Chapter 2 and in setting the price of footbaB tickets in thc^^"'
example we are currently studying.
Complete the definitioo the lectuiec gives
High and 3 Although the price elastidty of demand tyfucalfy changes
Demand clastictty is bw when. we move along demand curves, cconmnists frequently talk Li >
Is this statement cotmct or incoimc^ goods with high or low demand elastidties. For example, then H
^ 4.«;d. w d.., p., „ will uy that the demand for dl is price-inelastic (prici? w
changes have only a small effect on quantity demanded)-bui^
the demand for foreign holidays is price-elastic (pric^
^ "i"" changes have a large effect on quantity demanded). SucA'
statements implicitly refer to parts of the demand curve
U
Unit 9
Unit 9

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 corrtsponding to prices inaationj that a^e
typically charged for the« goods or services. They do „ot
necessarily describe the demand clastlcipr at points on the particular good. In fact, our example suggests a general rule.
demand wrve correiponding to real prices which havi never The more narrowly we define a commodity (a particular
been observed hisforicaUy, brand of cigarette rather than dgarettea in general, or oO
rather than energy as a whole), the larger wfli be the price
the DETERMINAKT8 or PRICE ELASTICITY elastid^ of demand.

CMwxw*
4 What determines whether the price elasticiQr of demand for a
laaUt good is high (say, -5) or low (say, -0.5)? Ultimately the
dedde
answer must be sou^t in consumer tastes. If it is considered
'«ah«(Hr
dmanrf ts aodslly essential to own a television, higher television pricei
kgharloa
may have tittle effect on quantiQ' demanded. If televisions are
considered s frivolous hixuiy, the demand elasticity will be
much higher. Psycholopsts and sociologisU may be able to
explain more fully than economists why tastes are as th^
are. Nevertheless, as economists, we can identify some
considerations likely to affect consumer responses to
The changes in the price of a good. The most imporUmt
mponaaea
consideration is the ease unth which consumers con subslttufe
another good thatfid/Us appiwdmately the samefiaietion.
5 Consider two extreme cases. Suppose first that the price of
sU cigarettes is raised 1 per cent, perhaps because the
cigarette tax has raised. Do you expect the quanti^ of
cigarettes demanded,to fall by 5 per cent or by 0.5 per cent?
Probably the latter..People who can easily quit amoking have
already done ao. A few smokera may try to cut down but thia
effect ia unlikely to be large. In contiaat, tuppose the price of
one particular brand of cigarettes is increased by 1 per cent,
sU other brand prices reinainlng unchanged. We should now
expect a much larger quantiQr response from buyers. With so
MEASURIHQ PRICE ELASTICITIES
Soms 7 To illustrate these general principles we report estimates of
thcw
price elastidties of donand in Table 4*3. The table confirms
prindptaa that the demsnd for general catcgoriea of basic commodities,
such as fuel, food, or even household durable goods, is
inftlsvti';, As a category, only services such as haircuu, the
theatre, and sauna baths, have an elastic demand.
Households simply do not have much scope to alter the
broad pattern of their purchases.
6 In contrast, there is a much wider variation in the demand
Hsitiriri** for luuTower definitioDS of commodities. Even
then, the for some commodiHes, such as dairy
produce, is very inelastic. However, particular kinds of
•ervices such as entertainment and catering have a much
more demarui. Small changes in the relative price of
restaurant meals and theatre tickets may lead households to
switch in large numbers between eating out and gdng to the
theatre, whereas the demand for getting out of the bouae oo
a Saturday evening maybe relativety insenaitive to the price of
• aU Saturday night activities taken as a arfaf^
TABLE M:EiUmitci sf price dsstidtks ofdciasBd la the UK
DOdANO
GOOD DEMAND GOOD

(NARROWER CATEGORY) ELASTXffnr

®sny other brands • available at unchanged prices, (GENERA!.CATEGORY) ELAsncnv

Fuel end light -0.47 Dairy produce -0.03

consumers will switch asray from the more expensive brand Food •0J2 Bread and ceresb •0J2
to other brands that basieally fulfil the same function of Alcohol •0.63 Enienaiament -1.40
nicotine provision. For a particular cigarette brand the Durables -0.89 Expenditure abroad -1.63
•2.61
Calerins
demand elestid^ could be quite high. Services -1.02
MMTCts: ine ICR-MM niunn a ukca boti icm Mucuomicr, acwic ms u— —— -~
6 Ease of subsUtution implies a high demand elasticity for a Codvositlon Effects and the Cos of Childna', Economic Journal, SqMcnber, WTt,Tifcte 7. TO
hairf Mkjmn U lUtfn from Angus Deww.•Tlw McMUfemeni ofIftcome md Prfce Elmiewa.
Eeonemie Review,Volume 6,1973.
16
Untt9 17
Unit 9

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 d l-u
^.utcmtfltcometo.mcon«t? II. Glossary

■ more negative than -1: &m nhi to report eaUmates of price.

.j hon-1 f elasticity of demand: dua ra
• at die mofDeot nhOng dv tinh vlf d^ co gi&n cua
unit elastic to gi&n ddn vi
• tncoeae
frivolous luxury: hkng xa xl ciu theo gik
• fcducet the ease of aubititution: si^ dl scope ~ opportunity n: d)p, cd
3 Look at paagnph 3igain. Are tbweititements correct or incorrect? dhngthayth^' hfi
• oa ii ptice^neltatic beciuse price changea do not affea demand very dairy produce: aan ph£m bd aihi
much. Q
• Holidays are pnce-dutk because their price inOueoccs whether people will D. Understanding discourse
buythetn. □
4. Look at patagnpb 4 again. What words hive the lame meaning ai: r to a lecturer giving tome students instructiotu about i .Note
• eotseaous
down what you must do.
• intheeod

• i^lace with lomethbg similar

• carries out
• however, in spite of that
5. look atpatagraph 5 apin. Are these statcmenti correct or incoocct?
• The wntet/xpects people to buy the same anxmnt of dgarectea whatever
the pdce. □ E. Extensive reading - English-Vietnamese translation '
• People are Ekely to char^ their brand if its price when other brands
keep die same price. PRICE ELASTICny OF DEMAND

6. look at paragraph 6 again. la ihiasiitciiiemcoatct or incorrect? We know that, tccording to the law of downward sloping demand, quantity
Price elairidtjr of der^ wai be greater if a wide range of commodities is demanded tends to vary inversely with price quanticy demuded &lls when
conndered. q price rises, and quantity demanded rises when price falls. Here we consider Asw
7. ^«pmgriphs7and 8 igwa. Using the infoiiriation given there, . wore mni quandty demanded will change in response to a change in price.
yow own eiqtlamtioa ofTable 9-3.
The /tna tkutidiy dtmend (or the 'elasticity of demand' for short) is a concept
that measures how much the quanticy demanded of a good changes when its
price changes. Elasticity is analogous to tesponsiveaess; a good is "ekstic''
when its quantity demandrd responds gteady to price changes. Demands for
goods differ in their elasticities. Demand for food generally lespoods htde to
tl
Unit9' \ Uoit9 19

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 ^ U incUstic. «hac.Mine «vd ii highly price ™.Wve^^
price ch»ng«»®^
.0^„,o .mch.precise number m (b) UNITARYsELASTIC DEMAND (e) INELASTIC DEMAND ..
1 fj
P
^niir«« of "f" Price La
• Ei& yi
4Al
^
ebstiaoes trc cu»^ .in Ihrec cstegories depending upon the re.po„.e „f
1'
■ . -v • -iut'
• i^uticd to pace gauge l\
1 jw
V 9
'^Z ,,pcrcefltmcinpiicccilbfatthmorclhir..lperccncdtdiitei„ J£ *

'■ "dtrdcm«i<ied.thbb^iT^^-«i
OJ .
ft
1
1 1 0
1 1

, i^eneperccflB^cmcbpt^rc^Jtsinincxacttyco^^^ 0 S
t

ID
1

IS 20
m cpnntMonmdrd (so thst totri revenue rennuns unchanged), this i, 0 1,000 2,000
Quantity (millions)
Quafltityv(mllitoos)

tkHeJauM^.
X Wheatl pet cent me mpi«evbkeilc« thin tl per cent f«ll in cpanriiy F. Vietnamese-English translation
dcmindcd, diis
refer to oflng pocei ind dedming quantities. They could huf 1. Co gian vk thu nhftp
B wcD icfci to quandtici. Moreover,» we shall sec. we Am hi^u do CO giin ^ ca th^t Ik quan trqng dfii vdi c4c qnyft dpih kinh
an oknhtc datkaties foe price changes other than 1 per cent t£ vk kinh doanh hdi vi di$ co pan zkc dpnh anh hudng coa Kf thay d& gxk
dfi vdit^ng doanh thuthudifoetitvi^bknhkiig.
Price Etasridt^ in Diagcam
Tdng doanh thu theo nhu d|nh nglua thi bkng gii nhln Itiqng
FIGURE M: Price etastldly or Ba tnrcing bqp co giSn tildng dng vtt ba mfii quan hf khie nhau giOa t&g
F^uxe 9-2 iOastates die three cases of deauad Tails knte Ibree
la esdi, price is cut in half as we doanh thu vk sv thay iA cua gii. K6i giam gii din din doanh thu pam thi
categories, depending on kow
move fpw potot A to point B. The easiest strongly qnaatlty dcnandtd dfty li trrtctng hqp cdu khing co giin; nlu giim gii din dih doanh >thu
respond to a change la price khOng thay d& thi diyli tnidng hop ranh gidi - eiu co pin don vi; cdn nlu
to vidi h die botde^ne case of unitary
(•) ELASTIC DEMAND
giim gii din din ting doanh thu ting thi diy li tnldog eiu co giin
ehsta^ of demand ihown in Rguie 9-2 (b).
theo gii.
la tfati cxazxple, (be dn»ih1ir>g of quitui^ P
Vi^ xem cku c6 co giin hay kh&ngli m|t thing tin t& cin thill dfi vtf vi|c
dmundrd eaaif wMrt^es the hahrng of
dgt ra gii bin ding cho m^t rokt hkng cua eic doanh nghi|p.
price, so revenue received
ondoDged. 1.000 —
2. V|in d\mg quy lu|t eung cAu
In Hguie 9-2 (a), a halving of price has i C6 hkng ng&n ylu tlanh hudng d6t gii ca. Nhung d th) tn^ng c^nh tran<
produced t trying of qusnti^ denwiyVj^ 300 —»
ti^ do, nhQrig ylu tlnky tic d|ng din gii chl bkng nhxtng hoft d|ng thli^l
^btnsnd is price dattic In Rgute 9-2 (c), the qua cung eiu. Cic chlnh phu thing thudng tic d^ng din gii vk Id^ hkr^t^
Iwbing of price led to only a 50 per cent - . 2 3 trin tCtng thi tnldng riing bt|t bkng eic hoft d^ng thing qua cung
Quant^ (millions) nhung dii khi chfnh phu tic d^ng din gii vk lu^g bkng vi|c dit gii
mciew m qusadty demanded, so this is the
«« of price belssoc demand. til da hay gii sin tii thi^u can thi$p vio cic hogt dfng cua thi truong. Khii
di luqng cung khing cin cin mit lu^g ciu-ngmng bkng nOa. M$t atf nl^tr^
20
Unit* Doit 9 'a;

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 ^. tj»u dims C6 th« bAn hofrc muo m^t ,6 luflng nhidu hdn ^
vL thd a mile gU hflp phAp.
T! vk Wm bi^u qw niy ^ c6 UnitIO
S wXn trd phi nhang miu thuin cung cdu nky du^ Ml phfcp «„
thifp *i gi"

fi]ft«tTy CONSUMER CHOICE

IP& s&n tdi thidu: minimum floor
- tnlfins bdP ranh gidl" Iwrderlina prkes
ease
94 b6p mdo: distortion
• d*t gii Mn ddnp to set a right A. Understanding a printed text(1)
price (br.~ sM kdm hi$u qua:indBdeticy n
• fU trio t£ da: aarimum ceiling th} trudng chq den: black market
L Improve your skimming
prices
The fbHowing ten wtQ Now look at diese quesdona:
G. Talking points inixoduM you to die topic of 1. What if die writers purpose to the first
the cfaeoiy of conaumer pangtaph?
1. IfifaedeffliodfuagDculninlptodoceBineUsdc, choice. Look at the way k Is 2. From die main hcsdtn^ vdnt do you eqiect
• ^at policy t^trdiQg si^iply must the goremmeot CbQow in ocdet to divided into sectbos end diis tort to be shorn?
ktaesse ftrmen'income? pacsgaphs. Pay attetttioa to 3. Whatis desk with in the first seciioo?
• bov viD diis affect pxkes to coosumeta? the able, fi^hte and notes in 4. Whitis desk widib the second icctioa?
the margin. 5. Whatisdeakwidxintbedutdsectioii?
1 For acb pair of commodities, state which you thbk is the more price
ekrac and gire your zeasons: Resd the passage through and find the answers to those guestioos. Remember,
• periume you do not hsTC to understand every wnrd to answer them.
• p^tnUin «n/t CtCam
• dgarrftrs and boob 1 In previous chapters we have learned to use curvee
• ice cream ind cfaocobte ice cream to represent consumer behaviour. The properties of these
demand curves may usefully be summarized by own price,
croaa price, and income elasticitiei of demand.
chapter we go these ineaaurea of demand by building,
What Ota
a model of consumer behaviour. The model of consume^
niAd«l<^
tonsumar
choice explains how buyers reconcile what th^ would Bke t^
bahauiour do, as described by their tastes or preferences, and what tli||
doH
market will allow them to do, as described by their income^
and the prices of different goods. The model sliows us
predict how consumers wOl respond to changes in markw

UnktO
Unit 9

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 dllton..c»™in«'to
^tfcidei It hdP* 1° Chapter 4. Prit^ tmd Income
, T-—'"P COWSPMER CHOICE
7^model has foW elements which describe both the
consumer snd the market environment:
(tenAcUi
O The given income that the consumer can spend;
O The prices at which goods can be bought;
O The consumer's tastes, which rank different combinations
or bundles of goods according to the aatisfaction thqr yield
the consumer;
9 The bcharioural Msumption ^t consumera do the best
Ibcy can for themsdvcs. Of the possible consumption
bundles that can be purchased out of a given income, the
consumer picks the bundle that maximlTCS hit or tier own
satisfisction.
3 of these ^ments in the mode! requires detailed
discussim.
cinema tickets at £10 each. Between these two extremes lies
a range of combinations of meals and films that tc^ether cost
exactly £50. These combinations are called the budget
constraint
6 Thus, the budget ranstraint shows the maximton affordable
fcwb* quantity of one good ^ven the quantity of the other good that
cwSbM
ihoua is being purchased'. Table lO-l shows the budget constraint
for the student In our example. Each row of the table shows
an affortiable consumption bundle. For example, row 4
shows that 6 meals (rasting £30) and 2 films (costing £20)
use up all available income. Other rowa are calculated in die
same way.
7 Table 10*1 shows the trado-ojf the student must make
between meala and films. quantitlea of meals require
lower quantitiee of films. For a given income, the budget
constraint shows how much of one good must be sacrificed to
obtain lar^ quantities of the other good. It is because there
is a trade-off that the atudent must make a choice between
meala and films.

The Budget Coastzaint The Budget Line

4 TogedMr, elements (1] and define the conaumer't budget 6 It is useful to depict the budget conatraint of Table 10-1 as a
constrainL Whgtch* biidpef fine, Plotting the data ofTable 10-1, the budget line in
t/udgetViiM
Budgtt
The budget constreutt describes the different bundles that sheutt
Figure 10-1 again shows the maximum combinatkma of
CBnttnmt the consumer can afford. meafa and Glma that the student can purchase out of
available income.
Whicb bundles are CeasiUe, or can be afforded, depends cm
two factors: the consumer's income and the prices of different TABLE Aitcnutive sffordsble coaiumptloa baskets' *
goods.
OUANTTTY SPENDING ON QUAKTTTY SPENDING ON
S.Coosider a student with a weekly budget(income, ^owance, OF MEALS MEALS OFRLMS ntMS • j «
or grant) of £50 which can be spent on meals or films'. Each (Qu) (i^aQM) (Or) (tiOxOr)
meal cosu £5 and each film £10. What combination of meals 0 0 5 50
2
and films can the student afford to buy? Coroplctch^ going 10 4
4 '• 20 3 30 iv.fl
withmit filnu, the student can spend £S0 on 10 meals at £5 6 30 2 20
each. Completely going without meals, the student can buy 5 t 40 1
10 50 • 0 'o° «
sttoding for 'all g<»^
'We essume that all income is spent on goods. There is no saving.
24
UfUllO Unit to

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 —uion and shape of the budget line arc dctert.,.
'LcmctUtion. point '■■ "t"
^ A .how. " ""P"
the ™>x.mum qu.„u.y „t>
t that the budgct-wiU purchase if the student goes vift
meals: £50 buys at most S tickets at £10 each. Point
Omt £50 buys at most 10 meals at £5 each If the stw
««, without films. The budget line joins up points a and p
intermediate poinU on the Unc such " B and c .how
balanced purchases of meals and rdms.
10 The budget toe is a convenient way to examine the tracW
itebudgit between meals and films. The alopc of the budget fine
IM
indicaus how many meab must be sacrificed to get anothe,
film. Moving from point F to point £ reduces the quanti^ of
mcaU from 10 to 8 but increases the quanUty of fflm. from 0
to 1. This trade-off between meals and films is constant along
the budget line. Giving up two meals at £S each always
provides the extra £10 to buy an additional cinema
the
11 We t«jw see the crucial role of prices. It U because film
iapartancc ticlmts cost twice as much as meals that two meals must be
tfpnco
■arrjficed to purchase another film twket If films cost three
times as much as meals it wouM be necessary to
three meals to pay for one extra film. The slope of the budget
tine depends only on the ratio of the prices of the two goods.
The slope of a line is the change in the vertical distance
divided ty the corresponding diange in the horizontal
distance. In Rguie 10-1 the slope of the budget line is -M. A
positive diange of 1 film must be divided by the
corretpoiuling negative change of -2 meals.
12 This example Qlustrates the general rule
rvfe
Slops of the budget line • -Pk/Pv (1)
where fSi is the price of the good whose quantity is measured
on the horizontal axis and Pv is the price of the gtwd whose
^Jtiantity is measured on the vertical axis. In our example, the
price of mcaU Ph U £5 and the price of films Pv is £10-
Pormuls (l) confirms that the slope of the budget line is
Unit 10
and the minus sign reminds us that there is a trade-off. We
have to give up one good to get more of the other good.
FIGURE lO-l: The badget line
The line thowt the mtximum comUnations of podt that the cocuuater can
afford, liven Income and the ptevaiiing price*. Poinu *ud> a* B and C «
budcet line AF, use up the entire consumer budg^ Points such as G. above the
budget line, arc untffordablc. PoinU such u K, Inside ihe budget line, would allow
iddilhuial consumption ofat least one good.
o G
13
oK
8 10 Qm
Meals
?Nt budget 13 Thus, the two end-points of the budget line (here, A and F)
of each good the budget vrill buy If the other
good is not purchased at aU. The slope of the budget line
joining these end-points, depends only on the relative prices
of the two goods.
14 Any point above the budget toe (such aa G in Figure 10-1) is
unaffordable. The budget line ahowa dre maadnnim quantity
of one good that can be afforded, dven the quantity
purchased of the other good and ffwen the budget available
for spending. Given an income of £S0, the point G is cu%jrfy^|
reach since It requires £25 to buy S meals and £50 to buy 5 '3
cinema tictota. Points such as K, which lie inside the buf^t^^
toe, leave some income unspent. The point K requires ^0
for meals and £20 for fijigs leaving £20 unspent The 8tu<^l111
could use this £20 to buy 4 extra meals (movii^ from K
without sacrificing films) or to buy 2 extra film ticted:n
Unit 10
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 Inovtag ftotn K to B without McrincinB mcal,|. o„,
udje. lino 1= thcro « trnde-oIT whore tho
^h<^|«(u«nfiln>onndmoal3. "^0
• cannot be bought • tzade-off
6. Look at pacagnph 7 again. What 10. Look at paragraph 11 «ga?n Vdiat
I ,5P2«^ou!jnt^^ words have the same meaning as: words have the same meadx^ as:
• exxstingat the time
Mo. »d tho toot cMofiJly. looking up now konu in. • given up • a minimum of
book.Thsn taswa the foUowing quesoons: ™ or 7. Look at paragnph 8 again Find • whole
I ipb,tbrecoocaed by the model ofconsumer choice? alternative words you could use in 11. Look at patagaph 12 agaiTL Using
2. \pbit does die wntertiiumeibout how consumen behave? the text instead of: the iufotmaooo m die paragnph,
3. Whildoes the eoQsumei'atbility to buy depend on? • useful can you explain:
• depict '-Ph/Pv
4. OosrfisttmiinpcionisTable 10-1 based? • purchase
5. WhitdocsthebudgetKneinFigure 10-1 show? 12. Look at pangcaph 13 "gain Cvn
6. Look at ptragaph 9 again. Gm you explain the words:
6. Hov tie the pouiioo and shape ofthe budget Une determined? you explain the pointa: • eod^i^t
7. What Bcomtantakmg the budget line? •A • relative prices
S. Wbt does die slope of the budget line depend on? .F
13. Look at pangnph 14 agsin. What
9. Why is point GbFguK 10-1 unaffbrdable? •B
words have the same meaning as:
•C
10. At point K,has the student spent aU his/her money? • beyond one's financial
9. Look at paragraph 10 again. What • to hand,in one's possession
fli. Improve your scanning does the writer mean by:

