Social Studies Economics - Bayport-Blue Point School District
Social Studies Economics - Bayport-Blue Point School District
Social Studies Economics - Bayport-Blue Point School District
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BAYPORT-BLUEPOINT UNIONFREE SCHOOLDISTRICT<br />
BAYP0Rr, NEWYORK<br />
Board of Education<br />
Michael Porwick, President<br />
Barbara Abrains,Vice President<br />
Trustees<br />
Steve Brown<br />
James Crowley<br />
Jack Guarneri<br />
Gary Judy<br />
Gary Maggio, D.C.<br />
Ruth Pasternack,Ed.D.<br />
Mary Weber<br />
Bernard F. McLaughlin,<strong>District</strong> Clerk<br />
Frances Malyk, <strong>District</strong> Treasurer<br />
George M. Reilly, Ed.D.<br />
Superintendentof <strong>School</strong>s<br />
Richard W. Curtis<br />
AssistantSuperintendentfor Instruction<br />
and Personnel<br />
Alice K. Connor<br />
AssistantSuperintendentfor Business<br />
Fred Coverdale<br />
Assistant to the Superintendent<br />
for Special Programs and Projects<br />
James E. Connell<br />
AdministrativeAssistant for Plant<br />
Operationsand Maintenance<br />
<strong>Economics</strong>Grade 12<br />
Curriculum<br />
September 1989
.<br />
<strong>Bayport</strong>-<strong>Blue</strong><strong>Point</strong> Union Free <strong>School</strong> <strong>District</strong><br />
<strong>Bayport</strong>, New York<br />
<strong>Economics</strong> Grade 12<br />
Curriculum<br />
Writers<br />
Edwin Horsley<br />
Robert Mansius
ECONOMICS — 12TH GRADE<br />
CURRI CULWI
Bibliography<br />
Table of Contents<br />
Introduction, General Overview<br />
Unit I — Introduction to <strong>Economics</strong> & Economic Systems<br />
(2 Weeks) (A) Why Study <strong>Economics</strong><br />
(B) Economic Systems<br />
(C) Supply, Demand, Prices<br />
Unit II — Microeconomics<br />
(8 Weeks) (A) Consumer<br />
(B) Business<br />
(C) Labor<br />
CD) Agriculture<br />
CE) Public Goods & Services<br />
Unit III — Macroeconomics<br />
(6 Weeks) (A) Measuring the Economy<br />
(B) Money<br />
(C) Unemployment, Inflation, Distribution of Income<br />
Page 2<br />
CD) Government Decisions Affect Unemployment and Inflation<br />
CE) “Good 1’ Tax System<br />
(F) Economic Growth as a National Policy Goal<br />
Unit IV — U.S. and the World Economy<br />
(4 Weeks) (A) Reasons for International Trade<br />
(B) Alternative Systems<br />
(C) Economic Problems of Developing Nations<br />
(D) <strong>Economics</strong> of Population Growth, Scarcity or Imbalance
I. Filmstrips<br />
Title<br />
BAYPORT—BLUE POINT HIGH SCHOOL<br />
Bibliography of Audio—Visual Materials<br />
As of Sept. 1, 1989<br />
<strong>Economics</strong><br />
1. The Market Economy — 2 parts<br />
A) Characteristics of Market Economy<br />
B) Supply and Demand<br />
2. The National Economy — 2 parts<br />
A) Measuring Economic Performance<br />
B) Good Times/Bad Times<br />
3. Government and the Market — 2 parts<br />
A) How Markets fail<br />
B) Government in the Market<br />
4. Anatomy of U.S. Economy — 1980<br />
5. China — Edging Towards the West —<br />
1986<br />
6. Deficit — Great American — 1986<br />
7. Foreign Investors — Who Really<br />
Owns the U.S. — 1980<br />
8. Inflation — The Incredible<br />
Shrinking Dollar — 1981<br />
9. Inflation and Your Taxes — 1980<br />
10. International Trade — 2 parts 1977<br />
A) Why Foreign Trade<br />
B) Money to Trade<br />
11. OPEC — Case Study<br />
— 1979<br />
12. <strong>Social</strong> Security — Is it Secure?<br />
1982<br />
13. South Africa — <strong>Economics</strong> of<br />
Apartheid — 1985<br />
14. Welfare — Who Benefits?<br />
Who Pays?<br />
—<br />
—<br />
1979<br />
15. World — Hunger What’s the<br />
Solution? — 1985<br />
Unit<br />
I<br />
III<br />
III<br />
Length<br />
20 inins<br />
each<br />
Location<br />
Room 221 — Cabinet<br />
20 mins. Room 221 — Cabinet<br />
each<br />
20 mins. Room 221 — Cabinet<br />
each<br />
I 10 tnins.<br />
IV 22 mins.<br />
IV 20 inins.<br />
IV 15 mins.<br />
III<br />
Room 221<br />
Room 221<br />
Room 221<br />
Room 221<br />
— Cabinet<br />
— Cabinet<br />
— Cabinet<br />
— Cabinet<br />
18 mins. Room 221 — Cabinet<br />
III 15 mins. Room 221<br />
IV 12 mins.<br />
each<br />
15 inins.<br />
Room<br />
Room<br />
221<br />
221<br />
IV 15 mins. Room 221<br />
III<br />
IV<br />
III<br />
— Cabinet<br />
— Cabinet<br />
— Cabinet<br />
— Cabinet<br />
18 mins. Room 221 — Cabinet<br />
18 mins.<br />
15 mins.<br />
Room 221<br />
Room 221<br />
— Cabinet<br />
— Cabinet<br />
I & IV 18 mins. Room 221 — Cabinet
Filmstrips — Can’t. Page 2<br />
Title Unit Length Location<br />
16. <strong>Economics</strong> — 4 parts All 15 inins. Library 11330.973<br />
A) Case for Interdependence each<br />
B) Economic Systems<br />
C) Share in Business<br />
D) Getting a Job<br />
17. American Economy — Quality 1 18 mins. Library 11330.973<br />
of Life — 3 parts each<br />
18. Anatomy of the U.S. Economy — 1 15 mins. Library #330.973<br />
1980<br />
19. Buy Now, Pay Later: Pros and 3 18 mins. Library 1/332.7<br />
Cons of Credit — 1979<br />
20. Labor Unions: Power to the 3 18 mins. Library #331.88<br />
People? 1978<br />
21. America’sNew Rival — The 4 18 mins. Library 1/338.94<br />
Common Market — 2 parts 1975 each<br />
22. Has Big Business Got Too Big? 3 20 mins. Library 1/338<br />
1974
II. Video Cassettes<br />
Title<br />
1. Understanding <strong>Economics</strong> — 9 lessons<br />
A) Money — Nature of Wealth<br />
B) Land & Man — Patterns of Land<br />
Ownership<br />
C) Real Value Makers — Laws of<br />
<strong>Economics</strong><br />
D) Commercial Industrial Complex<br />
E) Labor and Capital<br />
F) Land Rush<br />
C) Judging Taxes<br />
H) Reducing Poverty<br />
I) Human Rights & <strong>Economics</strong><br />
2. History of Labor<br />
3. History of Labor<br />
4. Marxism — History & Principles<br />
5. The Lions of Capitalism — Morgan,<br />
Ford, Carneige, Ray Kroc<br />
6. Wheels, Whistles, Wings — The<br />
Development of Transportation<br />
in U.S.<br />
7. Entrepreneurs — Case <strong>Studies</strong> of<br />
Recent Success Stories<br />
8. Free Enterprise — Financing the<br />
Boston Marathon<br />
9. Moneyworld — U.S. Trade Deficit<br />
10. Moneyworld — Movie Industry<br />
11. Moneyworld — Can America Compete?<br />
12. The Japanese — Poor & Rich<br />
13. The Kingdom of Mocha<br />
(Econ. Principles — Cartoon)<br />
14. Return to Mocha<br />
(Econ. Principles — Cartoon)<br />
Unit<br />
All<br />
II<br />
II<br />
I<br />
I<br />
Length<br />
Each<br />
Part<br />
is<br />
13 mins.<br />
60 mins. Room<br />
30 mins. Room<br />
26 mins. Room<br />
55 mins. Room<br />
Page 3<br />
Room 313<br />
Location<br />
313<br />
313<br />
313<br />
313<br />
II 50 mins. Room 313<br />
II 90 mins. Room 219<br />
IV<br />
I 30 mins. Room 219<br />
I<br />
IV<br />
Iv<br />
I<br />
60 mins.<br />
30 mins.<br />
30 mins.<br />
50 inins.<br />
40 mins.<br />
Room<br />
Room<br />
Room<br />
Room<br />
Room<br />
219<br />
219<br />
219<br />
219<br />
219<br />
I 40 mins. Room 219
•<br />
‘<br />
BAYPORT—BLUEPOINT HIGH SCHOOL<br />
Library Media Center<br />
May, 1988<br />
ECONOMICSBIBLIOGRAPHY<br />
Page 3<br />
ECONOMICS-GENERAL<br />
CALL 1/ TITLE AUTHOR<br />
COPY<br />
RIGHT<br />
332.4 Money: Whence it came Where it vent Gaibraith 1975<br />
GAL<br />
333.01 Global Challenges,World at Risk Blaney 1979<br />
BLA<br />
333.7 The Poverty of Power Co=ianer 1976<br />
COM<br />
382 The US & World Trade Hart 1985<br />
BAR<br />
330<br />
HEI<br />
<strong>Economics</strong> Explained Hei lbroner 1982<br />
330 , <strong>Economics</strong> in Plain English Silk 1978<br />
SI<br />
330 New Science of <strong>Economics</strong>,an intro. Soule 1964<br />
SO<br />
330.0202 <strong>Economics</strong>: Its nature & importance Wiegand 1968<br />
VIE<br />
330.b3 <strong>Economics</strong>Reference Book Paradis 1970<br />
PAR<br />
3O.09 <strong>Economics</strong>, Ideas & Men Boardman 1966<br />
BO<br />
330.1. Landmarks of Economic Thought Ferguson 1950<br />
FERG<br />
330.1<br />
BElL<br />
Wor1d1yPhi1osophets Hei lbroner 1980<br />
330.9401 Merchants & Moneyman: The Commercial Gies 1972<br />
GIES (Revolution,1000—1500<br />
332.0973 Lords of Creation Allen 1966<br />
JOS<br />
330.1 UnderstandingMacroeconomics Hei<br />
lbroner 1965<br />
B
Page 4<br />
ECONOMICS — . U.S<br />
cor<br />
CALL# TITLE AUTHOR RIGHT<br />
330.973 <strong>Economics</strong> in America O’Neil 1980<br />
ONE (OpposingViewpoints)<br />
330.973 <strong>Economics</strong> in America Bender 1976<br />
ECO (OpposingViewpoints)<br />
917.3039 The Americans—TheDemocratic Boorstin 1973<br />
Experience<br />
330.973 American Economic History Faulkner 1960<br />
FAU<br />
973.91 The Quest for <strong>Social</strong> Faulkner 1931<br />
FAU Justice 1898—1914<br />
330.973 The Limits of American Heilbroner 1966<br />
HE Capitalism<br />
973.9 RepublicanAscendancy Hicks 1960<br />
HIC<br />
330.973 History of American Economic Life Kirkland 1951<br />
KIRK<br />
973.91 The Great Depression McElvaine 1984<br />
973.91 Only Yesterday Allen 1931<br />
ALLE<br />
327.73 U.S. in World Affairs 1931<br />
U.S.<br />
17 973.<br />
WE<br />
Age of the Great Depression Westin<br />
973.916 The Invis.ibleScar Bird 1966<br />
B.<br />
309.173<br />
COL<br />
The Great Depression Go ldston 1968<br />
973.917 Brother, Can You Spare a Dime 1976<br />
BRO<br />
362.508<br />
wE ’<br />
The <strong>Economics</strong> of Poverty Weisbrad 1965<br />
333.7<br />
COM<br />
The Poverty of Power Con aner 1976<br />
338.973 Reaganomics;Reagan’s Economic Goode 1982<br />
COO Progress<br />
338.973 Government Subsidy to Industry Hacker 1982<br />
RAC<br />
338.09 American Industry Whitford 1984<br />
WHIT<br />
338.0973 American Heritage — History of Groner 1972<br />
CR0 American Business & Industry<br />
l.
Page 5<br />
COPY<br />
CALL# TITLE AUTHOR RIGHT<br />
338.0942 IndustrialRevolution Rooke 1971<br />
ROOKE<br />
609.73 Colonial Craftsman& the Tunis 1965<br />
TUN Beginningof American md.<br />
336.2 Taxation U.S.A. Heaps 1971<br />
HEAPS<br />
382 The U.S. & World Trade Hart 1985<br />
BAR<br />
ECONOMICS—FOREIGN<br />
cor<br />
CALL# TITLE AUTHOR RIGHT<br />
335.4 The Prophet & The Revolutionary; Goode 1975<br />
GO Arab <strong>Social</strong>ismin the Modern -<br />
Middle East<br />
335.43 Latin American Revolution;Politics Hodges 1974<br />
HO • & Strategy from A Pro—Marxismto<br />
330.96 Problems of Africa (Opposing Rohs 1986<br />
ROH • Viewpoints)<br />
305.8 The Apartheid Crisis; How We Can Williams 1986<br />
VIL Do Justice in a Land of Violence<br />
968 South Africa; The Cordaned Heart Wilson<br />
INVESTMENTS<br />
.<br />
1986<br />
CALL# TITLE AUTHOR RIGHT<br />
What is a Share of Stock? Little 1988<br />
332.61 What’s the Market? The Story Wood 1966<br />
VP ‘ of Stock Exchanges<br />
332.6. .A Method for Stock Profits With— Allen 1962<br />
Out Price Forecasting<br />
332.63 ‘Stocks& Bonds, Profits & Losses Scott 1985<br />
• SCO<br />
332:6 The Only InvestmentGuide You’ll Tobias 1978<br />
TOB tver Need<br />
332.678 The Money Game Goodman 1968<br />
GO<br />
332.6 The Stock Market Roberts<br />
RO<br />
332.021 Personal Financial Survival Brownstone 1981<br />
BRO<br />
332.024 Sylvia Porter’s Money Bank Porter 1975<br />
P0<br />
332.024 Sylvia Porter’s New Money Bank Porter 1979<br />
FOR
CALLI/ TITLE<br />
332.024<br />
VAN<br />
332.6<br />
BPS<br />
332.66<br />
EPS<br />
332.63<br />
KAU<br />
332.6<br />
LIT<br />
332.64<br />
LIT<br />
ISMS<br />
CALL# TITLE<br />
330.15<br />
ARNO.<br />
320.5<br />
EL<br />
330.973<br />
HE<br />
330.1<br />
KRO<br />
330.122<br />
LEO,<br />
330.9<br />
SHON<br />
330.122<br />
•<br />
320.531<br />
BAR<br />
331<br />
MA<br />
335.42<br />
MARX<br />
335.43<br />
TB<br />
320.531<br />
FOR<br />
335.009<br />
LICH<br />
335.4<br />
WO<br />
Money Dynamics for the New Economy<br />
AlternativeInvestments<br />
InvestmentBanking<br />
Mutual Funds<br />
Investing& Trading<br />
Wall Street—HowIt Works<br />
Folklore of Capitalism<br />
•<br />
Ideals & Idealogies:Communism,<br />
<strong>Social</strong>ismand Capitalism<br />
Limits of American Capitalism<br />
Capitalismv. <strong>Social</strong>ism<br />
Capitalism (opposingviewpoints)<br />
Modern Capitalism<br />
Capitalism:Economic Individualism<br />
Today’s Welfare State<br />
<strong>Social</strong>ism<br />
Capital, the CommunistManifesto &<br />
Other Writings<br />
Communist Manifesto<br />
<strong>Social</strong>ismReexamined<br />
<strong>Social</strong>ism: Its TheoreticalRoots<br />
and Present Day Development<br />
A Short History of <strong>Social</strong>ism<br />
Marxism: 100 years in the Life of<br />
a Doctrine<br />
Page 6<br />
COPY<br />
AUTHOR RIGHT<br />
VanCarpel 1986<br />
Epstein 1988<br />
Epstein 1986<br />
Kaufmann 1988<br />
Little 1988<br />
Little 1988<br />
COPY<br />
AUTHOR RIGHT<br />
Arnold 1937<br />
Ellis 1968<br />
Heilbroner 1966<br />
Kronenwetter 1986<br />
Leone 1978<br />
Shonfield 1965<br />
Fortnan 1972<br />
Barrington<br />
1972<br />
Marx 1959<br />
Marx 1969<br />
Thomas 1963<br />
Forman 1976<br />
Lichtein 1970<br />
Wolfe 1965
Page 7<br />
COPY<br />
CALL# TITLE AUTHOR RIGHT<br />
335.43 The Insurrectionists Fishman 1970<br />
FISH<br />
335.4 Marx & Marxism Feinberg 1985<br />
FEIN<br />
335.43 CommunismToday Hyde 1972<br />
HYDE<br />
335.43 Communism (opposingviewpoints) Leone 1978<br />
LEO<br />
951 Ideology & Practise: The Evaluation HSIUNG 1970<br />
USIU of Chinese Communism<br />
335.43 Communism:From Marx’s Manifesto Forinan 1976<br />
FOR to 20th Century Reality<br />
320.54 Nationalism (opposingviewpoints) Leone 1978<br />
LEO<br />
CONSUMER EDUCATION<br />
co<br />
CALL#. TITLE AUTHOR RIGHT<br />
640.73 1001 Ways to Stretch a Dollar Bennett 1977<br />
BE<br />
640.73 Better Business Bureau Guide to 1980<br />
COUN Wise Buying<br />
640.73 Buy it Right! An Introductionto 1974<br />
END Consumerism<br />
640.73 Complete Consumer Book Meyerson 1971<br />
MYER<br />
338.4<br />
ROS<br />
Consumer ComplaintGuide Rosenb loom 1971<br />
640.73<br />
WI<br />
Consumer <strong>Economics</strong> Wi lhelms 1966<br />
381 Getting What You Deserve Newman 1979<br />
NEWM<br />
640.73 Fraud & Deceit: How to Stop Suthers 1982<br />
SUT Being Ripped Off<br />
381 The Purple Pages (directory) Feinman 1979<br />
FEIN<br />
364.163 Frauds, Swindles & Rackets Rosefsky 1973<br />
ROSE
Page 8<br />
BUSINESS<br />
COPY<br />
CALL!! TITLE AUTHOR RIGHT<br />
658.42 Nobody Gets Rich Working for Fritz 1987<br />
FRI Someone Else<br />
658.4 CorporatePh.D. Groneman 1985<br />
GRO<br />
650.23 Women in Their own Business Oana 1984<br />
OAN<br />
338.74 Rating America’s Corporate Lyndenburg 1986<br />
LYD Conscience<br />
658.4 Beyond the Bottom Line: How Tulija 1985<br />
TUL Business Leaders are Turning<br />
Principlesinto Profits<br />
658 Big Business Parkinson 1974<br />
PAR<br />
658.4 The Fast Track Budd 1982<br />
BUD<br />
338.8 Global Reach: The Power of the Barnet 1974<br />
MultinationalCorporations<br />
658.1 Understandinga Company Little 1988<br />
LIT<br />
658.4 Up the Organization Townsend 1970<br />
TO<br />
658.8 Wall Street Journal on Marketing Alsap 1986<br />
ALS<br />
331.1097 A Pictorial History of American Cahn 1972<br />
CAHN Labor<br />
335 History of the Haymarket Affair David 1958<br />
DA<br />
331.0973 Bread & Roses: The Struggle of Meltzer 1967<br />
ME American Labor 1865—1915<br />
331.0973 American Labor Pelling 1960<br />
PE<br />
331.215 Primer on Employment & Wages Galenson 1966<br />
GA<br />
331.8809 Long Struggle: Story of American Raskins 1976<br />
Labor<br />
331.89 Strikemakers & Strikebrokers Lens 1985<br />
LEN<br />
332.4 Money: Whence it Came, Where it Went Galbraith 1975<br />
GAL<br />
332 Primer on Money Bernstein 1965<br />
BE
Page 9<br />
COPY<br />
CALLI’/ TITLE AUTHOR RIGHT<br />
331.137 Unemployment Claypool 1983<br />
CLA<br />
332.41 Inflation:Long—termProblems Harris 1975<br />
BAR<br />
332.4 UnderstandingInflation Case 1981<br />
CAS<br />
658.1 Understandinga Company Little 1988<br />
LIT<br />
658.3 The Frontiersof Management Drucker 1986<br />
DRU<br />
658.4 A Passion for Excellence:The Peters 1985<br />
PET LeadershipDifference<br />
CAREERS<br />
331.7 Career Choices for Students of 1985<br />
CAR <strong>Economics</strong><br />
650.23 Choosing a College Major: Pell 1978<br />
PELL Business<br />
650.1 Your Career in the Business World Bellas 1981<br />
BEL<br />
650.23 Opportunitiesin Business Management Place 1986<br />
PLA<br />
650.23 Careers in Business Stain 1980<br />
STA<br />
650.023 Your Future in Your Own Business Winter 1979<br />
WIN<br />
332.6<br />
.S EP<br />
Careers in the InvestmentWorld Epstein 1988<br />
301.43’ ‘Welcometo the Real World: A Guide<br />
to Making Your 1st Personal, Financial<br />
and Career Decisions<br />
Moldafsky 1979<br />
332.023 Rere is Your Career: Banking, Money Kliuiley 1978<br />
XLI & Finance<br />
‘<br />
BIOQRAPHY<br />
B Marx: Life & Works Rubel 1980<br />
MARX<br />
B The Life of Jean Janies Goldberg 1962<br />
JAUR<br />
B<br />
NADER Citizen Nader McCarry 1972<br />
c
REFERENCEWORKS (CONT’D.)<br />
R Encyclopediaof the Third World<br />
909.09<br />
KUR<br />
R Countriesof the World — 1987<br />
910.3<br />
WOR<br />
Readers Guide to PeriodicalLiterature3/69<br />
NY Times Index 1970—1985<br />
MISCELLANEOUS<br />
338.1 Will There be Enough Food US Gov’t. 1981<br />
13141<br />
353.007 InternalRevenue Service Taylor 1987<br />
TAY<br />
PERIODICALS<br />
Business Week 1980 —<br />
Changing Times 1980 —<br />
Consumer Reports<br />
1980 —<br />
: Dept. of State Bulletin 1980 —<br />
Money<br />
1/87—<br />
Newsweek 1980 —<br />
Time 1980 —<br />
U.S. New 1980—86<br />
Working Women 1/87 —<br />
FILMSTRIPS<br />
FSCMD ‘ <strong>Economics</strong> for Young Americans II (4 Parts) 1977<br />
330.1<br />
ECONO<br />
FSCM <strong>Economics</strong> for Young Americans III (4 Parts) 1980<br />
330.973<br />
ECONO<br />
FSCM erican Economy & Quality of Life (3 Parts) 1974<br />
330.973<br />
1NER<br />
FS M<br />
330.973<br />
AI4AT<br />
Anatomy of the U.S. Economy 1980<br />
FSCMD The Great Depression (4 Parts) 1973<br />
973.91<br />
GREA<br />
FSCM Driving Force of a Market Economy N.D.<br />
381.34<br />
CON<br />
—9—
Page 10<br />
920<br />
LAVI Famous Industrialists Lavine 1961<br />
920 Men at the Top Elliott 1959<br />
ELL<br />
920 Captains of Industry Weisberger 1966<br />
WE<br />
B lacocca: an Autobiography lacocca 1984<br />
IACO<br />
B Henry Ford Harris 1984<br />
FORD<br />
B Citizen Hearst Swenberg 1961<br />
HEARST<br />
REFRENCEWORKS<br />
R<br />
310<br />
PAY The Statesman’sYearbook 1983—84<br />
R<br />
317.3<br />
UNIT Historical Statisticsof the U.S.to 1957<br />
R<br />
317.3<br />
UNIT . StatisticalAbstracts of the U.S. 1984<br />
R<br />
317.3<br />
VOR The World Almanac 1988<br />
R<br />
320.973<br />
CON Congress & the Nation 1945—80<br />
R<br />
330.0.j<br />
MC McGraw—HillDict. of Modern <strong>Economics</strong> 1965<br />
R<br />
330.3<br />
SLO Dict. of <strong>Economics</strong> Sloan 1964<br />
R<br />
658:03<br />
BRO Ihe VNR Dict. of Business & Finance 1980<br />
R<br />
658.3<br />
SHA Facts on File Dict. of Personnel<br />
Management & Labor Relations
FILMSTRIPS<br />
Page 1].<br />
FSCW BusinessOpportunities 1979<br />
650<br />
BUSI<br />
FSCMD Has BusinessGotten Too Big 1977<br />
338<br />
HAS<br />
MFS 331.4<br />
WOME<br />
Women’s Work—America1620—1920 (4 Parts) 1974<br />
COMPUTER PROGRAMS<br />
APPLE UnderstandingTaxes
INTRODUCTION<br />
This course is designed for a one semester (2 quarter)<br />
course in regents level economics. There are approximately<br />
20 weeks or 90 lessons taught each semester.<br />
The course is divided into 4 units, with each 2 units<br />
lasting approximately 10 weeks. Each unit will include:<br />
(<br />
(A) A summary of the skills already required and<br />
accepted as part of their acquired knowledge<br />
from the 9th, 10th and 11th grade curriculums.<br />
(B) Objectives that each unit will accomplish.<br />
(C) The content to be covered in ‘each unit<br />
(D) Numerous activities that will enhance, the<br />
students learning.<br />
(E) The means of evaluation to be used in each<br />
unit.<br />
Page 12
NOTES<br />
(1) This course must meet with two school objectives.<br />
(A) A student not going on to higher education<br />
should be we].].versed in enough economic theory<br />
so as to be able to understand all relevant<br />
issues in today’s world.<br />
(B) A firm background in economic theory will be<br />
established so that all students will be well<br />
prepared for the basics of a college level<br />
entre economics course.<br />
(2) This course should be presented with an even mixture<br />
Page 13<br />
of lecture and discussion. Out of class work and various<br />
projects should make up an integral part of their learning<br />
experience.<br />
Recommended outside of class experiences:<br />
(A) Creating a model company from scratch<br />
(will need classroom support)<br />
(B) Visitation to a major company — See the<br />
real working world (ex. — NYC Wall St. firm)<br />
(C) Suggested reference work such as:<br />
(1) Following the Dow Jones Average and<br />
any pertinant stocks.<br />
(2) Follow personal (imaginary) investments<br />
(ex. — Gold Fund)<br />
(3) Outline major economic events, keeping track<br />
in a time chart.<br />
(4) Current events day/once every two weeks —<br />
whereby students report on outside economic<br />
world events (ex. — OPEC Meetings)<br />
(5) Follow world monetary exchange rates<br />
(6) Create yur own CPI — observe inflation
<strong>Economics</strong> — Marking Period Term Paper Topics:<br />
Directions<br />
: Select one of the following and write a documented<br />
report. You must have a bibliography with at least<br />
five sources of information. The paper should be a<br />
minimum of 750 words.<br />
DUE DATE:________________________<br />
1. Discuss the problem of garbage disposal here on Long Island.<br />
How serious is it? What are the causes of the problem? What<br />
are some solutions to the problem? What are the obstacles,<br />
costs and problems connected with these solutions?<br />
2. Discuss the problem of affordable housing on Long Island.<br />
How serious is it? What are the causes? Some suggested<br />
solutions? Obstacles, costs, etc. How will it effect you in<br />
the future?<br />
3. Discuss the problem of highway traffic congestion on Long<br />
Island. How serious is it? What are the causes, suggested<br />
solutions, obstacles, costs, problems, etc. connected with<br />
the problem.<br />
4. What is the underlying philosophy of “Reaganomics”. What are<br />
its major objectives? How does it differ from previous<br />
attempts to stabilize the economy and cause it to grow? Has<br />
it worked over the past 8 years?<br />
5. What factors have contributed to the tremendous success of<br />
the Japanese economy since the end of World War II?<br />
6. You have just inherited 10 million dollars from a long lost<br />
Aunt. You have to decide how you want to invest this windfall.<br />
Select one or a combination of the following investment<br />
possibilities as the way(s) you want to invest it and tell why<br />
you think each would be most beneficial to you. (You have to<br />
invest it all).<br />
Stocks (which ones)<br />
Bonds (which types or companies)<br />
Gold or other precious metals<br />
Real Estate — (where, what type)<br />
Collectibles (art, coins, etc.)<br />
Government securities<br />
Open a business (which kind?)<br />
Regular bank savings<br />
Other<br />
7. Describe what has happened to the price of crude oil over the<br />
past 20 years. What factors have contributed to the fluctuating<br />
price of oil during that time. What has happened to the price<br />
of oil recently? Why? What will happen to the price of oil in<br />
the year 2000? Why?<br />
0
ECONOMICS<br />
Term Paper Project<br />
Theme: Comparative economic systems: The “Raves” and the<br />
“Nave Nots”<br />
Directions<br />
: Your task is<br />
a “developed”<br />
to compare the economic systems of<br />
nation with that of an underdeveloped<br />
or lesser developed nation. In doing SO you will<br />
need to describe a great variety of human—economic<br />
features of each of the nations you select. Select<br />
ufro the following list of nations:<br />
Developed Nations (1)<br />
Canada<br />
Soviet Union<br />
Isi<br />
Great Britain<br />
France<br />
Italy<br />
Australia<br />
Switzerland<br />
West Germany<br />
Belgium<br />
Sweden<br />
South Africa<br />
D’ L ____<br />
Lesser or<br />
Underdeveloped Nations (1 )<br />
Mexico<br />
Nicaragua<br />
Nigeria<br />
Zaire<br />
India<br />
Pakistan<br />
Indonesia<br />
Bolivia<br />
Vietnam<br />
Peru<br />
Egypt<br />
Cuba<br />
You will need to include a great variety of information in your<br />
report. Make sure you include the following for each nation<br />
you select.<br />
I. Human : Facts (for each)<br />
1. Recent population<br />
2. Population growth rate<br />
3. Life expectancy<br />
4. Adult literary rate<br />
5. Population per physician<br />
6. Infant mortality role<br />
II. Economic : Facts (for each)<br />
__<br />
7. Projected Population (2000)<br />
8. Primary school enrollment ratio<br />
9. Political support system<br />
(command, market?)<br />
1. Agricultural or industrial or combination<br />
. Major products<br />
3. Major exports<br />
4. Major imports<br />
5; Balance of trade<br />
6. Most recent GNP<br />
7. GNP per capita<br />
8. Percent of labor force in agriculture, in manufacturing,<br />
in service industries<br />
9. Major natural resources<br />
III. : Analysis (for each)<br />
1.<br />
2.<br />
3.<br />
What are the economic strengths of each nation?<br />
What are the economic weaknesses of each nation?<br />
Which of the two countries is more important to the<br />
United States? Why?
