The Market's Impact on the Economy

by: BMA Editorial Team 3

Although economics has many facets, the field is unified by several central ideas. In article we will take a closer look at Ten Principles of Economics. There is no question as to what an economy is. Whether we are talking about the economy of Los Angeles, England, or Australia, a healthy economy is based on several distinct variables. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we start this series with four principles of individual decision making.

Principle 1: People Face Trade-offs.

"There is no such thing as a free lunch." To get one thing that we like, we usually have to give up another thing that we like. Nonetheless, acknowledging life's trade-offs is important because people are likely to make good decisions only if they understand the options that they have available.

Principle 2: The Cost of Something Is What You Give Up to Get It.

Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of some action is not as obvious as it might first appear.

Principle 3: Rational People Think at the Margin.

Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, with the opportunities they have.

Michael Leary of Apex Investment Services says that rational people know that decisions in life are rarely black and white but usually involve shades of gray. Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action.

Principle 4: People Respond to Incentives.

An incentive is something that induces a person to act. Because rational people make decisions by comparing costs and benefits, they respond to incentives. You will see that incentives play a central role in economics. Incentives are crucial to analyzing how markets work. For example, when the price of an apple rises, people decide to eat more pears and fewer apples because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples because the benefit of selling an apple is also higher.

Principle 5: Trade Can Make Everyone Better Off.

It is easy to be misled when thinking about competition among countries. Trade between the United States and Japan is not like a sports contest in which one side wins and the other side loses. In fact, the opposite is true: trade between two countries can make each country better off. By trading with others, people can buy a greater variety of goods and services at lower cost. Countries benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. The Japanese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they are our competitors.

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity.

At first glance, the success of market economies is puzzling. After all, in a market economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Yet despite decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economic activity in a way that promotes overall economic well-being.

Principle 7: Governments Can Sometimes Improve Market Outcomes.

If the invisible hand of the market is so great, why do we need government? One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a healthy economy. Most important, markets work only if property rights are enforced. A farmer won't grow food if he expects his crop to be stolen; a restaurant won't serve meals unless it is assured that customers will pay before they leave; and a music company won't produce CDs if too many potential customers avoid paying by making illegal copies. We all rely on government provided police and courts to enforce our rights over the things we produce - and the invisible hand counts on our ability to enforce our rights...

How individuals make decisions, and how people interact with one another make up the many variables of "The Economy."

Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.

The differences in living standards around the world are staggering. In 2007, the average American had an income of about $37,500. In the same year, the average Mexican earned $8,950, and the average Nigerian earned $900. Not surprisingly, this large variation in average income is reflected in the quality of life. Citizens of high-income countries have more TV sets, more cars, better nutrition, better healthcare, and a longer life expectancy than citizens of low-income countries.

What explains these large differences in living standards among countries and over time? The answer is surprisingly simple. Almost all variation in living standards is attributable to differences in countries' productivity- the amount of goods and services produced from an employee's time. In nations where workers can produce a large quantity of goods and services per unit of time, most people enjoy a high standard of living. Similarly, the growth rate of a nation's productivity determines the growth rate of its average income.

Principle 9: Prices Rise When the Government Prints Too Much Money.

In Germany in January 1921, a daily newspaper cost 0.30 marks. Less than 2 years later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the economy rose by similar amounts. This instance is one of history's most stunning examples of inflation. What causes inflation? In almost all cases of large or persistent inflation, the culprit is growth in the quantity of money. When a government creates large quantities of the nation's money, the value of the money falls.

Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment

Although a higher level of prices is, in the long run, the primary effect of increasing the quantity of money, the short-run story is more complex and more controversial.

Text 3. Read and render the text into Russian. Make up an abstract of it:

Money

by: BMA Editorial Team 2

Money was one of the earliest and most significant of all technological innovations, facilitating the avoidance of problems of equivalence involved in barter by establishing an external scale in which exchange values are manifest as prices, and payments are made in the form of coins or promissory notes. The use of pieces of metal as tokens of Exchange probably originated in the third millennium B.C., but the officially certified standardisation of coinage first became widespread in the seventh century B.C., early coins often being made of the gold/silver mixture called ‘electrum’. Coins designed for counting rather than weighing immediately became vulnerable to ‘clipping’ – the consequent preferential use of lighter coins being reflected in Gresham’s law, ‘‘bad Money drives out good’’— and gave rise to the dubious art of forgery. Paper money, first introduced in China in the eighth century and widely adopted in Europe in the late eighteenth century, played a discreet but significant role in facilitating the industrial revolution.

Money is a unique technology, in that it involves the deliberate incarnation of an idea, sustained by social convention; although coins may have a substantial ‘‘objective’’ value by virtue of the metal they contain, bank notes have virtually none, and yet their perceived value makes them far more useful and desirable than objects whose value is crudely utilitarian. Money is essential to the economic organisation of all but the simplest societies; the development of accounting systems to keep track of it was a major force in the development of writing. On the other hand, its confusing effect on traditional conventions of personal obligation is frequently reflected in religious suspicion, which has been particularly relevant to the charging of interest on loans.

The money and capital markets are the mechanism for converting the public’s savings into investments in buildings, machinery and equipment, public facilities, and inventories of goods and services that make it possible for the economy to grow, for new jobs to be created, and for living standards to rise. It is the financial system that handles most of the payments made for purchases of food, clothing, shelter, automobiles, and tens of thousands of other goods and services. That system also generates credit to sustain the public's spending and standard of living and stores future purchasing power in the form of stocks, bonds, and other securities. And the money and capital markets make possible the liquidation of those securities whenever cash is needed for immediate spending.

The financial system offers risk protection to businesses and individuals through sales of insurance policies and hedging instruments such as options, futures, and swaps. And both domestic and international financial systems today carry the great burden of public policy, serving as the conduit for government actions designed to promote economic growth, a stable international economy, low unemployment, and stable prices of goods and services.

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Date: 2015-01-29; view: 863