1. Look at the fiat pangaph again • chooses IV. Glossary

and uf what words coxxespood to 3. Locdc at pangcaph 4 again. What
these definifioQs:
the budget conatraint: gidi hfn cna ngudi tilu dfing
'Words ^ve the OppOS^ ng&n ikch
• qiedal quaHties thar belong b> to:
consumer behaviour: vi
soineduDg to use up: ai^ di^g hft cua ngu$ tilu dfing
• the wiy someone acts • not possibk the budget line: dtfbng bidu th) the model of
• apart
• say in advance ngftnikch ml hinb li^ di^ efia ngtib tilii U
^
• pwph I fildngi or preferences 4. Look at paragraph 5 again. Can economic interpretatioiu diin dbng
1 ^«pu,gnp!a2ind3.gm you explain what the writer means giai S nghla kinh td" behavioural assumption: g5»:
Wh« worf. h.;. ^ by: vertical distance:
tr^c tung
dki trtn thiA v4 hknh vi cua ngudi ti^f| '>1
meanittgas: • ' • these two extremes dOng
• budget constraint ' horizontal distance: dQ dki trfin pcsaible'consumptaon bundl^k^
•n«heidicmostof :
•pot-aaangeiaorfer ' 5. Look at paragraph 6 again. What trvchoknh nh6m hkng tilu dAng mi ngd^fs
•.••wttoondings '' eoneumer choice: lyjui clwjn tilu dtlng cd du ti& mua
• pve
words have the-opposite meaning
to:

21
UnktO
UsHiO

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 B.unde!5ta2£2gii!£ii!!S StctioH dL
Qr ■ i
10 I Ji
'• *™^^lf^ditA.youlisttn.«»werthcqu«do«bd<«« 'V
8
m-' -
(yypnftmd region
|fi
StOuff-
Noce Idbjcn that the itudenti have been studying. j

4
. N«c down the psidculst point the lectutet is going to talk about.
2 .b-' •e
Domi
Stami2^ I

« How BW^tHumpnoMStbekctitttt going to mak^ 2 4 6 8 10 Qm

Meats

• Ii dus sntaaeot cotcect ot incoaect? • What do the points a, b etc represent?

Hxe studeaa an oot sQowed tt disagtee vidi liie lectuto.
• Kote down ^edcBnitkn of HitiEty'dulec&itef gives 70U. • Where do you start to draw the figure?

• Then what do you do?

efcotvfli
St(tioH7_
« Accoidiag CO the lecture^ cootumets
amoot dedde between(finietent bundles of goods. D • Is this itatemeot correct or incorrect?

wilalwtyiuj one bundle is as good IS inothet. 0 Point b is better dun pdnt c

ciadeddevliedieraoefaua(ietsbeQei;w(3Beocdienmeisioodiee.. □ SutuaS

iboidd not be consulted by economists. □ • Note down die term the lecturer wants you to.
StaiaMi
• Note down die second mumpdoa Section 9_

• Write down the definition of the term.

A« tbe« mtcmenii conea or incotnxt?

®"ooomb cionot handle •bids'.
• N«e down how 1
etonotntsts handle W,if they do. 2. First, say what you think the lecturer means by the definition be has given iiK^

30 Unit 10 " m
Unit I®

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 . „„«,^uh.vciu.l 1""^
b>ck to the bcghming of the kcttut end lUtcn to it^
^ of utm^ing queedotu. tJte notce. When
^ Tto the -whole
Itftcneaw^ „i..ofsme
the leetute.
you noteyou willthebeimportaol
down «ked to give
..ho,t
poinu.
fummifT ^ ,
You.hoold d» write.ommuty ofthe lecture,htteed on yout note,.
„pu-^»onrilna a Printed text(2)
Do ,00 lenwndw dte Ust lecture? The lecturer did not tdk .bout hi. third
..^Lpno.Here h.handout he gave the atudent^ Read the handout,looking
If inything you do not understand.
We now introduce the concept of the marginal rate of
substitution of meals for films.
TTie morg^ rote o/substitutibn of meals for films is the
quantity of films the conauoier must sacrifice to increase
the quantity of meals by one unit uathput chongfitg toiai
consiuneis prefer more to less, an additional meal
tends to increase utiUfy. To hold utility constant, when one
Fn^' is added the consumer must simultaneousfy sacrifice
some quantity of the other good (films). The marginal rate of
substitution tells us how msuiy films the consumer could
exchange for an additiofisl meal without .chan^g total
utility. The marginal rate of substitution must be a negative
number it is the ratio of a itegative chan^ in the quantity of
films to the positive change in the quantity of meals when
utility remains unaltered.
Suppose the student begins with a bundle comprising 5 films
■od no meals. Having already seen 4 fiimw that week, the
•hident probably does not ei\joy the fifth very much.
With DO meals, the student is very hungry. The utility of this
is low: being so hungry, the student cannot realty
chjoy the films anyway. To obtain the same amount of utility
the studeiit could give up a lot of films in exchange for a little
i
32
Unit 10
food. The mai^nsl rate of substitution Is a large negative
number and we say that it is high.
Suppose instead that the student is consunung s targe
number of m^s but seeing few films. To obtain the same
amount of utility, the student will be reluctant to sacrifice
much cinema attendance to gain yet another meal. The
marginal rate of substitution is a small negative nxunber and
we aay that it is low. When the ratio of films to meals is
already high the rate of aubstitution of meals for
films is high. It makes sense to sacrifice abundant films for
scarce meala. Conversely, when the ratio of films to meals is
already low the marginal rate of substitution of meals for
filmo it low. It dees not make sense to aacrifke scarce films
for yet more meals.
Economists believe that this common-sense reasoning about
tsistea or preferences Is very robust. It wQl hold in a wide
range of cizcumatances. Indeed, it is aufSciendy plausible
that it can become a general prindide, the third assumption
we need to about consumer tastrs. It is caned the
assumption of a diminishing marginal rate of substitution.
Consumer tastes exhQnt a dMrdsidng margfnal rate of
subatftutibn when, to hold utfiity constant, diminiahing
quantitica of one good must be. sacrificed to obtain
■ut^asive equal Incieaaea in the quantity of the other
good.
For example, our student might be indilTerent between, thal^
is, be equally happy with, bundle X ■ (6 films, 0 m^ta).^'
bundle T - (3 films, 1 meal), and bundle Z - p fih&^<2;
meala). Begiiming from bundle X, a move to T tacrifiC^ >
films for I meal, but a further move from Y to Zaacri?j*U|
only 1 film for 1 extra meal. Such taatea satisfy f«hc|'
aaaumption of a dindnlshing mar^nal rate of substitutioi^fcr
These three assumptions - that consumers prefer mor? tv
less, can rank alternative bundles according to the VJj®!*;
provided, and have tastes satisfying a dinUniahing marginal
Q)
&
Unit 10
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 _ of .uutitution - all wc ahall^uire. it i.
^,«ucnt to show how toatc. can be represented M E. Extensive reading -Engllsh«Vietnamese translation
j^erenocoinwa- .
DEMAND UTILITY AND CONSUMER BEHAVIOUR
1. Economists explain consumer demand by the concept of total otiliiy and
with the law of diminiahing marginal utiltiy. UdSty is a concept that
represents the amount of usefulness or satis&ction chat a consumer
i- Wbffl TM t""""" obtained from a commodity. The additional satis&ctjon obtained from
.c-- 0£U.t Nw idcnli^ ^ P™" P'«Uctio„ i, consuming an additional unit of a good b gi*cn the name marginal otaby,
diffaent from *rf»t the kcwier lays. wfaae "maipaal" iwans the extra oc incremental utiH^.
3. Di5cu» these The law of marginal udlicy states diat as the smounr of a
commodity consumed ineteasea, the maiginal ntilay of die hat unit
U. Glossary consumcd.ccndi to decrease.

the mirpnal rate of diminishing marginal rate of 2. ttTMme that consumers allocate thcb Itmirrd mcwnn so as to
fubstUutioD:^ If tlugr 4n suhatitution: ty If thay thf cfn obtain the greatest satufaction oc udU^.To get maTimal utifrty, a consumer
biln giam din must equate the utilides of the last dolbxs speitt for each and
bi£n every good. Only when the marginal utflity per dollar b equal for bread and
utility n: tlnh h&i dpng, df indifTerenee curre: dudng hSnp
butter sM shoes and records and concerts will the consumer attain the
tl^d^nf quan
greatest satbfsctioa from the doQar locome.
This b a fundamental role of logic diac tnnK.fnds demand dieoiy: if you
D. Understanding discourse wane to allocate any limited resource among cocnpetng uses, whenever the
marginal advantage in one use happens to be greater dian in anothrr, you
A tutor a talkiag to a student, who b not studying in the way the tutor wants can benefrt by ttinsfeoing from die low-nurginal-adTancage use (o the
him ta Note down what die tutor dunks abmit the way the is studying, high until a final equiHbdum b reached at which til matpnal advantages
have become equal
and whatshe tfainb the itudent should do.
3. The foT sU consumers b derived by adding honxoataUy the
separate demand curve of each consumer. A demand curve can shifr for
many reasons. For example, a rise in income will, noanalty shift DD
xightward, thus increasing demand; a rise in ptice of a substitute good
(coffee for tea, and so forth) will also oeate a simOai upward shift in
demand; a dse in price of a complementary good (such as lemon in its
tebdon to tea) will teptesent a cross effect that shifts the DD ouve
downward and leftward.'Still other factors-chtnging tastes, populaiioo,or
expectadoni-can increase or decrease demand.
4. Without using the marginal utility concept explicitly, we can gain new
insight into die factors making for downward-sloping demiod by dividing
3)
Unit 10
Unit 10

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 Ac effect of.piice mc into (.) its .ub.titutioo effect component end (b)
it inconte effS cotnponcnt When P for • good m«. t«d ,o
^nun d.e .«ne level of wdl-being by .ubetituong other goods for the
eoods that hM just become mom eipeoaive. Reinforcing th« decrease in t
Lo^t Q that rises out of substituooD is the income effect; aince you
ordinarily buy iesa of the good in question when yoi^ funily income is
lower, the rise in its price- which has produced a drop in your real income
or real purchasing power- thus induces a ftirthcr cut in consumptioQ as a
result ofyou now having a lower real incoin&
5. Adam Smith's paradox of vahie - that a commodity important for welfare
may seD for less in the market dsan a less important one -is clarified by the
disiioction between Ac concepts of maiginil and total utility. The scarcity
of a good, as determined by its cost ^e. supply conditions), interacts with
the for the good as determined by the usefulness of its
unit (not die usefulness of the total stock of the goocQ. It is not
paradoxical that total utility is high when marginal utility is low.
6. The fact diat market price is dctrrtnined by marginal rather than total
utility is dwwyfiywl hj the concept ofconsumer surplus. We pay the same
price for each quart of milk diat we buy in the matkeL Moroover,thp price
is equal to the utility of die last unit bou^L But this means that
we reap a surplus of utility over price on all earlier units, for die nuugiaai
utilities of units are greater than that of the last unit by the law of
d«mini<hing mafgtnal Utility. This SUtpluS of Utility OVCt pISCe is Called
coosumer surplus. Consumer surplus reflects the benefit we gain from
being able Co buy all units at the same low price. In simplified cases, we can
measure consumer surplus as the area between the demand curve and the
price line. It is a concept relevant for many social decisions such as
deciding when die community should incur the heavy expenses of a road
or bridge.
F. VIetnamese-Englfsh translation
1. Nghjch ly cua giA trj
Nhitng nguyAn tic n6u ra d day c6 thi gidp ta giai tiifch m^t vAh dtf nifi
ti6ig <U I4m b$n 15ng Adam Smith.6ng phAn vin vi sao niJdc, raOt v^t
36
Unit 10
c6 fch din nfii con nguoi khfing thi sing thiiu n6. khfing c6 gii tri
trong khi kim cUdng khing th^t c4n thiit lai cao gii din nhti v^y.
Khic vdi Adam Smith, chdng U c6 thi dua ra ciu tri loi diing cho vfo
di dd nhU Bflu: Dudng cung vk ciu cua nUdc giao nhau tfi m^t diim gU
rit Lhip trong khi d6 dudng cung vk ciu cua kim cuong cit lihau tai
diim gik cin bing rit cao.
NhUng tfi aao cung, ciu cua nddc Ifi cit nbau t^i diim gik thip nhtf
yAy?
Ciu Ira Idi Ik kim cUdng rit hiim vk chi phf dl c6 thkm du^ nhfing viin
kim cUcmg rit cao. NgU<^ lai nUdc khi akn vdi gii rit ri. thoa d^ng
cua mlde ndi chung kbdng xic d|nh dU^ gii kokc ciu cua ntfdc. Chfnh
Ik thoa dyng cua cdc niidc eudi ckng xic dpih gii cua nUdc.Do cd qui
nhiiu nUdc nin gii cua nd giarn xufihg tdi mdc rAl thAp. M^c dk nhOng
gipt nude diu tidn c6 gii tn cdtu mfng ^ng cua mdt con ngudi nhttog
nhOng gipt cudi ckng ehl di tudi ciy hay rfia xe AtA. Nhu viy,chung ta
thky ring m^t hkng hoi qu^ nhtf ntlde khi bin hiu nhtf diing c6 gii tri
gl do bdi gipt ntfdc euAi ckng ding gii bing l^ng.
2. ThAng dtf cua ngtfdi tiAu dung
ChAnh Idch giQa tdng thoa dpng cua mdt hkng hoi vk ting gii tri thi
trtfdng dtf^ gpi Ik th^ng dtf cua ngtfdi tiiu ding.Thing dtf phit stnh do
bdi chkng ta *^hin dupe nhiiu htfn Ik chiing ta phai tra". Nguin g& cua
nd nitfn d quy luit di thoa dyng cin biin giim din.Chung ta cd thi di
ding nhin thiy thing du cua ngtfdi ciAu ding.
Chdng ta tra, ciing mAt gii cho mSi m^t qua trtfng hay mpt cAc ntfdc ta
mua. Nhtf viy, chiing U tri tiin cho gii trj cua ddn vj hing hoi eu^
ckng. Nhtfng thoo nhtf quy lu^t cua thoa dpng cin hiAn giam din,
nhOng don vj hing hoi diu tiin cd gii tri vdi c^iing U nhiiu hdn nhOng
don vj hkng cuAi ckng mi Ifi ra chdng ta phu tra tifo cao hon d»o
nhQng don vi hing hoi niy. Nhtf v§y,vi^c tra ckng mflc gii chq in& don
vj hing hoi chOng ta mua cd nghia li chung ta dtfpc hudng thing dtf
cua di thoa dyng dffi vdi mdi don v\ hing'diu tiAn ta tiAu thp.
37
Unit to
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 IjSlngaarv -
• nghjch cua gi4 tri: the paradox hiu nhu thing c6 gi& trj gi: to bo
worth next to nothing
(lvalue
• eao gii: exalted price th$ng du cua ngirdi tidu dilmg: CHECK YOUR PROGRESS 2
» Unhdunhir thing to aell consumer surplus
ibr next to nothing t&g gii tii th} trddng: total
aycbinhl^rgap market value
The following thoit test is for you to check wbediec you ue learning the «mi.
G. Talking points you will need to study Economica in En^h.It is for your inforxnatioa. It is
not an examination.You may use a dictionary.
1. Discuss the effects of advertising on a consumer's attempt to
A. READING
utility.
2. Talk about the consumer's tastes or preferences in ^^tnam. Read the following text and then answer die tjuestiofis.
3. Ii it corxect to say that total utility is high when marginal utiliiy is lov^ Why REPRE8EMTXNO TASTES AS QfDITTESEHCE CURVES
atid why not?(Give an example to prove it).
1 If we Join up all the many pointa the student likes equally, we
obtain an indilTerence curve.
u^t an An {ndijfference curve shows all the o^nsumyrtion bundles
indffftnrusa which yield the'same utOiQr to the consumer.
eunmahow*
Figure 1 shows three indifference curves UtUt, Lblb,
UjUx
FIGURE 1:F^rtscBtiog caunmer(sstes by iadUTerencc curves
.Along each uidinerencs carve, such as U2UJ, consumer utility b coostanL Since more h
preferred to less, any point on s higher IndifTcrence cunre, such u UjUt,is prefened to any
point on a lower indifTerence curve. Indi^rence curves must slope downwards.Odiciwise
the consumer would have more of both goods and would be better ofH Diminishiog
mar^nal rates of stdistitution imply that each irxliffareMe curve becomes fistter as we
move along k to the right