<strong>Economics</strong> Report<br />
Directions<br />
: Select any one of the following topics and prepare a<br />
documented written report of at least 750 words. You<br />
must include a bibliography of at least 5 sources.<br />
1. New Harmony, Indiana — Utopian Community<br />
2. Oneida Community — Utopian Experiment<br />
3. The Economic Principles of Karl Marx<br />
4. Thorstein Veblen — Capitalist Critic<br />
5. John Maynard Keynes — his economic theory<br />
6. What makes MacDonalds so successful?<br />
7. The 1981 Air Traffic Controller Strike — Causes and Consequences<br />
8. “Free Silver” and the Election of 1896<br />
9. Henry George and the Single Tax<br />
10. The history and functions of the Federal Reserve Banking System<br />
‘11. California’s Proposition 13 and Massachusett’s Proposition 2½ —<br />
Pros and Cons<br />
12. The Federal Debt — history and current dangers<br />
13. Milton Friedman — a modern day Adam Smith<br />
14. Do the Japanese really outproduce us? Why?<br />
15. The Miracle of “Apple.” How did it happen? Will it continue?<br />
16. The research of Frederick Taylor — scientific management<br />
17. “Small is Beautiful:” <strong>Economics</strong> as if people mattered —<br />
E. F. Schumacher<br />
18. Barbara Ward — Rich and Poor Nations<br />
19. The Work of Ralph Nader: Consumer Advocate or pest?<br />
20. The <strong>Economics</strong> of Divorce. Who wins? Who loses?<br />
21. The property tax on Long Island. How does it operate? Is it fair?
<strong>Economics</strong> Report<br />
Central America and The Caribbean Due ________________<br />
Select one of the following Central American or Caribbean Nations<br />
for your report:<br />
Guatemala Panama<br />
Honduras Haiti<br />
Costa Rica Dominican Republic<br />
Nicaragua Jamaica<br />
El Salvador<br />
Directions<br />
: Your report should include the following:<br />
1. A detailed map of the country.<br />
2. A brief history of the nation.<br />
3. A brief description of its type of government.<br />
4. The following social statistics<br />
:<br />
(Use the “Development Data Book”) — Make a chart or graph<br />
of the following: Make a similar chart for the United<br />
States<br />
Life Expectancy — Infant Mortality Rate — Population Per<br />
Physician — Adult Literary Rate — Population 1981 —<br />
Population Growth Rate — Projected Population by Year 2000<br />
5. The following economic statistics<br />
:<br />
(Use the “Development Data Book”) — Make a chart or graph<br />
of the following: Make a similar chart for the United<br />
States<br />
Major Products — Major Exports — Imports — GNP per Capita —<br />
GNP Growth Rate — Percent of Workforce in Agriculture —<br />
Energy Consumption per Capita<br />
6. Describe 5 of the nation’s major economic problems.<br />
7. Describe 3 of the nation’s major political problems.<br />
8. Describe 5 ways in which this nation is important to the<br />
United States.<br />
9. In your opinion in what ways can the U.S. help this nation.<br />
10. A bibliography of at least 4 sources of information you used.<br />
11. Length — 750 words minimum.
.<br />
INTRODUCTION TO ECONOMICS AND ECONOMIC SYSTEMS<br />
Page 14.A<br />
—Why do we study <strong>Economics</strong> Different Economic Systems Laws<br />
of Supply and Demand<br />
Skills Mastered Before the Course:<br />
I<br />
(1) Concept of standard of living<br />
(2) Basics of supply and demand (scarcity)<br />
(3) Laissez Faire economics<br />
(4) Commercial revolution<br />
(5) Industrial revolution and factory system<br />
(6) Economic reasons for American expansion<br />
(7) Different forms of capitalism<br />
(8) Concept: Economic development is critical to a<br />
countries heritage<br />
(9) Economic classes depend upon relative wealth<br />
(10) Economic comparisons of Capitalism and Communism<br />
(11) Mercantilism was viable economic system<br />
(12) Change to monopoly?<br />
(13) Marxism and Communism central planning<br />
(14) <strong>Social</strong>ism — Today in Europe<br />
(15) Our American Government promotes freedom from<br />
economic restraints<br />
(16) Our early American Government showed that we must<br />
take responsibility for our economic well—being
.<br />
General Economic Skills Developed Through Grade 11<br />
I. To be able to communicate General Economic<br />
information from 9th, 10th and 11th grade<br />
II. To be able to discriminate between economic<br />
fact and economic opinion<br />
III. To be able to locate primary sources of<br />
economic information<br />
IV. To be able to create ideas (pro and con)<br />
related to basic economic decisions<br />
V. To be able to understand the basics of a<br />
nations standard of living<br />
Page 14B<br />
VI. To be able to locate and understand problems<br />
on an international level<br />
VII. To be able to read and analyze basic graphic<br />
materials as related to economics<br />
. VIII To understand basic economic decisions made by<br />
various countries<br />
____ IX. To understand basic cause and effect relationships<br />
X. To be able to organize economic information by<br />
category (ex — econ. causes of a war)<br />
_____ XI. To be able to make generalizations from relevant<br />
economic data<br />
XII. To be able to give opposing views on economic data.<br />
XIII. To be able to make basic comparisons between<br />
various societies and their economies<br />
XIV. To be able to show that nations can deal with wide<br />
ranging problems such as: human needs and suffering,<br />
lack of technology, how economics are interdepent,<br />
and how some nations take advantage over others
BASIC STUDENT ATTITUDE OBJECTIVES<br />
Page 15<br />
1. To develop an objective and rational attitude toward<br />
economic issues and problems with which the students<br />
must be concerned both as individuals and as citizens.<br />
II. Develop a positive attitude toward economic analysis<br />
and questioning.<br />
III. Develop the capacity to understand ones society<br />
through the continuous changes in our economic system.<br />
IV. To perceive that mankind is a valued and important<br />
part of any economic system.<br />
V. Create negative attitudes toward economic injustice.<br />
VI. Create positive attitudes towards the value of<br />
capitalism and our mixed economy.<br />
I
Knowledge Objectives:<br />
*<br />
OBJECTIVES<br />
Page 16<br />
(1) Basic economic concepts such as scarcity, supply<br />
and demand, market productivity, opportunity Costs,<br />
specialization, productive resources, interdependence,<br />
growth and economic systems<br />
(2) The basic differences between different types of<br />
economic systems and their operation<br />
(3) Why do we study economics<br />
(4) Be able to understand the basic economic choices<br />
that must be made in all societies<br />
(5) Explain why economic theory is important in economic<br />
decision making<br />
(6) Explain a market economy<br />
(7) Describe the social choice on individuals and society<br />
(8) Discuss the place of personal incentive under social<br />
choice<br />
(9) Explain the conditions under which social choice is<br />
preferable to individual choice<br />
(10) Terms relating to the private sector<br />
(11) Differences between the private sector and the<br />
public sector<br />
(12) Describe how competition improves efficiency in the<br />
private sector<br />
(13) Discuss the role of profits in the private sector<br />
(14) Discuss the role of interest groups in the public<br />
sector<br />
SKILLS OBJECTIVES<br />
(1) Use the problem—solving process to identify and<br />
C define problems, hypothesize, investigate and<br />
analyze selected data, recognizing alternative<br />
solutions, and make decisions both as an individual<br />
and as a citizen
S<br />
1. Why<br />
(A)<br />
(B) All<br />
Study <strong>Economics</strong><br />
All individuals must make economic decisions<br />
Page 17<br />
(1) The problem of limited resources and unlimited<br />
wants<br />
(2) The necessity for making trade—offs<br />
(1)<br />
(C) The<br />
societies must make economic decisions<br />
Lirnited resources and unlimited wants applied<br />
to our society<br />
(2) The economic goals of a society<br />
(1)<br />
(2)<br />
(3)<br />
(4)<br />
(5)<br />
I]. Economic<br />
(A) How<br />
(1)<br />
(2)<br />
(3)<br />
(B) What<br />
(1)<br />
(2)<br />
• (3)<br />
(C) What<br />
(1)<br />
(2)<br />
(3)<br />
(4)<br />
(D) What<br />
(1)<br />
(2)<br />
Systems<br />
CONTENT<br />
role of economics in our daily lives<br />
Making economic decisions<br />
Applying basic economic concepts<br />
The use of economic models<br />
Examples of data<br />
The use of economic institutions<br />
did economic systems develop<br />
The traditional agricultural system<br />
The commercial and industrial revolution in history<br />
The economies of today’s world<br />
are the basic economic questions<br />
What is produce<br />
How to produce<br />
For whom to produce<br />
resources are allocated for production<br />
Land<br />
Labor<br />
Capital<br />
Management<br />
types of economies have developed<br />
Traditional<br />
Market
I<br />
S<br />
(3) Command<br />
(4) Mixed<br />
(E) How does the marekt economy answer the three<br />
basic economic questions<br />
Page 18<br />
(1) Payment of rent, wages, salaries and interest<br />
(2) Role of profit<br />
(3) Circular flow diagram<br />
(F) Traditional economy answer the 3 basic questions<br />
(C) How does a command economy answer the 3 basic<br />
questions.<br />
III. Supply, Demand and Prices<br />
(A) Model of pure competition<br />
(1) How outside forces affect P.C.<br />
(B) The Law of Demand<br />
(C) The Law of Supply<br />
(D) Equilibrium Price<br />
(E) Factors which affect demand<br />
(1) Preference and taste<br />
(2) Income<br />
(3) Price of substitute<br />
(4) Buyers expectations<br />
(5) Size of the market<br />
(F) Factors which affect supply<br />
(1)<br />
(2)<br />
(3)<br />
(4)<br />
(5)<br />
(6)<br />
(7)<br />
Research costs<br />
Technology<br />
Prices of producers substitutes<br />
Sellers expectations<br />
Number of sellers<br />
Natural events<br />
Gov’t. — taxes, subsidies and regulation
I<br />
(G) Responsiveness of quantity demanded to price<br />
changes (elasticity)<br />
(1) Availability of substitutes<br />
Page 19<br />
(2) Row necessary consumers consider the product<br />
(H) Responsiveness of the quantity supplied to price<br />
changes<br />
(1) Number of sellers<br />
(2) Degree to which fixed costs are involved<br />
in production<br />
(3) The price of other products the producer<br />
might produce<br />
(4) Future expectations of producers
GENERAL<br />
UNIT I — CLASSROOM PROJECTS<br />
Page 20<br />
1. Examine a daily newspaper, a weekly news magazine, or<br />
a current television newscast. Identify all the items<br />
that in any way pertain to economics<br />
. List the economic<br />
issues and problems.<br />
2. Make a list of your own economic goals . Which goals are<br />
most important to you? Are there any conflicts between<br />
goals? (For example, the goal of obtaining a job and the<br />
goal of getting a college education conflict because you<br />
may not be able to do both at the same time.) Do the same<br />
for the goals of your family, your community, your state,<br />
or the nation.<br />
3. Note the various economic activities that occur in your<br />
immediate area — in the area of your school and/or your<br />
neighborhood. How are you affected by these activities<br />
either directly or indirectly? How do these activities<br />
illustrate things discussed in Chapter 1 of your textbook?<br />
4. Make a list of your wants . If you could have everything<br />
you want, what would you list? Then check the items you<br />
could actually have, given your existing resources. How<br />
does this illustrate the concept of scarcity ? Do the<br />
same for the wants and needs of your school, your family,<br />
your community, or the nation.
Page 21<br />
5. Examine the lists you made in assignment 1/4 above and<br />
identify the tradeoffs that would be involved in attempting<br />
to satisfy one need or want. (For example, to buy new<br />
clothes you may have to reduce your purchases of records<br />
and audio tapes.) To illustrate opportunity costs , consider<br />
any allocation decision you have made, or that you know<br />
about. (For example, you once decided to buy a bicycle<br />
instead of using your savings to buy a new portable radio.)<br />
Identify the real costs (opportunity costs)involved in the<br />
decision. Show how the same principle applies to decisions<br />
made by your family, your community, or the nation.<br />
6. Examine an enterprise in your area. Identify the four<br />
factors of production being used in this enterprise. Explain<br />
• how each factor contributes to the operation of the enterprise.<br />
‘7. List several products that interest you, such as records,<br />
tapes, VCRs, bicycles, cheeseburgers, and cars. Determine<br />
what things affect the demand for these items. What might<br />
cause demand to change? (Consider such things as utility,<br />
price, the availability of substitute products.)<br />
8. List goods or services commonly purchased by you or by<br />
your family that you consider to be elastic . (For<br />
instance, if the price of records rises by 25% you might<br />
1reduce your purchases of records by 75%.) Do the same<br />
for goods and services you consider to be . inelastic<br />
(For example, your demand for milk might be inelastic,<br />
because you will reduce your purchases by only 10% when<br />
the price rises by 50%.) Then try to identify items
.<br />
Page 22<br />
that are sometimes elastic and sometimes inelastic. (For<br />
example, your demand for cough medicine will be inelastic<br />
when you have, a bad chest cold, but elastic when you are<br />
feeling well and no longer need the medicine.)<br />
9. Identify two products or services you use that have<br />
increased or decreased in suppj recently. How did the<br />
change in supply affect the price? (Examples: In early<br />
1986 the supply of gasoline rose and the price dropped.<br />
During the summer the supplies of fresh fruit and vegetables<br />
rose and the prices dropped.) Try to learn what caused the<br />
supplies to change.<br />
10. Consider the fact that in the future you will be trying to<br />
t8j•j•H your services in the labor market or you will be<br />
offering goods for sale if you open your own business.<br />
What things might affect the supply, demand, and prices<br />
of these services or goods? Is the demand for your service<br />
or product elastic or inelastic? Why? Is the supply<br />
elastic or inelastic?<br />
11. Draw a flow chart showing how money, goods, and services<br />
re exchanged in your area. Include yourself and/or your<br />
family in the model. Show how you (or members of your<br />
* ousehold) sell goods or services to others; how you pur<br />
chase goods and services from others; how you receive pay—<br />
ments, etc.<br />
12. Draw supply and demand curves for any good or service that<br />
interests you. Show how increases and decreases in supply<br />
and demand change the prices and quantities sold. How do<br />
thesechanges affec;.you as a consumer?
Page 23<br />
13. List some of your favorite musicians, singers, actors, or<br />
athletes. Find ont what their typical ee or incomes are<br />
and explain those incomes or fees. For example, why are<br />
some rock, musicians very wealthy while thousands of others<br />
can barely make a living? What do your findings illustrate<br />
about the workings of the market in our economy?<br />
14. To get a better understanding of graphs , draw some simple<br />
graphs to illustrate things that interest you. For example,<br />
make a record of your grades in various courses, putting the<br />
courses or subjects on the horizontal axis and the grades on<br />
the vertical axis. Or, you might make a graph shoving the<br />
batting averages of the players on your baseball team.<br />
15. Listen to a recording of the song “We Are the World”<br />
that was popular recently. How do the lyrics help to<br />
illustrate the economic problem of scarcity? Write a<br />
short description of the scarcity problem as it exists<br />
in some of the poor nations of Africa, Asia, and Latin<br />
America. How does the scarcity problem in these areas<br />
compare with the scarcity problem in the United States?<br />
Explain what accounts for the difference.<br />
16. Locate articles in recent newspapers or news magazines<br />
that suggest there is a scarcity problem. (Examples:<br />
*police chief blames rising crime rate on shortage of<br />
police.” “Housing shortage leads to high rents in city.”<br />
“American colleges are producing too few engineers to<br />
meet the needs of our industries.”) Cut out at least<br />
three articles, attach them to sheets of paper, and write<br />
a brief explanation of how each article illustrates the<br />
economic problem of arcity.
Page 24<br />
17. Identify two situations that involve trade—offs<br />
. One<br />
should be a local problem; the other should be of national<br />
importance. (Examples: (l)The school has a limited budget,<br />
but the students want a swimming pool. What goods and<br />
services could be “traded off” to have a stronger military?<br />
Write short papers in which you explain the problems,<br />
identify the goals, and show what must be sacrificed<br />
(traded off) to have the desired goods or services.<br />
18. Study the circular flow model . Make a rough drawing of<br />
the model, but illustrate the main ideas by using a business<br />
that you know about. For example, a fast—food restaurant<br />
sells hamburgers and milk, so your drawing could show these<br />
items going from the business to the market for goods and<br />
services. The restaurant hires workers; buys meat, bread,<br />
milk, etc., and purchases such capital items as ovens,<br />
mixers, tables, and chairs. Your drawing can show these<br />
“factors of production” going from the market for the<br />
factors of production toward the business. For the house—<br />
hold part of the diagram, think about your own household.<br />
What do you and your family buy from the market for goods<br />
and services? What do you sell to the market for the<br />
factors of production? (Members of your family who have<br />
jobs are selling their labor. If anyone in your family<br />
owns stocks or bonds they are providing capital, etc.)<br />
Show how you and your family fit into the circular flow<br />
of economic activity in our society.
Page<br />
19. Go to the library and look up Adam Smith in an encyclopedia,<br />
or read the chapter on Adam SmIth in the book The Worldly<br />
Philosophers by Robert Heilbroner. Write a brief summary<br />
of Adam Smith’s main ideas about economics. Where, in our<br />
economy, do you find examples of Smith’s theories at work?<br />
In what way is the American economy based upon Smith’s<br />
theories?<br />
20. By walking or driving through your area, and by examining<br />
‘<br />
“ads” in local newspapers, note the new businesses that<br />
are opening up. (For example, you might find that many<br />
stores that sell or rent video—tapes are appearing.) Why<br />
are these new enterprises being started? Are any other<br />
types of businesses disappearing? How can you explain<br />
your findings? What does this illustrate about the<br />
American economic system ?<br />
21. Consider some of the jobs that you or others in your age<br />
group have held. What wage rates or fees do these jobs<br />
provide? Why do some provide more than others? What<br />
does supply and demand have to do with these wages or<br />
fees? Why do teen—agers often receive lower wages than<br />
adults? How can young people improve their incomes in<br />
the future? (Example: By increasing your knowledge and<br />
Iskills you can become more productive. Thus there will<br />
be a greater demand for your services.)<br />
22. Select a particular good or service that is sold in your<br />
area and make a study of the market for that good or<br />
service to learn how supply , demand, and price function<br />
in the market for that item. Consider such enterprises<br />
25
Page 26<br />
as motels, automobile service stations, farms, candy<br />
stores, and bake shops. Write a brief report on your<br />
findings and be prepared to give a short oral report in<br />
class.<br />
23. As a , consumer you are affected by supply, demand and<br />
price. Select an expensive item that you hope to buy in<br />
the near future, such as a car, a VCR, a motorcycle, or a<br />
stereo record and tape player. Learn as much as you can<br />
about the market for that product. What are the prices<br />
being charged at the moment? Is there a large supply on<br />
hand, or is the item scarce? What might cause prices to<br />
change? (For example, an increase in demand can be<br />
expected during the months of November and December because<br />
of Christmas buying. Motorcycles might be in greater demand<br />
during the spring and summer months than during the winter.)<br />
Is there much competition among sellers of the item? How<br />
can you use the information you have gathered to get the<br />
item at a reasonable price?<br />
24. Consider four types of markets in our economy: (l)goods for<br />
consumers; (2)services for consumers; (3)goods for<br />
producers; and (4)services for producers. (Numbers 3 and<br />
4 are parts of the factor market —— the market in which<br />
I<br />
producers hire employees, buy raw materials, purchase<br />
machines, tools, buildings, and other capital items, and<br />
obtain funds to run their enterprises.) Identify the<br />
various markets in your area and decide how to categorize<br />
each one. Examples: A supermarket sells goods to consum—
Page 27<br />
era. A barber provides a service to consumers. A manu<br />
facturer of office furniture provides goods to producerE.<br />
Engineers sell the4r srv ce to pro’iucers. (Note that<br />
some industries can be in both the consumer market and<br />
the factor market. Try to identify and give examples of<br />
some of these. For instance, a plumbing supply firm<br />
might sell sinks to consumers for their homes and to<br />
business firms for their offices and factories.) Nov<br />
think about your own plans for the future. Will you<br />
be involved in selling goods to consumers, offering<br />
your services to producers, or what? What do you need<br />
to know about the market in which you will be involved?<br />
25. Try to get a copy of the book Enterprise: Doing Business<br />
in America by Eric Sevareid and John Case (New York:<br />
Mentor Books, 1983). Read one of the case studies about a<br />
well—known business person or company. Write a brief<br />
summary of the case and try to explain how the market<br />
(or markets) played a role in the successes or problems<br />
experienced by the business person of your choice.<br />
26. Examine the advertisements in local newspapers for property<br />
to . rent Row do the rents differ? Why do they differ?<br />
Is the term “rent” used in the ads in the same way that<br />
I economists use it?<br />
27. Try to identify a piece of land in your area whose use<br />
has changed. For example, a lot that was formerly used<br />
for growing crops may now be a site for houses, or a<br />
former city parking lot may now be the site of new office<br />
buildings. Try to explain the economic factors that<br />
caused the change i land use. What happened to the
.<br />
market value of the land ? Why?<br />
Page 28<br />
28. List the various natural resources that exist in your area.<br />
How are they being used? How do they affect the economy<br />
of your, area? How important are they to you personally?<br />
29. Assume that you must borrow money to pay for tuition at a<br />
college or a trade school, or to help finance your own<br />
small business. What rate of interest would you have to<br />
pay? Why is the interest rate at this level? What things<br />
would you take into account in deciding whether or not to<br />
pay this rate of interest?<br />
30. Write a long letter to an imaginary student in the USSR,<br />
describing the economic system of the United States , and<br />
showing how our system differs from that of the USSR.<br />
31. Make a large chart or poster describing economic systems .<br />
Have four columns labelled Capitalism, <strong>Social</strong>ism,<br />
Communism, and Market <strong>Social</strong>ism. List the features of<br />
each system in the appropriate columns. Distinguish<br />
between features that are basically economic and those<br />
that are basically political.<br />
32. Select any country that interests you —— perhaps one<br />
that you would like to visit. Learn all you can about<br />
its economic system . Write a description of that system<br />
(<br />
and decide how to categorize it. Would you call it<br />
capitalist, socialist, communist, market Bocialist, or<br />
mixed?
Page 29<br />
33. Consider your occupational plans. Write a brief des<br />
cription of how you would prepare for entering this<br />
occupation and how you would pursue your career. Now<br />
consider how your plans, preparations, and activities<br />
might differ if you lived in a country with a different<br />
economic . system How would each of the other systems<br />
affect your wage or salary, your working conditions, etc.?<br />
34. Compare the economic policies of Presidents Franklin<br />
Roosevelt and Ronald Reagan. How did their ideas differ?<br />
How did each change the U.S. economy ? Where do you find<br />
differences? How would you explain the agreements and<br />
differences?<br />
35. Many economists say that the United States has a mixed<br />
I<br />
economy. From your own experiences and observations,<br />
list things in the U.S. that are not in accord with pure<br />
capitalism (such as public libraries and public parks).<br />
Explain why each item on your list exists. Consider<br />
whether or not these facilities and services ought to be<br />
privately owned and produced.
e<br />
I<br />
Chapter1: WHATIS ECONOMICS?<br />
Name<br />
Class Date<br />
Theconceptof choiceis the basisof economics.Whatyoueat,whereyoulive,howyou<br />
spendyourfreetime—allinvolvemakingchoicesabouthowto usethe scarceresources<br />
availableto you.<br />
Supposeyouaregiven$100to spendonanyoneitemyouwish.Listthreechoicesonwhich<br />
youmightspendthismoney.<br />
1.<br />
2.<br />
3.<br />
4. Whichalternativeis yourfirstchoice?___________________________________________<br />
5. Whatdoeconomistscallthisexchangingof onealternativefor another? ____________<br />
6. Whatcriteriadidyouuseindecidingonyourfirstchoice? _______________________<br />
7. Whatwastheopportunitycostinvolvedin yourdecision? ________________________<br />
List in the spacesprovidedthe resourcesavailableto a nation’seconomy.Besideeach,<br />
describeproblemsaneconomymightfacebecauseof a scarcityof thatresource.<br />
8. ________________<br />
9. ________________<br />
1p.<br />
r<br />
I<br />
11. _______________<br />
12. ______________<br />
p
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER1<br />
Name Class____________<br />
_________________________________________<br />
Date__________<br />
1.1 SCARCITYAND CHOICES<br />
CHOOSINGA COLLEGE:OPPORTUNITYCOSTSANDTRADE-OFFS<br />
Eighteen-year-oldTina Lakis is graduating from high schooland thinking about<br />
collegeand her future. Tina wants to be an economist,but first she must decide<br />
which collegeto attend. She wants to attend the best schoolthat she can afford.<br />
She begins by consideringthe money available.From her earningsover the last<br />
few years, she has managedto save$4,000. In addition, she can borrow $2,500<br />
each year. Tina plans to work during the schoolyear and on vacations.She has<br />
been acceptedat three schools.<br />
U Halls of Ivy University, an outstanding private college,has offered Tina a<br />
scholarshipof $2,500a year. Ivy has a good economicsdepartment and a<br />
beautiful old campus. It is 800 milesfrom home, so Tina would have to live<br />
on campus and pay for trips betweenschooland home. One year’stuition,<br />
room, and board at Ivy is $15,000a year.<br />
• Home State Collegeis 80 miles from home, so Tina would have to live on<br />
• campus. Sincemany students from her hometowngo to Home State, Tina will<br />
probably be able to arrange rides or inexpensivetransportation home. Home<br />
State has a good economicsdepartment. No scholarshipaid is available,but<br />
she has been offereda campus job that pays $40 a week. The total room,<br />
board, and tuition at Home State is $5,000a year.<br />
•<br />
• Nearby CommunityCollege,a two-yearschool, is ten miles from Tina’s home,<br />
so she could live at home. She would need a car. A used car would cost $2,000<br />
initiallyand about $750a year to operate. After two years, Tina would have to<br />
transfer to a four-yearcollegeto completethe work for her degree. Community<br />
Collegeoffers a good beginningprogram in economics,but course offerings<br />
are limited. The tuition at CommunityCollegeis $1,500 a year.<br />
1. Completethe chart with the facts and valuesfor each school.<br />
.<br />
SCHOOLS<br />
Halls of Ivy<br />
I<br />
Home State College<br />
.<br />
Nearby Commuzuty<br />
College<br />
.<br />
of <strong>Economics</strong><br />
Department<br />
FACTORS<br />
YearlyRoom,<br />
Board,Tuition<br />
Scholarshipand<br />
Job Income<br />
a. b. c. d.<br />
e.<br />
i.<br />
f.<br />
j.<br />
g.<br />
:<br />
k.<br />
h.<br />
I.<br />
TravelCosts<br />
(estimated)<br />
2. Based on the chart you completed, list your choicesin the order that you would recommendthem to Tina.<br />
a. First __________________ b. Second __________________ c. Third _________________<br />
3. What is the opportunity cost of the scho of your first choice?
S<br />
I<br />
r<br />
I<br />
RGURE12 GRAPHICPLOTOFTRADEOFFsTiMESCHEDULE<br />
u<br />
Time Time<br />
‘II<br />
0<br />
I<br />
S<br />
7<br />
2 $<br />
‘1<br />
:1<br />
L<br />
— — —<br />
B<br />
— — — —<br />
0<br />
PracticeTIms Xax<br />
FIGURE 1.3TRADE .OFF CURVE: PR T1CE<br />
TIMEANDSTU(Tt TIME<br />
I<br />
J<br />
EEEEEE<br />
L<br />
2346576<br />
PractlcThn Xath<br />
3<br />
4<br />
5<br />
6<br />
7<br />
6<br />
S<br />
4<br />
3<br />
2<br />
I<br />
0<br />
TiMESCHEDULE<br />
PracUcs I<br />
Time Time<br />
o e<br />
I 7<br />
2 6<br />
5<br />
4 4<br />
5 3<br />
6 2<br />
7 1<br />
• 0<br />
FIGURE 1.4TRADE-OFF CURVE: SCORING<br />
ERAGEANDGRADEER E Grade<br />
erage Scorlag<br />
Mmge<br />
I<br />
z<br />
ISC<br />
—. — — — — — — — — — w<br />
—<br />
r--<br />
& 1d--<br />
. . — — — — —I • —<br />
• 61O15 25IO164O<br />
SngAi s fl_a<br />
a.<br />
— —<br />
65<br />
70<br />
3D<br />
6<br />
10<br />
15<br />
SC<br />
3D<br />
OVERHEAD<br />
N
4<br />
$<br />
I<br />
4<br />
Figure1-1:PRODUCTION POSSIBILITIES<br />
Military Goods<br />
(billions ofdollarsperwar)<br />
:•<br />
3,000—A<br />
S<br />
.<br />
:.•<br />
.<br />
100 1,000<br />
r<br />
I<br />
..:<br />
‘- - 1,500. 2,000.<br />
. ..<br />
CMlIanG ds<br />
(billions ofdollarsper‘ea)<br />
— .<br />
..<br />
2500<br />
31300
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER1<br />
Name_________________________________________ Class____________ Date__________<br />
Spending money requires making choices.Choices,in turn, involveopportunity<br />
costs and trade-offs.Imagine yourselfin the followingsituation. You have only<br />
$7.00 to spend for the week, but the items you wish to buy total more than $7.00.<br />
You will have to chooseamong them and to make a budget showingyour choices.<br />
• A schoollunch costs $1.00. Instead of buying lunch, however, you can bring<br />
lunch from home each day or on some days. You can also buy a half pint of<br />
milk at schoolfor 20 cents.<br />
I For this week only, class i-shirts are on sale for $5.00. If any are left next<br />
week, the price will be higher. Everybodyseemsto be buying one.<br />
I Sincethe beginningof the schoolyear, you have been saving$2.00 every week<br />
so you can go on the spring trip. It is an event that everybodylooks forward<br />
to.<br />
• The math reviewbook is in the bookstore this week for $2.00. If you bought<br />
it and studied it, you could probably raise your grade on Friday’s test about<br />
10 points.<br />
• Your favoriterock group will be in town this week. You know where you can<br />
get a ticket for $5.00.<br />
1. How will you budget your money?Write the amount next to the item.<br />
a. _______ lunches<br />
b. ______ T-shirt<br />
c. savingsfor trip<br />
.2. What trade-offsdid you make?<br />
3. On what did you base your choices?<br />
1.2 SCARCITYANDTHE INDIVIDUAL<br />
MAKINGINDIVIDUALCHOICES<br />
d. ______ math reviewbook<br />
e. ______ ticket for rock group<br />
4. What wtre the opportunity costs of your choices? _____________________<br />
5. How did your wants conflictwith your resources? _____________________<br />
6. Explainhow this real-lifesituation illustrates the problem of relativescarcity.<br />
7. What resourcesdo you consider to be scarcestin the real world?<br />
I
4<br />
*<br />
=<br />
E<br />
I<br />
LEARNING ECONOMICS<br />
Name<br />
SKILLSWORKSHEETClass Date<br />
Chapter 19: THE ECONOMIC GOALS OF THE NATION<br />
The economic.goals listedbelowareconsideredesirablebymostAmericans.However, these<br />
goatsareofteninconflictwitheachotherandwithothernon-economic goals,suchasprotection<br />
of theenvironment.Business,consumer,andgovernmentdecisionmakersareoftenfaced<br />
withdifficulttrade-offswhenthesegoalscomeintoconflict.Identifythetrade-offsinvolvedin<br />
eachof the followingsituations.<br />
GOALS<br />
IndividualFreedom<br />
Efficiency<br />
Equity<br />
Security<br />
Growth<br />
Stability<br />
FullEmployment<br />
1. Thedecisionby consumersto buylargequantitiesof importedgoods.<br />
2. Thedesireof environmentalists to protectthe nation’sremainingwildernessareas.<br />
3. Theneedsofseniorcitizensandwelfarerecipientsforincreasedgovernment assistance.<br />
4. Theprotectionof youthfromthe undueviolencein films.<br />
. Increasedspendingby governmenton the nationaldefense.<br />
I _______________________________
a<br />
t<br />
S<br />
r<br />
fiGURE2.1 ThECONCEPT OFANECONOMIC SYSTEM<br />
fiGURE22 ECONOMIC CIRCULAR FL MODEL<br />
C<br />
OVERHEAD21
SCARCITY AND OPPORTUNITYCOST<br />
Reviewof Concepts<br />
Somepeople want to raise the speedlimit on<br />
our nation’shighwaysso that motoristscanspend<br />
less time travelingfromplace to place and more<br />
timedoingotherthings. Otherswantto reducethe<br />
speedlimitbecausetheybelievetheadditionaltime<br />
spentdrivingat the lowerspeedwillreducehigh<br />
wayinjuriesandfatalities.<br />
This controversyillustratesscarcity, whichis<br />
the basicprincipleof economics: scarcityis the<br />
Thabilityof limited meansto satisfyall of every<br />
one’swants. The scarcityof time requiresus to<br />
choose between spendingmore time driving at<br />
slowerspeedsto reduceaccidentsand drivingat<br />
faster speedsto have more time for other activi<br />
ties. Similarly,the scarcityof yourtime requires<br />
youto choosebetweenvisitingfriendsanddoing<br />
homework,and the scarcityof your income re<br />
quiresyouto chooseamongmanypossibleitems<br />
youcouldbuywithyourmoney.<br />
Scarcityforcesyouto chooseamongalternative<br />
uses of your time and money. Wheneveryou<br />
makea choice,therefore,yousacrificesomething<br />
else you could have obtainedby spendingyour<br />
timeor moneydifferently. Thes.I opportunity<br />
yougiveup whenyoumake a choiceis yourop.<br />
• portunity cost. For example, suppose by<br />
spending$5 on gasoline you give up a $5hair<br />
brush,a$5 cassette,or a $5 lunch. Becauseeach<br />
of thesealternativescosts$5, youcouldnothave<br />
purchasedall three withthe $5 you spenton gas.<br />
As a result,youropportunitycostis notallthreeof<br />
theseproducts;it is whicheverof the threesacri<br />
ficedalternativesis mostimportanto you.<br />
Becauseof scarcity,youmakechoicesandbear<br />
opportunitycosts.Allindividualschooseandbear<br />
costsbecauseno nationhas enoughresources to<br />
I<br />
satisfyallof its citizens’wants. Resourcesarethe<br />
basic ingredientsused to producewhat we want.<br />
They are land, labor, capital and management.<br />
Machines,tools,andbuildingsare a nation’scapi<br />
tal, andmanagementis the abilityto organizethe<br />
otherthreeresources. No matterhow wealthyor<br />
poorindividualsandnationsmightbe, allindivid<br />
ualsmakechoicesandpay costsbecausescarcity<br />
stillexists. Even an unselfishpersontryingonly<br />
to satisfy others’wants would discover that re<br />
sourcesare insufficientto meet all of everyone’s<br />
wants.<br />
Because scarcity is everywhere,people must<br />
choosecarefullyif theyareto use theirlimitedre<br />
sourcesto satisfytheirmostimportantwants. Ec<br />
onomics examinesthesechoicesbecauseit stud<br />
ies how scarce resources are allocated among<br />
alternative uses. When examining individuals’<br />
choices,however,economicsemphasizesthink<br />
ing at the margin. Thewordmarginrefersto a
Name Date ____________ Score ________<br />
if! THINKING SKILLS<br />
When VW meant “lital 3Iants”<br />
Except for Volkswagenowners, most people could<br />
havecaredless aboutemblemsfromthe frontof VWs. If<br />
they had found one in the street, they probablywould<br />
haveignoredit. Butthatchangedin the summerof 1987,<br />
when singerMike Diamondof the BeastieBoyswore a<br />
VWemblemon a neckchain.Then,Britishfansscurried<br />
to find one for themselves.Thousandsof emblemssud<br />
denlybegandisappearingfromVolkswagensthroughout<br />
Britain. In orderto stopthe widespreadtheft,the British<br />
importerof Volkswagensbegangivingawaythe emblems,whichnormallysold for about$10 each. Two<br />
weeksafterannouncingitsgive-awayprogram,thecompanyhad received5,000mailedrequestsfortheem<br />
•blems.(Adaptedfrom:PaulHemp,“It’sJustLuckyHe Doesn’tSportA VWSteeringWheelon Stage,”The<br />
WallSrreetJournal,July29, 1987,21.)<br />
1. Brieflyexplainwhythiseventillustratesscarcity:<br />
2. MoreVWemblemswereavailableaftertheimporterbeganthe give-awayprogram. Despitethe greater<br />
supply,theemblemswerestillscarcerthantheyhadbeenbeforeMikeDiamondwasspottedwearingone.<br />
Whyweretheemblemsmorescarceeventhoughtheiravailabilityhadincreased?<br />
3. Comparetheopportunitycostof purchasinganemblemfor$10andsuccessfullystealingonefroma VW.<br />
Whobearsthecostin eachcase?<br />
I<br />
4. “Becauseresourcesare scarce,the emblemgiveawayprogramdid not make them free.” Briefly<br />
explainwhythisstatementis true.<br />
5
Name _____________________________________ Date ____________ Score ________<br />
BUILDING 1FlItII
0<br />
E<br />
0<br />
5<br />
U<br />
0<br />
Figure4.4Diminishing Returns(Table)<br />
OVERHEAD3<br />
(1)NumberofWorkers (2)Total (3)Outputper Worker (4)OutputAddedbyEacb<br />
(LabOrInputs) Output (col2 + coil) Mditio.aI Worker<br />
3<br />
V<br />
0<br />
1<br />
2<br />
3<br />
4<br />
1,0 0<br />
3,000<br />
5,500<br />
6,500<br />
1,00<br />
1,500<br />
1,833<br />
1,625<br />
2,000<br />
2,500<br />
1,000<br />
1n<br />
Retunis<br />
Düththshing<br />
5 7,100 1,420 Retun is<br />
6<br />
7<br />
.8<br />
7,500<br />
7,200<br />
6,800<br />
1,250<br />
1,029<br />
850<br />
300<br />
-400j<br />
NegativeReturns<br />
FIGURE 4.5 DIMINISHING RETURNS GRAPH) FIGURE 4.6ECONOMIES OFSCALE<br />
Economies<br />
—af+—<br />
Scale<br />
S ?<br />
I-—<br />
—<br />
—<br />
S ?<br />
. l<br />
- — — -<br />
— —<br />
,oonom ies<br />
-— — - — — — — of1—<br />
Sca le<br />
I — — — — — — —S<br />
Size ofFirm X
Name,<br />
WORKSHEET3<br />
MEASURINGDIMINISHINGRETURNS<br />
Class_____________ Date ]<br />
I. Each of the followingexplainsone categoryof returns in a hypotheticalexampleof business growth—<br />
increasing,diminishing,or negative. In the spacebefore each, identify the categoryit fits.<br />
a.<br />
- A new workerjoins the staff. Sheadds450 units to production,whereas<br />
the workerhiredjustbeforeher added500 units.<br />
b.<br />
C.<br />
- A newworkerjoinsthe staff.The workerhiredjustbeforehim added200<br />
unitsto output,but he addsa minus200.<br />
A new workerjoinsthe staff.The lastworkerhiredbeforeher added700<br />
units to production,but she adds 1,000.<br />
2. The tablebelowshowsthe developmentof a hypotheticalbusiness. Study the figuresin the first two<br />
columnsand thenat the rightof the output-addedcolumn,drawbracketsto encloseeachcategoryof<br />
returns.Label eachbracketby category<br />
Numberof<br />
Workers<br />
OiapuzAdded Costsof<br />
per Worker Production<br />
1 200 $60,000<br />
2 500 50,000<br />
3 850 40,000<br />
4 1,250 35,000<br />
5 *<br />
700 30,000<br />
6 300 35,000<br />
7 —100 40,000<br />
8 —400 50,000<br />
3. On the grid labeledDiminishingReturns at the bottom of the pageto the left, use the figuresin the first<br />
two columnsaboveto graph the patternof returns they show.<br />
First, label the Y axis “TotalOutput(100’s)”and the X axis “Numberof Workers.”<br />
Second,placethe figuresfor eachaxis (0 to 1,600by 200’sand 0 to 8) wherethey belongon the grid.<br />
Third,placea dot whereeachof the workerand outputfiguresintersect.Then jointhemto showthe curve<br />
theyproduce.<br />
Fourth,pinpointthe placewhereeachcategoryof returns begins, and label it by category.<br />
4. On the grid labeledEconomiesof Scaleat the bottomof the pageto the right, use the figuresin the first<br />
and third columnsaboveto graphthe pattern thatthey show.<br />
First, bel the Y axis “Costsof Production(1,000’s)”and the X axis “Numberof Workers.”<br />
Second,placethegures foreachaxis (0 to 80 by 10’sand 0 to 8) wherethey belongon the grid.<br />
Third,placea dot whereeachof the costsof productionand workerfiguresintersect. Then jointhemto<br />
showthe curve theyproduce.<br />
Fourth,label the parts of the curve as to the economiesor diseconomiesof scalethey show.<br />
DiminishingReturns Economiesof Scale
EXERCISEI Productionof GoodsandServices<br />
Transparency I Productionof Goodsand Services<br />
A. Overview<br />
The factors of production are the building blocks that are necessary to<br />
produce goods and services. A lack of an ’ one of the factors—land, labor, or<br />
capital—reduces greatly the kind and quantity of goods and services that a<br />
society produces. A healthy and growing economy, on the other hand, has<br />
sufficient factors of production and a balanced production of both goods and<br />
services.<br />
This activity provides practice in determining which factors of production<br />
are used in producing certain goods and services. The activity material is based<br />
on the diagrams depicted on Transparency 1. The first diagram shows that land,<br />
labor, and capital are the factors of production. The second diagram shows the<br />
steps used in creating products. This transparency and its accompanying activity<br />
material can be used in conjunction with Chapter 1 Section 2 in Ecoizoinics:<br />
Principles and Practices.<br />
B. OralDiscussion<br />
Questions<br />
A 1. What are the three factors of production?<br />
Answer: Land, labor, and capital.<br />
A 2. What are the two kinds of economic goods that are produced?<br />
Answer: Consumer goods and capital goods.<br />
• 3. What is the difference between a consumer good and a capital good?<br />
Answer: Consumer goods are material products people use to satisfy their<br />
i%’aiilsand needs. Capital goods are manufactured tools used to produce<br />
consumer goods and capital goods.<br />
• . Under which factor of production—land, labor, or capital—is the<br />
equipment used by a surveyor classified?<br />
Ans*ver:Capital.<br />
I . Under which factor of production is the site of a factory building classified?<br />
Answer: Land.<br />
• 6. What is the difference between a tangible good and an intangible good?<br />
Answer: Tangible goods are material, such as clothes, houses, and<br />
automobiles, intangible goods are nonmazerial, such as the service of a la ’ver.<br />
• 7. Why are economic products scarce?<br />
Ausit’er:Because limited resources are used to satisfy seemingly unlimited<br />
wants.<br />
• 8. Do you think the three factors of production are equally important? Why or<br />
why not?<br />
Ausivers will vary, but siz*denisshould note that all three factors mizustbe<br />
available in relative abundance to satisfy people’s wants.
