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UNIT 3. Savings and consumption.
Introduction.

TEXT A.

inflationA decrease in the purchasing power of money. That is, it now costs more money to buy the same range of goods as it did at an earlier date See also cost-push inflation; creeping inflation; demand-pull inflation; hidden inflation.
interestThe cost of borrowed money. Banks pay interest to depositors because the former have in practice borrowed the money; borrowers pay interest to lenders. See also compound interest; liquidity premium.
savingsIn general, income minus expenditure. By this definition, all income is either spent or saved, these are the only two categories and therefore savings plus expenditure must equal income. See also personal savings.
time value
of money
The fact that money has earning power means that a person who will be paid 100 pounds would rather have the money today than at some time in the future. If money can earn six per cent per year, then a person who receives 100 has been given exactly the same spending power as a person who will be given 106 one year later. See also present value.

Exercise 1.
a. Where do you think Text A comes from?
1. a magazine article explaining how interest can be earned
2. different pages of an economics dictionary
b. What are these paragraphs more useful for?
1. giving examples
2. giving meanings
c. Does the paragraph on interest explain everything about the profits earned from lending money? If you wanted to know more, where else would you look?

CLUES:b. How many examples can you find? How many meanings?
c. What does the instruction "See also compound interest; liquidity premium" mean?

 

Exercise 2.
Choose the correct alternatives.

When I lend my (a) savings/expenditure to a bank, the bank (h) pays/collects interest on what it has (c) lent/borrowed. This makes me an investor in the bank. In times of (d) inflation/deflation I am able to balance the (e) decrease/increase in the purchasing power of my savings by earning (f) a deposit/interest.

CLUES:a. Expenditure is defined as money that is spent.
d. Deflation occurs when the purchasing power of money increases.
f. Money that is left in the bank for safe keeping is known as a deposit.

 

Focus: Defining.

What does the term 'investor' mean in Exercise 2?
An investor may be defined as an individual or an organization that lends money for interest.
or An investor is an individual or organization that lends money for interest.
or An individual or organization that lends money for interest is called an investor.
or Economists call an individual or organization that lends money for interest an investor.

Look at the diagrams which follow.
This diagram shows how the first two definitions are made:

NEW INFORMATION:
an investor

DEFINITION:
an individual or organization that lends money for interest

This diagram shows how the last two definitions are made:

DEFINITION:
an individual or organization that lends money for interest

NEW INFORMATION:
an investor

 

Exercise 3.
Match each piece of new information with the definition that helps you understand it.

a. Capital goods 1. they mean the activity which results in the supply of goods and services.
b. A useful function performed for the benefit of someone who is prepared to pay for it2. is known as consumption.
c. When economists refer to production3. are items which are manufactured for the purposes of helping man in his productive efforts.
d. The way by which scarce resources are chosen to be used for consumption or production4. is called a service (e.g. hair dressing, selling food in a restaurant).
e. Investment5. may be defined as resources used to increase future income and consumption.
f. The use made of services and goods for the satisfaction of wants6. is called the allocation of resources.
CLUES:Your answers to Exercise 4 will help you.

 

Exercise 4.
If you are working on your own, complete passage 1 with the phrases given after it.
If you are working with a friend, one of you complete passage 1 and the other complete passage 2. Write the completed passages in your notebook.

PASSAGE 1.
Every government must decide on the (a) _____ , which may be defined how resources are shared out for production and consumption.
Consumption is defined by economists as the use made of (b) _____.
In a mixed economy (c) _____, this allocation may be achieved both by direct government action, (d) _____, and by price mechanisms. The latter (e) _____ and goods through the agency (effects) of price. The government has to take into account the extent to which patterns of production and consumption will change over a period of time when (f) _____.

PASSAGE 1 PHRASES.
1. such as by rationing
2. services and goods for the satisfaction of wants
3. it decides how resources should be allocated
4. (i.e. an economy that is part state controlled and part privately controlled)
5. allocation of scarce resources
6. may be defined as the distribution of services.

CLUES:If you are working on your own, check your answer by completing passage 2. But be careful! The two passages are slightly different.

 

PASSAGE 2.
Every government has to decide how (g) _____, by which is meant how they are to be used in consumption and production.
When (h) _____, they mean the activity which results in the supply of goods and services.
In (i) _____ (i.e. an economy that is part state controlled and part privately controlled) this allocation may be achieved both by direct government action, (j) _____, and by the distribution of goods and services through the agency (effects) of price. This form of distribution (k) _____. (l) , the government must take into account the extent to which patterns of production and consumption will change over a period of time.

PASSAGE 2 PHRASES.
1. When deciding how resources should be allocated
2. economists refer to production
3. a mixed economy
4. scarce resources should be allocated
5. for instance, by rationing
6. is known as distribution by price mechanisms.