Or U, U>

Meals Qm
3S
39
Unit 10 Check your progress 2
 2 Ev«y point on t/M yidd. the «n.e utUily. Point C olfem a
lot of meal, and few fllm., point B offer, a more balanced
quantiV of roeala and fitaa, and point A olfera many filma
but few meali. Because the consumer prefers more to less,
Sndifftrtnct indifference curves must slope downwards. Since more meals
curv*s wrust
Mtofm (end to ii«?ease utility, some films must simultaneously be
daumwards tacrifieed to hold utility constant
Vmalep* 3 The slope ofeach irul(0'erence curve gets steadily yiaffer as we
gtUflitUr
esuitmava
move to the righL This follows immediately from the
tetKtright assumption of a diminishing marginal rate of substitution. At
point A, where films eie relatively abundant compared with
meals, the consumer wQ]saciifioe a lot of films to gain a little
more food. At the point J9, where films are less abundant
relative to meals, the consumer will sacrifice a «m«iiU|-
quantity of films to gain the same additional quantity of
meals. And at the point C the student now has so many
meok that hardly any films will be sacrificed for additional
meato. In lactq we now recognize that the marginal rate of
substitution of meals for films is simply die slope of the
indifference- curve at the point from which we begin. These
Why
bvUfftnnea two properties of a ^gle indiflerence curve - its downward
cmwthovff
thCM slope ancMts steady flattening as we move to the right -
•pvpartka
follow directly from the assumptions that consumers prefer
more to less and that their tastea satisfy the assumption of
diminishing marginal rates of substitution.
4 Now consider the point D. which lies on a different
indifference curve UsUx Point D offers more of both goods
than point B. Since consumers prefer more to leas, utility at
15 must be higher than utility at R By definition. aU points on
UsU, yield the same utiHty. The difference between UaUi and
VeU,U that every point on tftt/, yields more utUity than every
point tm U,U2. Convcrwily. point E must yield less utility than
ywuia leu utility than every point on Ihlh.
40
Check your pr<^rett 2
FIGURE 2: Indifference curves cannot intersect
irindirrerence curves intersected, the eoosumer would be indinerent between X and Y.whidi both lie
on the indifference curve UU, and between Y and Z, which both lie on the indifference curve WW.
licncc the consumer would be indifferent bctwe« X and 2L Sinee Z offers more of both foods than
X, this violates the assumption that consumers prefa more to less. HsKe indifference curves cannot
kUenecL
Or
u.'
U'
. X
Meals Qm
5 Although in Figure 1 we have drawn onfy three indifference
curves, we can imagine drawing in other indifference curves
aswell. As we move on to higher indifference curves we move
to bundles that will be prefened. Higher indifference curves
are better because the consumer prefers more to less.
Indiffennca 6 You may be wondering if it is a coincidence that we have not
amneiew drawn any indifference curves that cross each other. It is not:
our assumptions guarantee that indifference curves cannot
cross. Figure 2 shows why. Suppose the indifference curves
UU and UU were to intersect. Since X and V lie on the same
indifference curve UU, the consumer is indifferent between
these points. But Y and Z both lie on the indifference curve
trtr,' Hence the consumer is indifferent between Y and Z.
Together these imply that the consumer is indifferent
between X and Z. But this is impossible, since the consumer
gets more of both goods at Z than at X. Hence intersecting
indifference curves would violate our assumption that
consumers prefer more to less. Our assumptions about
consumer tastes rule out intersecting indifference curves.
41
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 Chack your understanding
the bchavlounil nsoumptlon that the consumer chooses the
Answer these questions: affordable buncUe that maxlmaes his or heruidity.
1. Look at pangrtphs 1 end 2sgaio. What\rards have the same mesningu:
2 The consumer cannot afford poinU that lie above the budget
line and will never choose points that lie below thc budget
• gtreaup line. If the consumer begins at a point below the budget line,
• St the same dime some income is unspent and it U poaaible to purchase more
• gettiagless of one good without sacrificing any of the other good.
• unchanging Spending all the avalUble budget and thereby moving on to
the budget line muat increase utm^ since the
Z Look at pingzaph 3 again. Are these statements correct or incorrect? prefers more to less.
O It is because of an'assunspdon that inxliffcreoce curves get flatter towards 3 Thus we know thc consumer will select a point on the budget
tfaeiight Q line. To determlxie which point on the bud^ line ■na-.^Tv.w^
o The ronnimer has fewer films at point A than at point B. Q utility we need to think about thc consumer's
• Note down the two properties ofan mdiffetence curve. expect our glutton to pick a point with more mn/\ less
films than the point our film btxff win select We 1^
showing in genend how to use tadiflerence corves to
• Note down die two assumptioits on whidi diese pic^Mttties ate d
determine bundle the consumer wfll rhorut^ Then we
confirm that our model of consigner can c^cure the
3. Look at paragraphs 4 and 5 again. Is this statement correct orincorrect different behaviour of the ghitton and the fib" iiff
* Point D yields mote ncifi^ point E. q FIGURES; Coaniner cboiee in sctioa
* VPliy IK h^^indiffexenoe curves prefetKd? Points sbove the budget liae AF sre uesfCgrdible. coosuner
reach tbe indifference curve UjUj. Points such ts B sad E sre aflbrdable
but only tlkm the conxumer to resch the indifleneicB curve U,Ut, Tbe
4. at paragraph 6 again. Arc these statements correct or inconect? couumer will choose the point C to resch the highest possible indifiereice
curve OfUj. At the chosen point C, the iodiflieteace curve and tbe budget
• Itis a matter ofdunce thatindiflSerence curves cannot cross. O lincjust touch and their slopes are equal.
• The consumer caaoot be indiffnmt between points X and Z. D
•B. WRITING U3

Aifollowing ■«. Tien, niingrour own wotd.. wmn.«annaty ofit <yi

- ; • • yrn-ITY MAXnCZATlOW Aim COHSOMER CHOICE

Ul
' bundle,
nuuket envlr„„™,„, (u.. budget for given the
.pending 4 « I
Ihe price of different eoodmi n,. Meals Qm
the tamtam *u eon.umer.
"he Koodt). Thc Indifference
To complete mapweahowa
tl« model, ndd
42 Qieck your progress 2 43
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 4 Rgurt 3 again show, the budget line AF for the student who
has £50 to spend on films at £10 each and meals at £5 each. C. LISTENING
The indifierencc curves U,U,, V2V7, and UaUj are part of the
complete Indirfcrence map describing the student's tastes. You will now heat part of a lecture. listen to each sectioa twice. After you
5 Since the V3V3 Ues evciywhere above the budget line AF, aU hav^listened to each section for a second time,answez the questions below.
points on UjUi are unattainable, however much the student Ui
Ui
would like to obtain this amount of utill^. Suppose the
student considers the attainable point B on the indiOerence
curve IMJt. This will certainly be preferred to the point A.
which must lie on lower indifference curve (since indifference
curve caxmot intersect, the indifference curve through A
must lie everywhere below the indifference curve
Similarly, the point F must fie on a lower indifference curve Lh
.than the point B and the student prefers JS to F. The student
prefers any point on U3U3 to any point on lhV3, which in turn
10
is preferred to any point on Uilk
Meals
6 However, the student will chose neither the point B nor the
point £. By moving to the point C he or abe can reach a
Stdhs 1
higher indifference curve and obtain more utility, so C is the Are these statements or'"eonyct?
point that the student will choose. Any o^er affordable point The lecturer is going to come to t difCetent conclusion. □
on the budget line will place the student on a lower He is going to use an alternative way of r»««'^n«ng Q
indifference curve, and any indifference curve above I/sC/slies Complete the following sentence, using the same the lecturq;
entirety above the budget line AF and involves bundles that Hie of the budget line indicates s between
are unaffordable pven the. budget constraint The quantities of meals and films that the will allow.
assumption that consumers choose the bundle that Stt/k$i2 ; "
maximizes thdr utiUty given the affordable posstbQides Complete the foDowing swuence, using^e same t^rm^ ^ leeturfrn
described by the budget line thus has the foUowing simple
implication: the chosen bundle unH be the point at loWch an Point B shows how the raiuumer would trade for film* to preserve
• of
indifference curve just touches the budget tine.
Mathematicians would say that the budget line is a lonffenf Axe'these statements correct or incoaect?
to the indifference curve UjUjut the point C. The budget line It is sensible to move to the left of point B. □
does not ever cross any higher indifference curve, such as A move to die left would take the student onto a higher mdrffetencc
Md crosses twice every lower indifference curve, such curve. □
SefdoH 3
th u.
the j constraint.
budget ^ describes the point of maximum utility s^ven
• * Is this statement correct or incorrect?

44
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 Amove
„tht kft ofpotat E nute no lewe.
StttuM4 in between.Price eUsdcity is a pure number,involving percenuges;it b not
is statement cotrtct or incottectf
Is this to be confused with absolute slope, as numerical ubles and graphs can
Mova tn tho OK'" P"'"' ® ^ show.

SudtaS ~ Price elasticity of demand tends to be low fox necessities like food and
ahelter and high for luxuries like snowmobiles tod air travel Other bictoo
. No.edownd.cgenaJprinoipk'holootnmrexpl.m,. affecting price elisticicy are the extent to which a good has resdy
iubsdtutcs and the length of time that consumers have to adjust to price
changes. Additional elasticities relating to demand are: income
which indicate the response of demand to changes in coturamet incomes;
tnd cross elasticitiea of demand, which relate the quantity response of one
good to the price change of another good.
• Note down whjpoint Cis dgnifieaat Elastid^ of supply measures percentage responsiveness of oatpor stq>(£ed
by ptoducexs when marker P b raised by a fffta percentage.
Marshal] stressed the time clement in the supply carve (a) momentary
equilibrium of fixed supply,(h)ihort-nm.cqtnEbtium with output varying
within fixed plants tnd firms; (c) long-run egniHhnum, when numbers of
and plants, and all other condirioos, at^c completely to the new
demand conditions.
D. ENGLISH-VIETNAMESE TRANSLATION
E. VIETNAMESE -ENGUSH TRANSLATION
the following sutmnknes tnd dien teuulate thezn into Vietaainese.
Translate the following into Rnglbh
ELASncnY OF DEMAND AND SUPPLY
QUY LUAT THAY TS&
1 hGczDeconoinics deals widi die voddng ofthe oudcet mechanism.
It ge^ples with how the ecoQln^ sobes wbat^ bom, and fitr oAom in each Du&ng bkng quan du^ vfi USi c6 14 khi chung to dich chuydn xu&g
martfL The si^pfy and demand curves in Chapter 4 explain what goes on dtldi v4 v4 phfa phii d9C dufing b4ng quan (m^t s^ didi chuydn ed 14
in each con^ictitive market. t4ng lil^ng thflc fin v4 giim luqng quLi fio) thi di^ng n4y trfl nfin afit tiyc
2 Pnce clasticitj of detnand determines what happens to total revenue as hofinh hdn. Du&ng bfing quan dU(?c vfi theo cfich n4y bdi id n6 minh ho* m^t
ptice is cut Demand is elasdc, or unitary according to d^c tlnh thudng xay ra trong cu^c afihg thi^c vfi c6 thd g^i Ik "quy lu^l ^ay
thfi*'.
^tdiedier a reductimi in price increases, decreases, or does not change total
revenue. The oumoical coaflkicnt of price elasticity of demand is defined M4I hfing hofi cfing khan hifim thl gifi tri thay thd tiwng dfi tma nfi Ifii^
as percentage increase in quand^ demanded divided by the percentage Idn. D$ hflu dvng c^n bifin cia nfi tftng tUdng flng vdi dO hihi dpng c^n bifin
cot in price.* Depending upon whether the percentage rise in j2exceeds or cua m^t lofii hfing c6 nhidu.
£dh short of the percentage &U in P.wc have £„> 1 or E„ < 1. with D{ d& cua duaue bine qu«. U thudo do cua dd httu im "to
dSi cua m«t hing hoi hay thuic do cua cic di«u lojn thay thi. Vdinh g
46 47
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 Ji<o iifn niy. njxffi Mu dtaji>!n ring t™o dS m«I Idflne ft hdn m,t chdt
cia ni«t hin* hoi ii dSi liy mft lM<fng nhiiu hon m»t chilt cua loi)i hhng » *< JK..
hoi Ida.
Unit 11
F. SPEAKING

1. I* it possible thatin indlffctcocc curve ilopci upwards? Why or why not?

2. Talk about die properties ofan indifference curve. * '>«>J c OUTPUT SUPPLY

A. Understanding a printed text (1)

• >I ii - ■ ; I. Improve your skimming
- . V • !

i.- . •■- .1..-. ...w^-. 'la- The foUowiflg text win Now look at these questiona:
-/i-a-d-.. introduce you to the topic of 1. Look at the hatfii^ and say what you ezpco
X'U fc'i •«.?: . ou^ut auppty - revenues, to find in ihe
costs and profits. Look at the 2. How does the wricer prsfir*?
:■ 3 ■' V.,-.
way it is divided into sectioas 3. Whacisthe[aaposeof^pRll-l?
and paragtapha. Pay action 4. Whatcooc^tisiaisediasecdcKi2?
to the figtice and notes.in the 5. Whattsdiepuqx)aeofaectiaQ3?
margin.
Read the passage through and find the answers to those qoestiooa. Remember,
you do not have to understand every word to answer

«-^
REVBRUES. COSTS AND PROFITS

T A linn's reuenue is the amount it eama by ■*pfT*g gooda or

r.
services in a given period such as a yesu*. The firm's costs are
the expenses incurred in producing goods or services during
the period. Profits are the excess of revenues over costs.
Hour to Thus we can write
eaiaitaU Fronts ■ revenues ~ cost (1)
proJUs
Although these ideas are simple, in practice the calmlstiwi
of reNvnues, costs, and profits for a large busineaa la
complicated. Otherwise we would not need so many
accountants. We begin with a simple example.
41 4F
Unit 11
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 2 Rent-«-ftr«on is a firn that hires people wlioixi it then renu
put to other firms that need temporaiy workers. Rent>«.
Person charges £10 per hour per wwkcr but pays its workere
oniy £7 per hour. During 1987 it rented 100 000 hours of 'T,"""""
a healthy caah inflow. "" -rfn b,
labour. Business expenses, including leasing an of8ce,
buying advertising space, and paying telephone bills, came to FIGURE IM

V^tFigurt £200 000. Figure ll-l shows the income stafement or pro/it-
Jl.Ittwum
and-loss account for 1987. FVofits or net income before taxes Rent-s-Person
were £100 000. Taxes to central government (corporation tax) loeome Stslemcnt
For Ckfl Year Eadiag 31 Decmbcr 1917
phis taxes to local gov-emment(rates assessed on some of the Revenue
£1000000
(JOO 000 houn rented out at £10 oer
property the finn owned) came to £25 000. Rent-a>Ptersoa's hour)
after-tax profits in 1967 were £75 000. Deduct expetua (costs)
3 Now we can discuss aome of the compUcationa in calculating Wages paid to people rented out £700000
Advertuing 50000
profits. Office rent 50000
Wages for office worters 10000
Ontatandlng Bflls Other office expenses MOOO

faeptgde 4 People do not always pay their billa immediately. At the end 2sm
Net income(profits)before tnes
pagontime of 1987, Rent-a-Person has not been paid for all the worlnrs Taxes paid
£100 000
13 000
it hired out during the year. On the other hand, it has not Net income(profits)after taxea £73 000

paid its telephone biH for December. From an wM>nffmfc

viewpoint, the right definition ofrevenues and costs relates to
the activities cairied out during the year whether or not
ffiytkaf
payments have yet hfm
5 distinction between economic revenues and costa and
.actual recapta and payments raises the important concept of
cash fiow.
Caahflou A firm s cash Jlow is the net amount of mon^ actually
received during the period.
Profitable firms may still have a poor cash ilow, for example
when customers are slow to pay their bflls.
6 Part ofthe problem ofrunning a business is that cash flow at
the beginning is bound to be slow. Set up costs must be
tn^wed before revenues start to flow In. That is why firms
need financial capilai to start the business. If the business
50
Unli 11
Unit II
Capital and Depreciation
7 Pfiysioaf capital la the machinery, equiptnent, and
eapiud
buildinga used in productian.
Rent-a-Peraon owna little physical capital. Instead, It rents
office apace. Qrpewritera, and desks. In practice, burineases
frequently buy physical capital. Economlsta use tapitaT to
denote goods not entirely used up in the production process
during the period. Buildings snd lorries are.cap^ because
they can be used again in the next year. Electricity fas oot a
capital good because it is used up entirely during the period.
Economists also use the terms 'dtmble goods' or "physical
assets' to describe capital goods.
8 How should the coal of a capital good such as typcwritera be
treated In calculating profita and costa? The eaienrtal Idea is
that it is the coal of using rather than buying a piece of
capita! equipment that should be treated ma part of the firm's
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 CO.B Wllhln tht r~r. If RcnM-ftmon lea.e. all it. capi,^
^Uipmcnt. it. coat, indud. ittcraly the rental, paid !„
leasing capital goods.
9 Suppose however that Rent-a-Porson buy. eight typewritcra
«t the beginning of the year for ClOOO each. It should not
count £8000 as the cost of typewriter* in calculaUng coaU
and profits for that year. Rather, the coat should be
calculated as the reduction in the value of the typewritcra
over the year. Suppose the weai-and-tear on the ^rpewritera
ever the year has reduced their value from £1000 to £700
"catdi. The economic cost of the use of dghl typewritcra over
the year is £2400(8 x £300). This amount of depreciation Is
the cost during the year.
D^ndoiiM Depndatxon la the loss in value resulting from the use of
znacfainezy during the period.
The cost during the period of using a capital good is the
depredatioa or loss of value of that good, not its purchase
price.
Tht 10 The of depreciation again leads to a difference
between profits and cash flow. When a capital good
bttumn
•oonemie is first purdissed there Is s large cash outflow, much larger
^rqftU and
tBthflOUf than the depredatitm cost of using the good during the first
year. Unfits may be hi^ but cash flow low. However, in
subsequent years the firm makes no fUrther cash outlay,
that the Utter etrategy U even more profiubte. Henee the
true economic cost of using the typewriters in the first year
can be at most £2400.
II. Improve your Intensive fading
Now read the text carefully, looking up any new items in t (Sctiooary or
reference book.Then anawei the foDowing queatioos:
1. Why do we iKed a great many sccouatants?
2. How much did Rent't'Petsoa pay in wages in 1987?
3. What were Rent-a-Person's pre'tax profits?
4. What is cash flow?
5. Why does a firm need flaindal capital to start its business?
6. Why is electricity not a capital good?
-7. How should you treat the cost of a car m a firm's accounts?
8. What is depredatioo?
9. Must you hai^ a gpod cash flow in order to make a hi^ profit?
10. What is the effect ofusing depredaiioa rather drari purcfaaae pace?
n>. Improve your scanning .
1. Look at the first paxagcaph sgam. sooaewie in excha^ fior
Can you explain the terms: payment

having already paid for the capital goods, but must still • revenue decide or fix die of
• costs
calcuhte depreciation as an economic cost since the resale
value of goods is reduced still further. Cash -flow will now be • profits 3. Look at paragraph 4igam and ay
higher than economic profit 2. Look at paragraphs 2 and 3 agiiiL what diese words refer to:

11 The consequence of treating depredation rather than VPhat words cortespood to these • line 2:it
definitions? • line3:it
purchase price as the true economic coat is thus to spread
• to make a regular paynoent for 4. Look at paragraph 5 igtin. Can
the initial cost over the life of the capital good, but that is not
the use ofsomething you explain the terms:
the reason for undertaking the calculation in this way. Rcnt-
'• to pay rent for the use of • actual receipts
a-Perwn couid always have sold its typewriters for £5600 something over a fixed period • net amount
after one year, restricting its costs to £2400. The fact that the
of time
Cnn chose to keep them for reuse in the next year indicates • to obtain the services of
5. Look at paragraph 6 again. What
words have the same meaning as.
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.nalc nioocy, doe. wdl 8.
Batodt^T
• ccRun
• brought on ooeielf
6. Look It psngwph 7 again- What
,ronl, have the aame meaning aa:
• laitiog
Look at paragraph 9 again. Can
you explain the words:
• weat^and-tcar '
• loatofTalue
• purchase price
9. Look at paragraph 10 again. What
words have die opposite meaning
• Note down what document the lecturtt is going lo talk aboet
to:

• revenue,income • Note down what this document shows.

• often
« ioflo«'
7. Look at pangnph 8 again. Write
• preceding Stcti«a 2.
a sentoice tbowiag fou know die
s^eaoing of die words: 10. Look at paragraph 11 again. What FIGURE 11-2
• eapitalgood words have the aame meaning as:
• qKatiat • for diis reason,(rom here Soark International
• treat • eaixying out(a piece of work) Balance Sheet
• overall plan 31 DceemberIM?
• mecety
• rental • limtttng ASSETS UABIUTIES
Cash £40 000 Accounts payable
IV. Glossary £90000
Accounts receivable 70000 Sakria payabk SO 000
Inventories iOOOOO Mortgage fron insuiance CMBpiny ISO 000
* revenue n:doanfa tbn. thu nh4p corporation tax: thulT-I^ tde Factory building Bank 60 000
* excess of revenues over costs: cash flow: dfng d6i mft, luu (origiiMl value £250000) 200000 350 000
Other equipment
ph£n dtAj #.11« it#idmh thu trfr ht^ti6iinft (orituui value £300000) ISO 000 Netwwib 240 000
'chiphf physical capital: vfn v^t chtft
* sccounUmtn: k^'to&n vi8ri durable goods: hkng lAu bfn 590000 590000

* incoine stAtetnent: Vf lfh»t physical aaaets: tfi afn v^t chKi

thu nhip * Note down what the balance sheet fists.
depreciation n:kh£u hao
* profit-aad-loM account: bang k€ ' outlay n: chi phf, ehi tifu, phf
khai If Ui, bang hyfh If lii t^ What docs diis provide?