C. UsingTransparencyI<br />
ACTIVITY1.1<br />
Have students conipkte the chart on analyzing factors of production,<br />
Handout 1.1 on page 23. To begin this activity, students will study a list of<br />
factors of production and determine whether each item represents land, labor, or<br />
capital. Then, students wilidecide whether each listed factor is used to produce<br />
consumer goods, capital goods, services, or a combination of goods and services.<br />
Finally, students will provide specific examples of goods and services that can be<br />
produced through the use of these factors of production.<br />
D. Answers<br />
HANDOUT1.1<br />
A B C*<br />
Consumer and<br />
Coal Land Home Heating<br />
capital goods<br />
Computer Capital<br />
Combination of<br />
goods and services<br />
Capital and<br />
Machinist Labor Engine<br />
consumer goods<br />
Nuclear Reactor Capital<br />
Airplane Capital<br />
Combination of<br />
goods and services<br />
Household budget<br />
Energy<br />
Combination of Travel,<br />
goods and services Transportation<br />
Surgeon Labor Services Health<br />
Consumer and<br />
Trees Land Lumber<br />
capital goods<br />
Warehouse ; Capital<br />
Crude Oil Land<br />
I<br />
Combination of<br />
goods and services<br />
Consumer and<br />
capital goods<br />
Department Store Land and Capital Consumer goods<br />
Professional<br />
Football Team<br />
Storage<br />
Gasoline<br />
Clothing,<br />
Appliances<br />
Labor and Capital Services Entertainment<br />
Furniture Capital Consumer goods Couches<br />
High <strong>School</strong><br />
Teacher<br />
Laser Technology Capital<br />
A,: ers ttiIl ‘arv.<br />
Labor Services Education<br />
‘ Combination of<br />
goods and services<br />
Medical technology
I<br />
NAME DATE ______ CLASS ______<br />
HANDOUT 1.1<br />
Analyzing Factors of Production<br />
Study i/ic listing iz tile colzon;zto the far left. Decide t’hether each item in the listing<br />
represents land, labor, or capital, and it’rilethe answer under column A. Then, decide<br />
whether each item copitrihutes to or is used in the production of: consumer goods,<br />
capital goods, services, or a combination of goods and services. Write the ansiver under<br />
column B. Finally, provIde one specific example of a good or service that each item is<br />
used to produce, and ‘ri1e i/ic ansii’er under column C.<br />
Coal<br />
Computer<br />
Machinist<br />
Nuclear Reactor<br />
Airplane<br />
Surgeon<br />
‘I’rees<br />
Warehouse<br />
Crude Oil<br />
f<br />
Department Store<br />
Professional<br />
Football Team•<br />
Furniture<br />
High <strong>School</strong><br />
Teacher<br />
Laser Technology<br />
I<br />
A B C<br />
‘
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER1<br />
Name Class Date__________<br />
1.3 SCARCITYAND SOCIETY<br />
THEFACTORSOFPRODUCTION<br />
A. In your own words, explain each of the factors of production.<br />
I. Land<br />
2. Labor<br />
3. Capital<br />
4. Entrepreneurship<br />
B. Fill in the chart to show how each factor of production is used in producing the followinggoodsand<br />
services.<br />
tOOD OR SERViCE<br />
PRODUCED<br />
Computer<br />
VideoCassettes<br />
DentalSe rvice<br />
<strong>Economics</strong><br />
Textbook<br />
Pro Football<br />
Game<br />
Apartment<br />
Building<br />
Ia.<br />
FACTORSOF PRODUCTION<br />
Land Labor Capital Entrepreneurship<br />
.<br />
lb. Ic. 14.<br />
2a. 2b. 2c. 2d.<br />
3a. 3b. 3c. 3d.<br />
4a. 4b. 4c. 4d.<br />
5.. Sb. Sc. Sd.<br />
6a. 6b. 6c. 6d.
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER1<br />
A. Use the graph to answer the questionsthat follow.<br />
Write the letter of the best answerin the blank.<br />
______ 1. What happens when Nation X increases<br />
the production of weapons?<br />
a. It produces fewerconsumer goods.<br />
b. It increasesits total output of goodsand<br />
services.<br />
c. It fails to use all its resources.<br />
d. It experiencesoveralleconomicgrowth.<br />
_______<br />
_______<br />
Name Class____________<br />
_________________________________________<br />
2.<br />
a.<br />
b.<br />
C.<br />
NATIONX:WEAPONSANDCONSUMER<br />
What could cause a nation to move from point A to point B on the trade-offcurve?<br />
The nation is preparing for war.<br />
Production of all goodshas increased.<br />
The nation has cut back on the production of weaponsto increasethe production of consumer<br />
goods.<br />
d. Scarcityhas becomea factor in economicchoices.<br />
3.<br />
a.<br />
b.<br />
C.<br />
d.<br />
Which of the followingwould be the most likely reason for curve 1 to becomecurve 2?<br />
The total work force has decreased.<br />
Savingshave been reduced.<br />
There has been a breakthrough in technology.<br />
The governmenthas set up new regulations.<br />
B. Prepare to make your own trade-offtable and graph. (Reviewpages 11—12in your textbook before<br />
preparing the table.) Use a situation you know, make one up, or use one of the following:<br />
• A ece of land is availablefor a town to use. It may be used for a park or a hospital or both.<br />
• <strong>School</strong>teachersare availablefor assignmentfor specialstudent needs. They may be assignedfor remedial<br />
work or for preparing students to take collegeentrance exams.<br />
• The studen( council has raised money at a fair. The council will spend the money on a schooldance or a<br />
gift to the school, or it may divide the moneybetween the two choices.<br />
1. ‘hat nsituat<br />
will you use for the table?<br />
2. What is the total amount of the resource available(in space, time, money, etc.)?<br />
3. Completethe table and graph.<br />
1.4 SOCIETALTRADE-OFFS<br />
USINGSOCIETALTRADEOFFS<br />
TRADE-OFFTABLE<br />
‘4<br />
a<br />
Date__________
a<br />
SKILLSWORKSHEET<br />
CHAPTER6<br />
The tablebelowshowshypotheticalsupplyand demandconditionsfor the<br />
U.S.applemarket.<br />
4..<br />
a<br />
PriceperBushel<br />
(dollars)<br />
$5<br />
2<br />
1<br />
2 3<br />
4 5<br />
QuantuySupplied<br />
(millionsof bushels) QuantityDemanded<br />
(millionsof bushels)<br />
1. Graph the supplyand demand schedulesfor apples,usingthe informationprovidedin the table.<br />
2. Whatis the equilibrium priceof apples?<br />
______________________________ Class____________ Date__________<br />
SUPPLYANDDEMAND:A GRAPHICANALYSIS<br />
ANALYZINGSUPPLY<br />
3. How mai4 millionsof bushelsare suppliedand demandedat the equilibrium price?<br />
4. Supposethatat the equilibrium price,farmers are sellingtheirapplesat a loss and ask the governmento<br />
assist thembeforetheyare forcedout of business.The governmentagrees to paythe farmersthe difference<br />
between the marketpriceand a governmentset priceof $4. This actionby the governmentestablishesa<br />
new marketprice of $4. Using a dottedline, showon yourgraphthe quantity demandedof applesat a<br />
puce of $4.<br />
5. Using a dotted line, showon yourgraphthe quantity of applesthatfarmerswill supplyat a priceof $4.<br />
6. What is the name givento the marketconditionwhenthe priceof applesis set at $4 a bushel?<br />
1<br />
2<br />
3<br />
4 5<br />
0 1 2 3 4 5<br />
Quantity ofApples(millionsof bushels)<br />
7. What were the effectsof this governmentsubsidyon the supplyand price of apples?<br />
5<br />
4<br />
3<br />
2 1
ENRICHMENT WORKSHEET<br />
The AgricultureDepartment,<br />
searchingfor places to store the<br />
increasingglut of farm products,<br />
plans to put more corn on river<br />
barges.<br />
Officialswant to increaseby<br />
1,000the 1,200river barges that<br />
have been leasedfor crop storagein<br />
recent weeks, and they have asked<br />
barge lines to submit bids for the<br />
added space by Monday.<br />
The additional 1,000barges<br />
“would be most helpful” in relieving<br />
a severeshortageof space, said an<br />
officialof the department’s<br />
Agricultural Stabilizationand<br />
ConservationService.The barges<br />
will be used to hold corn moved<br />
from elevatorsand other storage<br />
facilitiesin Ithnois and Iowa to make<br />
room for the corn crop that growers<br />
will start harvestingin a few weeks.<br />
TRADEIN ALLFOODPRODUCTS<br />
(billions of dollars)<br />
$40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
, I<br />
‘78 ‘79<br />
I<br />
‘80<br />
I<br />
‘81<br />
I<br />
‘82<br />
I<br />
‘83<br />
I<br />
‘84 ‘85<br />
Source: InternationalTrade Commission<br />
10<br />
1. Accordingto the article, why have grain prices dropped?<br />
“We’re headed for possiblythe<br />
most critical grain-storagesituation<br />
in history,” said Merrill Marksman,<br />
a former ASCSofficialand president<br />
of a Washington-basedconsulting<br />
firm for grain warehouses.Prices<br />
have plunged becauseof a new<br />
governmentpolicy for slashingprice<br />
supports, the export market still lags,<br />
especiallyfor corn, and farmers are<br />
expectedto put sizableamounts of<br />
grain in federallyfinancedstorage<br />
rather than try to sell the produce on<br />
the market.<br />
So much corn is slated for<br />
storage that some buyers have had<br />
problems finding corn to purchase,<br />
and they complainof spot shortages<br />
amid a general glut. In a recent<br />
ASCSsurvey, storage-company<br />
requests for space for grain exceeded<br />
availablespace in 11 states, with the<br />
storageneeds at least tripling offered<br />
space in Iowa, North Dakota and<br />
Oklahoma.<br />
Source:The WallStreetJournal,August 21, 1986.<br />
2. Examinethe graph. What does an increasein agriculturalimports and a decreasein agriculturalexports<br />
imply?<br />
CHAPTER6<br />
Name_________________________________________ Class____________ Date__________<br />
I<br />
4<br />
SUPPLYAND DEMAND:A GRAPHICANALYSIS<br />
CHANGESIN SUPPLY<br />
Beloware two items of informationrelating to Americanagriculture. The first is<br />
an excerpt from a newspaperarticle describingthe problems of storing surplus<br />
grain. The secondis a graph showingthe changingrelationshipbetweenimports<br />
and exports of agriculturalproducts. Analyzethis informationcarefully. Then<br />
answer the questions that follow.<br />
3. Applyingthe principles of supply and demand, what effecthas the declinein U.S. food exports had on the<br />
U.S. grain industry?
Basic Grid<br />
7n JLISIat*I OnL,<br />
twodagIn9 items,cattedvWta As<br />
frwflOwodçlsmadiu<br />
t .blslcties, afled<br />
Dansparency<br />
I
Transparency I<br />
ECONOMICS: PRINCIPLES andPRACIICES<br />
PRODUCTION OF GOODS AND SERVICES<br />
FACTORSOF PRODUC11ON<br />
THEFACTORSOFPRODUC11ON<br />
ma modern economy, all three factors of production are needed for goods and services to<br />
be produced.<br />
.“rt, z’<br />
• •-.-—.- ....-<br />
GOODS AND SERVICES<br />
Merrill PublishingCo..Copyright© 1988byBell& Howell. i.u<br />
All rights,rserved.<br />
r<br />
PRODUCTS<br />
GOODS<br />
(Tangibles)<br />
Economic (Scarce)<br />
___<br />
SERVICES<br />
(lntangIbIe )
Demand Curve<br />
DM e<br />
‘ ..<br />
Explanation<br />
Quaniftydemandediy<br />
dec nes, so demandas s<br />
downb the t .f<br />
•<br />
G<br />
Ir re s<br />
tnu<br />
-<br />
pica<br />
1. Wdsmandedat$5?$2?<br />
’<br />
2..Atwhatpuce P* quar ty<br />
Three? Four?<br />
demwded?<br />
Wansparency
Figure8-3:DECREASED DEMANDFORBUTTER<br />
AFTERA.DROPINTHEPRICEOFMARGARINE<br />
PriceperPound<br />
Cl 1<br />
WI •<br />
$1.00<br />
•Di<br />
$0.85<br />
$0.70<br />
0<br />
Figure8-4:INCREASED<br />
DEMANDFORBUTTER<br />
AFTERADROPINTHEPRICEOFBREAD<br />
PriceperPound<br />
I $1.30<br />
$1.15<br />
$1.00—<br />
$0.85—<br />
$0.70—<br />
I I I I<br />
10 20 30 40 50<br />
Quantity Demanded forOneYear<br />
inThousands ofPounds<br />
I I• I •I .<br />
‘WOl<br />
0 10 20 30 40 50<br />
I<br />
Quantity Demanded forOneYear<br />
InThousands ofPounds<br />
- -—.• _- —- _* .---— -: .k.<br />
60<br />
WD2<br />
60
Demand<br />
VariationsIn Demand<br />
I<br />
S<br />
$6<br />
5<br />
4<br />
‘3<br />
2<br />
I<br />
ChangeIn QuantityDemanded<br />
*<br />
—s<br />
0 I 2 3 .4<br />
— OuantftyDemanded<br />
B<br />
—<br />
Explanation<br />
The graphon the faft Indicates a changeIn<br />
quantitydemanded. Aspricedecreases from$4<br />
(pointA).to $3 (pointB), quantitydemanded<br />
mcreasefromI (pointA) to 3 (pointB).The<br />
graphon the rightshowsa shift In demand.<br />
<strong>Point</strong>sC and D we on separatecurves.A<br />
changeI, a factorotherthanpricecausedthe<br />
shift.AnLngthesefactorsare changes<br />
I<br />
.<br />
4<br />
3<br />
2—<br />
1—<br />
—<br />
ShiftIt Demand<br />
5 0 I 2 S 4<br />
Quantity Demanded<br />
-<br />
.<br />
-<br />
—<br />
Wansparency<br />
3<br />
incomepricesofsubstituteaid rr,Iemei y<br />
products,andnsumer attitudes.<br />
GraphSkills<br />
1. What tourfactorscouldhavecausedlie shit<br />
Indemand shown inthegraphonlie ,Id?<br />
2. itthepriceineachexancleie againto$4,<br />
quantitydemandedwo d reSimto I It lie<br />
graphonthe left,and2In liegraphonl<br />
ie<br />
right ain.<br />
I
0<br />
I<br />
Figure8-1:ELASTIC<br />
DEMANDFORSELTZERWATER<br />
PriceperQuart<br />
$1.75<br />
‘$0.75<br />
f<br />
Figure8-2:INELASTIC<br />
DEMANDFORMILK<br />
PriceperQuart<br />
I<br />
$1.50<br />
$1,<br />
$1.00<br />
. $0<br />
0<br />
I I<br />
10 20<br />
•1 I<br />
30 40 50 60<br />
Quantity Demanded for<br />
OneYearinMillionsofQuarts<br />
1 I. 1—<br />
0 10 20<br />
I. I I I<br />
30 40 50 60<br />
Quantity Demanded for<br />
OneyearInMillionsofQuarts<br />
— .—. — .,.* .- .—... .
‘of Supply<br />
Elasticity of Supply<br />
•:-<br />
15<br />
I 2<br />
3<br />
4<br />
I<br />
i<br />
Inelasti “PI’ Y<br />
a0 12 3 4 5 6<br />
Ea h graphshowsan exarr Ie ofpricesincreas<br />
ingfrom$ Aend to $3 (pointsB,<br />
and B2). Thoughthe priceIncreaseis the same,<br />
the Increaseinquantitysuppliedis qiile differ<br />
ent.Inthegraphonthelafi,the amountsupplied<br />
increasesontyone unit.hithegraphonthe right,<br />
amountsuppled increasesfourunits.Thecurve<br />
on Ve rIgt*shows greater elasticitythan the<br />
ci ,veonejwL<br />
r -I<br />
Elastic apply<br />
0 I 2 .2 4 S 6.<br />
Wansparency<br />
4<br />
GraphSkills<br />
1. Ifthese graphsshowedthe .çply curves<br />
vecx)rdalbumsand mobi4es , 1ch cure<br />
wouldbe foraulomobies?<br />
2. Inorderto increasequantitysuppled byone<br />
unit,howmuchdoes pricehavetoincreaseIn<br />
the graphon the IQI*?
1<br />
Figure85: DECREASED SUPPLYOFTOMATO<br />
PASTEAFTERARISEINPRODUCTION COSTS<br />
PriceperPound<br />
$2.50<br />
$2.00<br />
:<br />
ti n<br />
$1.00<br />
I I I I I I<br />
0 10 20 30 40 50 60<br />
Quantity Supplied forOneYear<br />
InThousands ofPounds ofTomato Paste<br />
Figure8.6:INCREASED SUPPLYOF<br />
COMPUTERS AFTERACHANGE INTECHNOLOGY<br />
PriceperComputer<br />
•1 I I .1 I<br />
O 1 23 45 6<br />
• Quantity Supplied forOneYear
Supply and Demand Schedule for 1-shirts<br />
Supplyand DemandSchedule forT-shirt.<br />
Ice: SUPPUSd<br />
:1-. . - ‘.- =<br />
100,000<br />
70,000<br />
50,000<br />
35,000<br />
25,000<br />
15,000<br />
9,000<br />
5,000<br />
2,000<br />
0<br />
.0<br />
Demanded<br />
1,000<br />
3,000<br />
6,000<br />
9,000<br />
12,000<br />
15,000<br />
25,000<br />
50,000<br />
80,000<br />
100,000<br />
Thechartcombinesaaaçplyscheduled a<br />
demandschedule.Wc ded we theq<br />
ci I-shirts rs produ i Wd<br />
quantityconeumerswi demandMei pri<br />
horn$1 $10.<br />
chanSkUle<br />
2,000T.st*ts? .<br />
d whatpricewSnsumers dernwido<br />
3,000T-shlr ?<br />
.<br />
Wansparency<br />
5<br />
.
CircularFlow of Money and Products<br />
Wansparency<br />
6<br />
CircularFlowof Moneyand Products I<br />
I<br />
S<br />
BuyGoods<br />
&Servâces/ /‘<br />
Individualsand<br />
Households<br />
In ome<br />
\ AEa tnbEorne<br />
\ \ (wages,<br />
\\ c.)<br />
Sefl<br />
ofResources<br />
I<br />
Explanation<br />
The chart demonstrates the way factorand<br />
product markets are interrelated.The insidear<br />
rowsshowTheflowofmoney.Moneygoes from<br />
Individualsand householdsto businesseswhen<br />
people buy goods end ces. se Moneyflows<br />
frombusin4ses to Individualsand households<br />
whencompaniesbuythe resourcesforprodUc<br />
boo,suchas labor.Theoutsidearrowsshowthe<br />
4Iowof the items.WhenIndividualsand house<br />
holds spend money,they receive goods and<br />
services from businesses. When businesses<br />
Paycom<br />
Costs(wages.<br />
e(e .<br />
Bu<br />
BuySer res<br />
ol Resowoss<br />
spend oney, they receivethe resources r<br />
production,such as labor.<br />
GraphSICIUB<br />
Make a chart showingthe low of econonic<br />
activItyInthe automobilek’ó. stry. Usethe thai<br />
here as a modal , but replacethese fourterms:<br />
(1)individualsandHouseholds,(2)Product- ket, (3) Businesses,arid(4) FactorMarket.Use<br />
these fourterms:(1) WorkerSend Consumers.<br />
(2) AutomobileMarket,(3)AutomobIleCompa- ‘<br />
flies.and (4)MarketforAssently LineWorkers.
Distribution of FamilyIncome by Income Group<br />
IDiafributlon of Family Income by Income Group<br />
on<br />
Under$5,000<br />
$5,000to9,999<br />
$10,000to $14,999<br />
$15,000to$19,999<br />
$20,000to$24,999<br />
$25000to$34,999<br />
$35,000to$49,999<br />
$50000andover<br />
Total<br />
Number<br />
of Families<br />
3,539,000<br />
7,017,000<br />
8,298,000<br />
7,688,000<br />
7,932,000<br />
12,325,000<br />
9,091000<br />
5,430,000<br />
61.320.000<br />
Source:BureauoftheCensus.<br />
Percent<br />
of Families<br />
5.8<br />
11.5<br />
13.6<br />
12.6<br />
13.0<br />
20.2<br />
14.9<br />
8.9<br />
100.0<br />
‘8<br />
Wansparency<br />
1<br />
ExptenMten<br />
Theie showstheatib on of hme by<br />
familiesii the UnitedStatesit iasi. The<br />
showsthenumberof fwues b kn<br />
category. I o st s * perce.1<br />
tSIflhlieSitt oft cegory.<br />
1.Whatpercentage of Ia. s ceIwed ss<br />
than $5,000itt 1051?<br />
2. How nw y mI1es iscehed bat .n<br />
$15,000and$34999itt 1951?
FIGURE6.16 EQUILIBRIUM PRICEFORBICYCLES<br />
. - - - - - - - - -<br />
m<br />
.--<br />
17<br />
150<br />
125<br />
7<br />
-<br />
! -<br />
—<br />
1<br />
—. Ei ui<br />
&pf .<br />
0 2040 60 80<br />
y( ur.e<br />
— — —<br />
bnim!<br />
Puceand Quantity - .- -<br />
Quantity(Thousandsof BIcycIe<br />
Supply = Dsniand<br />
.<br />
1 rI ‘C.<br />
100 120 140160<br />
FIGURE6.17 DIStQUIUBRIUM PRICE(SHORThCE):<br />
BICYCLE INDUSTRY<br />
0 Thousands of B&cycIss<br />
.4<br />
OVERHEAD 5 I<br />
FIGURE6.16 DISEQUILIBRIUM PRICE(SURPUIS): BiCYCLE<br />
INDUSTRY<br />
T11 250 -<br />
a<br />
—s V<br />
., , QNW<br />
‘n<br />
‘<br />
:1<br />
z<br />
,<br />
• Susplim .<br />
.<br />
I<br />
—j,:<br />
;<br />
1<br />
I<br />
I<br />
40 100<br />
• Quantity Quantify<br />
Dd & -.<br />
Thousands of<br />
-
V I.<br />
FRE ENTERPRISE<br />
WORKSHEET<br />
SUPPLYANDDEMAND<br />
Name<br />
Class Date<br />
Chapter 8 discussed various nonprice factors that cause shifts in the supply and demand<br />
curves, not just movement along the same curves. In the chart below, are several situations<br />
that will have an effect on the supply and demand curves of cable television. Read each<br />
situation.Then answerthe followingquestions for each situationin the chart. The firstsituation<br />
has been completed as an example.<br />
1. Which nonprice factor causes the shift in the curve?<br />
2. Would the shift be in the supply or demand curve?<br />
3. Would there be an increase or decrease in quantity at each price?<br />
4. In which direction on a graph would the shift go?<br />
I. A very convincing<br />
ad warns parents<br />
about the dangers<br />
of children<br />
watching too<br />
much television.<br />
2. After a two-month<br />
U. strike, cable in<br />
stallers receive<br />
4<br />
a $1/hour raise.<br />
3. A new cable com<br />
S.<br />
pany opens.<br />
4. The cost of rent<br />
ing VCR movies<br />
qoes down.<br />
5. New technology<br />
makes installing<br />
‘1<br />
ctble less ex<br />
pensive.<br />
6. A large factory<br />
nearby lays off<br />
2,000 workers.<br />
7. Cable TV begins<br />
a very popular<br />
children’s pro<br />
gram.<br />
8. A cable TV trans<br />
mitter is severely<br />
damaged by a<br />
storm and has to<br />
be replaced.<br />
What is Is the Is there an What is<br />
the Change in the Increase or the<br />
Nonprice Supply or Decrease in Direction<br />
Factor? Demand Curve? Quantity? of Shift?<br />
tastes and<br />
preferences<br />
4<br />
demand curve decrease left
DIVIDINGUP THE TAKE—A GROUPDISCUSSION<br />
GradeLevel : 10—12(<strong>Economics</strong>Course)<br />
Time : Limit One classperiod -<br />
Concepts : 1. Distributionof goodsand servicesproduced<br />
2. Incomedistributionfromproduction<br />
3. Factorsof production<br />
Procedures<br />
:<br />
1. Give thisinformation:<br />
WidowSmith owns 200 acres of farmland which was planted in soybeans.<br />
.Yhn Bown performs all of the labor involved. He operates the equipmentused,<br />
but he does not own any of it.<br />
Bert,Jones , ownerof a grainelevatorand an implementdealership,furnished<br />
all of theequipment,fuel,seed,fertilizerand herbicidesthat<br />
were used to producethiscrop.<br />
$30L000was received for the bean . crop<br />
2. Preliminary Exercise:<br />
Have the students express in the vocabulary of economics which factors of producri ..::<br />
ach of the above furnished and what the income derived from furnishing that factor<br />
La ca1led<br />
Answers: Smith—land(rent/income)<br />
- Brown—labor(wages/salaries)<br />
Jones—capital (investment income)<br />
3. Questions for Discussion:<br />
1. In ‘your idealeconomicsystem,”how would the $30,000 be divided among the<br />
three persons involved in the production?<br />
(Have the students, individually, write their allocations on a slip of<br />
•<br />
These allocations are ubulated on the chalk board.)<br />
papej.<br />
2. What value, guiding principle, or “rule of thumb” did you use in arriving at<br />
your allocation?<br />
(Examples: “Share and share alike;” “To each according to his need;”<br />
incentive needed to secure this factor; time and effort expended; importance<br />
or productivity of the factor; income that could have been received from an<br />
alternate use; tradition; forces of demand and supply in factor markets;<br />
costs; etc.)<br />
3. Howwould AdamSmith or Karl Marx or Milton Friedman or another famous<br />
economist say the $30,000 should be allocated? How is it actually done<br />
in the United States (or U.S.S.R or china or Japan)?<br />
4. The “given” data said no thing about who “spark—plugged” this production.<br />
Who played the key 1eaders .p role? Who was the basic risk—taker? Economists<br />
call thisthe entrepreneualfactor. Should.it be consideredin makinga just<br />
allocation?<br />
. — —.
