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I want now to look at the distribution of world income, and of national income. Then we can ask the questions: who, in the world, gets what share of these incomes? The distribution of income, either in the world or in a country, tells us how income is divided between different groups or individuals. Let's look at this table. I want you to note down the figures I give you at this point, and later we can discuss what they mean. You can see there are three headings down the left-hand side of the table: income per head, percentage of world population and percentage of world income. Let's look at poor countries first. In poor countries, like India, China and the Sudan, the income per head is only one hundred and fifty-five pounds per year. But at the same time, they have fifty point seven percent of the world's population. These poor countries only have five percent of the world's income. Have you got those figures? Good.
Now let's complete the table. In the middle-income countries the income per head is eight hundred and forty pounds, that's in countries like Thailand and Brazil. In the major oil countries, like Kuwait and Saudi Arabia, it's seven thousand, six hundred and seventy. In industrial countries it's six thousand, two hundred and seventy. And finally, in Soviet bloc, it's two thousand eight hundred. OK?
Turning to middle-income countries again, they have twenty five point one percent of world population, with fourteen point two percent of world income. The major oil countries have point four percent of population, the industrial countries fifteen point six and the Soviet bloc eight point two. The oil countries have one point five percent of world income, the industrial countries sixty-four point eight and the Soviet bloc fourteen point five.
Let's come back now to our three questions, the three you read about. The first is for whom does the world economy produce? Well, as you can see, it produces essentially for the people living in the rich industrial countries. They get sixty percent of the world's income, although they only have sixteen percent of its population. This suggests an answer to the second question, that of what is produced. The answer is that most of world production will be directed towards the goods and services that these same rich, industrialised countries want.
Our third question was how goods are produced. In poor countries, workers produce much less than workers in rich countries. And poverty is very difficult to escape. It continues on and on. And this goes some way towards accounting for the differences in national incomes. It accounts for an unequal distribution of income, not just between countries but also between members of the same country, although there individual governments can help through taxation, for example. In other words, governments can act to help distribute income throughout their population.
Unit 2
Text B
This morning we’re going to continue to look at the role markets and prices play. What we’ve said so far, if you remember, is that markets are arrangements through which prices influence how we allocate resources, scarce resources. To show how important this role is, ask yourselves this question: how would resources be allocated if markets did not exist? If there were no markets? Well, let’s have a quick look at three kinds of economy to help us answer the question.
Let’s look first at what we call the command economy. The command economy. Now, this kind of economy is a society where the government takes all the decisions. The government decides production and consumption. In practice, that means that a government office, a planning office, decides our three original questions. It decides what will be produced, how it will be produced and also for whom it will be produced. The same planning office then tells households, firms or companies and workers what it has decided.
Planning of this kind is obviously very difficult, very complicated to do. And the result is that there is no society which is completely a command economy. But in many countries, such as the Soviet Union, there is a large amount of central planning and direction. The state owns factories, for example, and it also owns land. The state makes the most important decisions about what people should consume. It also decides how goods should be produced, and how much people should work.
Let’s turn now to our second kind of economy. This is what we call a free market. Markets in which governments do not intervene are called free markets. Now, in a free market individual people, such as yourselves, are free to pursue their own interests. They can become millionaires, for example. The basic idea behind the free market is this: if you, for example, want to become a millionaire, what do you do? Well, let’s say you invent a new kind of car. You want to make money out of it, in your own interests. But when you have that car produced, you are in fact moving the production possibility frontier outwards. You actually make society better off, by creating new jobs and opportunities, even though you become a millionaire in the process. And you do it without any government help or intervention. Hong Kong is an example of a free market.