CLUES:Compare the completed passages 1 and 2. But be careful! The two passages are slightly different.

 

Reading.

Exercise 5.
Choose the appropriate sentence to complete each paragraph below.
a. The government may decide to invest public funds in agriculture so that farmers are encouraged to grow more food. Alternatively, . . .
1. a better diet will lead to an improvement in the health of the present generation.
2. it may decide to invest in education.
3. this will encourage farmers to support the government.
b. Government aid to schools will encourage the development of an educated workforce. Moreover, . . .
1. if the money is spent on military weapons, the armed forces will be more likely to support the government.
2. an efficient educational system is extremely expensive to run.
3. the government will win political support from parents and teachers.

CLUES:a. 'Alternatively' means on the other hand. An example of its use comes in Exercise 6.
b. 'Moreover' means besides or in addition (to this).

 

Exercise 6.
a. Write out the following sentences in the order that makes best sense.
1. Monetary savings can simply be stored for future use, but in most cases their 'real' value will probably decline due to inflation.
2. That part of income which is not consumed is called savings.
3. Alternatively, savings can be deposited in a bank to earn interest so that their 'real' value may increase to the extent that the interest paid by the bank exceeds the rate of inflation.
4. Individual families, whether rich or poor, must decide how to divide their expenditures out of income in some proportion between present and future consumption.
b. What term is used to define that part of expenditure that is reserved for future consumption?
1. value
2. savings
3. income.

CLUES:a. Sentence 2 defines savings. So do you think it comes before or after sentence 1 and sentence 3, in which the term savings is used again? Sentence 3 begins with the word 'alternatively'; do you think it comes before or after sentence 1? Text B will give you the answer.
b. Look at sentence 2.

 

Exercise 7.
a. Which of the alternatives below do you agree with?
1. If the work force is better educated, it will probably be more productive/less productive.
2. A government, like individual consumers/unlike individual consumers has to decide whether to use existing economic resources in present consumption, or whether to invest them in production for future consumption.
3. If the government invests in expanding the educational service, the country will only benefit when the educated generation join the labour force/benefit immediately.
4. If the government invests in subsidies to farmers, who produce more food, the country will only benefit after a long period of time/benefit immediately?
b. What is the best order for expressing the ideas above?

CLUES:a. Check your answers with Text B below.
b. Text B, paragraph 2, gives one order.

 

TEXT B.

Individual families, whether rich or poor, must decide how to divide their expenditures out of income in some proportion between present and future consumption. That part of income which is not consumed is called savings. Monetary savings can simply be stored for future use, but in most cases their 'real' value will probably decline due to inflation.
Alternatively, savings can be deposited in a bank to earn interest so that their 'rear' value may increase to the extent that the interest paid by the bank exceeds the rate of inflation.
Like consumers, private producers and governments must face a similar choice in deciding how to allocate existing resources between production for present consumption and production for future consumption. Resources devoted to expanding future income and consumption are known as investments. The allocation of these present 'real' resources (land, labour, capital, materials, management, etc.) to future production and consumption is the essence of the process of investment. Its major characteristic is the dominant role played by time. For example, the decision whether to allocate limited public funds in the form of price support subsidies to farmers to encourage them to expand their production of a staple commodity like corn or to devote these same resources to expanding educational opportunities is essentially a decision about present consumption (food now) as opposed to future consumption (food later as a result of a more educated and possibly therefore a more productive agricultural labour force).

Todaro. M.P. Economics for a Developing World Longman 1977

 

Exercise 8.
The phrases on the left come from Text B. Which of the phrases on the right is closest in meaning within the context?

a. monetary savings 1. savings in the form of money
2. savings that are consumed
3. savings in the bank.
b. price support subsidies1. grants of money made to consumers
2. grants of money to decrease losses made in production
3. grants of money made to farmers.
c. staple commodity1. goods that remain at the same price
2. goods that are of major importance to the economy
3. fruit and vegetables.
CLUES:a. Note that monetary savings can either be stored for future use or used to cam interest.
b. Price support subsidies are often made to manufacturers in order to protect them against falling markets.
c. Some fruits and vegetables may not be of major importance to the economy. For instance, in Saudi Arabia strawberries are a luxury, but are not essential to the Saudi diet.