4<br />
I<br />
I<br />
I<br />
I<br />
S<br />
S<br />
S<br />
Name<br />
LEARNING ECONOMICS<br />
SKILLSWORKSHEET<br />
Chapter 8 READING COMBINED SUPPLY AND DEMAND CURVES<br />
Class Date<br />
Readingsupplyanddemandcurvesonthesamegraphis easyif yourememberthefollow<br />
ing:a demandcurve alwaysslopesdownwardto showthe oppositerelationshipbetween<br />
priceanddemand.A supplycurvealwaysslopesupwardto showthe directrelationship<br />
betweenpriceandquantitysupplied.<br />
Onthefollowingsupplyanddemandgraph,theartistleftoffsomeof thelabels.Afteryou<br />
addthemissinglabels,whicharelistedat therightof thegraph,answerthequestionsthat<br />
follow.<br />
4.<br />
‘.<br />
$100<br />
$90<br />
$80<br />
$70<br />
EquilibriumPriceforJoggingShoes<br />
I I I I I I I I I I I I I I<br />
1 2 345 6 7 8 9 10 1112 13 14 15 16 17<br />
QuantitySuppfiedandDemanded<br />
forOneYear(inthousands ofpairs)<br />
MissingLabels<br />
Equilibriumprice<br />
Shortage<br />
Surplus<br />
0<br />
S<br />
Whatwhouldhappento thesupplycurve,thedemandcurve,andtheequilibriumpriceif:<br />
1. thedemandforjoggingshoesdecreaseswhilethesupplyremainsthesame?<br />
2. the demandforjoggingshoesincreaseswhilethesupplyremainsthesame?<br />
t!e demandforjoggingshoesremainsthe samewhilethesupplyincreases?<br />
thedemandforjoggingshoesremainsthesamewhilethesupplydecreases?<br />
5. Underwhatconditionsmighttheequilibriumpriceremainthesameif boththesupply<br />
anddemandcurvesmoved?________________________________________________<br />
4
Handout131<br />
TREEPRODUCTIONWORKSHEET<br />
Name Class _____________<br />
Thecompan youworkfor is heavilyinvolvedin harvestingtreesfortheproductionof lumberandpaperproducts.<br />
Thecompanyhasjustobtaineda leaseona largetractoflandina remoteareaofthestate.Management hasdecided<br />
thatit wiflbe bestto harvesthesetreesasquicklyaspossiblesince(1)workcrewswit haveto be paidadditiona’<br />
livingexpensesforworkinginthisareaand(2)replantingsnouldbebegunasearlyaspossibleto maximizeprofits.<br />
Cutandprocessedtreesareto bestorednearbyin a largeareanextto a railroadline,sostorageandshippingare<br />
noproblem.Youmustdeterminehowmanyworkersshouldbe employedto harvesthetrees.<br />
lnfórmatlón:<br />
1 Youhavea fixedamountof landavailablefromwhichto cuttrees—approximately 2500acres.<br />
2 Youhavea fixedamountof capita’equipmentassignedto thistask—trucks. chainsaws,sk dders. etc..worth<br />
approximately$300,000.<br />
3 Becauseof poorweatherconditions.companypolicyforbidsemployeesto workovertime.<br />
NO.OF<br />
WORKERS<br />
(1)<br />
‘<br />
NO.OFTREES<br />
CUT& LOADED<br />
PERDAY<br />
(2)<br />
TREEPRODUCTION<br />
I 8 8<br />
2 ,<br />
.<br />
18 10<br />
. 3 40 22<br />
,<br />
4 89 49<br />
5<br />
6<br />
7<br />
9<br />
10<br />
.<br />
1<br />
130<br />
150<br />
159<br />
164<br />
167<br />
169<br />
NO.OFADDI<br />
TIONALTREES<br />
PRODUCEDPER<br />
DAY<br />
(3) (4) (5)<br />
FromMasterCurr,c 1um Guidein <strong>Economics</strong>TeachingStrategiesforsign Scrioof<strong>Economics</strong>Courses 985 JointCOun ’i onEconomicEoucat’o<br />
2 Par, Avenue.Ne Yoric.NY 10016<br />
‘4<br />
41
Name<br />
1<br />
Handout13 2<br />
HOW MUCH GUNKSHOULDWEACCEPT?<br />
Class ______________<br />
Youareaneconomicadviserto the U.S.Environmental ProtectionAgency.<br />
Youareinchargeor recommendingnewgunk controlstandards’(GCSs)forthe<br />
smurfstickerindustry.Whatsetof standards(options)wouldyousuggest.given<br />
thefollowingfacts?(Youmayselectonlyoneoption.)<br />
Fact1: BAT(Bestavailabletechnoiogy)standardsrequirethe industryto use<br />
whatevercontroltechnologycleansupthemostgunk(option10).<br />
Fact2: Eachsuccessivealternativeinvolvesa tightening01standardsto allow<br />
iessgunkintotheenvironment. Forexample.option3 allowslessgunkthan<br />
option2.<br />
Fact3:TechnicalstudiesbytheNationalAcademyof SciencesandtheEnviron.<br />
mentalProtectionAgencyhavegeneratedthefollowingdata:<br />
GCS<br />
Options<br />
EstimatedHealthand<br />
OtherBenefits<br />
(millionsof S)<br />
EstimatedCost<br />
of<br />
IndustryCompi lance<br />
(millionsof S)<br />
1 $10 $ 5<br />
2 20 11<br />
3<br />
.<br />
30 18<br />
4 40 26<br />
5 50 35<br />
6 60 47<br />
.7 70 61<br />
8<br />
9<br />
10(BAT)<br />
80<br />
90<br />
100 •<br />
80<br />
105<br />
155<br />
1 Whichoptionwouldyourecommend?Why?<br />
24 Writea briefreportjustifyingyourdecision.<br />
orn MasrerC. rr’cusum Gne E:onomtcs:eacnir g strategiesfor.lgn Sc ooi E:oncmicsC.urses. 985 ontCuncii on:onomc c. Ecuca:<br />
2 D Avenue.New NY QOi6.<br />
r.<br />
41
I<br />
j.CASESTUDv V<br />
The Value of a College Education<br />
An understandingof opportunitycostsand<br />
tradeoffsis important personallyto high<br />
schoolstudents,aswell aseveryoneelse.<br />
Sooneror later. high school studentsmust<br />
Collegegraduatesexpectto makeup for lost<br />
timeand worke*perience.<br />
makechoicesaboutwhatto doaftergradu<br />
ation.Thisyear.about2.5millionstudents<br />
will graduatefrom high school.The deci<br />
sionstheymakewill effectthe restof their<br />
lives. Somewill chooseto go to college:<br />
somewill wantto getfull-timejobs:others<br />
will decideto obtaintechnicaljob training.<br />
In everycase.economicreasoningwill help<br />
studentsmakebetterchoices.<br />
Considerthe costsand tradeoffscon<br />
nectedwith a decisionto goto college.Isa<br />
collegeeducationworth the expensein<br />
terms of immediateand future personal<br />
growthandeconomicwell-being?<br />
The chartshowslifetimeearningsesti<br />
matesfor Americansbasedon their levels<br />
of education.Whatis thegeneralrelation<br />
shipbetweenaperson’seducationandthat<br />
individual’searningpower?How muchis<br />
yourhighschooldiplomaworthin termsof<br />
earningpower?What is a collegedegree<br />
worth? How valuable is post-college<br />
schooling?<br />
The opportunitycostsof goingto col<br />
legeinvolvea lossof incomeanda lossof<br />
practicaljob experiencewhile attending<br />
1 w,
IT.<br />
I<br />
college.The tradeoffsinvolvedin goingto<br />
collegeincludeusingtimeandmoneynow<br />
to gain greateradvantagesin the future.<br />
Butwhatwould happenif theactualtuition<br />
andothercostsof a collegeeducationwere<br />
investednow? Could you invest 530.000<br />
now, for instance,foregoa collegeeduca<br />
tion.andwithyourinvestmentreturnsstill<br />
havethe samelifetimeearningpoweras a<br />
college-educatedperson?What are some<br />
otherconsiderationsin makingthischoice?<br />
- .*<br />
, E1m 1.<br />
rqj,ctedLfl.tb<br />
nI<br />
-.<br />
k’ - *aies eVemaies<br />
an,12.years ,$ !45,000 .5500 ,OO0<br />
iHigh O1 $1041.000 $634 000<br />
1—3yeaiscdliege .31 .155000 .3716000<br />
4 years llege<br />
degree) ,.. $39ZOOO $846.00D<br />
5orn Teyea1 -<br />
$1,503,000<br />
-<br />
$955,000<br />
ow .trus$u<br />
resu.<br />
____________________ _______<br />
Explanation’<br />
Thischartdemonstratesonevalueof educa<br />
Von. It showshowmuchmoneymalesand<br />
females variousamountsofeducationare<br />
eachlikelyto earnintheirlifetimes.<br />
ChartSkills<br />
1. Comparean&contrastheeffectof educa<br />
Vononprojectedlifetimeearningsformales<br />
andfemales.<br />
2. Howmuchmorecan a malehighschool<br />
graduateexp ct to earnthana malewho<br />
doesnotgraduate?Howmuchmorecana<br />
femalehighschoolgraduatexpecto earn<br />
thana femalewhodoesnotgraduate<br />
AlA i!NZ TE-ECASE ST ’.<br />
Copyandcompletethe charton a separate<br />
sheet of paperto analyzethe opportunity<br />
costsof a collegeeducation.<br />
‘<br />
‘4<br />
v 4<br />
..<br />
T<br />
rt-<br />
-!!!<br />
.-<br />
4.S 1 1’sadeotts<br />
/‘uJ<br />
1. Spendfour Betterstandaid +.<br />
yearsalschool ofliving<br />
touNMime<br />
2. : .<br />
3.<br />
4.<br />
.<br />
Explanation<br />
Thechartcontainsthreecolumnsto helpyou<br />
evaluatetheopportunitycostsandtradeoffsof<br />
a collegeeducation.After consideringeach<br />
entry,decidewhetherif encourages(+) or<br />
discourages (—) youfromgoingto college.<br />
ChartSkills<br />
1. Usingyoureconomicknowledge.explain<br />
themeaningof opportunitycost.<br />
2. Explainthemeaningoftradeoff.<br />
SlED Clarify the Issue<br />
1. List three more opportunitycosts of a<br />
collegeeducation.<br />
2. For each opportunitycost. identifyits<br />
tradeoff.<br />
STEP: ConsiderAlternatives<br />
1. Evaluatethe combinedimpactof each<br />
opportunitycost and tradeoff. If the<br />
combined impact encourages you to<br />
choose college, enter a plus (+) under<br />
Criteria.Ifthecombinedimpactdiscour<br />
agesyoufromattendingcollege,entera<br />
minus(—).<br />
2. Costsfor a singleyearat Massachusetts<br />
Instituteof Technologyareover515.000.<br />
Costsat the Universit of Texasat Aus<br />
tin are over 54.500. Figureout the real<br />
cost of a college educationin both of<br />
these schools. Compare opportunity<br />
costs andtradeoffs.<br />
2<br />
.<br />
.
OVE1 \7D V<br />
We ‘Arethe American<br />
Economic System<br />
BYT MAavEy<br />
GLANCEthroughthis issue, and<br />
you’ll come across some big<br />
names, big forces, big numbers. Th. national economy may<br />
‘7ust what I thought,”you may seem beyond our coufrel.<br />
say, “economics iz a big, com even beyond our<br />
plicated,conIusing subject.” But understanding. But it all<br />
read little deeper, and you’ll boils down to decisions<br />
find<br />
by<br />
people doing ordinary. rn<br />
complicated things. People mak peopie like you and me.<br />
ing everyday decisions.<br />
In our economic system, all tion, banking and insurance,<br />
the decisions that count are health care, and entertrTin1r<br />
ent.<br />
made by threegroupsof people: There are different kinds of<br />
people as consumers, people as economic systems. The one we<br />
producers. and people in gov have is often described as a<br />
emment.<br />
market economy. That means<br />
Consumers are people like consumers and producers de<br />
youand me. looking forthe best cide what goods and services<br />
value in return for what they will be providedat what cost.<br />
spend. Everyday. we make de Moreaccurately. the U.S. is a<br />
cisions to buy or not to buy. d mixed market economy. The<br />
these decisions shape the Amer “mixed” means that our govern<br />
ican economy.<br />
ment—the public sector—gets<br />
Producers. also. are people into the marketact along wth<br />
like yo l and me. seeking the the consumersand producersin<br />
best income for what they offer. the private sector.<br />
A worker—anybody who puts When our nation was first<br />
time, skills , energy into a job— founded, the national, state, and<br />
is a producer.Managers, super local governments played little<br />
visors. or administrators “pro part in the buying d selling<br />
duce”when they plan mid orga decisions of consumersand pro<br />
nize work and workers’ time. ducers. Over the years, the role<br />
Andinvestorsare producers.too. of government has grown. Yet<br />
Bysupplyingfinancial capital— the American system remains<br />
putting money in savings ac one in which government does<br />
counts. or buying shares of not dominate or ‘rule.” It re<br />
stocks, forexam de—an investor mains an economy that is more<br />
“produces”funds forinvestment capitalistic than socialistic.<br />
in the economy. Banks and cor Capitalism is another word<br />
porationsputour money to work that describes the U.S. economy.<br />
by financingthe growth of busi In our economy. most capital—<br />
nesses. This, in turn, creates industries, raw materials, busi<br />
new jobs.<br />
nesses, and the moneythat goes<br />
What exactly is an economic along with them—is privately<br />
system?It’san mrangement that held. TheAmerican style of cap<br />
brings together the labor and italism is rooted in our political<br />
skills of people to provide—out system of democracy, which up<br />
of the resources on this planet— holds individual freedoms and<br />
the things people want and allows private individuals to de<br />
need. These things include cide how &heirown work,skills,<br />
goods—food, clothing, cars, and resources will be used.<br />
steel, and the like; and services. Under socialism, government<br />
such as education, transporta takes a leading role in ple ’nning<br />
and making economicdecisions,<br />
and it owns and controlsimpor<br />
tant industriesand resources.A<br />
socialist economymay be demo<br />
cratic. Orit may be totalitarian.<br />
as under Soviet communism,<br />
where economic decisions are<br />
made by a singie. ruling poiiti<br />
cal party.<br />
The U.S. governmentgets in<br />
volved in our economy in basi<br />
cally three ways: (1)taxing both<br />
individuals and corporations; (2)<br />
spending our tax money on pro<br />
grams such as aid to needy indi<br />
viduals. national defense, and<br />
construction of public buildings<br />
d highways; and (3) regulat<br />
ing business and industryto as<br />
sure fair economic competition<br />
and to protect people’s health<br />
d safety.<br />
Some Americans feel that our<br />
national, state, and local gov<br />
ernments are too involved in our<br />
economic system. Others Want<br />
more government involvement.<br />
But what our government does<br />
or doesn’tdo, sooner or later, is<br />
what most Americans want.<br />
That’s how our democracy was<br />
set up by the Constitution—to<br />
reflect the will of the people.<br />
And the people is us.<br />
DISCUSSION:<br />
Why is the U.S. system called<br />
a “mixed marketeconomy”?<br />
How are goods and services<br />
different?Howare they similar?<br />
When people speak of the<br />
“publicsector”and the “private<br />
sector,”what do they mean?<br />
What is the principal differ<br />
ence between capitalismarid so<br />
calism?<br />
Do you think our national,<br />
state, and local governments<br />
have too little, or too much. in<br />
volvementin the economy?<br />
Do you agree, or disagree,<br />
with the statement, “Weare the<br />
American economy”?
I-<br />
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER2<br />
A. One way to understand the circular flowmodel is<br />
to seehow it appliesto real life. Figure out where<br />
in the circularflowmodel each of the following<br />
statementsfits. In the answer blank, write the<br />
number of the arrow that fits the statement.<br />
______ 1. The Smith familybought a new couch<br />
and paid a companyto clean their<br />
carpet.<br />
-<br />
2. MarIaLopez has a savingsaccount.<br />
This month she earned $15.63in<br />
interest on her savings.<br />
_______ 3. Roger Holmes works for the QRX<br />
ApplianceCompany.<br />
______ 4. Ellen Kim receivedthe sweatersshe<br />
had ordered by mail.<br />
5. Mrs. Starski collects$750each month<br />
from the familythat rents the top<br />
floor of her house.<br />
______ 6. The Pahna familyhad the gardener<br />
plant new bushes around their home.<br />
7. Eliot Fisk paid the barber to cut his<br />
hair.<br />
_______ 8. Marian Louis lent her daughter<br />
money to open a restaurant.<br />
• B. Now write your own examplefor each of the arrows in the diagram. Write the sentencenext to the<br />
number of he arrow.<br />
1. -<br />
2.<br />
3.<br />
4.<br />
Name<br />
Class_____________<br />
2.1ECONOMICSYSTEMS:THEMODEL<br />
WORKINGWITHTHECIRCULARFLOWMODEL<br />
Date___________
•<br />
FIGURE 7.1 NATIONAL INCOME BYFACTORS OF<br />
PRODUCTION, 1985<br />
$287.7 fientS iao BilUon<br />
$ 5414 Bon<br />
• ::‘ $gesndSa :$<br />
2,372.7<br />
•..<br />
FIGURE 7.2 THERESOURCE MARKET<br />
ILP,OdUC,MII* - 1<br />
Detam*iee<br />
:ccn.u 9<br />
I<br />
.:•;•<br />
-<br />
Gooc .id<br />
:. ‘.<br />
Reso s<br />
_• n*_<br />
.—<br />
-<br />
•.<br />
4,<br />
:..<br />
1I•<br />
OVERHEAD61
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER2<br />
Name Class____________<br />
________________________________________<br />
2.5 MIXEDECONOMICSYSTEMS<br />
WHATMAKESIT A MIXEDSYSTEM?<br />
Date__________<br />
Each of the situationsdescribed belowhas a mixture of tradition, command, and<br />
Market economyfactors. Read each paragraph. Underlineone traditional element<br />
in the economy.Circleone( ómmand element ) Draw a double line under one<br />
market element . (Someparagraphsmay have more than one of each element; lust<br />
show one of each.)<br />
1. The governmenthas told the farmers that they must produce more vegetablesand meat and less wheat.<br />
The womenhave alwaysbeen responsiblefor raising the vegetables.They are not sure they can produce as<br />
much as the governmentwants. The men have alwaysraised the meat animals. Somemen have been<br />
making leather from the skins. They have found many customerswho want to buy their leather goods. The<br />
money they earn from sellingleather goodsis their own money. More meat animalswill also mean more<br />
leather.<br />
2. For many years the country had a good textile industry. The ownersof textile companiesdid many studies<br />
to find out what people wanted. Then they produced what they believedcustomerswould buy. Several<br />
generationsof people in textile towns expectedto work in the textile mills. Lately, however, other countries<br />
have been making cheaper textilesand sellingthem for lowerprices. Now both the textile companiesand<br />
the textileworkerswant the governmentto limit the amount of foreigntextilescominginto the country.<br />
3. The governmentkeeps the prices on bread and milk low so that children can get healthful food. Many of<br />
these children earn moneyafter schoolby running errands for smallshop owners. They use the money to<br />
buy schoolsupplies. Their mothers buy the bread and milk in governmentstores, but they sell many other<br />
home-grownfoodsin the localmarket. The localmarket in most towns is open on Tuesdays and Fridays.<br />
Farm people have been cominghere for centuries to buy and sell their goods.<br />
4. Mina wants to be an acrobat. For more than 200 years, most of the members of her family have worked as<br />
acrobatsin the circus. Her parents and grandparents have trained her since she was little. The government,<br />
however wants Mina to go to college.She is outstanding at math and science,and the country needs more<br />
scientists.Acrobatsearn a good living, but a shortageof scientistshas made the governmentraise wagesto<br />
attract more people to work in science.<br />
4
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER2<br />
A. Answerthe followingquestions for a tradition system. When you are finished, saveyour worksheet. You<br />
will need it when preparing other worksheetsfor thischapter.<br />
1. Who or what decideswhat goodsand serviceswill be produced?<br />
2. Who or what determines how much of anything will be produced?<br />
3.<br />
4.<br />
Name ________________________________________ Class____________ Date __________<br />
Who or what decideshow output will be distributed?<br />
What are some advantagesof a tradition economy?<br />
5. What are some disadvantagesof a tradition economy?<br />
B. Explainthe way economicdecisionsare made in a tradition economyin the followingsituations.<br />
1. What crops will be planted this year?<br />
2.2THETRADITIONSYSTEM<br />
HOWA TRADITIONSYSTEMWORKS<br />
2. How many people will be availableto work on the farm, and what will each person do?<br />
3. What gooc<br />
s<br />
4. Who is in charge?<br />
will be manufactured, and what designswill they have?
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER2<br />
Name Class_____________<br />
__________________________________________<br />
2.3 THE COMMANDSYSTEM<br />
HOWA COMMANDSYSTEMWORKS<br />
Date___________<br />
A. Answerthe followingquestionsfor a commandsystem. When you are finished, saveyour worksheet.<br />
1. Who or what decideswhat goodsand serviceswill be produced?<br />
2. Who or what determineshow much of anything will be produced?<br />
3. Who or what decideshow output will be distributed? ___________________________________________<br />
4. What are someadvantagesof a commandeconomy?<br />
5. What are some disadvantagesof a commandeconomy?<br />
B. Decide how the questionsin the chart would be answeredin a command systemand in a tradition system.<br />
Fill in the chart to show the way the systemwould answer each question.<br />
.<br />
Will I be able to go to college?<br />
Are there any green shoes to<br />
buy?<br />
What does a loaf of bread<br />
cost?<br />
Who will see that I have work<br />
todo?<br />
Ia. lb.<br />
2a. 2b.<br />
3a. 3b.<br />
4b.<br />
TraditionSystem
____________<br />
INDEPENDENTPRACTICEWORKSHEET ___________<br />
CHAPTER2<br />
Name Class_____________<br />
__________________________________________<br />
2.4 THE MARKETSYSTEM<br />
HOWA MARKET SYSTEMWORKS<br />
Date___________<br />
A. Answerthe followingquestions for a Market system. Then tell how each answerwould be different in a<br />
tradition systemand a command system. Use Worksheets2.2 and 2.3 to help you compare.<br />
.<br />
Who decideswhat will<br />
be produced?<br />
Who decideshow<br />
much will be<br />
produced?<br />
Who decideshow<br />
output will be<br />
distributed?<br />
What are some<br />
advantages?<br />
What are some<br />
disadvantages?<br />
Market Command Tradition<br />
la. lb. ic.<br />
2a. 2b. 2c.<br />
3a. 3b. 3c.<br />
4a. 4b. 4c.<br />
Sa. Sb. Sc.<br />
B. Think about the opportunity costs in each kind of system.What do you think are the greatest opportunity<br />
costs in each?<br />
1. Opportunity costs in a tradition system:<br />
2. Opportunity costs in a command system:<br />
I<br />
3. Opportunity costs in a Market system:
4<br />
ENRICHMENT WORKSHEET<br />
In the SovietUnion, governmentplanners make most of the decisionsabout the<br />
production and distribution of goodsand services.Recently, however, the Soviet<br />
leadershiphas had to make some compromises.Read the article belowand answer<br />
the questionsthat follow.<br />
By mid-1987,the first of some<br />
100Pizza Huts may adorn the land<br />
of the blini and borsch. Pepsi is<br />
already here. . . . Bowsto capitalism<br />
in the nation that proclaimssocialism<br />
in its name? Well, yes, though they<br />
don’t call it that.<br />
There’s more, homegrown.In a<br />
muddy fieldon Moscow’ssouthern<br />
outskirts, artists and crafts people<br />
openly selltheir handiwork to<br />
weekend crowdsand pocket the<br />
proceedsin full viewof authorities.<br />
Elsewherein the capital, shoppers<br />
routinely bypasspoorly stocked,<br />
state-run stores to buy fresh produce<br />
from farmers’trucks parked at<br />
flourishingopen-airmarkets. In<br />
other towns, private family-runcafés<br />
and an after-hours TV-repair service<br />
are drawing cautiousofficialpraise<br />
instead of bureaucraticreprisal.<br />
While still small and ringed with<br />
practical and ideologicalrestraints,<br />
private enterprise clearly is stirring.<br />
The changeis the latest step in<br />
Mikhail Gorbachev’scampaignto<br />
put life into a stagnant economythat<br />
keeps most of his nation’s280<br />
million citizens scurrying for goods<br />
and services.<br />
How far Gorbachevis willingto<br />
go will becomeclearer this week<br />
when the Supreme Soviet,the<br />
U.S.S.R.’s national legislature,<br />
considers a law permitting<br />
CHAPTER2<br />
Name ________________________________________ Class Date __________<br />
I<br />
4<br />
COMPARINGECONOMICSYSTEMS<br />
FREEENTERPRISEANDTHESOVIETSYSTEM<br />
“individual labor activity”—<br />
Kremlinesefor limited private<br />
enterprise. A report by Tass, the<br />
officialnews agency, outlined a likely<br />
first step: Allowingfamiliesto<br />
operate businessesas long as they do<br />
not breach a constitutionalban on<br />
private hiring. Individualsalso may<br />
be permitted to band together in<br />
private enterprises such as repair<br />
shops, restaurants and barbershops.<br />
Gorbachev’swillingnessto<br />
undertake such reforms accepts<br />
inevitablepoliticalrisk. But it also<br />
recognizesthe inability of the<br />
centrallyplanned Sovietsystemto<br />
satisfygrowingconsumer demand<br />
while also meeting the huge costs of<br />
cradle-to-gravesocialbenefits,an<br />
enormous military establishmentand<br />
the war in Afghanistan....<br />
As the incomesof Soviet<br />
workers rose in recent years, millions<br />
of people turned to the black market<br />
for servicesand for merchandise<br />
ranging from daily necessitiesto<br />
prized jeans, cosmetics,lingerieand<br />
other goods from the West.<br />
Despite the widespreaddemand<br />
for private services,the pace of<br />
reforms will be limited by the<br />
realities of Sovietpolitics.<br />
Indeed, the Kremlin resists any<br />
suggestionthat economicreform<br />
means embracingcapitalism.<br />
Source:U.S. News& WorldRepon, November24, 1986.<br />
1 Name the two waysin which the SovietUnion has mixed capitalismwith communism.____________<br />
2. What restrictionsdo the Sovietsimposeon private enterprises?<br />
3. Why are the Sovietsallowingsomefeaturesqofa Market economyinto their system?,
Lesson3: Traditional,Market, and Command<br />
EconomicSystems<br />
TIME REQUIRED: Approximatelyfive class periods<br />
RECOMMENDED GRADE LEVEL: 10-12<br />
CONCEPTS: Types of economic systems: allocation<br />
mechanisms<br />
Instructional Objectives:Students will<br />
• Collect and record data about the three types of<br />
economic systems;<br />
• Analyze the data and make inferences about the<br />
economic goals of particular cultures;<br />
• Distinguish between economies in terms of the<br />
relative importance of different allocation mech<br />
anisms.<br />
Rationale: An economic system is a complex of insti<br />
tutional relationships that determine what goods and<br />
services willbe roduced, how they willbe produced,<br />
how much will‘be produced, and who will consume<br />
‘hem. Investigating these relationships provides stu<br />
dents with useful knowledge of different economic<br />
systems as wellas the social and political development<br />
of different cultures.<br />
• Materials: One copy each of handouts 3-1, 3-2, 3-3,<br />
• 3-4, 3-5, and 3-6for every student.<br />
* Procedure:<br />
1. Distribute handouts 3-I and 3-2. Ask students to<br />
read the selections in Handout 3-2 and then to fill<br />
out the three boxes in Handout 3-1 that appear<br />
under the heading “What is the main economic<br />
problem?”<br />
2. Distribute Handout 3-3. Ask students to read it and<br />
then fill Outthe top box in column 2 of Handout<br />
3- 1.<br />
3. Distri6uteHando it<br />
3-4. Ask students to read it and<br />
then fillout the middlebox in column2 of Handout<br />
3-1.<br />
-I<br />
21<br />
NOTE: Alter students read Handout 3-4, but be<br />
fore they complete Handout 3-I, you may want to<br />
point up the role that prices play in a market econ<br />
omy. If the price of a good or service tends to rise<br />
during a noninflationary period (or faster than the<br />
average of all prices in a period of inflation) the<br />
usual result will be to reduce the demand for that<br />
good or service and to increase the amount that is<br />
produced or offered for sale. If a price tends to fall<br />
in either absolute or relative terms, the opposite<br />
should happen: more of the commodity or service<br />
will be bought and less produced or offered for<br />
sale. In short, the market uses prices as key<br />
signals—orinformation—withwhich to help make<br />
economic decisions and to bring demand and sup<br />
ply into balance. That is why the market system is<br />
frequently called a price system.<br />
The point may be driven home by referring to<br />
that part of the reading titled “A Model: By Bread<br />
and Cheese Alone,” and requesting the students to<br />
assume that people in this imaginary economy<br />
want more cheese and less bread. Then ask:<br />
a. What will happen to the price of good dairy<br />
land? To the wages of bakers?<br />
b. Why would the changes the students describe<br />
take place?<br />
4. Distribute Handout 3-S and have students fill out<br />
the bottom box in Column 2 of Handout 3-I.<br />
5. Have students review allthe previous readings and<br />
then fill out the three boxes in Column 3 of Hand<br />
out 3-I.<br />
Evaluation:<br />
I. Distribute Handout 3-6. Have students complete<br />
the exercises given there.<br />
2. Have students write an essay on the following<br />
statement: “No economy is fully a traditional,<br />
command, or market economy. Each has traces of<br />
all three systems.”
NameandClass<br />
Handout3-1<br />
TYPESOFECONOMICSYSTEMS<br />
. Whit Is the main Howdoesthistypeof economydecide Whatgoa lslvaiues are Impliedasbeing<br />
of economicproblem? What?How?andforWhom? ImportantInthistypeof economicsystem?<br />
system (1) (2) (3)<br />
FromMasterCurriculumGuidefor the Natlons<strong>School</strong>s.PartI, Strategies for Teaching<strong>Economics</strong>:World<strong>Studies</strong> (Secondary).1980.<br />
Joint Councilon EconomicEducatIon.1212Avenueof the Americas.NewYork. NY 10038.
[Much)economicsgrowsout of onesimple<br />
but powerfulfact:Thereis neverenoughof every<br />
thing to go around.Forthis reason,the studyof<br />
economicsfocusesuponthe conceptsof scarcity<br />
andchoice.Everysocietymustfindawayto divide<br />
whatit hasamongwhat it needs.Thisgeneraliza<br />
tion appliesto suchvariedgoodsandservicesas<br />
food,shelter,transportation,andmedicalcare.<br />
Theworld’spoorestsocietiesfacescarcityin its<br />
mostsevereform.Anyonelivingin an underdevel<br />
opedcountrywhereatypicalperson’sincomemay<br />
averagelessthan$100ayearknowsthathecannot<br />
haveeverythinghewants.Thesamepointapplies,<br />
however,to the governmentsand peopleof rich<br />
societies,suchas. . . theUnitedStates.TheUnited<br />
Statesmayhaveto choosebetweentrips to the<br />
moonanda cleanenvironment.A richfamilyin the<br />
‘Inited Statesmayhaveto choosebetweenan ex<br />
.nsive automobileanda vacationin Europe.<br />
EconomiesAlongSpectrums<br />
Throughouthistory,peoplehavedevelopedmany<br />
waysof organizinga societyto decidewhat,how,<br />
andfor whomto producegoodsandservices.Dif<br />
‘ferentvalues,backgrounds,and geographyhave<br />
produceda widevarietyof economies.Outof this<br />
variety,however,threegeneraltypesor categories<br />
of economicsystemscanbeidentified—traditional,<br />
command,andmarket.<br />
Theoldestofthesesystemsisthetraditionaleco<br />
npmy.. . . Suchsystemsanswerthewhat,how,and<br />
for whomquestionslargelyaccordingto whatwas<br />
donein thepast.Theèfstresstheoldways,not new<br />
waysor progress.Peoplein thesesocietieswould<br />
bepuzzledbythe emphasiswhich[manymodern)<br />
economies... placeon constantchangeand im<br />
provement.<br />
A secondgroup,nearlyas ancientas the first,<br />
includes the commandeconomies.Rulers run<br />
theseeconomiesfrom above.The commandsof<br />
theserulersdeterminetheanswersto the keyeco<br />
nomicquestions.In the past,andin a few modern<br />
Handout3-2<br />
THEECONOMICPROBLEM<br />
societies,thecommandeconomieshaveoftenpre<br />
ferredold,setwaysof doingthings.Inthatrespect,<br />
they resembletraditional economies.But today<br />
manynationswith commandeconomies,suchas<br />
the SovietUnionandChina,stressprogress.<br />
Athird group,onlya fewcenturiesold, contains<br />
the marketeconomies.. . . [‘flheyincludesomeof<br />
the wealthiesteconomiesthe world hasyet seen,<br />
such as the UnitedStatesand Canada.Like the<br />
newercommandeconomies,theyemphasizepro<br />
gressand change.For the mostpart,the buying<br />
andsellingactivitiesof privatecitizensanswerthe<br />
what,how,andfor whomquestionsin marketeco<br />
nomies.Citizensselltheir laborto oneanotherfor<br />
whateverprice they can get. Then they use the<br />
proceedsto buywhatevertheywantandcanafford.<br />
Therefore,unlikeacommandeconomy,thegeneral<br />
publio—notthe rulers—decideswhat should be<br />
producedor howto produceit.<br />
Eachof thethreetypesof economicsystemshas<br />
beendescribedverysimplyhere.Moreover,when<br />
you try to put the world’seconomiesinto one of<br />
thesethreegroups,youwill find that no economy<br />
fits exactlyinto place.Althoughthe UnitedStates<br />
servesasanexampleof a marketeconomy,it has<br />
elementsof. . . traditionaleconomicsystems.For<br />
example,. . . someindividuals,almostwithoutgiv<br />
ingit anotherthought,go intothesamelineofwork<br />
as their fathers or mothers.[In manyInstances,<br />
womendo notyet receiveasmuchpayas menfor<br />
equalwork.]<br />
[T]heSovietcommandeconomyhassomeele<br />
mentsof a marketsystem.Somefarmersoncollet<br />
tiveor statefarmssell partsof whattheyraisefor<br />
whatevertheycanget in the market.Likewise,the<br />
Sovietsystemhaselementsof a traditionalecon<br />
omy.Thelong historyof the Sovietpeoplestill in<br />
fluencesthe countrytoday.Yet,for the mostpart,<br />
the Sovieteconomyoperateson commandsfrom<br />
the centralgovernment.<br />
Noeconomyis fully a traditional,command,or<br />
market economy.Each has traces of all three<br />
systems.<br />
ExcerptedfromComparativeEconomicSystems:An InquiryApproach,byJohnR.Coleman, Ted C.Soens,and EdwinFenton,pp.18,<br />
24-24.0 1914Holt,Rinehartand Winston,Publishers.<br />
23
•<br />
Handout3-3<br />
WHAT,HOW, AND FORWHOM IN A TRADITIONALECONOMY<br />
Untilrecentyears,theEskimosproducedand<br />
distributedfood, clothing,and shelterexactlyas<br />
their ancestorshad done for generationsbefore<br />
them.Whenthey killed a sealor a caribou,they<br />
dividedthe meatand hidesaccordingto the cus<br />
tomsof thepast.Eachhusbandandwifeeducated<br />
theirownchildrenastheyhadbeeneducated.They<br />
alsoprovidedotherservices,suchasmedicalcare<br />
or law enforcement,as their ancestorshaddone.<br />
IThefollowing]reading[s]concentrate.. . onthe<br />
ways In which the Eskimosansweredthe three<br />
basiceconomicquestionsassociatedwiththecon<br />
ceptof scarcity:whatto produce,howto produce<br />
it, andfor whomto produceit....<br />
WhatToProduce:TheSealor theCaribou<br />
TheNoabani rgmiut(no-a-ha-NEERG-me-ut) were<br />
still livingcn sealmeatandweremakingnoattempt<br />
to kill any‘ofthenumerouscaribouthatwereconti<br />
nuallymigratingpast . .. (they)had neverhunted<br />
caribouontheiceandhadnot consideredit possi<br />
ble. It wouldin fact be a fairly hopelessthing for<br />
themto try It; and while no doubt someof them<br />
1occasionally might<br />
securean animal,they would<br />
wasteso muchtimethat the numberof poundsof<br />
meattheyobtainedinaweek’shuntthatwaywould<br />
be but a smallfractionof the amountof sealmeat<br />
theymighthavesecuredin thesametime.Besides<br />
that,thisistheseasonwhichtheEskimogiveupto<br />
the accumulation of blubber for the coming<br />
year... Bygettingsealsin thespring . . . theyse<br />
cure an agreeablearticle of diet for the coming<br />
autumnandprovidethemselvesaswellwitha sort<br />
of insuranceagainsthardluckinthefall hunt.Each<br />
familywill in the spring be ableto layawayfrom<br />
threeto sevensagsof oil. Sucha bagconsistsof<br />
thewholeskinof thecommonseal.Theanimalhas<br />
beenskinnedthroughthemouthin suchawaythat<br />
thefewnecessaryopeningsintheskincanbeeasily<br />
sewedup ortiedup withathong.Thismakesabag<br />
which will hold about three hundredpoundsof<br />
blubber,sothata singlefamily’sstoreof oil for the<br />
tall will run from nine hundredto two thousand<br />
pounds.<br />
HowToProduceIt: CatchingaSeal<br />
The whole principle of successfullystalkinga<br />
sealisjustin realizingfromthefirstthatheisbound<br />
to seeyouandthatyouronlyhopeis in pretending<br />
thatyouarealsoa seal.If youactandlooksoasto<br />
convincehim from the first that youarea brother<br />
‘seal,hewill regardyouwithunconcern.[Imitating)<br />
a sealwellenoughto deceiveasealis notdifficult,<br />
for,to beginwith,weknowfromexperiencethathis<br />
eyesightis poor. You can walk up withouttaking<br />
anyspecialprecautionsuntil. . . youarewithintwo<br />
hundredandfifty or threehundredyards.Thenyou<br />
haveto beginto bemorecareful . . . Youmustnot<br />
only crawl ahead,seal-fashion,but you must be<br />
carefulto alwayspresentasideviewofyourbodyto<br />
the seal,for a mancominghead-ondoesnot look<br />
particularlylikeaseal... . Inthiswayyoucancrawl<br />
withinfiveor ten yardsof him it you like,andasa<br />
matterof fact I haveknownof expertsealhunters<br />
whounderemergencieswouldgoafterasealwith<br />
outanyordinaryweaponandcrawlsonearhimthat<br />
theycouldseizehimbyaflipper,pullhimawayfrom<br />
his hole,andclub or stabhim.<br />
ForWhomto ProduceIt: DividingtheSeat<br />
(B]oiledpiecesof sealmeathadalreadybeen<br />
takenout of the pot and laysteamingon a side<br />
board.. . . Myhostesspickedoutfor methe lower<br />
joint of aseal’sforeleg,andhandedit to me,along<br />
with her own copper-bladedknife; the next most<br />
desirablepiecewas handedto her husband,and<br />
othersin turn to the rest of the family.... [OJne<br />
extrapiecewasset asidein caseI shouldwanta<br />
secondhelping,andtherestoftheboiledmeatwas<br />
dividedinto four portions,with the explanationto<br />
methattherewerefour familiesIn the villagewho<br />
hadno freshsealmeat.<br />
The.. . adopteddaughterof thehouse,a [child]<br />
of sevenoreight,hadnotbegunto eatwiththerest<br />
of us,for it washer task to take a smallwooden<br />
platterand carrythe four [small]piecesof boiled<br />
meatto thefourfamilieswhohadnoneoftheirown<br />
to cook. . . . Everyhousein thevillagein whichany<br />
From VIhi&mur Stetanuons famous1913account, My Lif. with the Eskimo,first published in 1913;as quoted in Comparative<br />
EconomicSystems:AnInquiryApproach,by John R.Coleman,TedC.Soens,andEdwinFenton.pp.38-42.C1974Holt,Rinehartand<br />
Winston,Publishers.<br />
‘I<br />
24
cooking was done had likewisesent four por<br />
tions....<br />
During our meal presentsof .food were also<br />
broughtusfromotherhouses;eachhousewifeap<br />
parentlyknewexactlywhatthe othershad put in<br />
their pots,andwhoeverhadanythingto offerthat<br />
wasa littlebit differentwouldsendsomeof thatto<br />
the others,sothat everyminuteor twoa smallgirl<br />
messengerappearedin our door with a platterof<br />
somethingto contributeto our meal.<br />
TheInfluenceof thePaston Decision-Making<br />
Wehadseveralexcellentfishnetsin ourboat,<br />
andI hadsaidto [the]Eskimoin thebeginningthat<br />
I thoughtwe ought to put them out to see if we<br />
could catchanyfish; but theysaidverydefinitely<br />
thattherewerenofish here.At thattimeI hadhad<br />
no experiencewith Eskimoin a country new to<br />
them. I had dealt only with Eskimonear [their]<br />
home,andmyexperiencewiththemwasthat they<br />
knewexactlywhereto putnets,andknewalsowhat<br />
placeswerehdpelessasfishing localities.I know<br />
nowthatthe Eskimo... neverexpectto find any<br />
thinginanyplacewherenoonehasfoundit before,<br />
Handout3-3 (concluded)<br />
25’<br />
sofar astheyknow,andneverhavingheardof any<br />
one catchingfish in SmithBaytheyhadfelt sure<br />
therewouldnot be any.<br />
TheInfluenceof Beliefson Decision-Making<br />
[Tihéwondersof ourscienceandthewildest<br />
talesof our own mythologiespalebesidethe mar<br />
velswhichthe Eskimosupposeto behappeningall<br />
aroundthemeverydayatthe behestof their magi<br />
cians.<br />
WhenI showedthem my binocularsthat made<br />
far-awaythingsseemnearandclear,theywereof<br />
courseinterested;when 1lookedto the south or<br />
eastand sawbandsof caribouthat wereto them<br />
invisible,theyapplauded,andthen[made]thesug<br />
gestion,“Nowthatyouhavelookedfor thecaribou<br />
that are heretodayand found them,will you nt<br />
alsolookfor thecaribouthatarecomingtomorrow,<br />
sothatwecanteliwhereto lieinambushforthem.”<br />
Whentheyheardthatmyglassescouldnotseeinto<br />
thefuture,theyweredisappointedandnaturallythe<br />
reverseof wellimpressedwithourpowers,for they<br />
knewthattheirownmedicine-menhadcharmsand<br />
magic paraphernaliathat enabledthem to see<br />
thingsthe morrowwasto bringforth. . .