The third kind of economy we’ll look at is what we call the mixed economy. And this means very much what it says. At one extreme we have the command economy, which doesn’t allow individuals to make economic decisions – this is done centrally by the government. At the other extreme we have the free market, where individuals can pursue their own interests without any government restrictions. Between these two extremes lies the mixed economy. In a mixed economy, the government and the private sector interact in solving economic problems. On the one side, the government controls a share of the output. It does this through taxation, transfer payments and providing services such as the police. But at the same time, though with restrictions, individuals are free to pursue their own interests. Most countries are mixed economies, though of course some are nearer to command economies than others. Others are closer to free market economies.
Unit 5
Text В
This afternoon we’re going to finish looking at macroeconomics. Well, not exactly finish, of course, but finish our short introduction to this branch of economics at any rate. Macroeconomics is probably better known to you, actually, than microeconomics. This is simply because macroeconomic concepts refer to the economy as a whole, and this in turn leads to their getting more coverage in the media - that is, on television, in the newspapers and so on. Microeconomic concepts, on the other hand, because they are of interest only to the particular group they deal with, are of less public interest.
I want you now to note down three key terms. These terms are three of the most important building blocks of macroeconomics. They are three basic concepts which we use, and you may have already heard them in the media. The first of these is what we call Gross National Product. I’ll say that again: Gross National Product. Have you got that? Good. Gross National Product is often just called G-N-P. Note that down too. Now, GNP is the value of all goods and services produced in the economy. All goods and services produced in the economy over a given period, such as a year, that is.
The second basic concept is the Aggregate Price Level. The Aggregate Price Level. Got that? Right, I’ll pause for a moment ... The Aggregate Price Level is a measure. It’s a measure of the average level of prices of goods and services in the economy. The average level of prices of goods and services in the economy. Of course, this average level of prices is relative to the prices of the same goods and services at some fixed date in the past. OK? Good. Now, there is actually no reason why the prices of different goods should always move in line with one another. As you must have noticed, some goods go up in price more sharply than others. Others may hardly move. So the Aggregate Price Level tells us what is happening to prices on average. When the price level is rising, we say that the economy is going through a period of inflation.
The third concept I want you to understand, and of course note down, is what we call the Unemployment Rate. The Unemployment Rate. OK? Good. The Unemployment Rate is the percentage of the labour force, or workforce, which is out of work, hasn’t got a job. It’s important to understand what we mean by the labour force. By the labour force we mean the people, both men and women, who are of working age - so we don’t include children or those who have retired, stopped working. We also mean those people who in principle would like to work if they could get a job. So we don’t mean people who, although they are of working age, don’t have to work - people who, for example, have inherited from their parents enough money so they don’t have to work at all.
Unit 7
Text B
It’s equilibrium we’re going to talk about today. Specifically, the market and the equilibrium price. I’ll say that again. The market and the equilibrium price.
Look at Table 2 again, would you? You’ve seen this table before. It describes the demand for and supply of chocolate bars. Let’s say we now want to combine the behaviour of buyers and sellers described in this table. We want to do this in order to model how the market for chocolate bars would actually work. If you look at the table carefully, you will see that at low prices the demand for chocolate bars exceeds, is greater than, the quantity supplied. For example, if the price is ten pence, 160 million bars is the demand – but the number of bars supplied is zero. Notice also that the opposite is true if the price is high. If the price is 70 pence, the demand is zero and the supply is 240 million bars. Do you see what I mean? Good.
Now this is the important point. At some intermediate price... intermediate? It means in the middle. OK? At some intermediate price the quantity demanded just equals the quantity supplied. This we call the equilibrium price. The equilibrium price. If you look at the table again, you’ll see that the equilibrium price for chocolate bars is thirty pence. At a price of thirty pence, demand is for 80 million bars, and that’s the same quantity as sellers want to supply.
In this example, and I want you to note down this term, it’s important you understand it, we call 80 million bars the equilibrium quantity. The equilibrium quantity. At a price below thirty pence, the quantity demanded exceeds the quantity supplied. In other words, people can’t get enough chocolate bars. So we have a shortage. This shortage we call excess demand. Note that down too. Got it? OK, I’ll go on. From our previous discussions, you will, of course, realize that when we economists say there is excess demand we really mean the quantity demanded exceeds the quantity supplied at this price. And I emphasize that.