B. Understanding a lecture^
StcHotti
1. ^''^^•^^hc^pmoUkcturc.ihidaimtaAoauaioMtoh^PYai • Note down what is meant by'accounts cKctvable*.
tmderstand it. As you Estea,answer(he questions below.
.SeOioM 1 • Why is the value ofthe factory building and other equipment not shown at
its original cost?
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• lyhyiMsSruric gott bank loan?
. Note jJown the tarn Che lectuttftelli you to.
• What doci this tennxeptoent?
StcttenS^
• Note down net worth is shown as a habiliQr.
Sectiee6_
• rnmpWi- the foDowmg sentence with the teem die lectucer uses.
Ifyou want to bi^ the company you should make a
• The tf^p'rrr gtres two examples ofintangibles. What ate they?
• What do economists call these tntangibles?
2. Now wind die cassette back to the beginning of the lecture and listen to it
again. Ihis time» instead of answenog ijuestionap take notes. When you
have listened to the whole of the lectuccp you will be asked to give a short
oral auimna^ ofit So make sum yoo note down the important points.
3. Yon should abo write a summary of the Jccture,based on your notes.
C. Understanding a printed text i2\
the following text carefully^ looking up anything you do not understand.
EARMHOS
wc must consider what the firm does with its profits
t can pay them out to shareholders as diWdenda,
56
Unit 11
or keep them in the firm as retained caminga.
/Mcriurf Retained earnings are the part of after-tax profiu that ia
Mmfagt
ploughed back into the business rather than paid out to
shareholders as dividends. '
How Retained earnings affect the balance sheet If they are kept as
rttainml
tonOnga can cash or used to purchase new equipment, they increase the
btuMcd asset side of the balance sheet Alternatively, th^ may be
used to reduce the firm's liabilities, for example by rep^^ing
the bonk loan. Either way, the firm's net worth is increased.
OPPORTDRITY COST AND ACCOmmNO COSTS
2 The income statement and the balance sheet of a company
provide a useful guide to how that compaziy is doing. We
have already hinted that economists and accountants do not
always take the same view of costs and profits. Whereas the
accountant is chieffy intexested in describing the actual
receipts and payments of a company,the economist is chiefly
Thatmjcrmt
imertstaof interested in the role of costs and profits as detenmnants of
oceeufUonts
and
the firm's supply decision, the allocation of resources to
aconomitU particular activities. Accounting methods can be seriously
misleading in two ways.
3 Economists identify the cost of using a resource not as the
payment actually made but as its opportunity cost.
Oppertui^y Opportunity cost is the amount lost by not using the
coal
rewurce (labour or capital)in its best ahemathre use.
To show that this is the right measure of costs, given the
questions ccoaomista wish to study, we pve two example
4 Any persons working in their own businesses should take
into account the cost of thdr own labour time spent in the
business. A self-employed sole trader might draw up an
income statement such as Figure ll-l, find that profits were
£20 000 per annum, and conclude that this business was a
good thing. But this conclusion neglects the opportunity cost
of the individual's labour, the money that could have been
earned by working elsewhere. If that individual could^ve
earned a salary of £25 000 working for someone else, being
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 self-cmplpyed is actually losing the person £5000 per annum
even though the business is making on occounting proHt of
£20 000. If we wish to understand the incentives that the
isarket provides to guide people towards particular
occupations, we must use the economic concept of
monqrd«„hem.,u,.nn„tetr.u=otlower^'
opportunity cost, not the accounting concept of actual Supemonnai pmnu pmvido Uf true economic indie«or of
payments. Including the opportunity cost of £25 000 in the ^well tlf owner,are doing ty tying up thdr fund,in the
Income statement would quickly convince the individual that budne... Supemonnai pmOU. not mxonntln, pmBta.
the businesa was not such a good idea.
the memnrre
into or out ofth« will explain the incentive to .hill nnource.
a buaineas.
FIGURE ll<3.Accocatlag sod epportuaity costi:(wo Inportsal adjastoieats. The itM 6 Thcae are the two moat important mdiuitmenti between
a4JustmMnu
Eoonomic costs rqiresenis ACCOUKTTNO:INCOME STATEMENT b«tU«8R accounting and economic notions of costs and profiu. In
the qiponuniiy costs of
Revenues UOOOO
ficcDunli'n^
OfUt
other caaes there be minor diflerenees - for example,
resources used in
production. Acowntiag Costs
tconomie since if la hard to calculate the resale value of a accond-hand
5Q OOQ notionattf
costs Include most Accotmting profit eoMia and
factory, economic and accounting approaches to depreciation
economic costs but SIC
mm.
OPPORTUNny COSTS;INCOME STATEMENtT proflu may vary slightly. In many cases the two approacbea are the
fikelx to omit osts ofthe Revenues same - for example, the wages paid by farmers to students
owner's time and tbe £80 000
opportwuty cost of Costs; tar help in picking crops are not only an accounting cost but
flnsncial capital used in Accounting costs £50000 an economic cost Wthout maldng these payments, bimera
the firm. Econotnic Cost ofowner's time 2S000 would not have been able to attract temporary student
(supemonnai)profit
deducts tbe rig^ measure Opportunity cost offmaocial capital labour resources to tbe activity of crop picking.
ofeconomic costs from (£30000} used in firm,all OH 3000 ■ 7>QQP 7 Figure 11-3 summarizes the two most important adjustments
revenues. Economic profit(supemonnaO £ ?00Q that must be made to accounting costs srvj profits to get
economic measures of coats snH profits.
5 second place where opportunity coat muat be counted ia
I. Check your understanding
with rcapect to capital. Somebody has put up the monqy to
start the busineas. In calculating accounting profiU, no coat 1. Read the text duou^ again and make notes on dxe fiyiowmg^
ia attached to the uae of owned (as opposed to bonuwcdj
• what is meant by'retained profits'
finandal capital. This financial capital could have been used
^cre.in an intereat-bearing bank account or perhaps to • bow retained profits a^ect die balance sheet
tar .ta™ ta.differ^., opportunity co.. of • the different interests of accouatants atid economists

cMpm I. I„clud«i i„ a« oarnomio co.f of the • in what ways,according to the writer, accoundng methods ate midracfii^
^8.but not if acoounting coaf. For example, if the • what is meant by opportunity cost
haveeamedaretumof lOpercent elaewhem. the • what is meant by supemoanal cost what the two importsru adjustments
^^o".T the money ate

2. When you have done that cither write a summary ofthe text or give an oral
n»kc a profit,'
nakeaaDrafit economist. caU thisthis
*l«*ucting Supemonnai
cost, the pmfif.
business stfil summary of it
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Unit II ^
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 ielf-cmployed Iroder: nhh t,; and sold on a competithrc market If I bring my ton of coal to market. I will
•doanh receive a number of bids from prospective buyers: %25J0Z, $24 98 $25.01
accounting profit l^i nhuin ktf These represent the values of my coal to, say, three utilides.I pick the Jd^t-
■ shareholder J15 Co dfing $25.02. The opportunity cost of this sale is the value of the beat avadable
toin
. dividend mc^tCtc economic profit: nhu$n kinh
alternidve - that is, the second-highest bid at $25.01 - which is almost
•. to ploiigh beck:tdi diu tU identical to the price that is accepted. As the market approaches absolutely
• belance eheet: bin cfin dfii thu perfect compctidon. the bids get closet closer tmdl in die timh the sffond-
eupemonzud profit nhu^n hi^crt bid (which is our definidon of oppoctuaity cost) exact^ ecpials die
chi, bin quydt
siiu ng^ch highest bid (which is the price). This example shows that in conqieiirive
> net worth:tzi gU ring
• opportunity 00^ chi pMcdh^i net profit l&i(Wi nhuin)ring markets, the price that will be'generated equals the beat avaOabk akonattve
capital return: sulTt vdh and is therefore equal to the opportunity cost,
• accounting cost chi pW loin
• gconoipic cost chi phi kinh OpportuniQr Costs outside Markets * The concept of oppoitanuy cost is
particulsidy crucial when analyzing ttanaactions that take place outside
How do you measure the cost of a college education? Ihe value of a dam ox
D. Understanding discourse pack? Of a draft army? Of a health or aafety r^;uktioD? For these we need to
turn to oppocomi^ cost for sound ecoooouc analyais.
A jmdcot is not feeling well ind has gone to the medical centre. Note down ■ What is the opportunity cost of going to coQege? For a puhhc UDivaaity,
what is wTO(^ with die student and what die doctor tells him to do. tuirion, room,board, books and expenses in 1988 were around $5000.So die
opportunity cost is $5000, right? Na You mostindude as well die oppoteatatf
cost of die timt spent studying and going to classes, A 2D-yeac-^^ high school
graduate holding a fuU-tnne job would on aveca^ cam about $14,000 in 1988.
Thus the opportunity cost of college is $19,000 per year cadiec than $5000 per
year.
"The notion of opportuniqr cost might explain why students watch mote TV
the week after exams than the week before rrama. Watchiog TV ri^before
an exam has a high opportunity cost, for die alternative use of'tsne (stui^rii^
E Extensive reading - English-Vietnamese translation would have high value in imptovii^ grade performance. Aliet exami,time has
a lower opportunity cost
'Say the federal government is thinking of drilling fbc oH at Yoacsxute Natiocal
OPPORTUNITY COSTS IN MARKETS
PaA. A storm of complaints is heard.The secretary of energy nys,"What's all
Op^ttumty Costs in Markets • You might naturally say, "Well, now I'm die ruckus about? There's valuable oil under there, and the land's not worth
two bits an acre."
v"' of the .odal In fact, the opportunity cost might be very high. If oil drilling brou^t lois of
noise and new roads, it might spoil the park for hikers and bear watchers. The
opporturuty cost might not be easily measured but the recreational value ofthe
P <S"ah cppomooq,ece'
A..™e that a commodity
"mpeddve nmltet it like coal .ceo
i, adly ia bought
that land ia as teal as is the energy value of the battels ofoil under the sotL
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Unit 11
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 • tAig chi phh total cost(a)
TdNGCHlPBi.cHIPHlftfTBlfiNVACHlPHlKHABlfN • dii tlAu;chi phf: expenaefa)
Hnea

• aan lu^g;diu ra: output

tbihiftutopreaent
• ChlpWbftb«n ti^ theo mCc diu r»: to ir^rv^n
• cAng nbAn pbu tridi cic dAy with the level ofou^)ut
Chi pM bit bi6i(FQ cua m^t cdng ty Ik gi? D6i khi chi phf nky d\i<}c gvi chuyin aan xuit: productton
U'overhead" ho|c "tunk coaU". Chdng bao g6m nhOng mvc nha U tifo workera to ataff the production
thanh toin hflp rf^ng xty dypig v4 mua trang thitft bj, ti&i W,tiiSn tra iJLi
guit tifo vay, ti6i luictng cho c4n b^ trong bifin chif v.v... SS tife nAy G. Talking points
phai tn ngay ca khi cAng ty khdng aan xuA't ra aan phitm oAo vk »6
tiin nky khdng thay dfi ngay ca khi aan lif^ng(diu ra)thay dSi. Do *^y,
chi pM bdTt biAn U Itf^g chi phf thanh toAn d^ l^p vdi mute ddu ra vk 1. Say you ate a Vietnamese tnrdler in. the United States. You «e
luhn cd'dinh. considedng vdiethet to Oy or to take a bus horn Adaota to New Odeana
The aidaie is 100 dollars, and the ffigbt taka 1 booc. Bos &ie is SO
• Ch/phfUiibfkn
and it takes 6 hours. Which is the most ecooomical way to tcsvd fee
Chi phf kha biln (VQ Ut chi phf thay dift theo m(3c diu ra. V( dy: a. a business person ^ose tMt'e costs 40 dnifa** pa boo^
Bguyen lifu cin cho aan zuAt; c6ng nhkn phvi trkeh cic dAy chuydn aan
xuA't; nhiin liSu,inh sing vA di^n dl ho^t d^ng nhA m&y; vA nhihig thd b. a student whose time is worth 4doDar per houDp
nhtf v^y. c you?
Iheo dj'nh nghTa, chi phf khi bidh bit diu tgi 0 khi lifting lA khAng. DA Show how the concur ofopptxtuoity cost is cxodal here.
lA m6t phin cua t&ig chi phf vA d6 ting theo diu ra. Chdng ta hiy tdm 2. What's die point of calculating opportuni^ costs? in doing buitness? in
tit khii oiAm vi cic chi phf niy nhtf aau: enteicainment?

- Ting chi phf lA t&ag mde tiln chi tiSu thip nhft cin thii't di aan xuA't
ra mil lu^g diu ra (Q). dii phf(TO ting khi lu;fng(Q)ting.
- Chi phf bit bi& lA tSng aA ti6i chi tiiu phai tra ki ci khi chua c6 diu
ra. Chi phf bit bi& khAng bj anh fatfdng bdi bit j|^ m^t ad thay d^ nAo
vilu^gdiur^
- Chi phf kha bi£n lA nhOng chi phf thay dii theo mute diu ra - bao gim IV.

nguyin Ii#u, tiSn cAng, nhiAn lifu vA tit ca cic chi phf khflng cAdjiih. fi'.-'or • « a:

Theo dinh nghla, ting chi phf luAn luAn blng chi phf bit biin cAne vAi , o) la.'. :
ehiphfkha biih:

TC.FC + VC

cin bA trong bi& cbfi feng-^enn

cmplcyee
chi phf bit bi&;fixed co6t(8)
chi phfkha bifih: variable oost(a)
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 pront.are owned by ehmholder.in J.
unit12 the value of the factoty. output
«me a, the value of incomi.. "=n>ecte<l to be the
Initially we .hail .unp^, ^
country with no links with the rest «f»», a
NATIONAL INCOME ACCOUNTING .hall introduce the rest of ^ w.
P«d.ely the i„ue of W u. LT- "f
other Inconte to foroip>er. that etZTwlJ'wT^
dUtlnguUh ODP front the coneept of ^"
A. Understanding a printed text(1) Whale
dottd
t^ced ea^er. When an econotny ha. „o
aeoaomjf is
I. Improve your skimming with begin
We the re.tbyofthe world we how
coneidering My that
ourit i,a doMdcueuUr
timple eeoitooqp
flow
duigram .hould be attended to recognixe that traneaction,
Tlic foQowiog text Now look at these questions: do not take place excluaively between a single firm and a
discusKS in mote detail the 1. Look at the heading and say what you single hou«Aold. Finns hire labour ««ice. bom
lolqect of National 'expect to find in the text houaehokia, but they buy raw materiaU and machineiy from
Income Accounting. Z What is GDP?
other firms. If we include the value of the output of cara in
GDP we do not also to include the value of the atcd
Look at the xny it is 3. Whatis mZvrndiire? sold to the car producer which Is already in the value of the
drr^ed into sccooos and 4. What do jou do in ortici to avoid double car.

pstsgraphs. Pay atteotion accounting in the GDPr* To avoid double counting, we use the concept of value
to the notes in the mugift. 5. What example Is given to calculate the GDP? Thseoneapt Value added it the increase in the value of gooda aa a
^Kxlu*
eddsd result of the production process.
NATIONAL IHCOMS ACCOUimNO
Value added Is calculated 1^ deducting fiom the value of the
firm's output the cost of the input gooda that were used up in
UeasurittgGDP
the act of producing that output
Gross- domestic product (GDP) meaaurea the output Closely related to the concept of value added is the
produced by factori of production located in the domeatic distinction between final goods and intermediate goods.
economy regardleas of who owns these fiu:tor8. goods Final goods are goods purchased by the ultimate user.
MiatCOP
auasuru
GDP m«.urM the value of output pnxiuceti within the Th^ are either consumer goods purchased by households
^notny Moet of thi. output wiu be produced by doroeetic or capital gooda such aa machinery which are purchased
^ofpr^uction but thero ettceptions. Suppotu, hUanatihiUa by firms. Intermediate goods are partly finished goods
^ build,.c in-the UK. ^hey goods
which form inputs to another firm's production process and
are used up in that pronss.
output U p« of"rp'frth""However, the compan/a Thus, ice cream is a final good but steel is an interm^te
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 usea as an input to its
„hich «.n.c other fitm
production process- 7 The machine manufacturer spends £ionfi k •
which i. men converted Into a machine to
The « r. producer for £2000. The value added of the nZZ
tgampkin
An
^ nd it is important that you should study it unUl
mastcml these ideas. We assume that there are manufacturer 1. £2000 lea. the £1000 .pent on .teel inpuu
four firm, in the economy:..nml producer o producer of And thia net revenue of £1000 accrues direcUy or Indirectly
good, (machine.) u«d in the car induatty..tyre to households as income or profit Since the car firm intends
to keep the machine, iU full value of £2000 is shown under
^eer and a car producer who aolla cara to the flnal 'Final expenditure'.
burner., the houmitolda. Table 12-1 .how. how we im„r
guiculate GDP forthis simple ccononty. 8 Like the steel producer, the tyrt msnufKtuier produces an
intermediate output which does not show up under
•mc sted producer makes £4000 worth of steel, one-quarter expenditure. If the tyre manufacturer also owns the rubber
of which U sold as an intermediate good to the firm that trees from which the tyres were made, the entire output of
makes machines and three quarters of which is sold to the
car producer to make cam If the steel producer also mines £500 U value added and will contribute direct^ or indirectly
the iron ore from which the steel is produced, then the entire to household incomes. If the Qrre compaz^ bought rubber
£4000 is vsJue added or net output by the steel fuin. This from a domestic rubber producer we should have to subtract
revenue is directly paid out in wages and rents or is residual the input value of rubber from the tyre manuCscturez't
profits which also accrue to households as income. Hence the output to obtain value added or net output, but we abould
first two rows of the last column also add up to £4000. have to add another row showing the value added of the
company producing the rubber for sale to the tyre compaiqr.
Although finns have spent £4000 buying this steel output,
this does not show up at expenditure on final goods since 9 The car producer spends £3000 on steel and £500 on tyres.
steel is entirely an intermediate good which will be used up Since both are used up during the period in adiich cars are
in later stages of the prodtiction process. made, we subtract £3500 from the car output of £5000 to
obtain the value added of the car producer. This net revenue
TAfiLE IM:Cskolatiag GDP pays households for factor services supplied, or is paid to
them aa profits.
(I) (2) PI m (5) W (7)
(Y)on SELt£X BUYER
10 Finally, the car producer sells the car fijr £5000 to the final
TRANS- VALUE EXPENDITURE FACTOR
consumer-households. Only now does the car become a final
ACnON ADDED ON FINAL EARNINGS
good and iU fuU price of £5000 is entered as fins!
VALUE GOODS
Sted
expenditure.
Sled producer Medtioe producer £1000 £1000 £1000
StttI Sled producer Cw producer
11 Table 12-1 shows that the gross value of all the trmnsactwns
£3000 £3000 DOOO
Mscfaise Mecfaioe producer Car producer that occurred is £11500, but this overstates the value of the
£2000
"tyra Tyre producer ^producer £ 300
£1000 £2000 £1000
goods the economy has actually produced. For example, the
£ 300
Cwi CerpfOdticw 3oaatfficB
s
£ 300 £3000 that the steel producer earned by selling steel to the
£3000
ToulvilueofinuitietlAnc
£1300 £3000 £1300 car i. already included in the final value
£11.500 output It la aimply double-tmunting to count ttu. £3000
£7000 £7000 nooo twice.