•<br />
Handout3-4<br />
THEMARKETECONOMYASAN ORGANIZINGTOOL*<br />
Everydaythousandsof peopletakepartin mak<br />
ingorbuyingsuchdifferentitemsasgroceries,tenspeedbicycles,toasters,steelrods,houses,basket<br />
balls, magazines,factories,cars, cementmixers,<br />
end clothes.Who decideswhich of these items<br />
shouldbeproduced?Whowill getthem?Whatwill<br />
thesegoodscost?Howmanyof eachitemshould<br />
be made?<br />
It wouldbesimpleif anIndividualor groupcould<br />
be singled out as the decision-maker.It would<br />
also be simpleif someoverallplanexistedwhich<br />
set prices or production goals. However,such<br />
decision-makersandplansdo notexistin a market<br />
economy....<br />
TheMarket<br />
Becausewe livein a market-runsociety,we are<br />
apt to take for grantedthe puzzling—4ndeed, al<br />
mostparédoxical—natureof themarketsolutionto<br />
the economicproblem.But assumefor a moment<br />
thatwecouldactaseconomicadvisersto asociety<br />
that hadnot yetdecidedon its modeof economic<br />
organization.<br />
W could imaginethe leadersof such a nation<br />
saying,“Wehavealwaysexperiencedahighlytradi<br />
tion-boundwayof life. Ourmenhuntandcultivate<br />
the fields and perform their tasks as they are<br />
tbrougt up to do bythe force of exampleandthe<br />
instructionoftheirelders.Weknow,too,something<br />
of what canbe doneby economiccommand.We<br />
areprepared,if necessary, to signanedictmaking<br />
It compulsory;lormanyof ourmento workoncornmunityprojectsfor<br />
our nationaldevelopment.Tell<br />
us, is there any other way we can organizeour<br />
society so that It will function successfully—or<br />
betteryet,mo?esuccessfully?”<br />
Supposewe answered,“Yes, there Is another<br />
way. Organizeyour society along the lines of a<br />
marketeconomy.”<br />
“Verywell,” saythe leaders.“Whatdo we then<br />
tell peopleto do? Howdo weassignthemto their<br />
varioustasks?”<br />
“That’sthe verypoint,” wewouldanswer.“In a<br />
marketeconomy,nooneisassignedto anytask.In<br />
fact,the mainIdeaof a marketsocietyis thateach<br />
personisallowedto decidefor himselfwhatto do.”<br />
Thereis consternationamongthe leaders.“You<br />
meanthereis no assignmentof somemento min<br />
ing and others to cattle raising? No mannerof<br />
designatingsomefor transportationandothersfor<br />
weaving?You leavethiSto peopleto decidefor<br />
themselves?But what happensIf theydo not de<br />
cidecorrectly?WhathappensIf no onevolunteers<br />
to go into the mines,or if no oneoffershimselfas<br />
a railwayengineer?”<br />
“You may rest assured,”we tell the leaders,<br />
“none of that will happen.In a marketsociety,all<br />
the jobswill befilled becauseit will beto people’s<br />
advantageto fill them.”<br />
Our respondentsacceptthis with uncertainex<br />
pressions.“Nowlook,”oneofthemfinallysays,“let<br />
ussupposethatwetakeyouradviceandallowour<br />
peopleto do astheyplease.Let’stalkaboutsome<br />
thing specific,like cloth production.Just how do<br />
wefix the right levelof clothoutputin this ‘market<br />
society’of yours?”<br />
“But youdon’t,” we reply.<br />
“We don’t! Thenhow do we knowtherewill be<br />
enoughcloth produced?”<br />
“Therewill be,” wetell him.“Themarketwill see<br />
to that.”<br />
“Thenhowdo weknowtherewon’tbetoo much<br />
cloth produced?”he askstriumphantly.<br />
“Ah, but the marketwill seeto thattoo!”<br />
“But whatis this marketthat will do thesewon<br />
derfulthings?Whorunsit?”<br />
“Oh, nobodyruns the market,”we answer.“It<br />
runsitself.Infacttherereallyisn’tanysuchthingas<br />
‘themarket.’It’sjusta wordweuseto describethe<br />
waypeoplebehave.”<br />
“But I thought people behavedthe way they<br />
wantedto!”<br />
“And so theydo,” wesay.“But neverfear.They<br />
will wantto behavethe wayyouwantthemto be<br />
have.”<br />
Th. firsttwoparagraphsand “A Model:ByBroadand CheeseAlone” arefrom ComparativeEconomicSystems:An InquiryApproach,<br />
byJohnR.Coleman.Ted.C.Soens,and EdwinFenton,pp.88 and90-91.C 1974Holt,RinehartandWinston,Publishers.“The Market”<br />
Isfrom RobertL Hellbroner.TheMakingof EconomicSociety,5thedition,C 1975,pp.18-19. Reprintedbypermissionof Prentice-Hall,<br />
Inc., EnglewoodCliffs, NewJersey.<br />
26
“I am afraid,” saysthe chief of the delegation,<br />
“thatwearewastingourtime.Wethoughtyouhad<br />
in minda seriousproposal.Whatyou suggestis<br />
inconceivable.Goodday,sir.”<br />
A Model:ByBreadandCheeseAlone<br />
• . . Imagineamarketeconomysomewhereinthe<br />
worldwhichproducesandconsumesonlytwopro<br />
ducts. The people in this economylive entirely<br />
on breadand cheese.Studythe modelcarefully,<br />
and considerhow this economydecideswhat to<br />
produce,howto produceit, andfor whomto pro<br />
duceit.<br />
First,muchof the whatquestionis answeredby<br />
thefactthatthesepeoplejusthappento likebread<br />
and cheese,andonly breadand cheese.But how<br />
muchofeach? Sincethesepeoplelive in a free<br />
marketeconomy,they are not told which to buy.<br />
Theywill dividetheirspendingbetweenbreadand<br />
cheesein whateverwayappealsto theirtastes.As<br />
sumethat tey havebeenspendinghalf of their<br />
incomeonbreadandhalfon cheese.Nowsuppose<br />
thesepeopledecide,of theirownfreewill,thatthey<br />
wantmorecheeseandlessbread.Whathappens?<br />
First,the bakersandthe cheesemakerslearnof<br />
the changein tastenot froma kingor commissar,<br />
butfronlsimpleobservation.Thebakersfind them<br />
.‘ selveswithbreadunsoldattheendof theday.That<br />
is a signalto’ them to cut back production.The<br />
cheesemakers, on the other hand,find that they<br />
havesoldalltheircheesebeforetheendof theday.<br />
Thatis th ir signalto try to expandproduction.<br />
But the chain of eventshas just begun. The<br />
cheesemakerscannotsimply makemore cheese<br />
immediately.First,theywill haveto get moremilk,<br />
morelabor,and‘moreequipment.If any of these<br />
I<br />
Handout3-4 (concluded)<br />
4<br />
27<br />
ingredientsis in short supply,the cheesemakers<br />
maychangethewayin whichtheymakecheeseas<br />
wellastheamount.If skilledlaboris hardto come<br />
by,thecheesemakersmaytrainmorepeople,work<br />
their presentstaff overtime,cut corners in the<br />
cheesemakingprocess,or try to devisenew ma<br />
chineryto do part of the workthat hasbeendone<br />
by labor.Fromanyof thesechanges,a newhow<br />
answerwouldresult.<br />
At thesametime,bakerswill find thattheymust<br />
layoff someof theirskilledworkersasproduction<br />
is cut back.Theseworkersmaybeluckyenoughto<br />
find jobs in the expandingcheeseindustry.How<br />
ever,theirnewjobswill probablyneitherpayaswell<br />
norbeatashighaskill levelastheirold jobsinthe<br />
breadindustry.Farmerswith landthat is tine for<br />
raising wheat but not so good for raisingdairy<br />
cattlewill alsofeelthe squeeze[at leastuntil they<br />
canshift to anothercropthat is just asprofitable].<br />
Their friendswith good dairy landswill prosper.<br />
Thus,therewill be a redistributionof incomeasa<br />
resultof the shift in tastesfrom breadto cheese.<br />
Thefor whomquestionis answerednot bylawbut<br />
byimpersonalmarketforces.Thosewhogainfrom<br />
the shift in tasteget moreincomewith whichthey<br />
canbuy moreof the economy’sbreadandcheese<br />
thanbefore.Thosewho lostfromthe shift in taste<br />
end up with lessmoneyto buybreadand cheese.<br />
The real world, however,is more complicated<br />
than this imaginaryeconomyof breadeatersand<br />
cheeseeaters.Inthe realworld,thousandsof prod<br />
ucts exist. But the samebasicprocessis still at<br />
work.In a marketeconomy,freemarketforces,re<br />
spondingto thedemandof consumersalone,make<br />
the majordecisionsabout what goodsare to be<br />
produced,how they are to be produced,and for<br />
whomtheyareto be produced.
4<br />
Handout3-5<br />
THECOREOF THECOMMANDECONOMY*<br />
• . in a marketeconomy,productiveresources<br />
suchassteel,timber,skilledlabor,andcomputers,<br />
wouldgo to whoeverbids highestfor them.In the<br />
SovietUnion,governmentplannersdecidewhere<br />
suchresourcesareto go.Theysay,“Hereareour<br />
mostimportantgoals,and hereis the waywewill<br />
use our available resourcesto achieve these<br />
goals.”<br />
When consideringthe distribution of key re<br />
sources,the plannersfacean importantquestion:<br />
Howshouldtheydivideproductionbetweencapital<br />
goodsandconsumergoods?If theychoseto, the<br />
plannerscould raise today’sstandardsof living<br />
quickly.Theycouldallocateresourcesto the pro<br />
ductiono consumergoodswhichthe peoplede<br />
sire.Buttheyknowthatsteelusedfor automobiles,<br />
washingmachines,and refrigeratorscannotalso<br />
be usedfor railroadcars,bridges,and moresteel<br />
mills.And if the stock of capitalgoodsdoesnot<br />
Increase,the nationwill not beableto makemore<br />
consumergoodsin the future.Theproblem,then,<br />
is:Findaworkablebalancebetweengivingthepeo<br />
plewhattheywantin theshortrun,whileproviding<br />
for thelong-termexpansionof thenation’sproduc<br />
tivefacilities.<br />
All o the separatepiecesin the SovietUnion’s<br />
economicjigsawpuzzlesomehowhaveto befitted<br />
together.Thisis the taskof the Gosplan,the state<br />
economicplanningagencyof the Soviet Union.<br />
Thiscommitte e of economicplannersreceivesits<br />
S<br />
I<br />
generaldirectionsfrom the centralcommitteeof<br />
theCommunistParty.Thepartyframesthefive-year<br />
plansfor thesociety.<br />
In translatingthegeneralcommandsof theparty<br />
into manycloselyrelated,specifictargets,theGos<br />
plan hashelpfrom subordinatecommissionsthat<br />
governdifferentindustriesand regions.Theplanfling<br />
agencyalsousesstatisticsandcomputersto<br />
helpfit the piecesof the economicjigsawpuzzle<br />
together....<br />
EvenwiththevarioustypesofassistancetheGos<br />
plan receives,the task of the economicplanners<br />
remainscomplex.Theplannersmustmakemostof<br />
theeconomicdecisionsthatthefreemarketmakes<br />
in the UnitedStates.Outsidersknowmanyof the<br />
mistakesthatSovietplannershavemade.Toomany<br />
shortagesandtoo manyfailuresin achievinggoals<br />
makethesemistakesdifficult to conceal.<br />
TheGosplantakesitsordersfromtheCommunist<br />
Party.Thepartyisanelitegroupandisdeliberately<br />
kept small.In fact, only about six percentof the<br />
adultsintheSovietUniontodaybelongto theparty.<br />
Butoncetheybecomemembers,eachplaysa part,<br />
howeverminor,in settingthe goalsfor the nation.<br />
The membersof the Gosplanare the key tech<br />
nicianswhoseskillshelpdeterminewhetheror not<br />
the nation’s goals are achieved.But the goals<br />
themselves—andthe final control of the<br />
economy—stillremainfirmly in the handsof the<br />
CommunistParty.<br />
ExcerptedfromComparativeEconomicSystems:An Inquiry Approach, byJohnR. Coleman,Td C. Soens.and EdwinFenton.PP<br />
156-59.C 1974Holt.RinehartandWinston,Publishers.<br />
28
Handout3-6<br />
EVALUATIONEXERCISE<br />
Belowarestatementsdescribingvariouseconomicactions.In the spaceprovidedlabelor classifyeach<br />
statementaccordingto whetheryouthink it is typicalof a traditionaleconomy(T),a commandeconomy<br />
(C),or a marketeconomy(M).<br />
______ 1. “Onthe farms,the workingdaylastsfrom beforesunriseuntil duskor dark.As theyhave<br />
donefor centuries,womenfollowthe reapersandbinderson foot to gatherthe gleanings<br />
from the fields<br />
_______ 2. “Theproblemoffindingskilledworkerswasimmense.Thereweresimplynotenoughtrained<br />
menavailable.Hiscompetitorswerefightingfor theirshareof thelaborsupply.[He]decided<br />
to introducea five-dollar-a-dayminimumwage.Thenewminimummorethan doubledthe<br />
existingwage<br />
_______ 3. The practiceof givingcertainindustries[first call on scarcematerials]hasbroughtmore<br />
.rapid over-alleconomicgrowththan otherwisemight havebeenpossible.”<br />
_______ 4. “The proclamationof the [headof state]declaredthat no bankingoperationsshouldbe<br />
carriedon throughoutthe countryuntil further notice.”<br />
______ 5. “The [peoplebeingstudied]werestill living on sealmeatand weremakingno attemptto<br />
kill anyof the numerouscaribouthat werecontinuallymigratingpast.I thoughtat first that<br />
theremightbesometaboopreventingthemfrom huntingcaribouon ice,but this theytold<br />
me wasnot so. It wassimplythat they had neverhuntedcaribouon the ice and had not<br />
cpnsideredit possible<br />
______ 6. “Holdingpricesin checkwasdifficult.A greatburdenfell on theOfficeof PriceAdministra<br />
tion,createdto keepthelid on pricesbysettingpriceceilingson a largelist of commodities<br />
whichweremuchin demand.”<br />
r<br />
I<br />
Name Class<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s,PartII,Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary),1980.<br />
JointCouncilon EconomicEducation,1212Avenueof theAmericas,NewYork,NY10036.<br />
29
4<br />
r<br />
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER4<br />
Many aspectsof everydaylife can be explainedin economicterms. Read each of<br />
the statementsbelow. Then give an examplefrom the real world for each<br />
statement. The first one has been done for you as an example.<br />
1. We have personalfreedomthrough choices. My being able to choosebetweena yogurt or a sandwichfor<br />
lunch givesme a dçgree of personalfreedom.<br />
2. Peopleare maximizersof their own self-interest.<br />
3. Peoplewill choosethe most efficientor least costlyalternative.<br />
4.<br />
5..<br />
6.<br />
7.<br />
Name<br />
Peopleare competitive.<br />
The total amount of goodsand servicesa person wants is unlimited.<br />
There is a koint of diminishingutility for goodsand services.<br />
f<br />
4.2CHARACTERISTICS OFFREEENTERPRISE<br />
FREEENTERPRISEINYOURLIFE<br />
Many decisionsinvolvemarginalanalysis.<br />
Class_____________<br />
8. When calculatingmarginalcost, a person should include sunk costs.<br />
Date___________
I<br />
FIGURE 8.3TURFCOMPETITION ANDPURFMONOPOLY<br />
Low Freedomof Choice<br />
‘Pwe’Moncpoty<br />
FIGURE 8.4<br />
S<br />
LOW . Freedomof Choice<br />
I_<br />
..:-<br />
I . I I<br />
.-<br />
-<br />
OVERHEAD1<br />
Pw ’ Monopoty Olgopoly ostic AEon Competition A.e<br />
(Utilities:Electiiolty. (SteelIndustry, . (FastFoods,Toothpaste, Compalion<br />
Telephone, Etc.) Autolndustiy, . Etc.) (A ricuftz,e3<br />
Etc.)
I<br />
Number<br />
of Workers<br />
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER4<br />
Name________________________________________ Class Date__________<br />
p<br />
t<br />
,<br />
Imagine that you are in charge of a schoolfund raiser to make money for a school<br />
trip. The plan is to sell pizza at schoolfootballand soccergames. You are<br />
responsiblefor making and sellingthe pizza for each game. The work area and<br />
cookingfacilitiesare limited. You must decidehow many workers will be needed.<br />
Study the chart below.<br />
TotalOutput<br />
(in slicesof pizza)<br />
0 0<br />
1 40<br />
12<br />
120<br />
3 250<br />
4 400<br />
5<br />
-<br />
5<br />
6 550<br />
I 7 550<br />
8 500<br />
OutputPer Additional<br />
Worker(in slices)<br />
• 1. Fill in the blanks on the chart to show the output added by each additionalworker. To find each amount,<br />
subtract the output before the worker was added from the output after the worker was added.<br />
1<br />
b.<br />
C.<br />
d.<br />
t•<br />
f.<br />
0<br />
40<br />
80<br />
2. Accordir g to the chart, the pizza operationwill experienceincreasinggains up to a point becauseof the<br />
divisionof labor or economiesof scale. Up to what point do the gains continue to increasefor each worker<br />
added? Gains continue to increase up to worker number ____. Explain the reasonsfor the increasing<br />
gains.<br />
4.3 THE LIMITSTO MAXIMIZING<br />
OPERATIONPIZZA—HOW BIG SHOULD IT GROW?<br />
3. At what point in your operation will you experiencethe law of diminishingreturns? You will experience<br />
this beginningwith worker number ____. Suggestsome reasonsfor the diminishingreturns.<br />
4. Sinceyour workers are all volunteerswho do not get paid, when would it make sense to stop adding<br />
workers?It would make sense to stop ac ging workersafter worker number ____<br />
5. if you were paying the workers, at what point would you stop adding workers?You would stop adding<br />
workersafter worker number ____
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER5<br />
When the supply or the demand for an item changes, people are willing to sell or buy more or less than before.<br />
A. Answerthe followingquestionsbased on Table A.<br />
1. At the price of $150.00,<br />
a. how many bicycleswill be demanded? _______<br />
b. how many will be supplied?<br />
c. will there be a shortageor a surplus?<br />
d. how much will it be? ______<br />
2. At the price of $75.00,<br />
a. how many bicycleswill be demanded? ______<br />
b. how many will be supplied?<br />
c. will there be a shortageor a surplus?<br />
d. how much will it be? ______<br />
3. What is the market-clearingprice?<br />
,. ,ice<br />
$200.00<br />
175.00<br />
150.00<br />
125.00<br />
100.00<br />
75.00<br />
50.00<br />
TABLEA BICYCLES<br />
Quantity<br />
Demanded<br />
2,000<br />
5,000<br />
10,000<br />
25,000<br />
50,000<br />
80,000<br />
150,000<br />
Quantity<br />
Supplied<br />
75,000<br />
50,000<br />
40,000<br />
25,000<br />
10,000<br />
4,000<br />
1,000<br />
B. Assumethat a famousbike race increasesinterest in biking and makes consumerswillingto buy 30,000<br />
more bicyclesat each price.<br />
I. Pill in the demand column of Table B to show the new demand.<br />
‘<br />
TABLEB BICYCLES:INCREASEDDEMAND<br />
Pnce<br />
Quantity<br />
Demanded<br />
Quantity<br />
Supplied<br />
$200.00<br />
I a. • 75,000<br />
175.00 b. 50,000<br />
1540.00 c. 40,000<br />
125.00 d. 25,000<br />
100.00 . 10,000<br />
75.00 i. 4,000<br />
50.00 g. 1,000<br />
2. Accordingto Table B,<br />
a. what is the new market-clearingprice?<br />
___________________________ Class_____________ Date___________<br />
5.2 BALANCINGSUPPLYAND DEMAND<br />
ADJUSTINGTO CHANGES<br />
b. what quantity will be demanded and supplied at that price?
[Name<br />
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER5<br />
5.4 PROFITAND COMPETITION<br />
IT IS A CHANGINGWORLD<br />
A. Explainhow each developmentin the chart would affecteither the supply or the demand for the good or<br />
service.Write your explanationin the supply or demand column. Then use an arrow pointing up or down<br />
to showhow you would expect the price to be affected.<br />
B.<br />
1.<br />
2.<br />
3.<br />
C.<br />
1.<br />
2.<br />
3.<br />
Development Product Supply orDemand Price<br />
A severefrost hits Florida’scitrus area. Oranges<br />
A 50-percenttariff is placed on imported bicycle<br />
parts.<br />
.<br />
Consumerincome rises 20 percent.<br />
The governmentraisesincome-taxrates 25<br />
percent.<br />
A new invention createsa cheaper, faster way of<br />
writing messageson t-shirts.<br />
.<br />
Scientistsdiscovera way to make tasty<br />
bigh-proteinfood from seaweedand soybeans.<br />
10-Speed<br />
bicycles<br />
.<br />
Video-cassette<br />
recorders<br />
New cars<br />
Class_____________<br />
T-shirts with<br />
messages<br />
Meat, poultry,<br />
and fish<br />
List three factors that can cause changesin the supply of a product.<br />
f<br />
List three factors that can cause changesin the demand for a product.<br />
la lb.<br />
2a. 2b.<br />
3a. 3b.<br />
4a. 4b.<br />
Sa.<br />
óa.<br />
Date___________<br />
5b.<br />
6b.
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER6<br />
Name Class Date __________<br />
6.1 THE ANALYSISOF DEMAND<br />
UNDERSTANDINGDEMAND<br />
A. Decidewhether the changein conditionin each statement belowis more likelyto lead to a changein the<br />
quantity demanded or a changein demand. Write quan:i y demandedor demandin the answerblank.<br />
1. The populationof the United States increasesby 4 percent.<br />
_______ 2. Real incomedecreasesby 2 percent from the previousyear.<br />
3. A clothing store has a sale that features25 percent off the price of every item in stock.<br />
_______ 4. The state imposesa 15-percentluxury tax on the saleof jewelry.<br />
_______ 5. A frost in Florida destroys40 percent of the Florida orange crop and brings about an increasein<br />
the price of oranges.<br />
6. Consumersexpect prices to rise sharply next year.<br />
________ 7. The sale of videotapesis affectedby a 15-percentdecreasein the price of videocassetterecorders<br />
(VCR’s).<br />
_______ 8. The sale of mustard is affectedby a 10-percentrise in the price of hot dogs.<br />
_______ 9. Competitionfrom Japaneseimports leads Americanautomobilemakers to offer $300to $500<br />
rebates on the buying price of any new Americancar.<br />
_______<br />
10. A new manufacturingprocessleads to a decreasein the price of personalcomputers.<br />
B. Decide how elastic the demand is for each of the followinggoodsor services.Write elasticor inelasicin the<br />
answer blank. Then give the reasonsfor your decision.<br />
1. gasoline:<br />
2. health care:<br />
3. diamond rings: —<br />
4. antibiotics: _____<br />
5. designer jeans: —<br />
6. home heating fuel:<br />
f
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER6<br />
A. Imaginethat you are an entrepreneur. You must decide how much to produce in a given time period.<br />
Explain the part each factor listed belowplays in your decisionmaking.<br />
1. costs of production<br />
2. demand for the product<br />
3. quantity you expect to sell —<br />
4. quantity that can be produced<br />
5. sellingprice<br />
B.<br />
la.<br />
lb.<br />
2a.<br />
2b.<br />
3a.<br />
3b.<br />
4a.<br />
4b.<br />
Name__________________________________________ Class Date___________ 6.2 THE ANALYSISOF SUPPLY<br />
UNDERSTANDINGSUPPLY<br />
For each statement below,indicate whether the changein conditionswill cause a change in quantity<br />
suppliedor in the supplyby circlingthe correct phrase. Then give a reason for your decision.<br />
Steelproduction is affectedby a $5 decreasein the price of a barrel of oil.<br />
changein quantity supplied changein supply<br />
Reason:<br />
The producers of tennis rackets show record profits when tennis becomesa popular sport.<br />
changein quantity supplied changein supply<br />
Reason:<br />
During the Christmas sellingseason,consumersare willingto pay higher prices for designerclothes.<br />
changein quantity supplied changein supply<br />
Reason:<br />
There is a 10-percentincreasein the wagerates for skilled workers producing microcomputers.<br />
change in quantity supplied change in supply<br />
Reason:
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER7<br />
Name Class Date ___________<br />
7.1INCOME:DISTRIBUTIONTOTHEFACTORSOFPRODUCTION<br />
WHOGETSWHAT?<br />
A. Usethe chart belowto examineone exampleof incomedistribution to the factors of production. Assume<br />
that for an upcomingconcert, one factor of production is goingto be supplied by each group or individual<br />
listed in the first column. Decide which factor it is and writeland, labor, capital, or entrepreneurshipin the<br />
Factor of Production column. Then, in the Form of Incomecolumn, write wages,interest, rent, or profit.<br />
The organizerof the concert who<br />
hiresmusiciansand providesall<br />
needed suppliesand staff<br />
The farmer who agreesto make<br />
a pasture availablefor the<br />
concert<br />
The bank that lends the money<br />
to pay for advertising,tickets,<br />
and start-up costs<br />
The rock group that signs a<br />
contract to play at the concert<br />
Factorsof<br />
Production<br />
la. lb.<br />
2a. 2b.<br />
3a. 3b.<br />
4a. 4b.<br />
Formof<br />
Income<br />
B. Think of a production processthat you know somethingabout, such as the creation of posters to advertise<br />
a schoolplay. In the chart below, list a group or individualfor each of the factorsof production. Then tell<br />
what form of incomeeach factor would earn. (Assumethat all the factors of production are paid.)<br />
Type of good or service:<br />
Factorof<br />
Production<br />
13. labor lb.<br />
2a. entrepreneurship lb.<br />
3$. land 3b.<br />
4a. capital 4b.<br />
•1<br />
Formof<br />
Income
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER7<br />
Name________________________________________ Class Date__________<br />
7.2 INCOMEDISTRIBUTIONAND MARGINALPRODUCTIVITY<br />
DOESIT PAY?<br />
A. Apply the idea of marginalproductivity to each of the followingsituations. In each case, ask two questions<br />
that need to be answeredbefore a decisioncan be made. The first question has been asked for you as an<br />
example.<br />
1. A smallcompanyconsidershiring two new workers.<br />
Will the cost of each worker increase the output?<br />
a.<br />
b.<br />
2. A large companyconsidersinvestingmoney in new equipment.<br />
a.<br />
b.<br />
3. An entrepreneur considersputting all of the year’sprofits back into the company.<br />
a.<br />
b.<br />
4. A farmer considersbuying more land for growingcrops.<br />
a.<br />
b.<br />
5. A new companyconsidersborrowingmoney from a bank in order to expand.<br />
a.<br />
b.<br />
B. Explaineach of the followingsituationsin terms of economicma imi ing .<br />
I<br />
1. Good Health Hospital pays its nurses $300a week. In the last six months, one quarter of the hospital’s<br />
nurses left. Most have taken jobs at a nearby clinic that pays nurses $375a week.<br />
2. The rent on its factory has doubled but competitionprevents the High Tone Companyfrom raisingits<br />
prices to cover the increasedcost. Now the High Tone managersare lookingfor a factorywith a lower<br />
rent.
