efe

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

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

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

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

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

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REGULATION US -S TYLE

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

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

of capital (known as the “rate base”) and is the permitted annual rate of return, as a percentage of the rate base.

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

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

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

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

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

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

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

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

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

1.Utilities in the USA are regulated in order to

A.improve their efficiency.

B.raise their profits.

C.restrict monopoly power.

2. Rate-of-return regulation suggests that

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

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

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

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

A.its profit would go up.

B.it would make no extra profit.

C.the revenue requirement would be higher.

4. The regulated utilities in the USA

A.are under pressure from shareholders.

B.are not exposed to competitive pressures.

C.are often taken over by other firms.

5. The regulatory lag leads to

A.delays in setting higher prices.

B.rapidly rising costs.

C.an increase in the revenue requirement.

II. Are sentence below “Right” or “Wrong”? If there is not enough i n-

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

1. M ost of the utilities in the USA had been private companies.

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

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

lation.

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

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

1.___________________________________________

2.___________________________________________

3.___________________________________________

4.___________________________________________

5.___________________________________________

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THE POLITIC AL BUS INES S CYCLE

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

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

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

c)Inflation takes a time to build up.

d)This is a reduction in frictional unemployment.

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

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

success.

g)A recession is likely to follow.

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

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

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

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

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

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

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

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

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

1.The period of economic expansion is characterized by

A.a high level of unemployment.

B.increased government expenditure.

C.shortages and bottlenecks.

2.Governments are able to engineer booms and recessions by A. raising taxes.

B. decreasing government expenditure. C. cutting interest rates.

3.The balance of payments will not probably become a serious problem if A. the current account deficit gets severe.

B. the exchange rate starts to plummet. C. it is improved by the government.

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

A.there are no bottlenecks.

B.the peak of the business cycle is approached.

C.shortages do not occur.

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

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

and rapid growth preceding elections. c

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MANAGERS AND OWNERS :

High Salaries and Corporate Goals

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

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

b)Increasingly there has been greater reliance on payouts of shares and share “op-

tions”, rather than onsalaries and short-term bonuses.

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

d)Share option schemes are becoming less popular.

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

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

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

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

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

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

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

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

Share options give top managers the right to buy shares at a set price. ___ (4) If the share price falls below this level, the manager can exercise the option not to buy. In such

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circumstances, top managers are shielded from the risks of failure, but encouraged to do as well as possible.

It was estimated that, in the UK in 1994, the directors and senior executives of PowerGen and National Power had share options valued at £23 million. The chief executive of PowerGen alone made a profit of £1.2 million by exercising his option to buy the shares.

II.Complete the following table:

A.The giving of share options to top managers allows them

B.In order to provide additional incentives shareholders

C.High rewards are likely to motivate managers in the middle of the business hierarchy because

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

1.M any argue that such a pay awards have been excessive.

2.If the share value will go above this level, the manager makes difference.

3.Failure to offer high rewards may encourage the top executives within an industry moving elsewhere.

4.The justification for such a move is what giving rewards in the form of shares link the

interests of managers, owners and investors.

1._________________________________________________

2._________________________________________________

3._________________________________________________

4._________________________________________________

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INEQUALITY AND POVERTY

I. Read the text. Some parts of the text have been taken out. These e x- tracts are listed below. Complete each gap with the appropriate extract. One se n- tence does not belong in any of the gaps.

a)The definition is based on judgments, made by each particular society, as to what is considered a reasonable and acceptable standard of living, according to the conventions of the day.

b)Poverty as a social phenomenon should be eliminated.

c)A truly socialist society would be a much more equal society.

d)Nevertheless economists do have a major role to play in the analysis of inequality.

e)This may mean that some people are poor, and most on the right argue in

favour of government measures to alleviate poverty.

Inequality is one of the most contentious issues in the world of economics and politics.

The political right argues that a certain amount of inequality and poverty is the inevitable price paid for an efficient, growing economy. People need the incentives of high incomes to encourage them to work, train, invest and take risks. ___ (1) Nevertheless they worry that any significant redistribution from rich to poor may seriously reduce growth and efficiency by undermining incentives. People on the right also argue from a moral standpoint that the freedom to own property and to pass it on to children, and the freedom to keep the bulk of the income from that property, are fundamental rights.

The left, not surprisingly, disagrees. A fundamental tenet of socialism is t hat the distribution of income should be based on need, rather than on private property ownership and the workings of the market. ___ (2) M ost socialists nevertheless do accept that there will have to be incentives for an economy to function, and that therefore there will have to be some minimum level of inequality.

Whether the current distribution of income is desirable or not is a normative question. Economists therefore cannot settle the debate between left and right over how much the government should redistribute incomes from rich to poor. ___ (3) They can do the following:

Identify the extent of inequality and analyse how it has changed over time.

Explain why a particular level of income distribution occurs and what causes inequality to grow or to lessen.

Examine the relationship between equality and other economic objectives such as efficiency.

Identify various government policies to deal with problems of inequality and poverty.

Examine the effects of these policies, both on inequality itself and on other questions such as efficiency, inflation and unemployment.

In attempting to solve a social problem such as poverty, it is normal for the policy -making body to adopt the following four-stage approach:

The problem is defined.

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The problem is measured.

The problem’s causes are identified.

Alternative policies are considered to cure the problem.

The importance of defining the problem of poverty correctly is that it determines the subsequent stages: the number of poor, possible causes of poverty and ways of tackling the problem.

There are two ways of looking at poverty. Absolute poverty (or subsistence poverty).

As its name suggests, this definition involves identifying a poverty line measured in terms of those basic items considered essential to life: items such as adequate clothing, food and shelter.

By defining poverty in absolute terms, it is assumed that all individuals have similar minimum requirements, and that those whose means fall below the required minimum are poor.

Attempts have been made to include minimum social/cultural needs in such definitions: for example, adequate leisure and recreation, education and security.

Relative poverty

___ (4) Hence an individual who is unable to attain this reasonable and acceptable standard is considered poor. For example, if fridges, TVs and videos are considered part of “civilised existence”, then without them you are considered poor!

The standard of living considered to be acceptable by society will differ over time, and from one society to another.

II. Are sentences below “Right” or “Wrong”? If there is not enough i n- formation to answer, choose “Doesn’t say”.

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

1.Economists therefore cannot to settle the debate between left and right.

2.The standard of living considered be acceptable of society will differ over time.

3.Inequality is one of most contentious issues in world of economics and politics.

4.Hence an individual what is unable to attain this reasonable and acceptable standard is considering poor.

1. _____________________________________________

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