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 c

12 Column (5) ,howa »>,

production
the correct process,
measure of th.. at^^000
each .^age
af^ t
aach producer pays out th"e a closed economy: n^n Idnh
intermediate goodr On phim
households either as direct "" ddng (4Adng e6 quan h$ budn
tnmggiao
ban vdi bin n^odi) net output: tan lu^ng rdng
P^fils. ofhousehold
oolunm the table.er^*^'
If we^l! "°°° -" indire«
the ^ an opened economy: n4n kinh ti net revenue: doanh thu rtog
to households as in^'^s.^"""^ "■> '"= Ps^«u md (cd quan h4 ngoqi thtAtng)
value added: tri gi& gii t&ng
^ctor earnings: thu n>4p Ui
nhin tS ain zu^t

U^th« 13
tabit
confirm* ">«»ure If «e B. Understanding a lecture

1. You "e DOW ^ang to hear pan of a lecture, divided into abort aecoooa to
make ears. ® '""""ttagl.machinery used to help you undcotandit As you bteo, answer die queatioos below.
II. Improve vour Intensive resrtin,. iMfiusr 1
* Note down what die lecturer is going to talk about in

«faen«t,^k »P questioai:
rcfctcacc book. TTicn answer the foUowine "y o» i-m. br .dicrbrury oror la this statement correct or incorrect
Ihe complete economy consists only of
1. What does GDP measure?
2. What is the difFcrcncc between (tSDP and GNP? Ihe lectuxw mentioQS 'cccmoinic naitsf. What do dicsc

3. What is a closed economy? an Open economy?

4. Do you include the value of the steel sold' to die car manu&cturer if you
include the value of the output of can in GDP? • Note down what the lecturer intends to ^noce.
5. What axe intermediate goods?'
6. What are final goods? Is steel considered as final or inteitnedUte goods?
TAILE12-2} Traasactleiis by beeaelwlda and Otto
Why so?
4. What is the synonym of value added?
7. HOUSEHOLDS FIRMS

8. How do you usually calculate the value added? ' Own bcton of production which they Use ftcton of producdon supplied by
9. Look at table 12-1 and say three ways of measuring GDP supply to nrms households to produce goods and services
10. Do these three ways of calculating GDP g?vc different answen? Receive incomes from firms in exchange Pay households for use of bctots of
for supplying factors ofproduction pfoducdOR
III. Glossary Spend on goods and services produced by Sell goods and servica to households
firms
national income accounting: W?
to&n thu nh^p -quric dfin Stetion3_
gross domestic product: tdng sari
phdm'quffcnOi Unit 12
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 h.ve lutened to the whole of die leelure, you wUl be •
•ummery of it So muke 5u,e you note down the hnpo^pXr "
3. You ehould .ho write..utntnuty of Ute lecture. b«cd on your no'tct
C. Understanding a printed text (2)
Read the foUowlng text c«efully. looking up anything you do not underatand.
OBJECTIVES AND IW8TRUMEHT8 IN MACROECONOWTrw

1 As we weigh the claima of competing political Ggurea. w

puzzle over the rise and decline of nationa, !t <pudc^
becomes clear that a few key variables stand out in
importance. In judpzig a nation's perfonnsnce, time and
again we encounter gross national product (ONI^,
StdicitS^
emplojnnent, inflation, and net exports. These are the central
• Mote down the duee measutemeots d)e lecturet lists. measures by which we Judge macroeconoimc performance.
2 For much of histoiy, nations did tittle to affect their overall
economic performance. But with the development of modem

Sa/U9 6_ TABLE 12-3: Objectives and iastramcats of nseroccoaomks

The left'hind column dispUyi the msjor objeoim of mteroeamonic poiky. These |oeb cnbe
« Iitfaii statement conect atiocosec^
found in netional laws and In the staiemaUs of political laden. The ri^-haod cohiwn asataini
Yon win get a difioest estimate depeodit^ on the measurement the major ixumiments or policy measures tvaiUle to modeni cconotnies. These are the ways lint
poll^maken can afTect the pace and direeUoo ofeconomic activiiy. These otqecdvn and
jou use. □ instnunents will be discussed In the first part orthls chapter.
Stttiett? ■ OBJECTIVES INSTRUMENTS
* Is diis statement canect or incocrect?
Output: Flsesl policy:
Yon,^ teach a difflrrmt conchaaon ifyou taJa into account the High level Oovemment expenditure
questions the lecturer nises. q Rapid growth rate Taxation

EmploTment: Uonetary policy:

Note down the tenn the lecturer uses to dcsoibe this system. High level of employment Control of money supply
affecting interest rales
Low involuntary unemployment
Prlce-levc! stability with free Foreign economics:
Trade poUdes •
markets
Exchange-rate Intervention
2. Now wind ^ Incomes poUcles:
•gain. TTii, iojtetd of in«iF lecture and listen to*it Foreign balance: From volunlaiy wage-price
Export and import equilibrium
.n^cong note. When you Exchange-rate stability guidelines to mandatory controls
71
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 nomica, taiowlcdgc has grown about how
the economy. Wc now understand better the p. Undorstanding dlscoursB
*'°'^ents or tools of macrocconomlc policy. Wc know why
in the money supply or taxes and cxpcndilun., Listen to a tutor giving some adviV*
effect our economics. And having lasted the fruit of
pacroeconomic knowledge, few governments abstain from
sttcmpting to affect output, employment, inflation, and
foieign trade.
S Table 12-3 is a list of the m^or objectives and instruments of
tDsooeconomic polky. We will now turn to a detailed
discusnxi of esdi- thereby illustrating some k^ questions
that cmdRmt modem macroeconomics.
E. Extensive reading-English-Vietnamese translation
I. Check your understandina
THE OVERALL PICTURE
I. Read die text duou^ tgain tad mikes notes on the foUowio^ IMiat fiaeneeonotmes Is the study of the eeonomy ss a urfiola
viocra'
• The objecdves of mactoc«>oomlcs ■eofwmia Macroeconomics ia concerned not with the details - the price
k
• The msccoments of niscioecoQoaucs of idgarettes relative to the price of bread, or the output of
• The ccnrtal messuies in pi^^ag mKtoecoaomic perfonnince ofa country cars relative m the output of ated - but with the overall
• Inflidon rate
picture. In Part 4 we shall study issues such as the
determination of the total output of the econociy, the
• Unemployment aggregate level of unemployment, and the rate of kiflatioa or
• Micsoecononuc polkiei msde by govemmeots. growth of prices of gpods and services ss a whole.
^ When you hsve done that cithctwiitetsiimmaiy ofthe text or giresn oral The distinction between microeconanics and
summary of it The macroeconomms is more than the diffrronce between
Kmitationt economics in the small and economics in the large, wfakh the
H. Glossary qfiwdats
Qreek prefixes micro and macro suggest The purpose of the
analysis is also different.
objective n: muc tilu
money supply:cung ti«n A model ia a deliberate simplification to enable us to pick out
iustnimentmctogcp to price oneself out of jobs: d$t the key elements of a problem and think about them dearly.
foreipj economies: kinh tt d(S Although we could slutty the whole economy by pieemg
ntO|i
.pA q»i4 cso do khdng thifft tha
together our microeconomic anabrsls of each and ev«y
rate intervention: can
economic growth: tdng tnlSne market the resulting model would be so cumbersome that it
^*iot^p4hfido6i kinht^ would be hard to keep track of all the economm fcrces
'-toxportciutftkhiuring work. Microeconomics and macroeconomics take eren
approaches to keep the analysts mansgesble. detailed
on a
Microeconomics places the eoiph"''
72
73

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 undcwtandlng of particular markcU. To achieve this amount
oppnetM* of detail or magnification, many of the interactions with other
takm niarkcts ore suppressed. In saying that a tax on cars reduces
the equilibrium quantity of cars we ignore llie qUcaUon of
what the government does with the tax revenue. If the UnMrnphif-
government has to borrow less money, it is possible that m»ni
interest rates and the exchange rate will fall and tlmt
improved international competitiveness of UK car producers
will actually increase the equilibrium output of cars in the
UK.
Idicroeconomics is a bit like looking at a horse race through a
pair of binoculars. It is great for details, but sometimes we
^ a clearer picture of the whole race by using the naked
eye. Because macroeconoaics is concerned primarily with
dK interaction of different parts of the economy, it relies on a
different simpUScation to keep the analysis manageable.
Macroeconomics sinxpUfies the building blocks in order to Output
and
focus on how th^ fit together and influence one another.
gnuMh
js concemcd with broad aggregates such as
the totsJ H«>maTirf for goods by households or the total
spending on machinery and buildings by /inns. As in
watching the horse race through the naked eye, our notion of
the individual detaili is more blurred but we can give our full
attention to the adwk picture. We are more likely to notice
the borae sneskmg up on the rails.
The Issues Metro-
7 We vow
now introduce some of the main ««
issues'in
eeenomie
mrnmrmnnmict. We pose a series of questions which form
peScy
the theme of the analysis in Fan 4.
® Infialioo - The annual inpation rate is the percentage
m* increase per annum in the average price of goods and
services. In Chapter 2 we introduced the retail price Index
(WJ. a weighted average of the prices households pay for
goocU and services. The percentage annual growth in the RPI
is the most commonly used measure ofinflation in the UK.
c.u«. inmcn? The money .upply? Tnuic Union.?
74
Why do people ^
cauee unempj<^ent? These ore .«««
•hall seek to answer. ' we
10 Unemploymenl - Un«npIoymen,1.. ^ _
^l>»ple re,i.tered m looldn, fc, bo.
ne vnempleymeex mm 1. me percent.,, of.h, Ubour
tha i unemployed. The lahourforce U the number of people
working or looking for work. It excludes aQ those, kooi rich
landowners to heroin addicts, who are neither wortdne nor
looldflg for work.
U Unempltqmicnt u now high. Why did it increase so much in
the 1980s? Are workers pricing themselves out of jobs by
greedy wage claima? Is high unemployment necessary to
keep inflation under omtrol, or could the government create
more jobs?
12 Output and Growth - Real gross national product (real QNP)
measures the total inwme of the eranomy. It teSe us the
quanti^ of goods and services the economy as a whole can
afford to purchase. It is doseh^ related to the tiXal ou^t of
the economy. Increasea in real GNP are caOed ooanamic
growth.
13 What determines the level of real GNP? Doe* urtemptoyaent
mean that real QNP is lower than it might be? Why do some
countries grow faster than others?
14 Macroeconomlc Poliqr - Almost every day the newspapers
and television refer to the probJems of inflation,
unemployment, and slow growth. These issues are widely
diacussed; they help determine the outcome of elections, tnd
make some people interested in learning mere about
macroeconomics.
15 The government h«.v-ieW "f pdiey me«un:. Uuou^
which U cm. try .0 .ll«t performmme
.whole. 1. lovie.
.he money .uppiy. in.ere.t
I, tergc.. for the ou^ut m«l pnce. of n.tmom=»
industries,
75

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 can and ahould do is the subject of
^rdtur^within the field of economics and in the vdi tidn cdng cao cho nhOng ngudi rau^ Um vi^c;
f iar«. As usual, it is important to distinguish 3. Mflc gU in djnh hofc ling it. gig v4 tifo clog do thj Inicog l,do ^uy(l
» hc« m. ™y wor..
„d „onnativa iaauc. ralating to prioriUa. or v^oo 4. Quan h§ kinh dfil ngoyi dxitjc dknh dfu bdi ty gifi hfi do4i dn djnh.
iudgerocnts. In the ensuing chapters wc tiy to make clear nhkp khiu giam vk xu£t khiu tkng.
■ which aspects of the policy debate refer to diflcnng beUcfs Glossary
about how the economy works and which aspects refer to
differences in priorities or value judgements. * tknggkpddutodouble gik ia ih'nh:stsUe pries
* tkng vqt'to al^TOcket ^ gik bfii dokk fiiragn exchsnge
F. Vietnamese'Engnsh translation * vft Idn: to struggle rate

CHINH SACH KINH TE f)6l NGO^ G. Talking points

M^c tifeu cu£ cfing cua chinh s&ch kinh \£ v3 md Ifc nh^m diy m^nh chfnh 1. Talk about mscto-eccaomic poficj of the VirmiTnrtf govemmenc sc
s&ch kinh t£ dfii ngo^ hdp Mi?c dfch niy ngiy clmg tth nfin quan tr^ng
khi csc qu6c git trfin toin c4u ngiy cing gin b6 vdi nhau hdn dudi Wnh present Which Directives has Vietnam achieved?
thffe mliu djch vi tki chinh qu& 2. What do you *blnlc Vietnam should do to cmb inflaoon?
T£t ca c&c "fo irinb t£ tr&ci th^^di d^u Ik kinh t£ md. NhOng ndh Idnh tiTfy
ahip khiu vi xuk't kb£u h&ng hda vk dich vy; vay vk cho eke qude gia khkc
vay; bit diudc cdng ngh^ ntfflc ngoki hoic bin ckc phkt minh sing ch^ cho
nude ngudi dkn cua ckc qudc gis nky di khip nod trkn thk'gidi. hofc di
1km vi$c bofc di choL Vl$c giam gik phi giao thdng vfn tai dk 1km cho mdi
quan hf qudc te ngky ckng trd nkn gin bd hdn so vdi trUdc dky.
Kinh tk'CUA ckc nude trkn tbk^gidi cd mdi quan h$ kbkng khft vdi nhau. Ckc
chinh skch kinh t^cus My cd anh budng sku sic tdi chiu My La Tinh, Nh^t
Ban vk chku Au.Mka mkng thkt thu d Ukn Xd dk 1km cho gik ngfi cde t&ng J..'- " . - li'
Ifin vk gky ra tinh tryng Igm phkt gik ludng thyc chfnh d chku My vko * if.'
nhiing nkm 1970. Vi^c tkng gik diu cua ckc nUiSc luk't khiu diu Ji^ dk lAm
cko 1^ Phil ri thTt nghifp 5 MS ting gtp d«L Vio <Uu nhiing nim 1980, f «.» , «

^ T''v". •'i d.0 cSc nnac.chiu M9 L.

TW..Nhanrni(fcniyplu,vg,IJ;.d^lriajcl„„^j^„p,jj
Oi^ lit mpo lUu cu.chinh rfch hinh ti'W md nhu sau.*
L ^•^^"^thvcMcnyiniiyn.ttting-.
"®'"''"°""»'"^lJtWtnghi«p,hfp, cung ck'p vi^ 1km UTt
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 uattis •^'.rquTnuT
MONEY AND BANKING • -"Oi-oo of «himg..
Bart*r
Monomka
t^ZZT"
traded directly or ""
swapped for other goods. are

Understanding a printed text(1) In.b«ter economy, the kUo «ul the buyer coch murt
WMt «.mething the otherhM to oner. E«d. per^n u
L Improve vour skimming ■ntnullaneouely.eeUer .buyer. In order to «e.Chn
you must hand over in exchange a good or aervice that th^
The following text wiB Now look tt these quesdooK
cinema manager wanta. There has to be a daubU mtnefocnce
1. Look at the main heading and lajr vdut you qf wants. You have to find a dnetna where the
introduce you to die topic of '"'^'^ta vdiat you have to ofler in exchange.
f*p«irf dtf text to be abouL
money. Look at the way it is 2. Suxzoname the fist fiuKcion of money. 77w dU- 4 Trading ia veiy expensive in a barter ecoaomy. People must
divided into sccdoos and 3. Sumtnanse the second and third functions of
odvantagtt
qTabortcr spend a lot of time and effort finding otbera with whom thfy
paragraphs. Pay attendon to monqr.
aeoiumy can make mutually satiafactoxy swaps. Since trm,. and effort
the and notes in die 4. Summazise die fouith funcoon ofmoo^. are scarce resources, a barter economy is wasteful. The mv?
margin. 5. How many difZetent lands of money aie of money - any commodity genera% accepted in pigment for
dieie? goods, services, and debts - the trading procos
iimpLer and more efficient
Read die passa^ dirou^•nd find die answers to those quesdons* Remember,
you do not have to nnH<»refypd every word to answer them. Other Functions of Monty
Ihs unit«/ 5 The unit ofaccount is the unit in which prices are quoted and
M0NC7 AND ITS FUNCnONS f2£asti/ll
accounts are kept
1 Althou^ the crucial feature of money it its acceptance aa the In Britain prices are quoted in pounds sterling; in France, In
the meant of payment or m^um of exchange, mon^ has three French fnuics. It is usually convenient to use the unite in
ftuioieiu^
mflMy
other functions. It serves as a unit of account, aa a store of which the medium of exchange is measured as the unit of
value, and aa a standard of deferred payment We discuss account as well. However, there are exceptions. During the
each of the fijur functions of money in turn. rapid German inflation of 1922-23 when prices in marks
The Medtua ofJSxciuuige were changing veiy quickly. German shopkeepers found tt
more convenient to use dollars as the unit of account Pncw
f ^ ""O » one-hlf of were quoted in dollars even though payment was made in
marks, the German medium of exchange.
good, in ^change for money. Wo
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jif0A«ytsa
6 Mon^y is.store o/«.l«e becusc i. can be used .o A £10 note fe worth far more «
xl0r«</ purchases in the future.
vehM
TB be accepted in occhange. money has to be a ^rc of value. p'c« of high.qua,i„ P.P.,,Stalfcru^'
' "
S^body would accept money a, payment for '"Pf ecto. csoood. iho soKmo. y^'
them down and seiiimr ^^
Uy d the money was going to be worthleaa whtm they tned
to buy good, with it tomorrow. But money is neither the only
nor neceaaarily the beat .tore of value. House., .tamp med- of exchange.
mcdrum nwourccB
Sincerequired to produce money L
the manufecturing t* a
collection., and totcreat-bemrng bank account, all serve a.
store, of value Since money pays no Interest and its real why doesnt everyone make £10 notea?
purchasing power is eroded by inflation, there are almost 9 The «^tial condition for the suiviwal of token money ta the
certaioly better way# to store value.
restriction of the right to snppfy ft. Private production is
illegal. >
UongjfOMa 7 Finally, money serves a.a staiuiard ofdeftrred payment or a tmgatiandar JQ Soctefy enforces the use of token money by "laVTwg {{ upt ■
a^trrmd
unit of account over time. When you borrow, the amount to tender. The law says ft must be accepted as a of
paymMM be repaid neat year Is measured in pounds sterlinB. Although payment
convenient, this is not an essential function of money. UK 11 In modem economfea, token money Is supplemented by lOU
can get bank loans specifying in doUara the amount money.
that must be repaid next year. Thus the kqr feature of money lOU money An JDI/inonq/is a mcdhtm ofexchangn based on the
is its use as a medium of exrfiange. For this, it must act as a
of a private firm or sutividuaL
store of value as wefl. And it is usually, though not
invsriably, convenient to make monQ' the unit of account A bank deposit la tOU monqr because ft la a debt of me
and standard of deferred payment as well. bank. When you have a bonk deposit the bank owes you
mon^. You can write a cheque to yourself or a third pei^
Piflerent Kinds of Ifoney and the bank U obliged to poj whenever the cheque b
8 In prisoner-of-war camps, cigarettes.served as money. In the • presented. Bank deposUs are a medhan of rrrhange because
nrneteentfa century moiiey was mainly gold and silver coins. they ore generally accepted as payment
These are commod^ money,ordinary goods with II. Improve your Intensive reading .
Camatodity
monay industrial uses (gold) and consumption uses (cigarettes)
which also serve as a medium of exchange. To use a Now«dfl.c «« csrcfall,. lookmg up -
comroodify mon^, sodefy must either cut back on other refcrcnco book.Tbon the followiog que.noo£
uses of that commodiCy or devote scarce resources to
producing additional qiumtities of the commodify. But there
1 Why do people sccept money?
are less erqiensive ways for society to produce money. Z How are goods exchsnged in.barter economy?
Tbfan A token money Is s means of payment whose value or 3. Why uistrading
t^.'^Whit the unitexpensive
ofaccountin intbMtereconoin
your country
RUruy
purchasing power as money greatly exceeds its cost of
production ©rvalue in uses other than as money. 5. When did Germany not use its own
II

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 ^ wriw 1.7 emu be iiKd B»te*d o( tntmrj «•"ore of
Ift Vl»t ewiyk oflOU mcxier A>c» die irritct gi^
jL ifniyov yom" tcanninp
h Look rt ibe 6at p^^gojA"g^
XHei mexk hm tbe «iae
metoiagii:
• pot off oil ktET
« ml
Z Look « pMigs^»i» 2oad 3igdn.
Whit vocdi hire the cppocite
futtosif to:
« cifccewi^
« ajea
•pkaaedereat
3. Look ct pm^ztpfa 4 ifgds. Whit
woedf cotreyond to theie
dc£&i&3Qt?
• shsxcd bf nro o;zzKxe peopk
• wotidt^ smoodiiy tnd weD
• flff
4. Look n pmgopb 5 •gitn-
TouexpUio the ibllowiog;
• w^tnn
• itifduTin of
•footed
5- Look' «t pingtipb C igain. Wh«
wwtli bin the ttmc mcwiiig u:
IV. Oloaaary
« tnmrn of payment phuong tifn
lhanh toAn
• doable coinddenee of wwm^ «
• madiurn of exchange: phucmg ii|n ^ noAn. ag trtag
traodt^
b^vfsdtUdi
• unit of account; d<m vi tfnh toAn • intmat beving bank
tAi khoan ngin fakog thtk lAi
niw
—1————m— • ttoro of value: phtWng Ufn elk • commodity moiwy; tiln king hOa
|ia
• ilandard ef ddemd payment: tiCu • fAdng Ads dbbb idm tMv
• wDcnivi^
• v^uMtvihte token money; U«ri tnqng trm^
diuin dio thanh toAn tii eh|in/tri tiln danb agfalB (tiAi^se tMb
6u Look It piagnph 7 igiin. Wlut aau. tbtlAc do cho viAc thanb toAn *0)
words hire tbe same meaoing ts: tnlehAm/trA aau • legal lendOT: ddng tila pbAp 4nh
« ihrap • barter economy: nin kinh tl hing ■ • lOU money: tiln nd^dp tiin ag
• ghiflg tbe nime or details of dfTihAjig Clio ngdn Adng): gtly biln og
• serving to avoid difficulty • to iwap: traod^i
7. Look at paograpb 8 again. What i
words have the opposite meaning B. Understanding a lecture CI
to:
• in I minor way 1. You arc now goiog to hear part of a lecture, dietdad ioto ahocr secdooa to
• iooease help you unticataad it Aa you listen,atiswcr dte ^icacioAa below.
• as leas than
SiditM 1 —————
• sepantely
What co{MC is the lectnn gok^ R> intsoduc^
• very large
8. Look at pangnphs 9 and 10
again. What words have tbe tame a What is the poine ofthe story?
meatungas:
• against the Jaw e Who were the original baokcta?
• iimitatioo
9. Look at paxagzapb 11 again. What
words have the opposite meaning e Note down the fint development
to:
• he tmder no compulsion to
« public • Wlut ;U a., modem wo<d fo. U.. W .h. ^
Unit 13 Unit 13
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 . Wh»H«lhet«uUofafixia„cialpsnic?