T} PRICE IN SYSTEI PRISON CAMP*<br />
Richard A. adfor<br />
lnternational Nonec.ary Funo<br />
The following was written by an observant in—<br />
mate of a German prison camp for Allied soldiers<br />
in World War II. While seemingly far removed<br />
from .eryday ev economic life, it actually is note<br />
worthy as a clear and simple demonstration of<br />
basic economic principles. We live in a period<br />
when we are being continuscusly urged to live up<br />
toour responsibilities, to see ‘the big picture”.<br />
The price system is the moxe intriguing in such<br />
circumstances because it operates with great<br />
precision almost automatic<br />
lly, asking-nothing<br />
more of the participants than that they be them<br />
selves——buyer or seller.<br />
After allowance has been made for abnormal circumstances, the<br />
social institutions, ideas and habits of groups in the outside<br />
world are to be found reflected in i Prisoner of War Camp. One as-<br />
Spector social organization is to be found in economic activity,<br />
and this is to be found in any P.O.W.<br />
not dependent on his exertions for t) e<br />
crrp. True, a prisonor is<br />
provision of the necessaries<br />
or even the luxuries of life, but through his economic activity,<br />
the exchange: of goods and services, h: s standard of material com<br />
fort is considerably enhanced.<br />
Everyone receives a roughly equal share of essentials; it is<br />
by trade that individual preferences are given expression and com<br />
fort increased. Al]. at some time, ari most people regularly, make<br />
exchanges of one sort or another. Our essential interest lies in<br />
the universality and the spontaneity of this econc?mic life; it came<br />
ir to existence not by conscious imitation but as a response to the<br />
immediate needs and circumstances. Any similarity between prison<br />
organization and outside organization arises from similar stimuli<br />
evoking similar responses.<br />
The Development and Organization of the Market<br />
We reached a transit camp in Italy and received one—quarter of<br />
a Bed Cross food parcel each a week later. At once exchanges, al<br />
ready established, multiplied in volume. Starting with simple<br />
direct barter, such as a non—smoker giving a smoker friend his<br />
cigarette issue in exahange for a chocolate ration, more complex<br />
exchanges soon became an ac cepted custom. Stories circulated of<br />
4J
a padre who started of f round the camp with a tin of cheese and<br />
five cigarettes ana returned to his bec.with a complete parcel in<br />
addition to his original cheese and cigarettes; the market was<br />
not yet perfect. Within a week or two, as the volume of trade<br />
•grew, rough scales of exchange values came into ce. exis1 Sikhs,<br />
who had at first exchanged tinne beef for practically any other<br />
foodstuff, began to.insist on jam and margarine. It was realized<br />
that a tin .of jam was worth one—half pound of margarine plus some<br />
thin j else. that a cigarette issue was worth several chocolate<br />
issues, and a tin of diced carrots was worth practically nothing.<br />
By the end of a month, when we reached our permanent camp,<br />
there was a lively trade in all commodities and their relative<br />
values were well known, and expressed not in terms of one another,<br />
but in terms of cigarettes. The cigarette became the standard of<br />
value. In the permanent camp people started by wandering through<br />
the bungalows call their offers——”cheese for seven” (cigarettes)——<br />
and the hours after parcel issued were bedlam. The inconvenience<br />
of this system soon led to its replacement by an Exchange and Mart<br />
notice board in every bungalow, where sales and wants were advertised.<br />
When a deal went through, it was crossed off the board. The public<br />
and semi—permanent records of transactions led to cigarette prices<br />
being well known and thus tending to equality throughout the camp,<br />
although there were always opportunities for an astute trader to<br />
make a profit from arbitrage. With this<br />
cluding non—sr.okers, was willing to s!l<br />
development everyone,<br />
for cigarettes, using<br />
in<br />
ther<br />
to buy at another time and place. -rettes Cig<br />
became . the normal<br />
currency, though, of course, barter was. never extinguished.<br />
The unity of the market and the prevalence of a single price<br />
varied directly with the general level of organization and comfort<br />
in the camp. A transit camp was always chaotic. Organization was<br />
too slender to include an Exchange and I’lart board, and private ad<br />
vertisements were the most that appeared. Consequently, a transit<br />
camp was not one market buy many. The 7rice of a tin of salmon is<br />
known to Iave varied by two cigarettes in 20 between one end of a<br />
hut and the other. Despite a high level or tion organiz<br />
in Italy,<br />
the,market was inorcellated in this manner at the first transit camp<br />
we reached after our remova]. to Germany. In this camp there were<br />
up to 50,000 prisoners of all nationalities. French, Russian, It<br />
alian and Jugo-Slavs were free to move about within the camp; Brit<br />
ish andAmericans were confined to their compounds, although a few<br />
cigarettes given to a sentry would always procure permission for<br />
one or two men to visit other compounds. The people who first visited<br />
the highly organized French trading center, with its stalls and known<br />
prices, found cOf fee extract——relatively cheap arnoung the tea_drinking<br />
English——commanding a fancy price in biscuits or cigarettes, and sor<br />
enterprising people made small fortunes, that way.
The permanent camps in Germany<br />
inercial organization. In addition<br />
saw the highest<br />
to the Exchange<br />
level of corn<br />
and Mart notice<br />
boards, a shop was organized as a public utility, controlled by<br />
representatives of the Senior British Officer, on a no-profit basis.<br />
People left their surplus clothipg, toilet requisites and food<br />
•<br />
there until they were sold at a f&xed price in cigarettes. Onl.y<br />
sales in cigarettes were accepted and there was no higgling. The<br />
capital was provided by a loan from the bulk store of Red Cross<br />
cigarettes and repaid by a small commission taken on the first trans<br />
action. Thus the cigarette attained its fullest currency status,<br />
and the market was’ almost c• mpletely unified.<br />
There was an embryo labor market. Even when cigarettes were<br />
not scarce, ere t’ was usually some unlucky person willing to per<br />
form services for them. Laundryadvertised at two cigarettes a<br />
garment. A g)od pastel portrait cost thirty. Odd tailoring and<br />
other jobs similarly had their prices. - -- J_.<br />
•- - --• —-..-<br />
.-_ -<br />
There ware also entrepreneurial services. There was a coffee<br />
stall owner ho sold tea, coffee or cocoa at two cigarettes a cup,<br />
buying his raw materials at market prices and hiring labor to gather<br />
fuel an’d to stoke; he actually enjoyed the services of a chartered<br />
accountant at one stage. After a period of great prosperity he<br />
overreached himself and failed disastrously for several hundred<br />
cigarettes. Such large scale private enterprise was rare but sev<br />
eral middlemer or professional traders existec One man capitalized<br />
his knowledge of Urdu by buying meat from the Sikhs and selling<br />
butter and jam in return. As his operations became better known<br />
:fh0re and more people entered his trade, prices in the Indian Wing<br />
approximately more nearly to those elsewhere, though to the end a<br />
“contact”<br />
prevented<br />
amoung the Indians was valuable,<br />
the trade frombeing quite free.<br />
as linguistic difficulties<br />
Some were specialist<br />
in the Indian trade, the food, or even the watch trade. Middlemen<br />
•<br />
•<br />
traded on their own account or on ission. comii<br />
Price rings and agree<br />
ments were susoected and the traders certainly, cooperated. Nor did<br />
they welcome newcomers. Unfortunately the writer knows little of<br />
the workings cf these people; public opinion was hostile and the<br />
professi 6nals were usuallyof a retiring disposition.<br />
• One trader in food and cigarettes, operating in a period of<br />
dearth, enjoyed a high reputation. His capital was originally about<br />
50 cigarettes, with which he bought rations on issue days and held<br />
them until the price rose just before the next issue. He also<br />
picked up a little by arbitrage several times a day he visited every<br />
Exchange or Mart notice board and took advantage of every discrepancy<br />
between prices of goods offered and wanted. His knowledge of prices<br />
markets and names of those who had received cigarette parcels was<br />
pheonomenal. By these smear he kept himself smoking steadily--his<br />
profits——while his capital remained intact.<br />
5’
Credit etered into many transactions. Naturally prices varied<br />
accordingly to the terms of sale. A treacle ration might be ad<br />
vertised for four cigarettes now or five next week. An.1in the<br />
future market “bread now” was a vastly different thing from “brea<br />
Thursday.” Bread was issued on Thursday and Monday. and by Wed<br />
nesday andSt.nday night it had jisen at least ohe cigarette per<br />
ration. One man always saved a ration to sell then at the peak<br />
price; his offer. of “bread now” stood out on the board among a<br />
iumber of “bread Monday’s” fetching one or two less, or not selling<br />
at all——and he always smoked on Sunday night.<br />
The Cigarette Currençy<br />
Although cigarettes as currency had certain peculiarities,<br />
they performed all the functions of a metallic currency as a unit<br />
of account, a a measure of value and as a store of value, and<br />
shared most of its characteristics.<br />
Cigarettes were also subject to the working of Gresharn’s Law.<br />
Certain brand! were more popular than others as smokes, but for<br />
currency purposes a cigarette was a cigarette. Consequently<br />
. buyers<br />
used the poor’r qualities and the Shop rarely saw the more popular.<br />
brands; cigarettes such as Churchman’s No. 1 were rarely used for<br />
tradir . t oe time cigarettes hand-rolled frompipe tobacco<br />
began to circulate. Pipe tobacco was issued in lieu of cigarettes<br />
by the Red Crcss at a rate of 25 cigarettes to the ounce and this<br />
raLe was rd stand in exchanges, but an ounce would produce 30 home<br />
made cigarettes. Naturally, people with machine—made cigarettes<br />
broke them ndo’ and re—rolled the tobacco, and the real cigarrete<br />
vireually disappeared from the market. For a time we suffered all<br />
theinc nveniences of a debased currency.<br />
WM1e the Red Cross issue of 50 or 25 cigarettes per man per<br />
• week came in regularly, and while there were fair stocks held, the<br />
cigarette currency suited its purpose admirably. But-when the issue<br />
was interrupted, sto )cs soon ran out, prices fell, trading declined<br />
in volume and became increasingly a matter of barter. This defla<br />
tionary tendency was periodically offset by the sudden injection<br />
of rew currency. Private cigarette parcels arrived in a trickle<br />
throughout the year, but the big numbers came in quarterly when the<br />
Red Cross received its allocation of transport. Several hundred<br />
thousand cigarettes might arrive in the space of a fortnight. Prices<br />
soared and then began to fall, slowly at first but with increasing<br />
rapidity as stocks ran out•,until the next big delivery. Most of<br />
our economic troubles could be attributed to this fundamental in<br />
stability.<br />
I<br />
5’
Price Movem€nts<br />
The general price level was cted aff by other factors.<br />
influx of new prisoners, proberbially hungry, raised it. Heavy<br />
air raids in the vicinity of the camp probably increased the non—<br />
monetary demand for cigarettes aridaccentuated deflation. Good<br />
and bad war news certainly had its effect, and the general waves<br />
of optimism and pessimism which swept the camp ware reflected in<br />
prices. Before breakfast one morning a rumor of the arrival of<br />
parcels and cigarettes was circulated. Within ten minutes I sold<br />
a treacle ration for four cigarettes (hitherto offered in vain<br />
for three). By 10 otclock the rumor was denied, and treacle that<br />
day found no more buyers even at two cigarettes.<br />
Changed in the supply of a commodity, in the ration scale or<br />
in the make—up of Bed Cross parcels, would raise the price of one<br />
commodity re.Lative to other. Tins of oatmeal, once a rare and much<br />
sought after luxury in.the parcels, became a ce..in commonpl 1943,<br />
the the pric’ fell, In ii t weather the demand for cocoa fell, and<br />
that for soa rose. A new recipe would be reflected in the price<br />
level; the discovery that raisins and sugar could be turned into<br />
an aacohol ’uor li of remarkable potency reacted permanently on the<br />
dries fruit market. The invention of electric immersion heaters<br />
run off the power points made tea, a drug on the market in Italy,<br />
a certain se.ler in Germany. Any change in conditions affected<br />
both the general price level and the price structure.<br />
Public Qpinicn<br />
Public orinion on the subject of trading was local if confused<br />
and changeable. Certain forms of trading were more generally con<br />
demned; trade the the Germans was criticized by many. At one time,<br />
when there had been several cases of malnutrition reported among<br />
the more ed devo smokers, no trade in German rations was permitted,<br />
as the ‘ictims. became an additional burden on the depleted food<br />
reserves of the Hospital. But while certain activities were con<br />
demned as anti—social, trade itself was practiced, and its utility<br />
apprici ted, by almost everyone in the camp.<br />
Taken as . whole, opinion was hostile to the middleman. His<br />
function, and his hard work in bringing buyer and seller together,<br />
were ignored; profits were not regarded as a reward for labor, but<br />
as a result in sharp practice. Despite the fact that his very ex<br />
istence was proof to the contrary, the middleman was held to be re<br />
dundant in view of the existence of an Official Shopand the Exchange<br />
and Mart. Appreciation only came his way when he was willing to<br />
advance the price of a sugar ration, or to buy goods spot and carry<br />
them against a future 4sale In these cases the element of risk was
obvious to all, and the convenience of the service was felt to<br />
merit some reward. Particularly unpopular was the middlemar. with<br />
an element of monopoly, the man who contacted the ration wagon<br />
driver, or the man who utilized his knowledge of.Urdu.<br />
There was a strong feeling that everything had its “just price”<br />
in cigarettes. While the assessment oZ the just price, which in<br />
cidentally varied between camps, was ir.ipossibleof explanation,<br />
this price was nevertheless pretty closely known. It can best be<br />
defined as the price usually fetched by an article in good tirnes<br />
when cigarettes were plentiful. The “just price” changed slowly;<br />
it was unaffected by short—term.variations in supply, and while<br />
opinion might be resigned to departures from the “just price,” a<br />
strong feeling of resentment persisted.<br />
•Conclusion<br />
The economic organization described was both elaborate and<br />
smoothworking in the summer of 1944. Then came the August cuts and<br />
deflation. Prices fell, rallied with ce1iveries of.cigarette par—.<br />
cels in September and December, and fell again. In January, 1945,<br />
supplies of Red Cross cigarettes ran oat; and prices slumped stil<br />
further;, in February the supplies of food parcels were exhausted<br />
and the ‘impression became a blizzard, food itself scarce, was al<br />
most given away in order to meet the nofl—monetary demand for cig—<br />
arettes. Laundries ceased to operate, or worked for L’s or Reichmarks;<br />
food and cigarettes sold for frcy prices in L’s, hitherto<br />
unheard of. Th Shop was empty and the Exchange and Mart notices<br />
were ‘ull of unaccepted offers for cigarettes. Barter increased<br />
in volume,, becoming a large portion of a smaller value of trade.<br />
By April, 1945, chaos had replaced rc3er in the economic sphere;<br />
sales ere difficult, prices lacked stability. <strong>Economics</strong> has been<br />
defined as the science of distributing limited means among unlimited<br />
and competing ends. On 12 April, with the arrival of elements of<br />
the 30th U.S. Infantry Division, the usnering .n of ariage of plenty<br />
4demonstrated the hypothesis that with ineans infinite economic or—<br />
‘gani ation<br />
satisfied<br />
and activity<br />
wth effort.<br />
would be nt, redund as every want could be
£ FREE10 OJOOSES1IJDENTWORKSHEET<br />
erVsc WithPi gram No. 1—ThePo d theMarkd—.ntheFREE TO CR0 SET e66ien ceries<br />
FREE1D<br />
CH SE<br />
WHAT’SBEHINDA PENCIL?<br />
Here arejustafew peoplewhobenefitfrom themanufacture and a1e ofai<br />
ordinary everydayitemlikea pencil...<br />
Pencilfactoryworkers inthe U.S. mn machines, take ordersfor<br />
pencils,stock raw materials,packpencilsfor wholesale vustomers.<br />
Sales people sellpencilsto stores.<br />
Truckcompanyand railroadworkerstransport pencils.<br />
Storessell pencilstoall whoneed them.<br />
Minersin 4on, Ce<br />
Madagascaiand Mexico<br />
une aphite which is<br />
rouad and mixedwithclay<br />
gajnermany or eorgia.<br />
A s’aiietyof orkers in<br />
(i. . and elsewhere ITlake<br />
Øiepaint,provide iubber<br />
nd pumiceforthe eraser,<br />
nd metal orplastic or the<br />
aserL io1der.<br />
• (2an you Hame fi ’e<br />
• hi 4at<br />
other ticjths pcc thatpncil- gjiakü ates!<br />
• 1I I W$4d ppe t4 fe pL3 I f $OW 3P3eot ji ted<br />
pnc s ffiatcould be ade? i# t ioverBflients put in*s<br />
pf rawm$enals forpencilsfromti# ii r? .ipth<br />
thepe c,d wPt* r4 iid pøciJ ii r?<br />
• J4 py pffi e 6*cu.r#4 s *4c pans r<br />
ia pes ofworkers o<br />
tfrnet frp Øei? ou y me rajçh o 1ad M re<br />
aw mate,<br />
als çm frt!rn.<br />
.f.<br />
Lumberworkers cut down<br />
cedar trees in Oregon and<br />
Clifoima for the wood.<br />
Fucadio, P8Sby*LN Pu ic ommunicaiions. 1c. Erie PA
Activity I — BackgroundQuestions<br />
FACTORSOF PRODUCTION<br />
If yougivecopiesof the nd UBackgr to yourstudents,pleasehavethemanswerthe following<br />
questions:<br />
1. Whatarethefactorsof production?<br />
2. Brieflydefineeachfactorof production.<br />
3. Whyarethefactorsinterdependent?Explain.<br />
4. Whatis wealth?Givean example.<br />
5. Whyis landconsidereda passivefactorof production?<br />
6. Howdo capitalandlabordifferfromland?<br />
7. Howdoessocietycreatewealth?<br />
Activity II— Analyzingthe Factorsof Production<br />
EconomistAlfredMarshallexertedmuchinfluenceontheBritish.InthisexcerptfromhisPrinciplesof<br />
<strong>Economics</strong>,Marshallspeaksabouthefactorofland. Heemphasizestheroleofmanagerandorganizers<br />
withinthelaborsector.<br />
Landisonadifferent footingfrommanhimselfandthoseagentsofproductionwhicharemadeby<br />
man;amongwhichareincluded improvements madebyhimonthelanditself.Forwhilethesuppliesofall<br />
otheragentsofproduction respondinvariousdegreesandvariouswaystothedemandfortheirservices,<br />
landmakesnosuchresponse.Thusanexceptional riseintheearningsofanyclassoflabour, tendsto<br />
increase itsnumber, orefficiency, orboth;andtheincrease insupplyofefficientworkofthatclasstendsto<br />
cheapen theserviceswhichitrenders tothecommunity. Iftheincrease isintheirnumbers thentherateof<br />
earningsofeachwilltenddownwards towardstheoldlevel.Butiftheincreaseisintheirefficiency; then,<br />
thoughtheywillprobablyearnmoreperheadthanbefore, thegaintothemwillcomefromanincreased<br />
national dividend, andwillnotbeattheexpenseofotheragentsofproduction. Andthesameistrueas<br />
regardscapital;butit isnottrueasregardsland.<br />
Pleaseanswerthefollowingquestions:<br />
1. Whatis the centralthemeof thisparagraph?<br />
2. Whatis meantby land makesnosuchresponse ?<br />
3. Accordingto Marshall,whatis therelationshipbetweenland,laborandcapital?<br />
4. Marshall, inanotherportionofhisbook,statesthatlandisbutaparticularformofcapitalfromthe<br />
pointof viewof the manufacturer.Isthisa contradiction?Explain.<br />
5. Giveotherexamplesof howcapitalandlandareconsideredthe samething.
Activity Ill- Tracingthe ProductionProcess<br />
FACTORSOFPRODUCTION<br />
Makealistof10examplesofwealth.Thengiveexamplesofthecorresponding land,laborandcapita’<br />
usedto producethiswealth.Twoitemsaregivenasexamples.<br />
Wealth Land Labor Capital<br />
1. a house a buildinglot architect concrete<br />
2. automobile ironore engineer robot<br />
Activity IV — ClassifyingTerms<br />
Classifyeachtermfromthelistbelowaseithercapital,labororland. Ifyoudonotthinkthattheitem<br />
belongsin anyof thecategories,placeit in thefourthcolumn,non-applicable.<br />
taxicab applepie schoolbus river money<br />
salesman savingsbond typewriter slave forest<br />
storeowner Pres.of GM air computer wildboar<br />
factory teacher tires flowers<br />
Land Labor Capital Non-applicable<br />
iI r
OPPORTUNITYCOSTS<br />
<strong>Economics</strong> isthestudyofhowsocietymakeschoicesconcerning theuseofitsresources -- land,labor<br />
andcapital.Humanaturetellsusthatpeoplealwayseektomaximizebenefitsandminimizecosts.This.’<br />
principleofhumannaturerevialsimportant informationabouthowpeoplespendmoney.<br />
Everyeconomichoiceonemakesdeniesanother choicethatcouldhavebeenmade.Forexample, if<br />
awomanhas$5,shecaneitherbuylunchwiththemoney,orshecangotothemovies.Ifshegoestothe<br />
movies, shegivesupthepleasureoflunch.Ifsheeatslunch,shegivesuptheenjoyment ofwatchingthe<br />
movies.Inadecisionlikethis,thevalueofthethinggivenupisdefinedasopportunity cost.Theperson<br />
makingthedecisionmustdecidewhichchoicecreatestheleastopportunitycost.Thiswillmaximize<br />
benefits(pleasure) andminimizecosts(sacrifice).<br />
Societyasawholealsoincursanopportunity costwhenitdecidestouseitsresources foraparticular<br />
purpose.Government decisionsontaxpoliciesandspending forpublicgoodsinfluencehowsocietyuses<br />
itsresources.Forexample, spendingpublicfundstobuildabridgemeansthatwecannotusethatsame<br />
moneytobuildadam.Theopportunity costforbuildingthebridgeisthelossofthedamthatwouldcreate<br />
hydroelectric powerandfloodcontrol.Ifwebuildthedam,theopportunity costisthelossofthebridge<br />
whichwouldreducethecostoftransportation andsaveenergy, labortimeandcapital incommercial lobs.<br />
Government policiesconcerninglandalsocreatean opportunitycost.Landspeculationis the<br />
practiceofholdinglandoutofusetosellitforaprofitwhenlandpricesrise.Sometimes landspeculators<br />
borrowmoneytobuyland.Theloanmoney,whichcouldhavegonetoaproductivebusiness, goesinstead<br />
to a speculatorwhowillholdthelandidleandproducenothingofvalue.<br />
Landspeculation createsagreatopportunity costosociety.Financial resourcesaretiedupinland,<br />
whilepotential jobsandtheproductionofnewwealtharediscouraged whenlandisheldidle.Thisdoesnot<br />
allowsocietyto maximizeitsresourcesintheproductionofweatth.<br />
Whenlandisheldoutofuseincities,construction companies areforcedtoseekoutlandforhousingin<br />
suburbancommunities. Iflandisalsoheldoutofusebyspeculators intheseareas,buildersmustmove<br />
furtherouttoruralareas.Theopportunity costofthisurbansprawlrevealsitselfinincreasedtravelling<br />
expenses, higherutilitycosts,moreroadconstruction andhigherhousingprices.Inaddition, thistendsto<br />
prematurely destroyfarmland, sincethelandismorevaluable forhomesitesthanforfoodcultivation.<br />
Astudyofopportunity cost showsthat,ineconomic decisions, thesmartest choicesarethosewhich<br />
benefitsocietyasa whole.Futureconsequences ofanydecisionmustalsobeconsideredtominimize<br />
costsandmaximize benefits.
Activity Ill — Local GovernmentBudget<br />
OPPORTUNITYCOSTS<br />
Youhavebeenaskedbythecouncilof governorsto drawupa proposedbudgetfor stateandlocal<br />
government.Thecouncilalsowantsto knowwhatpositivegainswillcomefromyourchangesandwhat<br />
negativ effectswillresultfromyourdecisiontochangespendingpatterns.Inthechartbelow,pleasewrite<br />
in yourchoiceforthe amountof thebudget(in%)to bespentoneachitem. (Lastyear’samountsare<br />
listed.)Thenlistonepositiveandonenegativeeffectof yourdecision.<br />
StateandLocalGovernmentExpendituresProposal<br />
Your OnePositive OneNegative<br />
Expenditures(%) Decision(%) Gain Result<br />
Education 35.0%<br />
PublicWelfare 13.0%<br />
Highways 8.0%<br />
Hospitals 7.0%<br />
Police 4.0%<br />
Parks& Recreation 6.0%<br />
PublicTransit 5.0%<br />
PublicHousing 6.5%<br />
Others 16.0%<br />
Activity IV — Writingan Essay<br />
Readthe excerptbelowon stripminingandthenwritea two hundredwordessaydescribingthe<br />
opportunitycostofstripmining.Intheessay,writea paragraphexplaininghoweachofthefoI owing has<br />
beeneffectedbystripmining:<br />
- individualworker<br />
worker’sfamily<br />
localinhabitants<br />
farmers<br />
STRIPMINING — Coalis deeplywovenin the storyof Appalachia’spoverty.Undergroundcoal<br />
mininghitapeakafterWorldWar11(1939-1945). ManyAppalachianmenworkedindeeppitmineswhere<br />
’ nanm shaftsweredugto reachthecoal. Inthe 1950stheminingcompaniesbeganstripmining.This<br />
newmethod,insteadofdiggingtunnelsusedhugemachinestoscrapewidebutshallowholesinthehillside<br />
to laybarethecoal.<br />
Manyminerslosttheirjobs. Somemovedtolargecitiestolookforwork,butmoststayed.Therewere<br />
fewjobsfor them,however.<br />
StripmininghaswoundedthelandofAppalachiaswellasthepeople.Stripminingtearsoftthetop<br />
soil — therichestsoil — andleavesthehillsidesbare. Rainswashawaywhatsoilisleft. Eachyearabout<br />
12,000ormoreacresoflandarescarredbystripmining.Afewminingcompaniescoveruptheircuts,but<br />
manymoveon andleavethedamagedlandbehind.
SELFINTEREST<br />
NYOu thinkyouarehelpingtheeconomicsystembyyourwellmeaninglawsandinterference. Youare<br />
not.Letbe.Theoilofselfinterestwillkeepthegearsworkinginalmostmiraculous fashion.Nooneneed<br />
plan.Nosovereigneedrule.•Themarketwillanswerallthings.” — AdamSmith,WealthofNations<br />
Ineconomicterms,selfinterestmeansthateachpersonpursuesaspecificeconomicactivitywhich<br />
willimprovehisownlife.Aproducer ofgoodswantsmostoincreasehisownwealth.Hetriestomakethe<br />
largestpossibleoutputusingthesmallestamountofland,laborandcapital.<br />
Consumers, too,areinfluencedbyselfinterest.Theywanthebestproductandthemostsatisfaction<br />
fortheleastcostandeffort.Therefore, lowerpricescaneasilyeffectconsumer choices.Thistug-of-war<br />
betweenproducers tryingtomaximize incomeandconsumers lookingforabargainhelpstocreatethebest<br />
possibleproductattherightprice.<br />
Selfinterestworksbestina puremarketeconomy. Intheidealstateofapuremarket,competition<br />
wouldworkperfectlytoproduceproductsofthebestqualityandprice.Consumers desirescouldalwaysbe<br />
fulfilled.Ina puremarket, thelargenumberofproducerswouldnotbeabletoinfluencepricesunfairly.<br />
Consumerswouldbetreetochoosebetweenmanysubstituteitemsofvaryingpriceandquality.Vast<br />
numbersofproducerswouldbeunabletobandtogether tochangeprices.Purecompetition, motivatedby<br />
selfinterest,wouldinsurethebestservicesandproductsatthebestprices.<br />
However, sinceoureconomy islessthanperfect, theadvantages ofselfinterestarehardertoseein<br />
the realworld.Incomeandwealtharenotdistributedequally.Consequently, bothconsumersand<br />
producerscanusetheirbargainingpowerto alterthesituationunfairly.Producerscanrefuseto pay<br />
workersadequatewages,orcanincreasesharplythepricesoftheirproducts.Consumerscanmake<br />
unwisechoicesinwhattheybuyduetowronginformation.<br />
Thealternative toselfinterest istohavesociety(government) makedecisions forthewelfareofallits<br />
citizens.Veryoftenpublicworksprojectsaretakenonbythelocalorfederalgovernments becauseprivate<br />
companieswillnotbuildroadsordamsforthewholecommunity. Thiswouldconflictwiththeirownself<br />
interestsincetheprojectwouldnotgeneratemorewealthforthem.Inthe1930s, theTennesseeValley<br />
AuthoritybuiltseveraldamsalongtheTennesseeRiver.Thisprojectcreatedlowcostelectricityandflood<br />
control.Theworkbenefittedallresidents; thegovernment paidfortheprojectbecauseprivateindustry<br />
wouldnot.<br />
Intherealworld,bothconsumers andproducersmaymakedecisionswhichmayharmsocietyasa<br />
whole.Deceptiveadvertisingmayenhancetheproducers’swealth,butdoesit promotethegoodof<br />
&ciety? Advertisements forsugar-coated candiesappeal tochildren, buteatingtoomuchsugarisbadfor<br />
one’shealth.Andwhataboutadsforcigarettes?<br />
Consumersare motivatedbymanyneeds.Forexample,a drugaddictmaystealmoneyto buy<br />
drugs.Dohisactionscontribute toabettersociety?Althoughselfinterest isanimportant balancingforce<br />
betweentheproducersandconsumersofwealth, individual choicesdonotalwaysbenefitsocietyasa<br />
whole.Unevenbargainingpowerandpoororuninformed consumer choicesdistorttheeconomicprocess<br />
motivatedbya moralselfinterest.
ActivityIll — AnalyzingEconomicBehavior<br />
SELFiNTEREST<br />
Dividethe classinto five groups.Assigneachgroupone of the five occupationslisted in the<br />
chart. Eachgroupshoulddiscusstheselfinterestof thepersoninthatoccupationwithregardto price,<br />
safety,durability,fashionandcompetition.Afterten minutes,one memberof eachgroupshouldbe<br />
preparedto makeatwo-minutespeechonthegroup’sfindings.Theclassshouldfillinthechartwithself<br />
interestviewsfor eachoccupationdiscussed.Thefirstitemis filledin brieflyas an example.<br />
SELFINTERESTCHART<br />
garment clothing<br />
worker manufacturer consumer<br />
price/cost highwages lowcost<br />
highprice<br />
safety<br />
durability<br />
fashion<br />
competition<br />
low<br />
price<br />
.<br />
retail<br />
merchant<br />
lowcost<br />
highprice<br />
clothmill<br />
operator<br />
lowcost<br />
highprice<br />
Aftercompletingthechart,describe, inashortparagraph, howselfinteresthelpssocietyfunctionbetter.<br />
ActivityIV — SurveyingStudentsandTeachers<br />
Dividetheclassintotwogroups.Onegroupwillinterviewstudents; theotherwillinterviewteachers.Have<br />
eachstudentinterviewthreepeopleandaskthemseveralquestionsuchasthefollowingaboutselfinterest.<br />
1. Whatselfinterestmotivatesyouractions?<br />
1. Howdoesyourownselfinteresthelptheschool?<br />
3. In whatwaysdoyourselfinterestsruncontraryto the interestsof the schoolcommunity?<br />
4. Howdoesyourselfinteresteffectyourpeers?<br />
Thenhavethe studentssummarizetheirresultsbyfillingin thefollowingchart.<br />
Studentor<br />
TeacherObjectives Helpsthe <strong>School</strong> Harmsthe <strong>School</strong><br />
Students:<br />
Example:<br />
highergrades betterstudents encouragescheating<br />
Teachers:<br />
Studentsshould<br />
handin homework<br />
shouldbe<br />
preparedfor class<br />
encouragescopying<br />
homework
SUPPLYANDDEMAND<br />
Theforcesofsupplyanddemandhaveanimportant influenceonthewayoureconomyoperates.It<br />
affectsprices,andin turnaffectsthetypeofgoodsproduced,methodsandthedistributionof produc<br />
tion.Theseforceshelpdecidewhatgoodsfindtheirwayintostoresandintohomes,andwhatpriceyouwill<br />
payforthem.<br />
Earlyclassical economists regarded thelawsofsupplyanddemandasnatural laws.Reactingagainst<br />
existingman-made lawswhichfavoredthenobilityandtherich,theysawthelawsofsupplyanddemandas<br />
ameanstoallowforamorejustproductionofwealth.Anatural lawdescribes trendsinthewaypeopleact<br />
insociety.Man-made lawsderivefromgovernment actionandareimposedonsociety.<br />
Thelawofsupplystatesthataspricesofgoodsrise,theproducerwillincreaseproduction.Asprices<br />
fall,productiondecreases.Forexample, in1978,whengasolinecost70centspergallon,productionwas<br />
low.Whenpricesroseto$1.30,production increasedgreatly.Thelawofdemandstatesthataspricesfall,<br />
consumersbuymoregoods.Whengascost$1.30,peopledrovelessandboughtlessgas.<br />
Supplyanddemandinteracto establishprices.Whendemandis greaterthansupply,prices<br />
rise.Thisencouragesnewproducers toenterthebusiness.Newproducerscreatecompetitionwhich<br />
increases thesupplyofthegood.Whensupplyisgreater thandemand, pricesfall. Producers thenleave<br />
theindustry,becauselowpricesmeanlittleornobusinessprofits.Thus,supplyanddemandregulate<br />
competitionandprices.<br />
Whe neithersupplynordemandchangewhilepriceschange, thensupplyanddemandaresaidtobe<br />
inelastic.Forexample, ifthepriceofsaltdoubled, demandwouldstillremainaboutthesame.Thepriceof<br />
landdoubles,andthesupplyoflandremainsthesame.Therefore thedemandforsaltandthesupplyof<br />
landareinelastic.<br />
Laborandcapitaloperatefairlysmoothly followingthelawsofsupplyanddemand.Ifwagesincrease,<br />
moreworkersenterthefield;ifwagesdecreaseinaparticular field,workersleavethatfield.Ifwagesrise<br />
comparedto interestrates,thenbusinesspeoplecansubstitutecapitalforlabor.If interestratesrise<br />
comparedtowages,thentheysubstitutelaborforcapital.Thisconstant competitionencouragesbetter<br />
useofsociety’sresources.<br />
However, landreactsdifferentlybecausethesupplyisinelastic—there isafixedamountofit. Supply<br />
anddemandoperatetocreateapriceforland,butcannotaffectheamount available.Increases inwages<br />
andinterestencourageincreasesinthesupplyof laborandcapital.Insteadof increasingthesupplyof<br />
land,increasingpricescausemorelandspeculation.<br />
L
.<br />
ActivityIII — SupplyandDemandof Capital<br />
Legend:<br />
SUPPLYANDDEMAND<br />
Studythegraphon supplyanddemandof capitalandanswerthefollowingquestions.<br />
PRICEOF<br />
CAPITAL<br />
Dl = onginaldemand<br />
D2=newdemand<br />
P1 onginalprice<br />
P2=newpnce<br />
UNITSOFCAPITAL<br />
1.000<br />
01 = odginaiquanifty S = supply<br />
02 = newquantity<br />
1. Whatis thepriceandquantityat Dl?<br />
2. WhendemandchangesfromDl to D2,whatis theeffecton priceandquantity?<br />
3. Thesupplyof capitalis elastic.Howdoesthechartconfirmthis?<br />
4. Whatwouldcausethe demandcurveto shiftfromDl to D2?<br />
5. Givean example,usinga specificproduct,of howelasticityworks.<br />
6. Doesthischartdealwithelasticity,inelasticity,or both? Explain.<br />
&eg.nd. S—siçply<br />
01 = supplyollend<br />
$1,000<br />
$500(P1)<br />
ActivityIV — SupplyandDemandof Land<br />
0<br />
$600(P2)<br />
$500(P1)<br />
—ong Pi lnajpdra<br />
P2 newpdce<br />
450 550<br />
(01) (02)<br />
Studythe graphon supplyanddemandof landaridthenanswerthefollowingquestions.<br />
PRICEPER<br />
ACRE<br />
0<br />
ACREAGE<br />
1. Whatis thepriceandquantitywhereDl intersectsS?<br />
2. WhendemandchangesfromDl to D2,whathappensto the priceandsupplyof land?<br />
3. Whatwouldcausethedemandforlandto increase?Decrease?<br />
4.Canyouincreasethe supplyof land? Explain.<br />
5.Doesthischartdealwithelasticity,inelasticity,or both? Explain.<br />
6. Citesomeexamplesof theworkingsof inelasticity.<br />
‘S<br />
(01)550<br />
S<br />
Dl odgin&demaid<br />
D2=newdemw<br />
0<br />
II
Activity I — BackroundQuestions<br />
ECONOMICSYSTEMS<br />
If yougivecopiesof the UBackgroundfl to yourstudents,pleasehavethemanswerthe following<br />
questions:<br />
1. Whatis aneconomicsystem?<br />
2. Whatarethe basiceconomicquestionsaddressedby aneconomicsystem?<br />
3. Brieflydescribeeachof theeconomicsystemsdiscussed.<br />
4. ExplainGeorge’sproposedsystem.<br />
5. Whateconomicsystemdo youliveunder?Explain.<br />
6. CompareGeorge’seconomicphilosophywiththemarket,commandandtraditionalsystems.<br />
Activity II— Exploring the CommandEconomy<br />
In the followingexcerptfromRoadto Serfdom,FriedrichHayekcriticizescentralplanningin the<br />
commandeconomy.<br />
ftisnoexaggeration tosaythatifwehadhadtorelyonconscious central planning forthegrowthofour<br />
industrial system, itwouldneverhavereached thedegreeofdifferentiation, complexity, andflexibilityithas<br />
attained.Comparedwiththismethodofsolvingtheeconomic problembymeansofdecentralization plus<br />
automatic co-ordination, themoreobviousmethodofcentral directionisincredibly clumsy,primitive, and<br />
limitedinscope.Thathedivisionoflaborhasreached theextentwhichmakesmoderncivilization possible<br />
weowetothefacthatitdidnothavetobeconsciously createdbuthatmantumbledonamethodbywhich<br />
thedivisionoflaborcouldbeextended farbeyondthelimitswithinwhichitcouldhavebeenplanned.Any<br />
furthergrowthofitscomplexity, therefore, farfrommakingcentral directionmorenecessary, makesitmore<br />
important thaneverthatweshoulduseatechniquewhichdoesnotdependonconsciouscontrol.<br />
Afterreadingthe excerptabove,pleaseanswerthefollowingquestions:<br />
1. Whatis the centralthemeof Hayek’sdiscussion?<br />
2. Whatis meantby consciouscontrol?”<br />
3. Howvalidis Hayek’scriticismofcentralplanning?<br />
4. Howwouldyougatherevidencetosupport thevalidityof thisargument?<br />
5. Citetwoexampleofhowyourlifeisgovernedbyacommandeconomysystem,andtwofora<br />
marketeconomy.