Now let’s turn to excess supply. Another term you should note. Excess supply. Excess supply happens when, in our example, the price is higher than thirty pence per bar of chocolate. At this price, the quantity supplied exceeds the quantity demanded. This means sellers will be left with stock they can’t sell. Again, of course, economists use the term excess supply to mean excess in the quantity supplied at this price.
Now let’s ask ourselves the question ‘Will the market for chocolate bars automatically be in equilibrium?’ And, if so, ‘What mechanism brings this about?’ Let’s say for the moment that the price for chocolate bars is fifty pence. That is higher than the equilibrium price, of course. At this price, sellers want to sell 160 million bars – but, as you can see from the table, nobody wants to buy chocolate bars at this price. They’re too expensive. So what happens? Well, producers must get their money back, the money they’ve spent on producing these 160 million chocolate bars. So what do they do? They cut, reduce, their prices, naturally, to clear their stock. Say they reduce their price to forty pence. What is the effect? As you can see, this move has two effects. First, it increases the quantity demanded to 40 million bars per year. And second, it reduces the quantity producers want to sell at this price to 120 million bars per year. This price – cutting process will continue until the equilibrium price of thirty pence is reached.
The same process actually works in reverse. What I mean by that is that if the initial price is below the equilibrium price, say twenty pence, the quantity demanded is 120 million bars. But at this price only 40 million bars are produced. This means, of course, that sellers will quickly run out of stock. They will realise they could have charged higher prices. This gives them a reason to raise prices, so that scarce stocks are rationed. And prices will continue to rise until the equilibrium price is reached. At that point the market clears. At this point, are you all clear...
Unit 8
Text B
Good morning, everyone. Today we’re going to look at shifts in the demand curve. Shifts? SHIFTS. The word basically means changes, but we economists prefer the word shift. So, shifts in the demand curve. You may remember from Table 3 we drew the demand for chocolate bars. We drew it for a given level of three underlying factors: the price of related goods, incomes and tastes. Changes in any of these three underlying factors will change the demand for chocolate.
Let’s look at these shifts more closely. Take a look at Table 3 here. Can you all see it? Good. Now, this table illustrates the effect of a rise in the price of a substitute for chocolate. I’ve taken ice cream, as you can see in the table. Ice cream could well be a substitute for chocolate. Notice that at each chocolate price there is a larger quantity of chocolate demanded when ice cream prices are high. This is because people substitute chocolate for ice cream.
Now look at Figure 4. Here I’ve shown the same change in ice cream prices leading to a shift in the demand curve. A shift from the line DD which you can see running from a price of fifty pence to 200 million bars per year, to a new demand curve running from seventy pence to 280 million bars per year. As you can see the entire demand curve has shifted to the right, and this is because a higher quantity is demanded at each price.
OK so far? Good. Notice also that this shift to the right has changed the equilibrium price. It was thirty pence, and is shown by the letter E. Now it’s forty pence. And the new equilibrium quantity is 120 million bars of chocolate per year.
Once we’ve reached this point, we can even sketch how the chocolate market makes this transition from the old equilibrium at E to the new equilibrium. Think about it. Think about the moment the price of ice cream rises. What happens? Well, the demand curve shifts from DD, as you can see. Until the price of thirty pence changes, we now have excess demand at this price. You can see this excess demand EH in the figure. At a price of thirty pence, 160 million bars a year are demanded, but only 80 million bars are supplied.
What effect does this excess demand have? Well, it puts upward pressure on prices. The price of chocolate bars rises until it reaches the new equilibrium price, which as you can see is forty pence. But, notice this, this higher price reduces the quantity demanded. It reduces it from 160 million bars to 120 million bars.