Steckir}. . Nott down the ,uation tht Uctnrti mc.™ *■ t. ..

A„,tbcie wtcnieots correct or mcottcct? □
dijcuM youi .nw« with your rr.n~^.^ ■'*«>><> toI tho,
D

^
J#*<wr< .gtdn, nu. ti™,
have h«c„cd to tha whola of d«
TABU ly-li CotdmWu M BmVw*
3. .umtnuy of it. So .«kc aura you note dowu tha inponan,p„i„r "
LIABIUriES
ASSETS
Deposits £100
YouihouldaIsowritea,unuimyoftfaelectuteb.aedoGyo«cn«^
Gold £100
(1) 01d-fiubk»ed goldsnUi Gold£90-^k>u£I0 Deposits £100
(2) CoU lender Deposits £110 C. Understanding a printed text f21
Gold £100-^lou £10
(3) Depesh lender Sttf I Deposits £100
Gold £90 +loan £10
(4) Step!
• Is this etatesneat conect or laconcc^
W the foUowiflg text caccftiDir, looking op Miythiag,0Q not
Oooe the goUsimth hid made 1m loan, his liabilitiea were greitM thin his MODERN BANKING
■sseis.
1 The goldsmith bankers were an eaztjr at a
J<diMr5_
intennediaiy.
• \Ohat would we call1dqMsit toda^
Bonfcsw A Jinandal intemuutiary is an
finandat
hta*
in bringing lenders and borrowera together.
• Is dut rvTTT^ ot iacosect? HMcfiarfas
A commerciai bonk borrows mon^ from-the pobtie, ereditlDg
Whether the loan was is gold or asidfpA**y made no difFezent to the them with a deposiL The deposit is a fiability of the bank. It
goldsmidi. □
is mon^ owed to depositon. In ttim the bank knds tnonor
Sidka6 to firms, households, or ggvemntonts wishing to borrow.
• Note down what the kaaseroteaaabj'xesetves'. 2 Banks are rtot the only firuiadal inteimediariea. Insuranee
companies, pension ftinds, sttd buQding societies also take in
• Vhat is ^goldsaith's move atio liter nuking the loan? money in order to relend it The cnidal feature ^ banks U
thAt some of their Uabilidea are used as a means of psyment.
atul arc therefore part of the money stock.
StftitM?
Cpnunefdol 3 Cbmmerdol banks are financial intennediaiiei with a
bonJcs government licence to make loans and issue dcposita,
tens does he use to describe this lush? including deposits against which cheques can be written. .
We begin by looking at the present-day UK
Although the detail, vary from country to country, the
M
ts
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 gwcra] principle is much the Boinc everywhere.
4 In the UK, the commercial banking aystem comprises about
600 registered banks, the NaUonal Girobank operating
through post offices, and about a dozen trustee savings
banks. Much the most important single group is the London
Ota/^ clearing banks. The clearing banks arc so named because
ban)a they have a central dearitxg house for handling pitynienta 1^
cheque. 77w balanet
a/uHt/lHg
Vmdkams
A clecrny system is a set of arrangements in which debts
tysUm between banks are settled by adding up all the
transactions in a given period and paying only the net
amounts needed to balance inter-bank accounts.
Howtht Suppose you bank with Barclays but visit a supermarket
tyaitm that banks with Uc^ds. To pay for your shopping you write a
unritt
dreque apinst yotir dq>osit at Barclay The supermarket
this cheque into its account at Lloyds. In turn, Uoyds
presents the cheque to Barclfya which will credit Uoyds'
Puesntnil
account at Barclay* and debit your account at Barclays by
as equivalent amount Because you purchased goods from a
supezmaiket tising a diflercnt bank, a transfer of funds
between the two banks is required. Crediting or debiting one
bsnks account at another bank is the simplest way to
aduevethis.
5 However on the same day someone else, caU her Joan
Groover, is probably writing a cheque on a Uoyd's deposit
aommt to p^ ibr some stereo equipment from a shop
bsaldng with Barc^ys. The stereo shop pays the cheque into
its BarcUyi' account, increasing Its deposit Barclays then
p.y the cheque into it. account at Utyd. where M.Oreovefa
dmultaocouah, debited. Now the tnmafcr Dow.
irom Lloyds to Barclays.
"wnk inuuuuion, betweea thenl" «parate inter- j
the n« bctw^Ttt
twecn the member clearing hanks jI
16 t
I
Unit 13 ' Unit 13
lhrm.elve.. >«•«„
Balaac. Bh.., Unio,a.rta,B..ta
iondcn
dtaiing
banks
.hZT rZ.'^' "«< of the geld«ni,h bwdcer
oftJ,
of the balance sheet discussing the asset tide
8 Cash assets are notes and coin hi the banks' vaulu just ss
the goldsmiths held gold in their vaults. However, modem
banks'cash ssseti also include their cash reserves deposited
with the Bank of Engisnd. The Bank of England (usually
known as the Bsnl^ is the ceniroi bank or banker to the
bank
commercial hawks,
9 Apart from cash, the other entries on the ssaet side of rhy
balance sheet show money that has been W>t out(w nvrt to
pundiase interest-earning SMets. The second item. bOto ind
mailcet loans, shows short-tena {a
Lifuattty l^uidiiy refers to the speed and the ceitainqr with whkfa
an asset can be converted back into monqr, wimncver the
asset-holders desire. Money itself is thus the moat bqukl
asset of aU.
lOThe third item, advances, shows lending to bousebolda and
firmi. A firm that has borrowed to see it through a sticlqr
period may not be able to repay whenever the bank dcmanda.
Thus, although advances represent the major share of
clearing bank lending, they are not very liquid fanns of bank
lending. The fourth item, securities, shows bank purchsare
of interest-bearing tong-term Bnanclal assets.
govermneat bond, or indu.tri.1 .h««-
aa.cta are traded daily on the «odc
there .eeuritie. can be eaahtd in;r
their price lluctustci from day to dajr.
r
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 «rtmn how much thty will fict when they .ell out. Hcncc
. financial investment in securidM is also illiquid. I. Check your understandlnTT
11 The final t«-o items on the asset side of Table 13-2 .how
• lending in foreign currencies and miscellaneous bank asset, 1. the text through .grin and Bttlce
whose dctafls need not concern us. Total asscU of Uie the cole of banks
ooteioothe foDowiog;
London clearing banks in May 1986 were £200.1 billion. We • commercial bank*
now examine how the equivalent liabilities were made up. • the cletciflg tyitem
pwr 12 DeposiU are chiefly of two kinds: sight deposits and time • Ihc b.Unct Iheet of ih. London tfa-ing l-.y,
deposits. Whereas sight deposiU can be withdrawn on eight
• their usets ■
whenever the depositor wishes, a minimum period of
notification must be given before time deposits can be • their liabilities
withdrawn. Sight dcpositi are the bank accounts against 2. Whenyouhavedonethaidthciwrite.fumtaMyoftheimocmMooI
which we write cheques, therehy running down our deposits summary ofit
without ghnng the bank any prior warning. Whereas most
II. Glossary
banks do not pay interest on sight deposits or chequing
accounts, th^ can aflbrd to pay interest on time deposits. fmandal intermediary: tnmg sang tiln mft
Since th^ have notification of any withdrawals, thQ^ have gian tkichlnh liquidity n:tfoh VVmw
plenty of to sell off some of their high'iuterest eommercial bank: ngAn h^ng mdvaneefi): khoan ddn tfm flag,
investments or call ii^ some of their high interest loans in tfaudngmai Vtiftan tiAn frng trWfe
order to have the mon^ to pay out depositors. deposit a: ti&i guti ngin kkng Sticky period: giai Ua in
I - liability n: kho&n n^,tijSn VV»A Win
TABLE 13>2:fislisee fbed ofLoadoa Clesriog Bsoks, Msy I9S<
to make loans: cho vay securities a:cbdng khoin
ASSETS LlABILITiES £b trustee savings banks: ngin governinentbond: trii pbi^ cu
SlefUftg: Cub 19 Sterlif^: Sight dqwa'tt 54.1 hkng tin th&c cblah ph^ cfing txii
Bin* ndmtriotIons 34.7 Time deposits 59.9 clearing bank: ngftn hkng thanh stock ezchange: .3 giso ^cfa
Advmces S3.0 ^ CDs(Ceninca(esofdeposiO It to&nbfltrfr diticngkho&n
Sfcuriua 9.4
cleari"E system: h$ thfing thanh fluctuate IT. dso lin xn&g
Leadiiig io odier Gwmeks Oq>isits in other currencies
Mwdkoeousuns
S4S 461
to&nbfrtrtt QHquid a:khdng d2 ckuyfo d£
I5J Mtst^llsneoia liabilities 31.1
sight deporik ti£a g3i kh&og
total ASSETS 200.1 , total LIABILITIES 200.1
vault: kit(ti/n, udng)
goldsmith: th^ kim hokn bin
Qmrterfy Bulktln.
rifn«» deposit ti&|3i c6 baa
the central bank: ngin hing certificste of deposit kjpbi6i •
13 Certificates of deposit (CDsJ hie an extreme form of time tning Udng, ngin hkng nhi niifc
deposit where the bank borrowa from the public for a apcdflcd liquid asseU: tki san di chuyin
^ period
^lini and knows
l liability items inexactly
Table*;iriicn
13-2 the
diowloandeposits
must be repaid.
in foreign
D. Understanding discourse
Ihewtv^^ °d»ccilaneoua liabilities such as cheques in
U
"^proccM of clearance. Ii««. to.<u»c giving .cn.= ..ua.n» .dvic..bcu. How »-^ "
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top««d.dr«d.No«<'ownU...dvicc
"""*• we tho bsok

"™«'r lb,
c Fvtenslve reading -English-Vietnamese translation
of Ml in I9ea^„d fo.37
COMMERCIAL BANKS .n impmun. pan „f dm.
bibihtics
. .,.r
„e an important eompooent ofofM3 but the depo« lobflkio of Uda
raoney-The eofnineicial bMiii'toiJ

If the binb kcpl in Am tnett in the form of dcpo.it» «t the Fedc^ Reserve ■re not the only component, of the nation'. m«iey. Other 6i«oaal bmtutioo.
»nd cuh in their noUi. ibcy wouldn't mtke any profit But tf they tho take deporit. d»t form part - snd an baearing part - of the iwion',
money.
wmc of their a»ea as cwh in their vaults and as dcpositt at the Fct^
Reserve, tbc»
pUcewouidaH
on thcta.beNorabkwould
to tnect
they bedieabledctnaods for cash that teUei
theit
ontonicix to keep ti«t autoottcic F. Vietnamese-English translation
tqiknishcd every trme you,your fiicaids. and aS their other customcn
have raided it Cot cadi for a inidn^ pizza.
Stf mit 6n dinh cna Vi^ Nam ddng li nguyto nhin ehfnh khi^'dAa
The bulk of a bank's borrowed rcsoanw are pur to work by making loans. gia m^t khfi lu^g Idn ddla vk vkng dd ta^t kikm. (5n dlah Mh kiab
of are iostandy uinvtrnMr into cash and with virtually no vi mA ak rCt quan trqng trong vi^ thu hiir ogky ekng nhifa ngoei tk vko
tvk. These ate iiqaid assets. Liquid assert, tdiicb take their name from trong b^ thdhg ngin hkng. gii hfi do4i vk Hi sukt trkn th) tiukif al trd'
the firnrrp of hquidsy, are assets dtat ate iostaady cotivenible into a nkn quan trqng trong vi^ thu hdt ngky ekng nhilu hrqng tiln bkng
ofcKhar^ «s& visEoafy no uncertain^ about the piice at which th^ ngofi t|.
on be coovesed. An nriTTTpV of a liquid a»er is a US govenunctit treasury 6 Vi$e Ham, Ngin hSng Nhk nudc diinh U ngkn hkag tning uaog. Dudi
bond that can be sold at a momeofs noiiee for an almost guaranteed price.
Ngkn hing Nhk nude U c4e ngkn hkng thuong m»i. Nhang ngkn hkng
The banks'assets sho rndude iavestntent An investment secuciEy is a thuong Idn nhtft, gdp phin quan Hqng *ko eing cudc (1& mdi d V^t
tnatketabk srr'imry that a bank can ad! at a moments notice if necessary but at Nam. phai kt dtfn c4e ngkn hing thuong m«i qu& doanh: Ngkn hkng Ngoai
a price that fiiwuatei, An atample of an investment secunQr is a US thuong Vi^t Nam. Ngkn hing Cflng thuong Viit Nam. Ngkn hing Ntog
goremmem In^-cerm bond.Such boodi can be sold instandy but their prices
fluouue on the bond market Banks cam a hi^cr interest rate on thdr
nghi$p vi Phit triin Nfing thdn. Ngkn hing Diu tu vi Phil triii. Ngo^«
c6n c6NhBog
Nam. cic ngkn
Dglnhing cd niy
hint phinUrn
vi nto
eke ngkn
h» hingtWnude
chfnh a Vi*t N«. b*.
inmtmenr seoiriries than they do on liquid a.«^. but
du. d.., h.,c A lo.n i..
6n dinh ha Ihfog tii chinh li mat
ofopal
"•8'«d P«iod of dm.. Mo..
*"^'ocpoaaoa, to Cmn« d» purchw. d Viet Nam. Chfnh aich cung ung uin ti vi ^ ^
-|>eooiuiioio^5^^j_ to houKhold. ti^ng trong vi^c kiim l»m np ^ vdn
■re med to buy consumer durable goods such as thanh toin c6 hieu qui hon. huy ddag ngiy cing nm
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 i hi?" t«
rfc khoin VM ^Ch ly gii M- ■"»« r* (tis h®
dc hwl »" vi«c en -linh Wnl- «• Ph4t Wfo n,«i „j
Unit 14

. Mnf thtm ntecontrol

aotnlc itotewn ocwnnjercwl t««
^ bing cS phtn: joinUtock
^Vt«. v^nt-«tock central banking
Wnk
A. Understanding a DrintArt toy*
6. Tafklng points k Improve vournkimmlnB

b Whit uc Ac funcrions ofiamuneidal bank (e^. VIETINCOMBANK ) The following text win
bVietnas^ btroducc you to the topie of Now look at these queadooc
1. Look it d* main heatfing tad j*y what yoo
2. Talk abom an laAenticbdiDce sheet jwi could get fawn one of the banh central banking Look at the
apectthetexttobeaboQt
bVietnasL
way it is dhrided into lectiooa 2. Wbt does the wnter sty be a gong m
tod pangrtphs. Pay atteotioa B this *"t?
to Ae lii^etinp tt^ nota in 3. WfaatiiifaeaeEoodseoioaesKnta^aboQt?
Ae margin. 4. What B the daxdaeasottaMOQal^Aoa^
S In the wste^s opiaioc, can a ewwwf h^*'
inflnence the caoney supply
Read the passage through and find Ae answers ID those tpesdoBS. Remeniei,
you do not hare to undentaod every word to anaag

THE BANK ARD THE MOHZT SDmr

1 A thia aecGon we study the wayi in which a central tank

can alTect the supply of money in the ecowmy. ^
Ml narrowest meastue Ml" of the money supp^ b currenqr b
circulation outmde Ae banking system pina the li^t
deposits of commercial banka againat which the jabate
lector can write ch«iuea Thus the money supply b partly »
UabAty of Ac Bank (currency in private drculatlonl airf
partly a liability of conunercial banks (Acquing sccounta
Ae general public). •
The
inontUiry
2 In Ae last chapter we introduced the monetaiy
bosa 93
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 cy supplied
currency »upp»co by the Bank both to the commercial
. banks Simftarly, when a particular reserve requirement is already in
^J to nrivatc
priva^ circulauon,
circulaaon, and the money multpUer,
multipUer. the
th". force, any increase in the reserve requirement will reduce tiw
Th»^ extent to which the money supply is a multiple of th, money supply.
monetaiy base. We saw that the money multiplier was larger TTK^eetoR 7 When the central bank imposes a reKtve requirement in
the smaller
the smaller the
the casn
cash reserve ratio of the
—v commercial
ww<u4uciciai banks
oanka
excess of the reserves that banks would otherwise have
uid the smaller the private sector's desired raUo of cash to
-nrf
bank deposits. wished to hold, the banks tre creating fewer deposiu and
undertaking less lending than they would really like. Thus a
3 We now describe the three most important Instruments
reserve requirement acts like a tax on banks iry forcing than
through which the Bank might seek .to aflect the money
to hold a higher hactimi of their total assets as bank reserves
supply: reserve requiremenU, the discount rate, and open
oiarket operations.
and a lower fraction as loans earning high interest rates. Can
tlm banks do anything about it?
Katerra Rsquiremeats S Although there are profitable lending opportunities, the
4 A reqidnd reserve ratio is a minimum ratio of cash banks can advantage of them only if they can increase
restfves to deposits that the central bank requires thcii- cash reserves. In principle, they amid try to borrow
eomnuudsl banks to hold. cash from the
requirement is tocentral bank.
reduce the If the
money point
supply, theofcentral
a reserve
ba^
If s reserve requirement is in force, commercial Hnnb^
hold more than the required cash reserves but th^ cannot will be reluctant to lend banks tiie cash they want to
hold less. If their cash foils below the required amount, they additfonal bans, increase deposiU. «ul expmui the nW
must immediately borrow cash, usually from the central
bank, to restore their required reserve ratio.
Haga 5 Suppose the commercial banking qrstem has £1 million in generous interest rates on uu« r-
cash and for strictly commercial purposes would normally ejjcourage people to public, banks may
«rti maintain cash reserves equal to 5 per cent of sight deposits. By attracting more cash .ending.
Since sight deposits will be 20 times cash reserves, the that the central bank will
tanking lyttem wiU create £20 million of sight deposits
against lU £1 million cash reserves. Suppoae the Bonk now though there is then tne
mposcs s reserve requirement that banks must hold cash
9 One form of reserve depcaits. Commercial
of at leasllO per cent of sight deposiu. Now banks ^ popular in the thefr cash resen^^
• resovei of£1 million.
dMpoi banks were required to ^ ^^his money could not be
acounted
specialasdeposit
part ofatthet^ebo^ meeting theT
required."
in impciea a reserve requirement
invmvk 'ooerve ratio that prudent banks would :«rve lever for con.^
hank ^ reduce the creation .pedal deposit. .mi the -xe of the
reduce the ^ for uiy given monetary
multiplier, deposit creation by the oar»"
«y supply base. money muVtipher.
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 Tha PUcottOt B*'®
minimum of 10 per cent of dcpoiiu. There i» too » risk
that sudden withdrawals wUl then for« the bank to boirow
lOTbc «cond iostrumer.. of monetary control availabfc u., from the Bank at 10 per cent interest. U win have lost money
'oal bulk 1""=
cen
dfscounl nrt. U the interest rate that the Ban^ by making these extra loans. It makes more sense to hold
when the comraerdal banks want to borrow some excess cash reserves against the possibihty of a sudden
withdrawal.
money-