Activity Ill — EvaluatingGoodsand Services<br />
ECONOMICSYSTEMS<br />
Belowisa listof schoolservicesandgoodsdistributedto students.Havestidentslistallitemsona<br />
sheetofpaper.Aftereachitem,indicatewhetheritisdistributedaccordingtothelawsoftraditional,market<br />
or commandeconomy.Thencomposean essaysuggestingalternativewaysfor threeof theseto be<br />
distributed.<br />
Courses:DriverEducation,English,<strong>Social</strong><strong>Studies</strong>,ForeignLanguage,Math,StudyHall. Compu<br />
ters,libraryservices,parkingspots,text books,lunchprograms,remedialhelp,socialworkservices,<br />
tutoringservices,reviewbooks,laboratoryequipment,classrings,yearbook,schooldances,school<br />
footballgames,membershipon an athleticteam,schoolnewspaper.<br />
Activity IV — ChartingEconomicSystems<br />
FillinthechartoexplainhowCommand,Market,TraditionalandGeorgisteconomicsystemstreatthe<br />
itemsbelow.<br />
Command Traditional Market Georgist<br />
Land ex: government<br />
owned<br />
Labor<br />
Capital<br />
Rent<br />
Wages<br />
Interest<br />
privateor<br />
government<br />
private private
QUESTIONBANK<br />
UNITI<br />
Baseyouranswersto questions1 through3 on thechartbelowwhichlists<br />
somecharacteristics of NationsA and B and on your knowledgeof social<br />
studies.<br />
Factorsof Production NationA NationB<br />
Land(naturalresources) Relativescarcity Relativeabundance<br />
Labor Relativeabundance Relativeabundance<br />
Capital RelativeabundanceRelativescarcity<br />
BusinessManagement RelativeabundanceRelativescarcity<br />
(1) Whicheconomicdecisionwouldmostprobablybe in thebestinterests<br />
of NationA?<br />
1) permitting an unfavorable balanceof payments<br />
2) seekingforeignmarkets<br />
3) attractinginvestments fromforeignations<br />
4) encouraging immigration<br />
(2) Duringthe early19thcentury,whichnationmost nearlyresembled<br />
NationA?<br />
1) theUnitedStates<br />
2) GreatBritain<br />
3) Russia<br />
4) Turkey<br />
(3) IfNationalB wishesto industrialize, howcouldit bestencourageits<br />
owncitizensto inves theircapitalindomesticindustries?<br />
1) by permitting an unfavorable balanceof paymentsandseeking<br />
colonies.<br />
2) by permitting an unfavorable balanceof paymentsand<br />
encouraging immigration<br />
3) by attractinginvestmentsfrom foreign nations and<br />
encouraging immigration<br />
4) by instituting highprotective tariffsandgivingtax<br />
concessions to business<br />
Baseyouranswersto questions4 through6 on the economists’ statements<br />
belowandon yourknowledgeof socialstudies.<br />
EconomistsA, B, C, 0, and E representfivepointsof viewon whateach<br />
believestherelationship of bigbusinessandgovernment shouldbe.<br />
Economists A: As thisnationhas industrialized, muchbusinesshasgrown<br />
so largethatonlytheFederalGovernmentis capableof regulatingit. The<br />
Governmentmust protectthe consumeragainsttrusts,for, afterall,<br />
Governmentexiststo help the individualsdo what they•cannotdo by<br />
themselves.
EconomistB: This country’samazingeconomicgrowthrestsuponprivate<br />
enterprisewhichshouldbe allowedto functionfreely.The Government’s<br />
role shouldbe only to providean economicclimateconduciveto the<br />
development of business.<br />
EconomistC: Majâr industryhas becomeso largethat the individual<br />
citizenis at themercyof thebigcorporations. Theonlywayto solvethe<br />
problemis for the Governmento assumeownershipof the nation’sbasic<br />
industries.<br />
-<br />
EconomistD: Oursis a marketeconomywheretheconsumerIs king. Leave<br />
businessalone,and it willprovideconsumerswithwhattheywantat the<br />
cheapestpricespossible.<br />
EconomistE: Combinations in businessare not necessarilyan evil,but<br />
Government mustregulatetheirdiverseactivitiesto assurethewelfareof<br />
variouseconomicgroups.<br />
(4) Whicheconomistwouldbe considered<br />
a socialist?<br />
1) A 3) C<br />
2) B 4) E<br />
(5) Which economistmost closelyreflectsthe currentpolicyof the<br />
FederalGovernment towardbigbusiness?<br />
1) B 3) D<br />
2) C 4) E<br />
(6) Whicheconomistbest representsthe policiesfollowedby the U.S.<br />
Government<br />
duringmostofthe19thcentury?<br />
1) A 3) C<br />
2) B 4) E<br />
(7) Bushlandis a countryin whichthegovernmentownsalltheindustries<br />
and thefarms. Productionandwagesare set by the government.The<br />
government provideseducation, childcareandmedicalcareforallthe<br />
people.Bushlandis a:<br />
1) Marketeconomy<br />
2) Mixedeconomy<br />
3) Comandeconomy<br />
4) Traditional economy<br />
(8) Accordingto the“lawof supplyanddemand”,if twiceas manyheadsof<br />
lettuceweregrownthisyear becauseof goodweatheras were grown<br />
lastyear:<br />
1) thepriceof lettucewouldgo up thisyear<br />
2) thesupplyof lettucestaysthesamethisyear<br />
3) thedemandof lettucewouldgo downthisyear<br />
4) thepriceof lettucewouldgo downthisyear<br />
-
(9) WhenConjnunist Chinabuildsa canalentirelywithhandlabor,we can<br />
probablyassumethat:<br />
1) CapitalIs relatively scarcethere<br />
2) Canalsbuiltby handarebetter<br />
3) Laboris relatively scarcethere<br />
4) Theyhavean abundanceof naturalresources<br />
(10) An importanteffectof competition in oureconomyis that:<br />
1) It guarantees thatallworkerswillhaveJobs<br />
2) It helpskeeppricesdown<br />
3) It preventsbusinessfromproducingtoomanygoods<br />
4) It preventsdepressions<br />
(11) Whichwouldbe theonebestwayof increasing theamountof goodsand<br />
servicesthenationcanproduce?<br />
1) Raiseeveryone’sincomeso thatwe all havemoremoneyto<br />
spend<br />
2) Havethegovernment takeoverthefactories<br />
3) Passlawsto preventworkersfromgoingon strike<br />
4) Providebettermachineryandmoreeducationforworkers<br />
(12) Grasslandisa countryinwhichthereis verylittlegovernment<br />
ownershipof farmsand businesses.Peoplemay trainfor jobs and<br />
startbusinessesas besttheycan. The governmentdoesnot usually<br />
controlpricesandwages.Grasslandis:<br />
1) Coniiiunistic<br />
2) Capitalistic<br />
3) <strong>Social</strong>istic<br />
4) Cooperative<br />
(13) VinelandIs a countryinwhichthegovernment ownsmajorindustries,<br />
suchas railroadsandelectricpowercompanies.Privatecitizensown<br />
otherindustriesuchas farmsand shoefactories.Peopleare paid<br />
accordingto how gooda job theyhave,but the governmenthelpsthe<br />
poorandgenerallypaysformedicalcareandschooling.Vinelandis:<br />
1) <strong>Social</strong>Istic<br />
2) Coninunistic<br />
3 Capitalistic<br />
4 Fascistic<br />
(14) “Scarcity”isan economicproblem:<br />
1) Evenforwealthyfamiliesin theUnitedStates<br />
2) Onlyforpoorfamiliesin theUnitedStates<br />
3) Forindividuals andfamilies,butnotforgovernments or<br />
nations<br />
4) OnlyforpeoplewholiveIn underdeveloped countries.
(15) Whichof thefollowingIs themostImportantdifference betweenthe<br />
economicsystemof theUnitedStatesandtheeconomicsystemof Soviet<br />
Russia?<br />
1) Wagesand salariesaremuchmoreequalIn Russiathanthey<br />
arein theU.S.<br />
2) The governmenthas nothingto do with the economyin the<br />
U.S.<br />
3) Mostof thefactories, farms,andequipmentareownedby the<br />
governmentIn Russia<br />
4) Theeconomyof Russiahasalwaysgrownmoreslowlythanthe<br />
economyof theU.S.<br />
(16) Ina capitalist economicsystem,suchas theU.S.,whohasthemost<br />
influenceindecidingwhatwillbe produced?<br />
1) Laborunions<br />
2) Thefederalgovernment<br />
3 Consumers<br />
4 Businesspeople<br />
(17) Therearemanydifferenteconomicsystemsin theworld.Whichis the<br />
problemtheyallhaveincommon?<br />
1) Peoplewantmorethancanbe produced<br />
2) Bigbusinesses aretoopowerful<br />
3) Laborunionsaretoopowerful<br />
4) Farmersareproducingtoomuch<br />
(18) Whatis therewardof thosewhotaketheinvestment risksin an<br />
enterprise?<br />
1) Salaries<br />
2) Wages<br />
3 Profits<br />
4 Rents<br />
(19) Ina marketeconomysuchas theU.S.,mostgoodsandservicesare<br />
producedby:<br />
1) Consumercooperatives<br />
2) Profit—making businesses<br />
3) Governmentindustries<br />
4) Nonprofitcorporations<br />
(20) Everyeconomicsyste mustmakechoices.Which0f thefollowing<br />
choicesdo alleconomicsystemsface?<br />
1) To balancethegovernment’s budgetby reducingspending<br />
2) To savemoneyandthusreducethenationaldebt<br />
3) To dispensewiththeproduction of luxuries<br />
4) To makethebestuseof scarceresources
(21) Whena nation’shumanandmaterialresourcesarebeingfullyand<br />
efficiently<br />
used,moreof anyoneproduct<br />
1) cannotbe produced<br />
2) can.beproducedonlyif thereis a generaldecreasein<br />
prices<br />
3) Can be producedonly if thereIs lessproductionof some<br />
otherproducts<br />
4) cannotbe producedunlessprivateenterpriseratherthan<br />
- -<br />
government doesso<br />
(22) Newspaperheadline:“SCHOOLREFERENDUM DEFEATED.”Inmanyrecent<br />
voteson schoolbudgets,citizenshavedefeatedschooltax proposals<br />
and forcedschoolsto eliminatextracurricular activitiesbecauseof<br />
a lackof funds. What,if any,are the opportunitycostsof such<br />
decisions?<br />
1) Whateverbenefits there might have been from the<br />
extracurricular activities<br />
2) Sincelessmoneywill be spentthereare no opportunity<br />
costs<br />
3) The costsof what taxpayerswill now buy with what they<br />
saved<br />
4) Theopportunity to useschoolfacilities fully<br />
(23) Of thefollowing, theprincipleof diminishing returnsis best<br />
illustrated by:<br />
1) anydeclinein theaveragerateof profit<br />
2) thedeclinein personalincomeas workersage<br />
3) smallfirmsbegindrivenoutof businessby largefirms<br />
4) a slowingrateof increasein outputas farmersadd<br />
increasing amountsof fertilizer to theirland<br />
(24) Thebestdefinition of profitis:<br />
1) totalassetsminustotalliabilities<br />
2) totalrevenuesminustotalcosts<br />
3) totalsalesminusalltaxes<br />
4) totalsalesminuswages<br />
(25) Mostof themoneythatAmericanbusinesses receiveby sellingtheir<br />
productsor servicesis paidas:<br />
1) profitsto theownersof thebusinesses<br />
2) wagesandsalariesto employees<br />
3) rentto propertyowners<br />
4) intereston debts<br />
(26) “Economicdemand”fora productrefersto howmuchof theproduct<br />
1) thepeoplearewillingandableto buyat eachprice<br />
2) thepeoplewant,whethertheycanbuy itor not<br />
3) thegovernment ordersto be made<br />
4) is availableforsale
(27) InitIally, thepricesystemIn a marketeconomyreactsto a shortage<br />
of a productby:<br />
1) raisingthepriceandproducerprofits<br />
2) loweringthepriceandproducerprofits<br />
3) raisingtheprice,butloweringproducerprofits<br />
4) loweringtheprice,butincreasing producerprofits<br />
(28) WhichIsmostcharacteristic of a comandeconomy?<br />
1) Resourcesareallocatedby government direction<br />
2) A varietyof economicincentives encouragebusinessgrowth<br />
3) Thereis a highrateof unemployment<br />
4) Pricesaresetby consumers<br />
(29) “Theuncontrolled extraction of ourrawmaterialswillabsolutely<br />
insurethatourposteritywillonceagainturnto thehorseandplow.’<br />
Thepersonmakingthisstatementwouldmostlikelyagreethat<br />
1) productionshouldbe dependentonlyuponthedemandof the<br />
market<br />
2) scarcitycanbestbeminimizedby a laissez-faire policy;<br />
governmentintervention is undesirable<br />
3) conservationof our resourcesis essentialif future<br />
generations areto enjoycontinuedprosperity<br />
4) scarcitycannotbe totallyeliminated, so theproblemshould<br />
be handledby thoseforwhomit ismostsevere<br />
(30) Thebasiceconomicproblemwhichhasfacedmankindthroughistoryis<br />
howto:<br />
1) encouragetradewhilecurrencydecreasesin value<br />
2) maintaincapitalism whileachievingsocialdemocracy<br />
3) checkthespreadøf comunismwithoutworldconflict<br />
4) Fulfillunlimitedwantsin thefaceof limitedresources<br />
(31) “Combinations in industryaretheresultof an...economic lawwhich<br />
cannotbe repealedby politicalegislation.”<br />
The authorof this quotationwouldprobablyfavorwhicheconomic<br />
policy?<br />
1) antitrustlaws<br />
2) laissez—faire capitalism<br />
3) mercantilism<br />
4) socialsecuritylaws<br />
(32)In theU.S.,a “mixedeconomy”meansthattheGovernment<br />
1) ownsbusinessenterprisesbut permitsoperationby private<br />
management<br />
2) places agricul ure under strict regulationbut leaves<br />
industryto privatemanagement<br />
3) makesredistribution of incomea majorobjectiveof taxation<br />
4) affectsthe economythroughregulationsand spendingbut<br />
leavesmostof industryto privatemanagement
(33)Whichis themostvalidstatementconcerningtheproblemof balancing<br />
humanwantswithlimitedresources?<br />
1) ItexistsonlyIn societieswitha freeenterprise economy<br />
2) It hasbeensolvedIn nationswithstron governmental<br />
controlsovereconomicactivity<br />
3) It has becomelessof a problemwith the advancements in<br />
technology<br />
4) It existsin allsocieties, no matterwhattheeconomic<br />
system<br />
(34)A basicdifferencebetweencapitalismand socialismis in their<br />
beliefsaboutthe<br />
1) needfora writtenconstitution<br />
2) sovereignpowersof nations<br />
3) ownershipof themeansof production anddistribution<br />
4) importance of self-interest In foreignaffairs<br />
(35)Whichisa fundamental characteristic of a freemarketeconomy?<br />
1) Traditional methodsof production areused<br />
2) Governmental economicplansarefollowedto meetmarket<br />
demands<br />
3) Consumermarkettastesareshapedby productadvertising<br />
4) Pricesaredetermined by theforcesof supplyanddemand<br />
(36)The supplyof and demandfor a certainproductremainthe same;the<br />
pricerises.Themostlikelyexplanation<br />
is that,forthisproduct<br />
1 perfectcompetionin themarketexists<br />
2 themanufacturer controlsa significant partof themarket<br />
3) consumersarewillingto paymore<br />
4) thelawof comparative costsIs inoperation<br />
*(37)Youreadthefollowingheadline:“ORANGEGROWERSFORMMONOPOLY.”How<br />
will the new orangemonopolymost likelydifferfrom a highly<br />
competitive orangegrowingindustry?<br />
1) Profitsin theorangeindustrywillnowbe certain<br />
2) Theorangegrowerswillincreasetheiruseof capitalgoods<br />
3) Theorangemonopolywillhiremoreworkersandincrease<br />
output<br />
4) Therewillbe lessincentiveforthe orangemonopolyto be<br />
efficient<br />
*(38)A risein thepriceof whichproductwouldbe likelyto increasethe<br />
demandforbutter?<br />
1) Margarine<br />
2) Butter<br />
3) Cheese<br />
4) Bread
*(39)If U.S.farmoutputremainsthesamehowwillseveralyearsof bad<br />
weatherin EuropeandtheSovietUnionaffectAmericanfoodprices?<br />
1) Raisethem<br />
2) Decreasethem<br />
3) Makeno change<br />
4) Cannotbe determined<br />
*(40)Assumingthatthesupplyof a productremainsconstantas thedemand<br />
forit increases,<br />
itspricewillnormally<br />
1) fall<br />
2) rise<br />
3) staythesame<br />
4) eitherriseor fall<br />
*(41)“Americans<br />
aremixed-upeople.Everyoneknowsthatbaseballis far<br />
lessnecessarythanfoodand steel. Yettheypayballplayersa lot<br />
morethanfarmersandsteelworkers.”Why?<br />
1) Theemployersof theballplayersaremonopolists<br />
2) Ballplayersarereallyentertainers ratherthanproducers<br />
3) Therearefewerprofessional ballplayersthanfarmersor<br />
steelworkers<br />
4) Goodballplayersarescarcecomparedto thedemandfor<br />
theirservices<br />
*(42)Howmucha workerearnsdependsmostlyon:<br />
1) Whetheror nothe/shebelongsto a union<br />
2) Thesupplyof anddemandforhis/herskills<br />
3) Lawsregulating wages<br />
4) Thekindof firm forwhichhe/sheworks<br />
*(43)Overa longperiodof timea countryincreaseditsproduction of goods<br />
andservicesperperson.Thiswasprobablydueto:<br />
1) An increasein itspopulation<br />
2) Tariffswhichkeptoutgoodsfromothernations<br />
3) Conservation of itsnaturalresources<br />
4) Increasedoutputperworker<br />
*(44)If a companyis theonlymakerof bricksin thecountry,it is:<br />
1) a competitor<br />
2) a monopoly<br />
3) an oligopoly<br />
4) a metropolis<br />
*(45)Thelonglinesof consumerswaitingoutsidemanystoresin Russiatell<br />
us thatmanyconsumergoodsthereareprobably<br />
1) Pricedtoolow<br />
2) In greatsupply<br />
3) Notin demand<br />
4) Pricedtoohigh
*(46)WhichIsthemostfundamental economicquestionforeverysociety?<br />
1) Whatformof currencyshouldbe used?<br />
2 Withwhichnationshouldthesocietytrade?<br />
3 Whatlevelof personalincomeIsappropriate?<br />
4 Howshouldgoodsandservicesbe producedanddistributed?<br />
*(47)Thestatement, “Wecannothaveourcakeandeatit too,”whenapplied<br />
to economics, mostnearlymeansthat<br />
1) basiceconomicdecisionsmustbe madeby government<br />
2) specialization in industryresultsin a risein thecostof<br />
production<br />
3) increasesInleisuretimehavecauseda declinein economic<br />
production<br />
4) productive resourceswhichsatisfysomewantscannotsatisfy<br />
otherwants<br />
*(48)Whichsituationwouldbe thebestexampleofeconomicscarcity?<br />
1) Consumerdemand is not sufficientto maintainfull<br />
employment<br />
2) Thereis notenoughcopperavailableto supplycurrentneeds<br />
3) The valueof goodsimportedexceedsthe valueof goods<br />
exported<br />
4) Taxrevenuesarelessthanprojectedexpenditures<br />
*(49)Theeconomyof theU.S.is sometimesreferredto as a mixedeconomic<br />
systembecauseboth<br />
1) inflationandrecessioncanexistat thesametime<br />
2) foreignanddomesticproductsaresoldin theU.S.<br />
3) theGovernment andprivatebusinessesinfluencetheeconomy<br />
4) corporations andsingleproprietorship existsideby side<br />
*(50)Whichaspectof theU.S.economicsystemwouldbe foundin any<br />
capitaliSt system?<br />
1 antitrustlaws<br />
2 theprofitmotive<br />
3) minimum—wage scales<br />
4) tariffson importedgoods<br />
*(51)Inwhichsituationwouldthelawof supplyanddemandoperatemost<br />
freely?<br />
1) in a puremarketeconomy<br />
2) whenpricecontrolsaremaintained<br />
3) duringa periodof verylowinterestrages<br />
4) whentwoor threelargebusinesses controloneindustry<br />
*(52)Themainpurposeof anyeconomicsystemis to<br />
1) produceanddistribute goodsandservices<br />
2) provideforequaldistribution of wealthamongthepeople<br />
) providepqualopportunity forindividual prosperity<br />
4) ensurethatallmembersof societyhaveadequateresources
*(53)Theoretically, competition amongbusinesses shouldresultIn<br />
1) highercostsofmaterials<br />
2) higherpricesforproducts<br />
3) reductioninconsumerdemand<br />
4) moreefficientproduction<br />
*(54)Whichsituationwouldbe characteristic of a marketeconomy?<br />
1) Consumershavelittleinfluenceoverwhatis produced<br />
2) Themeansof production arecontrolled by government<br />
3) Manufacturer’s decisionstendto reflectconsumerdemands<br />
4) Thereis littlecompetition amongmajorbusinesses<br />
*(55)Thebasicproblemthatalleconomicsystemsmustdealwithis the<br />
issueof<br />
1 automation<br />
2 monopoly<br />
3) scarcity<br />
4) profit<br />
*(56)Whicheconomicproblemustallsocietiesolve?<br />
1) guaranteeing everyonean annualwage<br />
2) securingright—to-work laws<br />
3) satisfying unlimitedwantswithlimitedresources<br />
4) speedingup therateof industrialization
MATCHING<br />
Matcheachdefinition with the correct term.<br />
1) humanphysical and mental skills applied<br />
to production<br />
2) thecostof thelossof thenextmost<br />
desirablegoodor servicethatcould<br />
havebeenproducedwitha resource<br />
3) a lineon a graphthatshowsthevarious<br />
amountsof goodsandservicesa country<br />
canproducewithits’existingresources<br />
andtechnology<br />
4) naturalresourcessuchas climate,soil,<br />
minerals,forests,rivers<br />
5) an economicsystemInwhichanswersto<br />
thebasiceconomicquestionsaredetermined<br />
inthemarketplace<br />
6) thestudyof howpeople,bothindividually<br />
andingroups,dealwiththeproblemof<br />
scarcity<br />
7) an economicsysteminwhichthegovernment<br />
makesmostof theeconomicdecisions<br />
8) man-madegoodsusedto produceothergoods<br />
andservices<br />
9) theactof combiningland,laborand<br />
capitalresourcesin a productive<br />
way<br />
10) resourcesusedto producegoodsand<br />
services — land,labor,capitaland<br />
entrepreneurship<br />
11) theproblemof limitedresourcesand<br />
unlimitedwants<br />
12) personwhosejobit is to studyhow<br />
peopleandsocietiesmakechoices<br />
resultingfromtheproblemof scarcity<br />
13) givesup onethingto havesomethingelse<br />
14) a graphshowingvariouscombinations of<br />
goodsthatcanbe boughtwitha given<br />
sumof money<br />
15) a simplified representation of an<br />
economicsituation<br />
Onetermwillnotbe used.<br />
a. factors of production<br />
b. budgetline<br />
c. capital<br />
d. labor<br />
e. entrepreneurship<br />
f. economicmodel<br />
g. services<br />
h. land<br />
i. economics<br />
j. opportunity cost<br />
k. trade-off<br />
1.marketeconomy<br />
m. scarcity<br />
n. production-possibility<br />
frontier<br />
o. commandeconomy<br />
p. economists
ESSAYQUESTIONS<br />
1) a. What are the threebasiceconomicquestionsthat all nationsmust<br />
answer?BrieflydiscussthefactorsinvolvedIn findingsolutionsto<br />
eachof thethreequestions<br />
b. Explaintheroleof scarcityindetermining whethera nationwill<br />
producecapitalor consumergoods<br />
c. Discussthreeopportunity costsInvolvedinthedecisionon whetheror<br />
notto attendcollege<br />
*2) a. Explainhowproducersineachof thethreebasiceconomicsystems<br />
decideon whatto produce.<br />
b. Explaintheadvantages anddisadvantages of a corrinand economy.<br />
c. Whydo countriesoftenhavea combination of allthreebasictypesof<br />
economicsystems?<br />
3) Oneof thebasiccharacteristics of a marketsystemis economicfreedom.<br />
a. Define“economicfreedom.”<br />
b. Givean exampleof whereeconomicfreedomis presentin theAmerican<br />
economytoday<br />
c. Givean exampleof whereeconomicfreedomis restricted<br />
*4) a. Explainthedifferencebetweencapitalgoodsand consumergoods. Be<br />
sureto includexamplesof bothkindsof goodsinyourexplanation<br />
b. Explainhowsomeitemscanbe bothcapitalgoodsandconsumergoods<br />
5) Oneof thebasiccharacteristics of a marketsystemis competitive markets.<br />
a. Definetheterm“competitive markets.”<br />
b. Givean exampleof wherecompetitive marketsexistin theAmerican<br />
economytoday.<br />
c. Givean exampleof wherecompetitive marketsarerestricted<br />
*6) Nameand brieflydiscussthe threebasiceconomicquestionsthat every<br />
countryhasto answer<br />
7) a. Whoanswersthebasiceconomicquestionsina traditional<br />
economy?<br />
b. Whoanswersthebasiceconomicquestionsin a comandeconomy?<br />
c. Whoanswersthebasiceconomicquestionsina marketeconomy?<br />
d. Howdo economists<br />
classifynationswithmixedeconomies?<br />
e. Describethecharacteristics of capitalism, theeconomicsystemfound<br />
in theU.S.<br />
* Denotesquestionsappropriate forgeneralstudents
II. Microeconomics — Consumer, Business, Labor, Agriculture,<br />
: Skills<br />
(i.) Concept of automation<br />
(2) Monopolies (history)<br />
Public Cov’t. Assistance<br />
(3) Business growth and regulations<br />
(4) Concept of entrpreneural work<br />
(5) Major court cases affecting the American economy and its<br />
laws (ex. Munn vs. Illinois)
(6) American union movement and its history<br />
Page 52<br />
(7) History of American industrialization — affects on our<br />
standard of living<br />
(8) Growth of the American Middle Class creates increased<br />
consumerism<br />
(9) American land use has changed our style of living<br />
(ex. farm to city)<br />
(10) Economic & <strong>Social</strong> reform has helped to protect the consumer<br />
(11) Georgraphy and climate affect economic growth<br />
(12) Basic corporation structure<br />
(13) American philanthrophy (ex. food<br />
(14) Woman and their economic role<br />
(15) How technology affects economic growth<br />
(16) How business is affected by wars<br />
(17) Investment capital<br />
(18) Venture capital<br />
(19) Pooling and related terms<br />
(20) Gov’t. — American corporate buy out (Chrysler)<br />
(21) Protectionism and free trade<br />
(22) Federal Reserve Bank and Board<br />
(23) Discrimination hurts economic progress (ex. black history)<br />
(24) Political and economic rights go together (ex. laws<br />
concerning ethnic groups)<br />
(25) Welfare, workfare, and other related social benefits
Knowledge OBJ<br />
Page 53<br />
(1) The role of various components of the American Economic<br />
Systems<br />
(2) His/her role in the economic system as consumer, worker,<br />
invester and/or voting citizen<br />
(3) The political and social impact of economic decisions<br />
and the economic impact of political and social decisions<br />
(4) Specific terms relating to demand curves and schedules<br />
(5) Describe how the determinations of demand affect demand<br />
(6) What is elasticity<br />
(7) What are the factors of production<br />
(8) Be able to calculate marginal products<br />
(9) Explain the difference between a change in quantity and<br />
a change in supply.<br />
(10) Be able to calculate price elasticity of supply<br />
(11) Explain how costs and the principle of diminishing marginal<br />
productivity affect the level of production<br />
(12) Explain the effects of a shortage or a surplus<br />
(13) Be able to identify in which 2 ways the balance between<br />
supply and demand is prevented<br />
(14) Affects of a price floor and a price ceiling<br />
(15) Define the terms related to the forms of business<br />
organization<br />
(16) Identify the advantages and disadvantages of the 3 kinds<br />
of business organization<br />
(17) How do business organizations obtain financing
Page 54<br />
(18) Describe the different types of mergers<br />
(19) DefIne terms related to the organization of markets<br />
(20) Describe types of market (business) organizations<br />
(21) Describe the demand curve and level of output and<br />
price for the perfectly competitive firm<br />
(22) Describe the demand curve and level of out for the<br />
monopolies firm<br />
(23) Explain monopolistic competition and oligopolistro<br />
competition in tr e market system<br />
(24) Describe the demand curve in a monopoly<br />
(25) DescrIbe the demand curve in an oligopolistic firm<br />
(26) Why have market economies failed<br />
(27) Describe how negative affects on the market can be<br />
controlled<br />
(28) Explain why public goods are provided<br />
(29) Explain how natural monopolies occur<br />
(30) Effect of negative externalities on the market<br />
system, and how they can be controlled<br />
(31) Effects of positive externalities on the market system<br />
(32) Describe why public goods are provided the people<br />
(33) Be able to explain why natural monopolies occur<br />
(34) Supply and demand as it relates to labor<br />
(35) Analyze minimum wage laws<br />
(36) History of labor unions<br />
(37) Factors that influence interest rates<br />
(38) Why a good year for farmers may really be a bad<br />
year
Page 55<br />
(39) Comparison of farm income and non farm income<br />
(40) Present and future trends in agricultural productivity<br />
(41) Government agricultural policies and their effects
MICROECONOMICS<br />
I. The consumer in the economy<br />
(A) What decisions do consumers make?<br />
(1). Spending decisions<br />
(2) Savings decisions<br />
(3) Borrowing decisions<br />
Page 56<br />
(B) The role of the consumer in determining production<br />
(1) Consumer sovereignity<br />
(2) Limits on consumer sovereignity<br />
(C) Protection of the consumer<br />
(1) Government protection<br />
(2) Private protection<br />
(D) Factors which affect consumption<br />
(1) Price<br />
(2) Advertising<br />
(3) Tastes and styles<br />
(4) Economic confidence<br />
(5) Gov’t. policies<br />
(6) Needs (general)<br />
II. Business in the economy<br />
(A) Business decision making<br />
(1) What to produce<br />
(2) How to produce<br />
(B) Forms of business organizations<br />
(1) Proprietorship<br />
(2) Partnership<br />
(3) Corporation
(C) Role of profit<br />
(1) As an individual owner or partner<br />
(2) As an investor<br />
(D) Capital and productivity<br />
(1) Capital as the foundation of business<br />
enterprise<br />
Page 57<br />
(2) Productivity as the object of the use of<br />
capital<br />
(E) Role of competition<br />
(1) Perfect competition<br />
(2) Monopolitistic competition<br />
(3) Oligopoly<br />
(4) Monopoly<br />
(5) National monopoly<br />
III. Labor in the Economy<br />
(A) Labor as one of the four factors of production<br />
(1) The role of labor<br />
(2) Wages and their determination<br />
(3) Effects of forces outside of the model..<br />
unions — government<br />
(4) Productivity — labor as human capital<br />
(B) Organized labor in the U.S.<br />
(1) Reasons for organizing<br />
(2) Difficulties of early attempts to organize labor<br />
(3) Organization of national labor unions and the<br />
development of collective bargaining<br />
(4) Recent developments in organized labor
(C) Labor—Management relations<br />
Page 58<br />
(1) The goals of management and its weapons<br />
(2) The goals of labor and its weapons<br />
IV. Agriculture in the Economy<br />
(A) The importance of agriculture as part of the economy<br />
(B) The effect of the agriculture economy on the U.S.<br />
(C)<br />
(D)<br />
and the world<br />
The agricultural economy<br />
Productivity and agriculture<br />
(1) Changes caused by increasing agricultural<br />
productivity in the U.S.<br />
(2) Problem surrounding agricultural prices<br />
(3) Problems of inelastic supply<br />
(4) Problems of overproduction and surpluses<br />
(5)<br />
(6)<br />
in relation to world hunger and shortages<br />
The question of diminishing returns<br />
Organized labor in agriculture<br />
(E) Coy ‘t. and agriculture<br />
(1)<br />
(2)<br />
(3)<br />
History of gov’t support for agriculture<br />
Agricultural surpluses and gov’t. support<br />
Costs of government support to the consumer<br />
and to the economy<br />
(4) Government and international trade in agriculture<br />
V. Public Goods and Services<br />
(A) Goods and services provided by governments
Page 59<br />
(B) Why gov’ts. provide certain goods and services<br />
(1) Use is available to all — roads<br />
(2) Services which are supplied by both the<br />
‘public and private sectors<br />
(C) Government expenditures can be organized into 4<br />
categories<br />
(1) Gov’t. purchases goods and services<br />
(2) Gov’t. makes payments to people for which<br />
it receives no goods or services (transfer)<br />
(3) Fed and State Gov’ts. make payments to lesser<br />
governments for certain programs — (grants)<br />
(4) Payments are made to individuals or industries<br />
to encourage certain activities (subsidies)<br />
(D) Regulatory function of Gov’t.<br />
(1) Gov’t. maintains a legal system essential to<br />
the economy — enforces contracts, protects<br />
property, guarantees right of individuals<br />
(2) Gov’t. makes and enforces regulations (agencies)<br />
(3) Cov’t. regulation is necessary when market forces<br />
fail to achieve desired goals<br />
(4) Effectiveness of regulation — judged upon socially<br />
desired goals
Unit II — Projects Ideas<br />
Page 60<br />
(1) Assume that you have an income of $200 a week. How<br />
much of this would you spend? How much would you save?<br />
Now suppose that you had extra income, such as another<br />
$20 a week. How much of your extra income (your marginal<br />
) income would you spend? Save? What Is your propensity<br />
to ? consume What Is your marginal propensity to consume ?<br />
What factors affected your decisions on spending and<br />
saving? Now assume that your weekly income soars to<br />
$2000. How would your spending and savings plans change?<br />
Are your answers in accord with the theories Set forth in<br />
the textbook?<br />
(2) Talk to a business owner or manager. Ask him or her to<br />
try to explain what happens when the firm increases<br />
investment<br />
, such as buying a new word processor for $1000.<br />
Who gets the $1000? Then what probably happens to the<br />
money? Try to identify the various businesses and people<br />
who might eventually get some of the money that was<br />
originally spent for the word processor (or other capital<br />
item). How do the results of your investigation help to<br />
illustrate the multiplier concept?<br />
(3) Assume that you have been saving money to buy an<br />
item, such as a VCR, a car, or a new stereo set.<br />
expensive<br />
Assume<br />
that the marginal propensity to consume is 75%. Figure<br />
out how much the money you spend on the new item will add<br />
to the economy because of the multiplier effect. What<br />
will happen if the )IPC increases? Decreases? When might
Page 61<br />
a larger multiplier be good for the economy? When<br />
might it be bad for the economy?<br />
(4) “In any given year, the federal government should not<br />
spend more than it receives in revenues.” What arguments<br />
support this statement? What are the arguments against<br />
it? Summarize both sides and then give your own conclu<br />
sions with your reasons.<br />
(5) Write a paper on the theories of the economist John<br />
Maynard Keynes, show how Keynes changed the way many<br />
economists view the problem of economic slumps. Use<br />
such sources as the following for fairly brief and<br />
simple explanation of Keynesian theories:<br />
Canterbery, E. Ray, The Making of <strong>Economics</strong><br />
, 2nd<br />
edition (Belmont, California: Wadsworth Publishing<br />
Co., 1980), Chapter 7, “J.M. Keynes.<br />
Fusfeld, Daniel R., The Age of the Economist<br />
, 4th<br />
edition (Clenview, Illinois: Scott Foresman, 1982),<br />
Chapter 9, “The Keynesian Revolution.”<br />
lleilbroner, Robert L., The Worldly Philosophers (New<br />
York: Simon and Schuster, 1967), Chapters 9 and 10.<br />
Moggridge, D.E., John Maynard Keynes (Baltimore:<br />
Penguin Books, 1976).<br />
Victor, R.F., John Maynard Keynes:Father of Modern<br />
<strong>Economics</strong><br />
. (Charlotteville, N.Y.:SamNar Press, 1972).<br />
This is a short booklet written for the high school<br />
student.<br />
You might also look into some of the ctiticisms of<br />
Keynes, such as Henry Hazlitt’s The Failure of the
Page 62<br />
“New Econoxnics:An Analysis of the Keynesian Fallacies<br />
(New Rochelle, N.Y. :Arlington House, 1973).<br />
(6) Consider the items that you and/or your family purchase<br />
most often. How does competition affect the price and<br />
the quantity, as well as the quality, of the things that<br />
you or your family buy?<br />
(7) Examine the markets and/or industries In your area.<br />
Describe each one, and categorize it in terms of being<br />
pure competition, pure monopoly, monopolistic competition<br />
,<br />
or oligopoly<br />
. Which type of market is most common?<br />
How do you explain this?<br />
(8) Go to a large record store that sells all types of records<br />
and audio tapes. Note how much space is devoted to each<br />
type of music (rock, classical, jazz, country and western,<br />
etc.). List the different kinds of music, ranking them<br />
in order of which type gets the most space. What does<br />
this show about the way in which consumer demand guides<br />
production In the music industry?<br />
(9) Interview the owner of a small business to learn about<br />
the costs of operating a company. Without asking for<br />
specific figures (unless the owner volunteers to give them),<br />
find out which costs are fixed and which are variable .<br />
Make a list of these costs and explain why each can be<br />
categorized as either fixed or variable.<br />
(10) If you are involved In a club, athletic team, or other<br />
organization that has expenses, make an analysis of its<br />
. costs Which costs are fixed ? Which ones are variable ?