What lessons can we learn from this? Well, I suggest the first lesson is this. It is that the quantity of chocolate demanded depends on four things. In addition to the three factors I mentioned at the start of this lecture, prices of related goods, incomes and tastes, demand also depends on its own price. The price of chocolate that is. And this is why, when we draw demand curves, we always choose to single out the price of the commodity itself, in this example the price of chocolate bars. We put the price in the diagram together with the quantity demanded. The other three factors become what we’ve called ‘other things equal’, and any changes of these will shift the position of our demand curves. Now before I go on...
Unit 9
Text B
The income statement shows the flow of money during the given year. But we also describe the position the firm has reached as a result of all its past trading operations. We call this document the balance sheet. The balance sheet.
Now, essentially the balance sheet lists the assets the firm owns. It also lists its liabilities. What? LIABILITIES. OK? Good. Now by doing this the balance sheet provides us with a picture of the firm at a particular point of time, for example at the end of a year. I’ll now go through a balance sheet with you, so take a moment to look at this. It’s the balance sheet of Snark International on 31st December, 1987.
Let’s start with assets. Assets are what the firm owns. These assets are listed on the left, as you can see. Snark, this firm, has some cash in the bank. That’s one asset. It’s also owed some money by its customers, who haven’t paid yet. This money is shown as accounts receivable. That’s another asset. Yet another asset is the large inventories it has in its warehouses. Not only that, but it also owns a factory. This factory originally cost a quarter of a million, but notice that, because of depreciation, it’s now only worth two hundred thousand. Of course, it also has other equipment desks, perhaps, or machinery which originally cost Snark three hundred thousand. Again because of depreciation, this equipment is now worth a hundred and eighty thousand. So we can say, after adding all these assets up, that Snark is worth five hundred and ninety thousand.
Now let’s take a look at liabilities. Liabilities are what the firm owes. These liabilities are shown on the right of the balance sheet, as you can see, starting with accounts payable. These are bills that Snark owes but has not yet paid. It also hasn’t yet paid some salaries, some fifty thousand pounds’ worth. That’s also a liability. Then, there is a mortgage on the factory of a hundred and fifty thousand which it has negotiated with an insurance company. Finally there is a bank loan. That’s for shorter-term cash needs. Adding all that up, we can see that Snark has liabilities, or debts, of three hundred and fifty thousand. So we can say that the net worth of Snark, note that term ‘net worth’, is two hundred and forty thousand. That’s the excess of its assets over its liabilities.
Some of you may be wondering why Snark’s net worth is shown as a liability rather than an asset. The reason is simply because the firm is owned by its shareholders. So the net worth is really owed to them. It is a liability of the firm to the shareholders.
Now let’s imagine you have lots of money and you want to buy Snark. To make what we call a take-over bid, in fact. How much do you think you should offer? Eh? Well, you might think of offering two hundred and forty thousand, which is, after all, the net worth of the company. But I think probably not. Why not? Well, Snark is a live company. It’s got good prospects for future growth. It’s got a proven record. You have to remember you’re not just bidding for its physical and financial assets, less of course its liabilities. You’re actually bidding for the firm as a going concern. You will also get its reputation. Its customer loyalty. And a great many other things, all intangible. All these intangibles, like reputation and customer loyalty, we economists call goodwill.
Case Study
Case 1
In the early 1980s there was a controversy over the “Fares Fair” policy of cutting bus and tube fares in London. Some people thought low fares would increase passengers and bring in extra revenue for London Transport, which runs the bus and tube services. Others thought that low fares would lead to disastrous losses in running London Transport. Eventually the matter was referred to the courts. Suppose you had been a consultant brought in to analyse the relationship between tube fares and revenue from running the tube: how would you have analysed the problem?
To organize our thinking, or - as economists describe it - to build a model, we require a simplified picture of reality which picks out the most important elements of the problem. We begin with the simple equation.