Vftmn the diacount rttc wat on important part of monetaty The power of Thus, by setting the discount rate at a penalty level In excess
ihs Sank general level of interest rates, the Bank can induce
control in the UK it uied to be known as the Bank Rate, or commercial banks voluntarily to hold additionsl cash
)4iniinum Unding Rate (MLR). reserves. Since bank deposits'now become a lower muhipk of
11 Suppose banks think the mimmum safe raUo of cash to banks' cash reserves, the money multiito U reduced snd
deposUs is 10 per cent For the purposes of this argument it the money supply is towa tor any given level of the monetary
does not matter whether this figure is a commercial
base.
judgement or a required ratio imposed by the Bank. On any
particular day, banks are likely to have a bit of cash in hand. Itnorovo your Intenslvo rsading
Say thdr f reaervea are 12 per cent of deposits. How feu-
dare they let their cash reserves fedl towards the minimum No« .he tact cartfWly. kx,ldng up n™ to ». «
level of 10 per cent?
«fctencc book.Then answer die following quesoooa:
Wiff banks 12 Banks have to balance the interest rate they will get on extra
hCBWto
1. Whose liability U Ml?
fending with the dangers and costs involved if there is a
sudden flood of withdrawals which push their cash reserves 2. Whatis the mooetiry base?
below the critical 10 per cent figure. This is where the
diicotmt rate comes in. Suppose market interest rates are 8
per cent and the central bank makes it known it is prepared 5. Why does ttesctvemp"™""" ""
to fend to commercial banks at 8 per cent Commercial
banks may as well lend up b) the hilt and drive their cash
6. Wh«c.ab»k»dod»»tdd.'t«'?
reserves down to the minimum 10 per cent of deposits. The
be^ are fending at 8 per cent and, if the worst comes to the 8. ^tU»od««nnf«B.nkIU«ocMl«
worst and they are ahort of cash, they can always borrow Whyc.nbtooo.lo^Wl^"»^^^^„to«
,, Undei what cutoonces » «
fiom the Bank at 8 per cent Banks cannot lose lending at 10.
much as possible. possible'*
llTunt fa
•fauwrtfj 13 Surooie however that the Bank announces that, although
bonJa n. Improve youfjSaSiSi.
fandfaf oO faterest rates are 8 per cent, it wUl lend to centrsl
thfueai hanks only at the penalty rate of 10 per cent , Look.t>hcfi«<P«»B"P*'*f. , ostiowest
*, rwrvcs of 12 per cent may conclude fUmo voui dictioiury, find a »pa**y

interest ® to the
t would drive its cash reserves down tncaniflg 91

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 _phi2tnd3igain. • make larger
• giving,ready to give , discount rate: ty 14 triftkhtfu , . ..
7. Look at paragraph 9 , open market operationCs); hoft " 41iisuftph|t
woid»:
.mooettixbase
you explain the foUowing; d^ng Uii trUcfng md, c6ng 09 th)
• cash reserves trddng md
»aoaefad^'^ • reserve requirements
,cwhtefcfvenao
• idtituDiena
8. Look at paragraphs 10 ,nj , B. Understanding a lecture
3. ^twordjoooeipondtothae
Lookitptng«P^^*°^^*^ again. Using your dictionary. J
a word or words that have th 1. You will now heat part ofa lecture, divided into short tectioQs to h^ytm
aame meaning as: understand it. As you listen,answer die quesiioos bdow.
^egntooos?
• chatges
• piib nonnal again; bring back StOipa i
• argument
(to a fomtcf omdition) • What is the lecturer goii% to talk sbout:
• cotnmetcial
• keq> in good order
• piedseljr(Umito^ 9. Look at paragraph 12 ag^.
4. Look at patagiapb 6 agaiiL What you explain the following; a The lecturer namea three scarce resources. Whst ate dx]^

votds hare the oi^orite nwaotng

• sudden flood of withdrawalt
ttx
• up to the hilt StOioMl^
• in a dHTereot way
• ifthe worst comes to thewoot Note down what can cause a financial pamc.
• Qot binding 10. Look at paragraph 13 again. What
• careksi words have die same meaning ac
Is dus statement correct or tocooec^
5. .Look at paiagtapb 7 agata What • is more sensible A central bank can reduce the risk ofa finaodil panic by pto«fing cash.□
Words bare the same mganwtg y; • pushdown
• in case of Sttticni, —
• vasdog
11. Look at paragraph 14 again. What Now down the term die lecturer pvea you.
6. Look at pangnpb 8 agaia What words have the opposite twining
words baae the tame fti»«nif^g y* to: What is the effect of diis role?
• pto&abJe • compulsorily
• season for
• unknown

W. Glossary • Note down 6e second main funcooD.

• =«t™l Unk: hW • What does PSBF. stand for?

• nquired reserve ration: ti4n 14
trO bit bu^c
"""""ykuKcritantl ■ • money supply: cung ti^n
St^on —— i em finance 1
• money demand: ciu ti4n
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 tfonctfis a 4 The distrnguishing feature of money i.iu use as a medium of
medium of exchange, for which it must also serve aa a store of value. It
, No« mjohango
PSBR. is in these two functions of money that we must seek the
reasons why people wish to hold it
rtod me ciiscoe ~ 5 I^ople can hold their wealth in various forms- money,
Mow people
- ■ ^ime, i»tad of tnwenng quciOODS. take noto. Wht„ eon

hoU money
bonds, equities, and properfy. For simplicity we assume that
^lb«ned to the whole of the lecniie. you will be asked to give an o^I there are only two assets: monqr, the medium of exdiange
ofit. So rotkc nire you ootc down the important points. that pays no interest, and bonds, which we use to stand for
3 YOTJhouiaiUownteiiummiryofthclcctiitc,btscdonyoutiiotes. all other Interest-bearing assets that are not directly a meaxu
of payment As people earn income, thqf add to their wealth.
As they spend, th^ deptete their wealth. How should peojde
C. iinrterstanding a printed text(2) divide their wealth at any instant between money and bonds?
Read the foflowiog text carefully,looking up Mything you do not undcatand. 6 There is an obvious cost in holding any money at aD.
THE DEBUKD FOR MONEY Qppertuniqr The opportunity cost of holding money is the interest
e»s( given up by holding money rather than bonds.
1 In 1965 the amount of money (Ml) in the UK was £7.6
People wiU hold money only if there is a benefit to offset this
baikm. By 1985 it waa £65 billkm. Why were UK reaidenta cost. We now consider what that benefit might be.
prepared to hold nine thnes aa much money in 1985 aa in The 7 The Transactions
mcmey to purchaseMotive
good,. In services
and a monetaryand economy we use
receivt money m
Tyoiuactien*
1965? Answenng that question will introduce ua to the
factori that determine money demand, which in tur^ acts the
VoUwe
cxchlgc for the goods mid services we selL Without mo^.
stage for understanding how monetary poU^ alTecta the ^tmnsaction. direct barter -uld be^tly
ecoiuMny. ftnd effort Holding money cconomlies-on the time
naum 2 We lingle out three key variables that determine money involved in undertaking transactiona.
icy
Mrtabln demand: inteiMt rates, the price level or awrage price of 8 IfaU«n«ctton.wc«p«f=c«y.y|;^^^^^
goods and icrvicea, and real income. Before examining
•bether movementa in these variablea can explain the nine gcrwces at uic p«-ot at that Instant
fold uunase in money holdings between 196S and 1985, we ar„i services we wish to consume. Except at twu
wed bold no money at alL ^ the fact
«o>wlder why people hold monty at all.
th.
The Motlvei for Holding Honey that payments and P'
Wt^ia a atock. It ia the quantify of drculating cunency money bcbv®.
We need to hold money betwoo
not the field at any given time. Holding money is „^g.ubKq«ntp<l.eh.^ two thing..
to thecW we hold money now in order """y a meal
to spend or go
it later. 9 How much money we need to ^^„d the degree
U„vdueofthetnmwteOon.we
lOl
100

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 of synchronization of our paymcnta and reccipu. Money u a
nominal variable not a real vanable. We do not know how
„uch £100 will buy until we know the price of goods, if^
prices double, both our receipts and our paymenu wUl
double in nominal lenni. To make the same transactions as
before we wiM need to hold twice aa much money. Putting
thiadiflmntly:
ThctfMUfld The demand for money is a demand for real money
Jhtmontu balances.
We need a given amount of real money, nominal money
deOated by the price level, to undertake a given quantity of
total transactions. Hence when the price level doublea, other
thinp equal we expect the demand for nominal money
balances to double, leaving the demand for real money
balances unaltered. People want money because of Us
purchasing power in terms of the goods it will buy.
lOThe second factor affecting the tranaactiont motive for
Sjfndwnito- holding money is the degree of synchronization of payments
tiantf
peynmti
and receipts. Suppose that, instead of spreading their
MirtttyXs •hopping evenV throughout the week, households do sU
ihcir shopping on the day they get a aalaiy cheque from their
employers. Over the week, national income and total
trsnisctlons are unaltered, but people now hold less money
ove-the week.
11A nadm^ habits for msldng psymcnU change only slowly. In
our simplified model we assume that the degree of
tion remains constant over time. Thus we focus
m&tiM for holdingbicome
aotrre as thebalances.
reoi money measure of the transactions
ftiermy Motive ■ Thus far we have assumed that
P®y"«ats. obtain receipts and make
Urtcertainh ®®brte we live in an uncertain world. This
neoey.
giv« riL ^ *precise timing of receipts and
Precautionaiy motive for holding
to buy a lot of interest-earning bonda
101
Unit 14
and try to get by with only a small amount of money
holdings. You are walking down the street and spot a great
bargain in a shop window. But you do not have enough
money to take advantage Immediately of this opportunity. By
the time you hsye arranged for some of your interest-esming
bonds to be sold off in exchange for money, the sale may be
over. Someone else may have snapped up the video recorder
on sale at half price. This is the precautioiuuy motive for
holding money.
In an uncertain world, there is a pncautionary motive to
hold money. In advance, we decide to hold money to meet
contingencies the exact nature of which we cannot yet
foresee.
If we had foreseen the contingency we would have had jrtenty
of time to cash in Intcrest-eaming bonda to have monqr
available. If we did not have to take advantage of the
transactions opportunity irrunedialcly. It would not matter
that it was unforeseen: we could still cash in our bonds at
our leisure and buy the half-price video recorder. We forgo
interest and cany monqr for precautionary reasons, because
having ready mon^ allows us to snap up unforeseen
bar^lns,or stave off unforeseen crises by making Inunediste
payments.
14 Together, the transactions and precautionary motivea provide
the main reasons for holding the medium of exchange. They
are the inotivcs most relevant to the benefits from holding the
narrow definition of money Ml.
ThMAMMt ISThe Asset MoUve.Suppose we forget all about the to
«»«»• transact. We thirdc of a wealthy individual or a firm deciding
in which assets to hold wealth. At some distant
may be a prospect of finally spending some of
but in the short run the objective is to earn a g«w
return. ^t
16 Some assets, such as industrial ye«r» toe"
• high rate of return but are also quite n.lty_ ^
return is ocry high but in other yea"
lOJ
Urut 14
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 ^price. M..I.C""""'"'^ "P«^ low V?hen you have done ihst cither write s summary of the text or give ««il
ZZ„y dividcnri payment to which they nre enH^T
•« ■""!* """ return "fon«tZ summary of it
^
Odier tta-."
be much lower than the average ri.^
II, Glossary
tMCU.

17 How tbouW people divide their portfolio of financial • Ml: tiln giao dich (fUn U/u thing d^ng CO giQ tidn m|t
tavcstmenti between safe and mky assets? We discussed ngodi ngin h&ng, tUn m^t, • transactioit motive; co gito
this question in detail in Chapter 13 and you might like to tie du lieh, tUn gili khdng h^n djch
reread Sectioni 13-4 and 13-S. We concluded that, sinet
people dislike risk, they wfll not put all their cgga i„ one cdc ngdn king vi cdc hhodn • to synchronize: xsyraddnfthdi
basket As well as holding some risky asseu, toey will keen tiingiHedthinitbingi^) • a great bargain: hing bin vdi g^
■ome of their weslth in ssfe assets. Although on average^ • M2: ti^n r^g M2 ^ao gim HJ r^ri
pertiblio will eim a lower rale of return, it wiU help avoid
«

c^ngvdit^tUnnhigUcdf^hin, • togetby:sdngquanfiy;dus0ng
absolute disaster in bad years. tiing^tUiki4m) • to be on sale: bin hg gii
No/k The asset motiue for holding money arises because people • MS: titfn r^g MS (boo g6m M2 • precautionary motive: mgc dfch
ABmtiA dislike risk. People are prepared to saarifice a htgh awrage e^vdis^tiinHng^cdkyh^n, di phing; dfng cO dl pbdng
rate of return to obtain a portfolio with a lower but more tiin gtH ngopt vd (tin gtti uang • asset motive: d^ng cd gifi cut
predictable rate of return. • rate of return: lai, Uti, Iqi suit
tifc&a cde tdehtJe Un)
The asset motive for holding money is important when we • equity n = ordinsry share: d portfolio: tip cic danh mpe;
.
consider wby people hold broad measurea of money auch as tip hop cic. khoan diu tu giin
•teriing M3. It is much less relevant when we consider why pluKti thtfbng
peqide hold the medium of exchange as measured by Ml • equity capital: vdn cd phin tiip
WBecsuse if we are going to lend or invest money for any • the motives for holding money:

^ .ri fac. « am put it In a time dcpo.it. which i.

int^
^ though ntthcrmic,
duirily thm.cmn
in.notightintctcL
dcpodtSine
or in auh
iimo D. Understanding discourse

motive ■ of inlcc« Chic%

•toiing I to a tutor g^g some students sdvice about tevisioos. Note down the
for M3 butmouum.
witlcr not in Ml,ofthemoney.
asset
advice.

c Fvynnnlve readlP" - Fnallsh-VlBtnamese tf.nsl.tlon

I Ptectutionaty Motive monetary poucy inan open economy
*^«Ooerii how pec^
• how rurinU hold
Ur,)A money

IM
^ Asset Motive in rcccn. ycr. dw inUracrioo bc»c«. ri.c riomcric ecooomf .mri fowign
tos

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 . u.«m£tDdomiMB«onorak!K)liqr.Thetdationjhipbcs„, uncuiuinii" of the imp.cB of monet«y polk, „po„
tcT Md foWB"
jKonomo Ub Cmda,Briuin. md J.pan. Howev«,
fo' mull a out undentuidmg of the tmung u.d hnpm of n.onet«y polide, t-^,
10 recent years.
«ciu^ ^ • B-idg ct;
„d «port>»'h'"S «°°°"'' ■" P"""" °f ""rnmui.
^tokcd ^rkcu, kB^rionJ
^ccoraln)k»>USmon««rpo' todc 1980..
«7''unngthe md &«„« luv. come^ F, Vietnamese-English translation

Rcoll brieflr the roott by rtich mooctair policy aifects Inde .od then outpac
S,™o« du Fedenl RcKm dedde. to dow money growth to 6ght infl„ica^
Ui. ptocBS ddm up intoest rate, on uieti denonuntted in US doIUn,
Uige iastminonil investon will compite interest rates in US dolUts with
imetcst rsto for iskb m other cuncndes. Attracted by higjict dollar interest
rates, thqwa buy dollat securities, dining up the foieign exchange rate on the
The hi^ exchange rate on the doUar encourages the United States to
in^ and hurts US exports. Net exports tall, dectcasiog aggregate demand.
lUs has 6e tmpao of bodi lowering real GNP and lowering prices or the rate
ofioflitkxL
C&c bi^n phiip sau d&y diryc eoi linhOng bifn ph&p quan tiqng tnog vifc
ning cao tinh bi$u qu& cila ng&n hiing trung inmg:
- so4t vi$c ma r^ng tin dyng
- Thihinhcach^Uiir?
. Ap dvng 1^ chiit kh&u di tic d^ng d^ li^ gCH
. ThvcthivibfitbuOccicnhuciudvtrO
, Ting ordng cic ho?l d$ng da thj trudng m6
Bk tang cu6ng Unh hi?u qu4 cOa h$ thing ngin hing, cin phii:

Note dtit the directioa of dte eHect of monetary policy is the same for the - Biw>i^vadAot9ol?icanbOtr€ntltc4cAcRnhvvcbaogimiig6angtt,
trade impact as for the in^tact on domestic investment: dght money lowers k6 toiiu thim dinh vi kiim scat cic khoin cho \vf v.v...
output ind prices, The tisde impact m^ortu the domestic-cconoaiy . TranBbihi$nd9i cho cic he thing thflng tin vii^thicnckh^ thong
If the foteigo-ciade impitt simply augments the domestic response, why do
opeo-ecoooffly ties pose idditionil problems for monetary policymikert? They
aanpliate the Hfc of die Fedcisl Reserve both because the opcn^conomy
of policy are not precisely understood and because our economic
rdstioas with-the rest of the wodd pote a whole new act of dflemmti for hitocicchlnhsichvikiimchil^mphit. .u^\.a„aaL
economic pdieymakcn.

^ S^atitttive relatioiishipi between

coaSr!^'
"oici«the P®"'" our understanding
^>•0 of mcMM. r ®'®oomic models caruiot accurately predict die Id^tindvmg.
™ the impact ofF««h7"«
«»«tionship. if«
exchange rate, on ntossag
durf. Uch Bin tt:
'"ndeatsodiDg economic ^ " «*mple of die infiiraity of our . hoyl d^ng thi ItUtat "A 0P«»
®*iw swing in die cxdian^'**^^ ® 1979 and 1980'faded to predict the market operations dii- ""
toward li^Kt » net exports that followed upon the
m 1979. On balaiue, then, because ofThe
. thJm dinh:.ppr.i» •''"''''jL" ertend credit condition.
. ehtah.icht«kh6.:li«dp.Uey Iffl
m

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 1

Unit15
^^ to those
^field studiesofinCental
the StateBanks of other Western coimtna?
Btnk.)
, What is the required lesenre ratio set by the State Bank of Vietnam? Do
yoo think it is a sdtable ratio? (Research must be done before answering INTERNATIONAL TRADE
dieqoestioas).

A. Understanding a printed text(1)

I. Improve your skimming

The following text wiD Now look at these qoestioiK

introduce you to the tofuc of 1. From the headto^ what do yoo expea the
inccnuitioiial trade. Look at text to be abou^
the way it ts (firided into 2. P»pl*m Table 15-1 shows m yoor
sectiom and piiagtapha. Pay own words.
attention to die heading!, 3. what Table 152 abows io jfm
own words.
«»•
tables and notea in
4. what TaUc 15-3 shows in yow
own words.
5. Explain what TaUe 154 shows b yoor
own words.
Rc.d du= pu«p 4c » tf.o-
you do not b«c to undcoond CVC7 «orf to «a«r than.
THB PATTERIC or WORLD TRACE

,Since ccty intcnatW

„U«.
.jiporu.one count./.
To set tut IdeaUnpcrt.
or hct^u ITX
^ pl«.
^«
Now la
can count the total value of
b. to countAnd
everyto
cafciilnto
bU«rnaljoM(
Ifodo
total value ofimporta.^J^
count both importa and exporta
transaction twice.
101 109

Unit 14 UnHtS

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 ,1 .hom the ™lM of "orld export, for •uch a,Saudi Arabia and Kuwdl art.w„
' Mid"•henchmerk. the level of world trade rela^ Wt bi« compriae. Ruttia and fot
r^W to "titea Europe. The rtmammg oounlrit, art grouptd a.
Statin- LDCa. Wt atudy ihtat Itaa dtvtloptd counuit. -
WHidttoii
3 TWO facts stand out. First. In real tcnna world trade ha. fcom the very poor, such as Chink and India, to the
has vciy rapidly since 1950. at an average annual rate rich, such as Brazil and Mexico - in greater detaU in Chapter
of' 6 per cent. IntcntaUonal trade has been playing axi 33.
i„(;rea«ingly important part in national economlca. Between
7 The entries in Table 15-3 are the percentage of world exports
I960 and 19B5. UK exports as a fracUon of GNP rose from 20 from countries in the left-hand column to the countiiea in the
per ant to nearly 30 per cent Dctafls for selected countrie, first four column heads. Thus, for exampk, 43.4 per cent of
.re shown in Table 15-2. By 1985, world exports were abom worid exports ire fiom industrial countiiea to other bdustrisl
18 per cent of world QNP. countries.
Tuio/aeun 4 Second, the Great Depression of the 19308 and the Second 8 What can we learn from lltble 15-3? ^t, almost half of
thai
dttatyid
World War virtually destroyed international trade. Taking US world trade is between the industrialixed countries. Second,
iaUnetieaat QNP.u a benchmark, it was not until the inid-19708 that these cotmtrles have about two-thirds of wDild exports, wodd
9tdM world trade again reached Its 1928 ratio to US GNP,
income, and world importe. World -trade U very mudi
TABLE IS-hlkcVsloeofWorkl Experts organized arotmd these countries. Hie only sigoiQcant entry
I9U 1935 1950
in the tablf does not involve faxluatrial counfrics is trade
1973 19M 1985
within the Soviet bloc, which trades mostly among im
Warid ofoft*(biliieos ef 1980 £) 139 SI 19 415 881 1054
member countries.
Worideqnrj(%ofUSGNP] 57 27 20. 40 71 65
TABLE 15-2: Exports ss a Psrceatsgf ofGNP
itoflirtar Naliatol hetmi Aceouna eftht Vnittd Suntt. 1928-49. 1960 1984