 

Exercise 9.
Read this paragraph which comes from a magazine article on the difficulties that one country faces in feeding itself.
The country's inability to feed itself means that the Ministry of Agriculture & Forestry is constantly worried about a 'food crisis'. Imports of agricultural products satisfy about 28% of Japan's dietary needs. Although the nation's farmers grow more than enough rice for the population of 117 million, the self-sufficiency rate for other grains, including wheat, has dropped from 81% in 1955 to a currenr33%. Japan last year paid out US $15 billion to food trading partners, and this accounted for 13% of total imports.

a. Where do you think this paragraph comes in the article?
1. first
2. in the middle
b. Which of these titles do you think describes this paragraph best?
1. The Japanese diet
2. A world food crisis
3. A food crisis in Japan
c. Which of these diagrams shows present food production in Japan?

d. Which of these topics do you expect the writer to discuss elsewhere in the article? Choose three and write them in your notebook.
1. How to grow soya beans
2. Studies made by the government of a possible food shortage
3. Japanese military history
4. The political difficulties of formulating (planning) a new food policy
5. Why the shortage of essential food frightens the Japanese
6. The use of cheap labour in paddis (rice farms).

CLUES:b. Is the writer describing a food shortage that might affect the whole world, or Japan only?
c. Does Japan produce sufficient rice to feed its own people? Sufficient wheat?
d. Text C gives you the answers.

 

Now read the complete text from the magazine article.

TEXT C.
A Food Crisis?
Imagine Japan without soy sauce. The idea may seem trivial but it frightens the Japanese. They depend on soya bean products for much of their daily protein. Food shortages that might result from a breakdown in Japan's international trade are a worrying, ever present danger. For despite its economic affluence, the overcrowded nation remains the world's only major nation that imports a sizeable proportion of its food.

The country's inability to feed itself means that the Ministry of Agriculture & Forestry is constantly worried about a food crisis. Imports of agricultural products satisfy about 28% of Japan's dietary needs. Although the nation's farmers grow more than enough rice for the population of 117 million, the self-sufficiency rate for other grains, including wheat has dropped from 81% in 1955 to a current 33%. Japan last year paid out US $15 billion to food trading partners, and this accounted for 13% of total imports

The potential threat to the Japanese diet posed by global crop failures, international disputes, port strikes or trade embargoes has led the government to study the problem of is 'food security'. A recent report says that Japan could eat pretty much as usual if imports dropped by 10-20% but if supplies fell by 50% the Japanese would have to go back to eating more rice, and less meat. If imports stopped altogether, they would have to consume 20 times more sweet potatoes. Nobody would starve to death, perhaps, but meals would look very different. The government, which currently subsidises rice production, has been encouraging farmers to 'rest their paddis' or switch to growing wheat, or soya beans. But because many government Members of Parliament depend on rural votes, they are reluctant to change the decade Old Food Control Law.

However, unless the government formulates a new food policy, a sudden decline in grain imports could leave the Japanese very hungry. A disaster is very unlikely to happen, says one ministry official, 'but you never know how things will be in the future".

Asiaweek 12 February, 1982

 

Exercise 10.
The words on the left come from Text C. Which of the words or phrases on the right is closest in meaning within the context?

a. trivial 1. unimportant
2. important
3. frightening
b. protein1. drink
2. an imported food
3. an important food substance found in meat, eggs, etc.
c. affluence1. influence, authority
2. wealth
3. poverty
d. global crop failures1. worldwide crop failures
2. serious crop failures
3. failures in grain crops
e. reluctant to change the decade
old Food Control Law
1. unwilling to change the ten-year- old Food Control Law
2. eager and willing to change the ten-year-old Food Control Law
3. uncertain whether to change the ten-year-old Food Control Law.
CLUES:a. Look at the phrase '. . . but it frightens the Japanese'.
c. Is the Japanese economy successful or unsuccessful?
e. Fanners (who are rural voters) are subsidized by the Food Control Law. Do you expect that those members of Parlament who are elected by rural voters are eager to change the Law?

 

Exercise 11..
Which of these statements agree with Text C? Write 'agreed' or 'disagrees' in your notebook.

a. The Japanese get much of their protein from soya products.
b. The government is not worried by trade embargoes (i.e. stoppages on trade by other countries).
c. If all food imports were stopped, many people would starve to death.
d. The Japanese would be forced to change their diet if food imports ceased.
e. The government can change the pattern of food production by stopping paying subsidies to paddi farmers.
f. This move would be very popular among voters in the countryside.
g. Japanese politicians are therefore eager to stop paying subsidies on rice production.

CLUES:a. Look at sentence 3.
b. Look at paragraph 3, sentence 1.
c. Look at paragraph 3, sentence 4.
d. Look at paragraph 3, sentence 4.
e. Look at paragraph 3, sentence 5.
f. Look at paragraph 3, last sentence.
g. Look at paragraph 3, last sentence.

 

Exercise 12.

What types of food production are subsidized in your country? What long term investments does the government make in such fields as education, industry, communications? Write the answers in your notebook and discuss them with your teacher.

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