39
5 As trade has grown, both in abaolute terms and relative to Belgium
the iixe of national economiea, the interdependence of Qeiminy
UK
natks^ economies has increased. liVe many of the
luly
countries shown in Table 15-2. Britain ia now a very open Japan
economy. BvenU in other countries affect our daily lives USA
nmch more than they did 20 yean ego. We now look at the SaurttK IMF

facts about who trades with whom. TABU 1W:World Trade Patteras. 1983
World Tisdo Pttteras (Ftretatat* *f rxfoaTsio
KSHAua
WOSLD
SOVIfT WQUP
00. NOHOa. •COME
•cuniM. BLOC TUOE
cxroaTsfsoM KOOUCW tXCl 66.7
C0UKQ&3 2.8 63J
^ ^pattern of trade among four majo*" iniiuMriai CQWino 43.3
6.3
3.3
OJ
92
2.9 0.3 10.1 3.8
13.7
inch^ countries. The industrial or developed countries Oil produceff
Ho»4ilLDCt 92 1.0 3J 0.9
5.7
13.7
tl.l 13.9
and N Europe, North America. Japan, Australia, Soviet bloe
viorid ^^
and world countiiea
income. Tiw with the largestcountries
oU-produdng share of Soaret
"7^ frw.A.198W.World BM.K
110

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 ^ComooditT CompMlUon of World Trade 3. Whit is the second fka that Table 15-1 demomtmtci?
g-MJe 15-4 shows which goods arc being intematioiuoiv 4. What has resulted from the growth of btenuddnal trade?
II distinguishes between pnmary eomnio^
mtd («gricultursl commodities, minerals, and fuels) ^ 5. What is an LDC?
tfftd j^acbiTtd or processed commodilies (chemicaU, 6. Which major gnmp does yom country &Dmto? Call you capfaia why?
itmrnt^
etc.). Note in particular the sharply declining ahai^ 7. Hound which countries is most wodd tnde organised?
priaaiy commoditiea. which fell from 39J ^ 8. What are tomatoes so eximpk of?
of world trade in 1955 to only 18.5 per cent in igg^ jJ
contrast, the share of manuiactures and of fuelt in 9. What is a'computet an exirz^le of?
trade each rose by about 10 per cent during thla period. The 10. What kinds oT good hive become mme io^orant rccenti^
increase in the value of fuel cxporU ii due mainly the
drimadc rise in real oil prices after 1973. III. Improve your scannlnfl
lOFor trade in numufacturei, engineering goods have become t. Look St the first paragraph i^in.
incrtasingiy significant, as have road vehicles,"nic increased 5. Lo(^ at paiag^bs 9 and 10.
share of cnpneering goods is one of the significant trends in tgphat words have the same What wocds coirespood to bem
world trade to which we return when discuaaing theories of meaning as:
the ^lins from Kdernatiotml trade. • precisely • • nbdenoxezcidng'
• deal, busiocn sriaagesBeot • so that djffrrrnrg
TABLE 15-4:Ike Coaposttioa of World Exports IXC pointed oat ■
2. Look St psrsgtaphs 2 and 3
fgain. What words hire the • getting less
%ihiit of: 195S 1984 « cars,lorries etc.
oppositt meaning to:
Prlaary couodida: 50J ■ • increase of possession ct
3U • riowfy
Food sgrioiiiBtil goodi wcaldi
23J' 11.0 . • not chosen
Fids
lU , 19J
6. Lookatpuognph 11 sg^Cio
Otedaerab
3. Look at paxsgiaphs 4 tod 5 yoQ exphin the following?
3.1 IJ tgaixL What words have the same • breakdown
Msssbdarcs: meaning as:
49J 60.0 • ow
load vehicles • hsppeiungs • pttdy fijusbed manufrewro
3.6 7J
Eariaeeriag goods • as good as
21.4 335 7. Look at paragraph 12 agsm.
Textila tod cioduag 6.0 52 4. Look St paragnpbs 6, 7 and 8 ^phat words have the ssme
Using your dicttooaty, find moningis:
,controlled ocfflaueaced by
words dut have the same or
i=-te2!«yg'rlnten.lv.,.,Hinn appioximately the tame meaoiog • exphiodieaoseof
si:
• byitielf/th«a««^*«
Now tpd die text caiefuDv U«u- • composes
''^^^TTieaiaf^'.w^ "P «ny new items in a dictionsty or • separately
• remaining • textiles

• significant • consumer du»hl«

U; • • mostly
in

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^ riw^ganr —■ .
primary commodity: k* luvclirtcacdtothcwholeoflhtUct«.,™..abe.i.J,
.
, ynhn4"dichtMpA
world nguyfin li^u, hing ad chV nmrnaq- of .L So make aumyou note doara the impoitmtpoinr• ^
. the commodity compottbai. cd manufactured gooda; hAn- .-
bi«Sn, hhrig thhnh phdm
3. Yousl.onldeliowiiteasiimn,aiyofd.elect,ite.ba«donro«notet.
cfuhhnsbda
c. Understanding a printed text (2)
B. Understanding a lecture
Read the following text carefully, looking up anything you do not
1, Yoo itttKWgon^ to har put of a lecture, divided bto short aectioni to GOOD AND BAD AROtJMERTS PGR TARIFFS
help you uodeatuid U. As youIkieo, answer the questbns below.
StOitn 1 ■ —■- 1 Table 15-4 liats some of there arguments. We group them
• Note dovQvbit die leduttt 11 going to talk about Ffral and under several headings. The first-best argument ia a care
•Mond-Ocst where a tariff U the beat way to achieve a given obgective.
arpuiMn(s
Second-best arguments are eaiea where the poUqr would
• Note dowo the fiat Cut •
indeed be benefwitl but where there ia another poliqr that
would be eren better if only h could be implemented. If
• Note dovQ die second fixi possible we should ahnors use first-best poUriea, but
sometimes we have to make do with eecond-beat ones. Non-
• Note down die duid&ct argumenta, are cases In which the claimed benefits are partly
or completely fallacioua
iMtuaZ
TABLE lS-4: Argnoeab ferTtrllB
Are ibese sttfemcQls correct or bcoirect? nasT-eEST SECOND-BEST stkatecic NON-
arcumentt
• I^barcdorompliintiigtinitbdustziiHiedcoua^^ Cbe^fenigB
□ Foreiga trade Way oflife lofeoi industry Ctnesatsiast
UXU wouldliire to be aUe to sa Hire oa-piodudng countaci.
Jiflitwi •
□ monopcdy Aotl-luxtiiy
Defence
Rmnae feRigBcn bbour

thij aatemern correct or incoiTcct? jh. Optimal TarUn The rtrit4«rt AxgnasMit to TkrUIs
2 in pr^cnttag th. ame for fm. tmd., «

For a amaU economy this may be a reaeom^^^

; ■ n However, when a counu/. imp^ of
*- Now wind the eanetiehiA I . ' Uports is likelmarket
of the world y to bidforup athe world prij'ce cfr the spod bri"g
the aood being
•put "Ihii ti»nf {n^j kegmning of the lecture and'Hsten to k
o aniwcnag quesdoos, take notes. When you tmported.
Its
Ufibl5
UnHIS

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 ,l„ thi. <«=."h' P"" """'"port"! i. lower that activity dirccUy. Policies that attain tk.
\.o <hc troc
d,.o the tn.c oo.t
a..t ofol toe
<h. loot import
import to the dom^u^
domeeUc
^ooiy. The domestic economy should recognhe that fa also fanuence other .cti,iU„ ... .eeond.fal"^'"'
toaanding another unit of imports, it raises the price it h,, they distort these other activides.
-y on
to pay on the quantity already being imported. But in a The optimal tariff is a first-beat application of the principle of
trade worid without tariffs, each individual wiU think ^ only
®nly
targetmg precisely bcc«u«: the «,urce of the proUem U.
about the price that he or she paya. Although no tingle divergence between social and private marginal cetu in trade
individutl bids up the price, collectively the indhridualt of the itselt That is why a tariff on trade U the most efficient
economy Ud up the price of importa. aolution. The argumcnU for tariOs that we now m alt
4 Under free trade, each individual buya imporU up to the second-best arguments because the originil source of the
point at whidi the benefit to that individual equals the world problem does not directly lie in trade. And the principle of
price the individual must pay. Since the collective coat of the targeting assures us that there' are ways to solve these
last import exceeds its world price, the cost of that import to problems at a lower net sodal cost, without having to incur
society exceeds its benefit There are too many imports the deadweight burden or waste trian^ks.
Society
last will gain
import by its
equals restricting
cost to importa until
sodety aa the benefit
a whote. When of the
the * Suppose sodey wishes to preserve Inefficknt
farmers or craft industries. It believes (hat the old way of life,
tariff is art at the level required to achieve thia, it is called the or sense of community, should be preserved. Therefore it
optmaltotJp Only when a country levies tariffs to protect such groups from foidgn competitxn.
price of iu imports U the cost todocB not bid
society up the
of the lastworld
unit 8 But there is a cheaper way to attain this objective. A tariff
imported equal sere.
to the There
world price. helps domestic producers but also hurts domestic consumers
opamil tariff is noTbenand
longer only
any then is the
reason to through higher prices. A production subsidy would etm keep
■lacmusgt imports. That is the case for fne tiude under farmers In business and, by tedding the problem directly,
filose drcumstancea. would avoid hurting consumers,
5 The optimal tariff U a streightlbrward application of the lujoirks 9 Suppressing luxuries ■ Some poor countries believe it b
Pnn^ of efficient reaource aOocatkm which we dlKmased wrong to sHow their few rich dtfaens to buy RoHs Royces or
hrt 3 There is another wqy to see how the optimal tariff luxury yachts when society needs its resources to stop people
starving. A tariff on imports of luxuries wfll reduce tbm
ftr iu imoorts^wT^ ^ upward-aloping auppfy curve consumption but, by raising the domestic price, may do
^jports, Ic^ a tariff wffl reduce the world prfce (ff provide an incentive for domestic
EO^ this fa,^JZa Lome, to pmduc A cc«umpta « udd» ll«
«PP>«..irtm k«out. to the importing country. Which g^ problra. directly, mtd U.more effiioent tool
£)./«c 10 Defence - Some Retries that
Becond^rt AtgDmeats forTarilft «r, it 1. «..»ldy
t^l. tde mo.t emclem-T to -
to atufn - ■ ^ says that the most eflldent way
objective is to use a policy that influences
IU
InAxxfrMS II'
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 . >h.>. umffb "> Mu.Wc,u,„
.,„«l. SUPP0« 1""""B- Only by D. Understanding discourse
bcing in businew wUl finns learn how to reduce costs ^
become a« cSidtM as foreign compeUtora. A tariff l, ne,^''
to provide protection to new or infant industries UnUUh^ listen to a tutor giving some .dvi« on eaaunadons. Note down dw advice.
have mastered the business and can compete on equal te
with more experienced foreign suppUera.
12 Revenue a In the dghtwnth century, most Bovernmcnt
revenue came from tanfla. AdministraUvely, it yras ^
simplest tax to coUcct Today this remains true in
developing countries. But in modem economics with
sophisticated lyttema of accounting and administratian It u E. Extensive reading - Enfllish^Vietnamese translation
hard to argue that the adminiitrativc costs of raising
revenue through tariffs are lower than the costs of raU' PKEfiTXAOe IN CLOrmiNG
nCintE IS.I: Aacrkie
revenue through income taxes or taxes on expenditure. prodoctiM, laporti, ewl
coassBpUoa wilb free trsdt
t Chsck your understanding We see berc ibe be^eide cqHttrioa
ia Sk narket fiv cioifan^ Aookifas
Resd thtou^ die text sgsin and make iwtes on the foDowinp t conpvitivc 6#dvmnc n dodins
Theftfae, a 6e efteadc eqeffihrim a
• how msnydifretenttiodi ofsqpimeat the writer lists N. AncxkXi price Moid te SI. «Ue
tteworid price bSA
• the opiimsl Asnfflios Itec AibuIem iStmiad Sea
Xt4
ml eRca fte worid price of tt pa (A
• die sdviooges sod disadrantiges of nidi a tariff
• the pnncyle ofgyfing
■7 the ficc-etec eqtiOMaa eeoa atea
Aaoia preduca UE (100 wi
tepots ite dinooKB tecwa doBod
• ■odeqf's wiy ofKle ■a dopaaic «pp<r OvmnEE («
e iSo—585—300 *00 XOauuX
• 1mnm»r

• mfuit mdcstDo
paBBTSAOa IN CLOTHING nCURC li* A liriirkiwen
.,u.nm«T of d« or (■ports Md coassapdHi nko
aoBcsdc prsdactiM ud price
Smtki fioa da
11 Glossary h Fte IJ-l. A»ria mm pai • B
Wiffoo cSAi* ^
• tsriffn:lhirffluin Earapeai dahini tea""* nia a »
• JJ^trillin.teu,ur,untfi ■ ftclt wwwSaeV
^Khidiot da iwilD-
Tteaatolriceitol^^'^
• to mikc do wtth: in dtuw «, * industry: nfo c6ng ngbifp [Mis wrak t™» y:. ^
dpagt|m " "W tgin, su nontrd !fSrlliae dooow ^odeta*
frfilOOlp|»wiB.
■^
J«ad wdght buiden: tWt tho4t
v«een. thft tax / to levy tax (on):
dinh thutf (vio)
e IN "• ** . ^
Q.a»aateu,taA—i-i-te
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 . ^sts of Tariff*
The We can easily measure the amount of this waste „ g.. ^
^14W that an countries would benefit by opeiuna .l • This area IS the sum of the matgind costs of rf g. ,"1^"
b, the domestic supply eurte) minus the tnat^ coso of fo,.;
(,4^ nte total loss in ^ U ,50 (w^ b, gco.„«,. u
^ Amcria puti « tantf on clothing, such u the 1? „ tanfi times the mduced domestic ptoductioo).
15-» ""'^'= (') Tic B. In addition, there is a loss of consumer suipbs from the too-high price.
'P°" P""''"' >>» <l>c bdB Recall that the demand curve represents consumea* mar^ udiuie,^ ^
^^d pretobn; ftl consumen »c faced with higher price,^ value of the different units of doihing. The resource cost of cach aoit of
fr-<^ rcdoct faeii cooBimpnoii: md ftl the govemmen, g»iu tidff clothing is the world price, $4. Hence, the trian^ fi tbe loss ia
xerenue.t^t» 4= »« «oootidc imprct ofthe leiifP consumer satis&ctkin fiom having to cut back on coosun^nioo.It a aho njoal
Mnrp ni«as«lv
Tariffi create ecooocQic mcffiaency. More precise^, when tan& mc inipose<^ to S50 (which is calculated as equal to one-half the price (fifieience die
the
loss to consumers exceeds the
lOU ID uuu»uu**»
revenue gained by the
«.w A
consumption reduction).
gorcmmem pbs die extra profits earned by producers C. Area C ia simply the tariff revenue, equal to the amount of the tariff omo
the of imports. Revenues in figure 15-3 ate I^XL Note diat. uoEke
SSNOkOCCCbTOFTAUPF FIGURE IS-3: Inposiaea tariff
ribei revenues and leads to A and B, revenue rectangle C need not be an efficiency cost or a
ineflldency deadwei^t loss. The govetnment revenues aised by taziffi can be enjoyed
This dj8gr»n shows the same to fimince useful government prognms ot can Im letsmcd to mnmmm fix
as ihai In Fig. IS-l. We have shows theic own purposes.
the impact of ihe tariff IS three effecQ.
Rgure 15-3 illustrates one feature that a hx^ionast in oodeatimfag 4e
W«UPlM
Ikiirfnir Region A is the cost of the
incnktcncy In production'induced hy
a higher domestic price. Triangle B U politics and history of tariffs. When a tariff a imposed, part of tbe iospact is
upon economic
shown inefficiency but the largestandeffea a oftenefficieDcy
wfiseribaove.
kaaesIn&om
the
•teUhiM

ihe toss fai consumer autplua from the

hefliciently high price. Region C b example Figure 15-3, aitas/I B riqaesent
the tariff revenue gained by the
govemmeat - a transfer from inefficiently high domestic productioo and inefHdently low vu.diiiin[Uion.
aoftsimen to the govemmetd but not respectively. Under the simplifying assumptiocs used above, ^
losses ace equal to the two little triangles sod sum up to $lOa ^
m u« tu joe
an effickncy loss.
tedistributioii involved tnd shown as area C b much larger.
Diagtamnutic Analyaia 12(H) raised in tariff rcvenuea levied upon consumers
Conmmres will bu uuhupp, .bout the highe.
.tum.pt to cpUHU th. poumtU rev«u« by .lufo.4!6^^^
1^1 iavcttigite eadu highli^ted. tat. re. why gitins
Ittiistnbutive bttttlarailorct impott
loise. resmcnotB
that on the: imp.ctJ .po cffidatcy.
A tiwff tsijM jL.
In summary: :«.rtu«ir domesric
to domestic mariteu fiwm $4 to 16. Firms arc
- le., to bring on line factorici udiost Imposing a uriff has three of the tariff
'^■oai^-coit ^ ^wtween $4 and |6 per unit. Bringing on these ptoducdon: it induces conaumcta to «duce Only the fiat
^®°uei could be bou^ fw the clodung produced by those Low efficient levels; and it Jr^rcconomy-
two , of these necessarily impose effiaency cosa
111
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 niossarv

• thuA quan: tariff • thunhipdemltititthuAquan:

Zi\iii My.■"« '^''''' P""! • hgn ngf du quota revenue from the tariff
;«nt CO thu nh»p vk tic dfo cu phit triin ci.
afnyinh cdn,n^P <!«»«" "f »Wch. T(, • dit ra thui quan vi hgn nggch: to
impoie tariff and quota
• cSng n^iifp non tri;
induitiy
ry^d 18, khi Nghi Vifn Anh d}t ra b.iu lhu« qu«n cho ch8, dua„, • cio bing: to equalize • 1^ thA to tinh thudng mfh trade
htat bPk kkic trfn eic thujc dja cua Anh 0 My, cho din 0,4,
M,. chfah ad. thuf qoan di chtot lA lA ninh dit mSu m3 d6J v4i cich • thit thoit kinht£econonnevitttte comparative advantage
DfDS viitfu trmnh cUnh t^. • si^thua^:lott
Chiini U c6 thi lii^u eic tic d^ng kinh cua thu^ quan vi han ng^ch
ting *i$c pi»*o cung-ciu. Di bit diu. cAn hiiu tW b4o U thuA G. Talking points
quin.Ihinio U h?n nRch. Thui quan U thutf dinh vio hing hoi nh^p
khiu. otob^n ng»ch U gi& h»n vA idlUflng hing nhip. 1. Comment ctiticalljr on the in^t-indmtiy argumeoi for tanfh. What k ia
2 Miu dich ttf do a cio blng gii ca trong nUdc vi gii qu& t^. Dtfdi hJjih relation to companthre advantage?
tbdc m|a djch. hinghoi U trin tit thj tnfbng c6 gii thip tang thi 2. What do you rhink of the tanffi and quotas imposed by the Vietnamese
trUdng c6 gii CBO. government at present (the advantages and disadvantages)?.
5 Tbui quan eidiy^ king nbipkhiud trong nude len, din dfogiam 3. Why do countties trade?
diu ding vi pam nh|p khiu. ding thoi ting tan xuAt trong nude. Hfn 4. Why should Vietnam foOowao open-door poliq?
ng^ c&ng c6 ink huong tUOng ti^
4 Tbui quan giy nin thit thoit kinh U£. Nin kinh tgphii chtu thua IS
do tieu ding ttotig nude giam vi do ling phi nguSn li^c vio vi$c aan
xuii hing hoi tlpiu 1^ tbA to tinh. Thua IS thudngIdn hdn ao vdi thu
nhip ti thuS quan cua chlnh phu.
6 ThuiquanUov#tfmth6in<nc6ngnghi$piiontri trong nUflcnhim
lbt?c hiinIfli thito tinh th^c ti? vS mlt Uu dii vi roang Igi eingin
viiclimchonhlndin.
6 ^q<ai:w.d4nlhAylyilchc4avifcthamgiavAoin»udichqu«il# .
»»1> do di cie qu& jia than ,U vto mAu djch quifc tA 1»:
• "«»ld«"«niafljia.eicqu&,iakhionhau
pi" do qay m«.in wit M„
* •'#U»icnhauviihihiitt

^ ^ th^Bo tinh thudng mfi gifl*

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the ESSEIVnALS OF ECONOMICS

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