Page 63<br />
(Examples: If the club pays an annual rent for a meeting<br />
place, this is a fixed cost. If refreshments are provided<br />
at the meetings, food is probably a variable cost because<br />
it will rise if membership increases.) What causes some<br />
of the costs to rise? Can you identify any marginal<br />
? costs<br />
(11) Study two business firms in your area —— one very large<br />
firm and one very small company. Compare and contrast<br />
them. (You might compare a large chain store with a small<br />
retail shop, for example.) What advantages does the<br />
large firm have? What advantages might the small firm<br />
have?<br />
(12) Consider the things that you and/or your family buy fre<br />
quently. If demand for these things suddenly increased,<br />
which ones could you continue to get without difficulty?<br />
Which ones would be in short supply because the producers<br />
need more time to create more? (In short, which ones have<br />
an elastic supply and which ones have an inelastic supply? )<br />
How would you tell what is the market period, short run<br />
, period and long run period for each item? How would a<br />
sudden increase in demand affect the price of each item?<br />
(13) ThInk about a product or service that you have provided,<br />
such as making cookies, moving lawns, or baby sitting.<br />
Compute all the costs of producing the product or service.<br />
Be sure to include implicit costs as well as the obvious<br />
“out of pocket” costs. (For example, if you made cookies<br />
you must include an “implicit wage” for the time you
Page 64<br />
spent, as well as the cost of ingredients and equipment.)<br />
Now consider the payments you received. How much profit<br />
did you actually make? What was your profit per unit of<br />
output (such as profit per dozen cookies, or per average—<br />
size lawn mowed)?<br />
(14) List the arguments in favor of pure competition and the<br />
arguments against it. Which arguments do you consider<br />
to be the strongest? Why?<br />
(15) Read the book Free Enterprise in America by Andrew Hacker<br />
(New York:Harcourt, Brace Jovanovich, 1977). Written for<br />
secondary schools, this book explains the market, supply,<br />
demand, costs, and productivity in a brief but interest<br />
ing and lively fashion. Write a review of the book, show<br />
ing how it relates to your textbook’s discussion of pure<br />
competition.<br />
(16) Read the book McDonald ’s:Behind the Arches by John F.<br />
Love (New York:Bantain Books, 1986), for a case study of<br />
the famous fast—food company. In what ways does McDonald’s<br />
illustrate economic concepts discussed in your textbook?<br />
Why do you think it has been so successful in such a<br />
highly competitive field?<br />
(17) To learn more about cost—benefit analysis , interview a<br />
representative of a firm that sells home insulation. Ask<br />
for an explanation of how to estimate the money saved by<br />
insulating a house. Evaluate the explanation by trying<br />
to identify all possible costs (including the imputed
Page 65<br />
spent, as well as the cost of ingredients and equipment.)<br />
Now consider the payments you received. How much profit<br />
did you actually make? What was your profit per unit of<br />
output (such as profit per dozen cookies, or per average—<br />
size lawn mowed)?<br />
(14) List the arguments in favor of pure competition and the<br />
arguments against it. Which arguments do you consider<br />
to be the strongest? Why?<br />
(15) Read the book Free Enterprise in America by Andrew Hacker<br />
(New York:Harcourt, Brace Jovanovich, 1977). Written for<br />
secondary schools, this book explains the market, supply,<br />
demand, costs, and productivity in a brief but interesting<br />
and lively fashion. Write a review of the book, showing<br />
how it relates to your textbook’s discussion of pure<br />
competition.<br />
(16) Read the book McDonald’s:Behind the Arches by John F. Love<br />
(New York:Bantani Books, 1986), for a case study of the<br />
famous fast—food company. In what ways does McDonald’s<br />
illustrate economic concepts discussed in your textbook?<br />
Why do you think it has been so successful in such a<br />
highly competitive field?<br />
(17) To learn more about cost—benefit analysis , interview a<br />
representative of a firm that sells home insolation. Ask<br />
for an explanation of how to estimate the money saved by<br />
insulating a house. Evaluate the explanation by trying<br />
to identify all possible costs (including the imputed<br />
cost of your labor if you do some of the work of insulating
Page 66<br />
the house), and by examining the means by which the<br />
possible benefits were estimated.<br />
(18) Make a list of the industries in your area. Which would<br />
you consider to be monopolies? Oligopolies? Monopolistic<br />
competition? Pure competition<br />
? Explain your reasons in<br />
each case. Which type seems to be most common in your<br />
area?<br />
(19) Give examples of non—price competition in goods and<br />
services that you normally buy. For example, several<br />
fast—food restaurants may charge the same price for ham<br />
burgers, and thus do not use price competition for this<br />
item. In what ways do they compete? (Examples:Advertis—<br />
ing campaigns; faster service; more attractive facilities.)<br />
How important are these things in terms of their influence<br />
on consumers?<br />
(20) Go to a library and look for books and articles about OPEC,<br />
the international oil cartel . How and why did OPEC become<br />
established? How has it affected the price of oil and<br />
petroleum products? Why hasn’t it always succeeded in<br />
limiting supplies and raising prices? How might you<br />
personally prepare for the possibility of future oil price<br />
increases and fuel shortages?<br />
(21) Contact a few large corporations in your area and try to<br />
arrange to interview management people. Look for companies<br />
that are considered to be multi—nationals<br />
. Find out how<br />
and why they became involved in over—seas operations, how<br />
important their foreign holdings are, and what problems<br />
they might have in regard to their status as multi—nationals.
Page 67<br />
(22) To learn about product differentiation<br />
, examine the<br />
products or services of several firms in your area<br />
that are in the same industry —— that is, firms that<br />
produce the same kind of product or service. In what<br />
ways are their products or services different? (Example:<br />
Does the gasoline sold by a Getty station differ from the<br />
gasoline sold by a Texaco station? If there are no real<br />
differences between the products, are there other differ<br />
ences, such as different brand names, different packaging,<br />
differences in the guarantees or warranties offered, etc.?)<br />
Do the differences that you have discovered affect sales?<br />
Which differences, if any, are important to you as a con<br />
sumer? Which ones would induce you to purchase more of<br />
one brand instead of another, or to pay a higher price?<br />
Why? Do you think that product differentiation is good<br />
or bad for our economy? Why?<br />
(23) Assume that you are in business for yourself, such as pro<br />
viding lawn care to home—owners. Assume, also, that you<br />
are competing with several others who provide the same<br />
service or product. How might you convince consumers that<br />
your service or product is different? How would you cate<br />
gorize the market that you are in (monopoly, oligopoly,<br />
monopolistic competition<br />
, or pure competition)<br />
?<br />
(24) Write a paper on . advertising For a favorable view of<br />
advertising, read The Trouble With Advertising by John<br />
O’Tooi.e (New York:Chelsea House, 1980). For a negative<br />
view, read Advertising, The Uneasy Persuasion:Its Dubious
Page 68<br />
Impact on American Society by Michael Schudson (New York:<br />
Basic Books, 1986). Give both the favorable and unfavor-.<br />
able aspects of advertising and then set forth your own<br />
views on whether it is good or bad for our economy.<br />
(25) Locate business firms in your area that are proprietorships,<br />
partnerships<br />
, and corporations<br />
. Describe each firm and try<br />
to explain why each firm is organized as a proprietorship,<br />
partnership, or corporation.<br />
(26) Interview a management person from a business firm . Learn<br />
how and why the firm got started, why it is organized as<br />
it is (proprietorship, partnership, or corporation), and<br />
how it is currently managed. Does the firm illustrate any<br />
of the economic concepts discussed in the textbook chapter<br />
on business enterprise?<br />
(27) Obtain the annual report of a major corporation<br />
, such as<br />
Armstrong World Industries in Lancaster, Pennsylvania, or<br />
a company in your area. What goods or services does it<br />
produce? To whom does it sell its products or services?<br />
What is its current financial position? How does this<br />
compare with Its position In previous years? Why has its<br />
financial position changed? Do you think the demand for<br />
its output is elastic or inelastic<br />
? Why?<br />
(28) What economic services does your local government provide<br />
for you or for your family? Consider indirect as well as<br />
direct benefits. Try to list the services and benefits<br />
(such as police protection, fire protection, public parks,<br />
public health facilities, educational programs, consumer
Page 69<br />
protection, aid to the elderly, etc.). What might<br />
these services cost if you or your family had to pay<br />
for them diretly? Do you think that any of these govern<br />
ment programs should be increased, decreased, or dropped<br />
altogether?<br />
(29) Identify the agricultural products used in your home. Be<br />
sure to list non—food Items (such as things made from<br />
cotton and wool), as well as food provided by farms. If<br />
the price of each item doubled, how much would you continue<br />
to buy? That is, is your demand elastic or inelastic in<br />
each case? Now suppose that the prices dropped by 50 per<br />
cent. By what percentage would you or your family increase<br />
your purchases? What are the implications of your findings<br />
(regarding elasticity) for farmers?<br />
(30) Try to interview farmers or people Involved in agricultural<br />
industries in your area. Learn what you can about farm<br />
production costs and the economic situations that create<br />
problems for farmers. How is farming different from other<br />
industries? How do these differences help to explain some<br />
aspects of the farm problem ?<br />
(31) Pretend that you are going to appear before a Congressional<br />
committee holding hearings on government aid for farmers .<br />
Decide which group you want to represent —— the farmers,<br />
the consumer of farm products, a taxpayer group. Present<br />
that group’s view on government aid for farmers. Be pre<br />
pared to defend your position.<br />
(32) Contact the department of agriculture or other agencies<br />
that deal with farmers in your state or county. Try to
Page 70<br />
obtain information that will explain the role of agriculture<br />
in the economy of your area. (Even in large urban areas<br />
one can find agricultural industries, or industries that<br />
relate to agriculture in some way.) Write a short paper in<br />
which you set forth the importance of agriculture to your<br />
area.<br />
(33) For a truly challenging assignment, write a report on how<br />
many of the economic principles and concepts covered in<br />
the text can be applied to agriculture. It might help to<br />
refer to specialized books, such as Econoxnics:Applications<br />
to Agriculture and Agribusiness byEwell P. Roy, Floyd L.<br />
Corty, and T.D. Sullivan (Danville, Illinois:The Interstate<br />
Printers and Publishers, 1981); <strong>Economics</strong> of Agriculture<br />
by Harold C. Haicrow (New York:McGrav—Hill, 1980); or<br />
Introduction to Agricultural <strong>Economics</strong> by John B. Penson,<br />
et. al. (Englewood Cliffs, N.J.:Prentice—Hall, 1986). Your<br />
paper should show that many economic theories have applica<br />
tions to one of America’s most persistent problems, and<br />
that the theories are very useful tools of analysis.<br />
(34) Select a corporation in an industry that interests you.<br />
Follow its stock on the stock exchange that lists its<br />
securitites. (Pick a company that is listed on a major<br />
stock exchange such as the New York Stock Exchange or the<br />
American Stock Exchange.) Construct a graph to show the<br />
changes in the price of the stock. When changes occur,<br />
try to find out what factors might have caused the stock<br />
to rise or fall in market value .
Page 71<br />
(35) Assume that you have inherited $10,000 and that you want<br />
to invest it in securities<br />
. Examine common stock, pre<br />
ferred stock, and bonds. Also consider other investment<br />
possibilities, such as mutual funds. List the advantages<br />
and disadvantages of each. In the light of your financial<br />
goals, which investment (or combination of investments)<br />
would you select? Why?<br />
(36) Make a study of competition in an industry that interests<br />
you, or of competition in the sale of goods and services<br />
that you commonly buy. Describe the competitive situation<br />
and how it affects price and quality. How are your per<br />
sonally affected by it?<br />
(37) Obtain some of the educational publications of New York<br />
Stock Exchange, such as You and the Investment World .<br />
(New York Stock Exchange, Educational Division, 11 Wall<br />
St., New York, N.Y. 10005.) Study these to learn how and<br />
why the Exchange began, what role it performs in our economy,<br />
and how it exemplifies some of the economic principles (such<br />
as the laws of supply and demand) discussed in the textbook.<br />
(The offices of stock brokers in your area might also have<br />
material you could use.)<br />
(38) How much competition is there? What do you need to know to<br />
succeed in this field? How much money and what other<br />
resources will you need to get started? Are there any<br />
government regulations that you will need to know about?<br />
What will it cost you to operate the business? Row will<br />
you be using the various factors of production in the<br />
business?
Page 72<br />
(39) Contact your local chanber of commerce or other business<br />
organizations in your area and ask for material that<br />
describes business enterprise in your town, city, county,<br />
or region. What kinds of businesses are predominate? How<br />
important are they to your area? How do they affect you<br />
personally? Will they provide employment opportunities<br />
for you when you leave school? Will the local or regional<br />
business organizations help you if you want to establish<br />
your own business? (To learn how to assess the importance<br />
of different enterprises in your area, read “How to Do<br />
Regional Analysis” by James H. Savitt, and “Studying Your<br />
Region’s Economy” by George Dawson, chapters 41 and 42 in<br />
The Economy of New York State , edited by Sanford D. Gordon.<br />
This book was published in 1987 by South—Western Publishing<br />
Co., 5101 Madison Road, Cincinnati, Ohio 44227.)<br />
(40) If you are thinking of starting your own business, read the<br />
book Creating A New Enterprise by Roger W. Hutt (Cincinnati,<br />
Ohio:South—Western Publishing Co., 1982). Summarize the<br />
main points in a notebook. As you continue to read your<br />
economics textbook, add to your notebook comments on<br />
economic principles and problems that will be useful to<br />
you as a business owner. For example, after reading the<br />
textbook discussion of “fixed costs” note what kinds of<br />
costs in your own firm will be “fixed.” (Fixed costs are<br />
those that do not change, regardless of how much you pro<br />
duce. Examples: The rent that you pay for a building or<br />
office. The payments that you owe to a bank for a loan.)
Page 73<br />
(41) Get a copy of the book In Search of Excellence: Lessons<br />
From America’s Best—Run Companies by Thomas J. Peters<br />
and Robert H. Waterman (Warner Books, 1982). The book<br />
describes 62 companies. Select.about three of these and<br />
write a brief report in which you explain why these firms<br />
have been successful. Identify the economic principles<br />
that help to explain their success. (For example, how<br />
did they appear to use the law of demand in making decisions<br />
on what to produce, for whom, and how much to charge?)<br />
(42) Write a brief report on the role of small business in the<br />
American economy. Use such books as Steven Solomon’s<br />
Small Business USA:The Role of Small Companies in Sparking<br />
America’s Economic Transformation (New York:Crown, 1986).<br />
How important is small business today? What are some<br />
problems associated with small business? What does the<br />
Small Business Administration try to do? Do small busi<br />
nesses present attractive employment opportunities to you<br />
personally? How important are they in your own community?<br />
If you become interested in the history of small business,<br />
read Small Business In American Life , edited by Stuart M.<br />
Bruchey (New York:Columbia University Press, 1980). This<br />
goes back to the Revolutionary War in discussing the role<br />
of small business in the United States.<br />
(43) Identify at least one enterprise in your area that is a<br />
natural . monopoly Why is it a natural monopoly? Is it<br />
controlled by some unit of government (such as a state<br />
public service commission)? How well does it serve the<br />
buyers of the goods or services it produces?
Page 74<br />
(44) If you are considering establishing your own small<br />
, business make a study of the situation. What would<br />
be the market for your product or service?<br />
(45) Make a. study of the wage or salary situation in the<br />
occupation that interests you. How much will you earn<br />
in your chosen field? What explains the wage or salary<br />
rate? Are wages and salaries higher in one area than<br />
inanother? If so, what accounts for the difference?<br />
(Are the costs of living higher in one area than in<br />
the other, for example?)<br />
(46) Learn what is needed to obtain employment in the occupa<br />
tion that interests you. What sort of training and edu<br />
cation is required? What personal characteristics are<br />
important? (For example, a manager might need more<br />
interpersonal skill than an assembly—line worker.) What<br />
are the working conditions like? Is there a great demand<br />
for people in this occupation?<br />
(47) After you have learned what your job involves, try to<br />
think of ways of improving your productivity in that<br />
type of work. How can you increase your knowledge,<br />
skill, or experience? (An increase in productivity<br />
could bring an increase in your wage or salary.)<br />
(48) Visit a factory, bank, or large store and observe labor’s<br />
role in the firm. How does labor interact with such<br />
capital items as machines and computers? Write a report<br />
in which you explain this interdependence and its effect<br />
on efficiency and output
Page 75<br />
(49) Study a particular capital item that is relatively new,<br />
such as the word processor or the personal computer,<br />
and show how it has changed the nature of work, and how<br />
it has affected productivity. Consider whether or not<br />
you might be able to use this item in your own future<br />
work.<br />
(50) Do research on your state’s minimum wage law (if any),<br />
and compare it with the provisions of the federal minimum<br />
wage law. Is your own chosen occupation affected by a<br />
minimum wage law? Do you favor or oppose minimum wage<br />
legislation? Why?<br />
(51) Examine the union situation in the industry in which you<br />
plan to work. Do the workers belong to a union? Is<br />
there more than one union? If so, which unions are<br />
they? What are the existing union—management contracts<br />
like? What protections do the unions provide? What are<br />
the responsibilities of union members? How are the<br />
unions controlled? What federal and state laws apply<br />
to these unions?<br />
(52) If there is a labor dispute in progress in your area,<br />
or a dispute that is of national importance being<br />
reported in the news media, make a study of the dispute.<br />
Who is involved? What are the issues? What arguments<br />
are being presented by both sides? What efforts are<br />
being made to resolve the dispute? How is the public<br />
being affected? How do you think the dispute ought to<br />
be settled?
Page 76<br />
(53) Contact unions in your area and ask for copies of<br />
their union constitutions and of existing contracts<br />
with management. Compare the constitutions of several<br />
unions.. In what ways are they similar? How do they<br />
differ? What accounts for the similarities and diff—<br />
erences? Do the same with several different contracts.<br />
(54) Study the advertisements that appear on radio and TV,<br />
and in newspapers and magazines. In what ways do they<br />
serve to inform and assist the consumer? Do any of<br />
them mislead or misinform the consumer? In what ways<br />
are you personally influenced by ads? How can you<br />
benefit from the positive aspects of ads? How can they<br />
help you make wise choices? How can you protect your<br />
self from the negative effects of false or misleading<br />
ads?<br />
(55) Develop a savings plan for yourself. First set your<br />
goals. Why do you need or want to save money? List<br />
the reasons, such as helping to pay for college, to take<br />
a trip, to buy a car, or to have money for emergencies.<br />
Examine various ways of saving (such as opening a savings<br />
account in a bank, buying mutual funds, or purchasing<br />
government bonds), and decide which way (or ways) would<br />
be best for you. Find out which ways are the safest,<br />
which ones pay the most interest (or yield the best<br />
dividiends), etc.<br />
(56) Assume that you need to borrow money to pay for an<br />
important item. Examine the various sources of credit .
Page 77<br />
What are the terms of the loan? What is the interest<br />
rate? Which source of credit is best for you? What<br />
are the risks you are taking when you go into debt?<br />
Would it be better to wait until you have saved<br />
enough money to make the purchase?<br />
(57) Interview several workers who produce different goods<br />
and services. What do they like about their jobs?<br />
What do they dislike? Do they belong to unions? What<br />
is their opinion of unions?<br />
(58) Interview representatives of labor and of management<br />
regarding the role of unions in our economy. In what<br />
ways do the labor people and the management people<br />
agree? In what ways do they differ? What changes have<br />
taken place in labor—management relations in recent<br />
years? Why have these changes occurred? Give your own<br />
opinion on whether the changes (such as more union<br />
participation in management) are good or bad for our<br />
economy.<br />
(59) Many public employees have joined unions in recent years.<br />
Consider the question of whether or not public employees<br />
should have the right to strike. Gather opinions on<br />
both sides of the issue and then write your own conclu<br />
sion.<br />
(60) Review the major labor laws , such as the Wagner Act,<br />
the Taft—Hartley Act, and the Landruni—Griffin Act, that<br />
have been passed by the U.S. Congress. What are their<br />
major provisions? How do they affect the workers? The<br />
consumers? Management? Evaluate each law in terms of
Page 78<br />
whether it is good or bad for our economy. For a<br />
fairly short book on labor law see A Primer on<br />
American Labor Law by William B. Gould (Cambridge,<br />
Mass. :The MIT Press, 1982). For a slightly longer<br />
work (368 pages) see Labor Law:Cases, Text, and<br />
Legislation by E. Edward Herman and Gordon S. Skinner,<br />
(Washington, D.C.:University Press of America, 1982).<br />
If you need a very detailed source, use Labor Relations<br />
Law, 4th edition, by Benjamin Taylor and Fred Witney<br />
(Englewood Cliffs, N.J. :Prentice—Hall, 1983), which is<br />
914 pages long, or Labor law and Legislation<br />
, 7th edition,<br />
by David P. Twomey (Cincinnati:South—Western Publishing<br />
Co., 1985), which is 622 pages long.<br />
(61) Learn about the major labor laws in your state . (Your<br />
state may have a department of labor or other agency<br />
that is concerned with labor relations, working conditions,<br />
etc. Try to get information from this agency.) How do<br />
your state’s laws compare with federal laws? How might<br />
those laws affect you as a worker, or as an employer or<br />
manager?<br />
(62) Read the book The Role of Unions in the American Economy ,<br />
2nd edition, by Ray Marshall and Brian Rungeling (New<br />
York:Joint Council on Economic Education, 1985). This<br />
will teach you about the history of American labor unions<br />
as well as giving the current situation. Write a brief<br />
review of the book, and try to apply the concepts to the<br />
union situation in your own area. Are unions strong or
Page 79<br />
weak in your area? How important are they in your<br />
area? What role do they play in your region’s economy?<br />
(63) Find out what consumer protection agencies or organiza<br />
tions exist in your area. Contact each one to learn<br />
what they do to help consumers. Which ones are govern<br />
ment organizations or agencies? Which ones are non—<br />
government?<br />
(64) Although consumers suffer from misleading advertising,<br />
high prices, poor quality merchandise, and inferior<br />
service, they can also create problems. (Examples are<br />
shoplifting, damaging merchandise, and failing to pay<br />
their bills.) Interview a few merchants, restaurant<br />
owners, and motel managers to learn what problems they<br />
have with irresponsible or dishonest consumers. How<br />
do such people indirectly harm other consumers? (For<br />
instance, the merchants may have to raise prices to<br />
pay for goods that have been stolen or damaged, to cover<br />
the costs of hiring guards, etc.) Draw up a “Bill of<br />
Rights” for consumers and a “Bill of Responsibilities.”<br />
(65) If you are very well informed about a particular product<br />
or service, you can help others by preparing a written<br />
report on this. item. How do you determine whether or<br />
not the item is. of high quality? Where is the item sold?<br />
What is considered to be a reasonable price? What do you<br />
need to know about using the item intelligently? (Examples<br />
might be musical instruments that you play, portable radios,<br />
personal computers, VCRs, compact disk players, or cameras.)
FRE ENTERPRiSE<br />
J WORKSHEET<br />
CUSTOMERRESPONSIBILITY<br />
Name<br />
Class Date<br />
Since the consumer movement began, businesses have had to accept additional<br />
responsibilities in advertising, packaging, and product guarantees. However,<br />
consumers still are responsible for reading product information carefully, keeping<br />
receipts, and checking repairs among other precautions. Read the following situations,<br />
and then decide what would be a fair resolution of each problem.<br />
I. John Hernandez buys a stereo that has a 90-day warranty. The warranty clearly<br />
states that within the 90-day period the manufacturer will give the buyer a new<br />
stereo if the original does not work. Afterward, the manufacturer will repair the<br />
stereo at the customer’s expense. John brings the stereo back after 120 days and<br />
demands another stereo. The salesclerk will not replace John’s broken stereo. How<br />
would you resolve this?<br />
2. After Meredith Johannson leaves work at midnight, she deposits her paycheck in her<br />
bank’s 24-hour cash machine. The machine gives her a receipt, but the money is not<br />
credited to her checking account. Two weeks later, Meredith’s checks start coming<br />
back marked “insufficient funds.” When she goes to the bank and shows the<br />
manager her receipt, she is told that the machine’s receipt is not acceptable as<br />
proof of deposit. How can Meredith prove she deposited the check?<br />
3. James Shigura sees a used car that he would like to buy. However, he notices a<br />
small oil leak. He tells the dealer that he will buy the car lithe leak is fixed. The<br />
dealer agrees. James buys the car, with a warranty of three months or 1,000 miles<br />
(1,600 kms) for all repairs. After driving 1,100 miles, the car breaks down. The<br />
cause is a major oil leak. James takes the car back to the dealer and demands that<br />
the car be repaired free of charge. He claims that the dealer never fixed the car in<br />
the first place. The dealer refuses to do this, claiming that the warranty period is<br />
over. How would you resolve this problem?<br />
I
YOUTHECONSUMER<br />
WORKSHEET<br />
Name<br />
Class Date<br />
EVALUATINGSAVINGAND INVESTMENTOPTIONS<br />
People save and invest for very different reasons. Three criteria involved in deciding<br />
how to save or invest money are: return on investment, safety, and liquidity. These are<br />
defined as follows:<br />
Return on Investment: the increase in value over time of the original sum.<br />
Safety: the degree of risk involved.<br />
Liquidity: the ease with which an asset can be converted to cash.<br />
The following table lists the various saving and investment options discussed in Chapter<br />
7. Define each option in the column provided. Then rate each option for return on in<br />
vestment, safety, and liquidity as good (+ +), adequate (+), poor (—),or variable<br />
(+1—).<br />
Saving/Investment<br />
Option<br />
1. Passbook<br />
savings<br />
2. Money market<br />
account<br />
3. Certificate<br />
of deposit (CD)<br />
4. Stocks<br />
5. Bonds<br />
6. Individual<br />
retirement<br />
account (IRA)<br />
7. Straight life<br />
insurance<br />
8. Real estate<br />
Definition<br />
Return on<br />
Investment Safety Liquidity
YOUTHECONSUMER<br />
WORKSHEET<br />
UNDERSTANDINGTHE CONSUMER<br />
successful. Why?<br />
Why?<br />
Name<br />
Class Date<br />
In Chapter 8, you learned about several rules and principles that govern supply and<br />
demand. Study the rules and their definitions below. Then use them to complete the ex<br />
ercises that follow.<br />
1. Law of demand: As the price of a good or service falls, a larger quantity will be bought, and<br />
vice versa.<br />
2. Law of diminishing marginal utility: Total satisfaction rises with each unit bought, but the<br />
amount of additional satisfaction will lessen with each unit.<br />
3. Elasticity of demand: The quantity of demand for a product or service will change. Elastic<br />
means that demand will change greatly. Inelastic means that demand will not change much.<br />
Three factors determine whether demand for a product is elastic or inelastic: (a) whether the<br />
item is a necessity or a luxury; (b) whether or not the item has substitutes; (c) what amount of<br />
income the consumer spends on the item.<br />
1. Rumson’s Clothing Store had a successful two-for-the-price-of-one sale. The owners<br />
next tried a three-for-one sale on the remaining clothes. This sale was not nearly as<br />
2. Kemal’s Restaurant wanted to increase its lunch business. The owners distributed<br />
coupons good for $1 off on every lunch order. Business increased by 25 percent.<br />
3. Associated Metal Mills is the only manufacturer of a special machine part. The cost<br />
of producing the part increased by 15 percent. Associated Metal raised its price by<br />
15 percent, but demand for the part stayed about the same. Why?<br />
4. The Daily Star, a morning newspaper, raised its price from 30 cents to 35 cents to<br />
cover its rising costs. The number of newspapers sold stayed about the same. Why?<br />
5. Better Builders has constructed 20 luxury homes, all priced at $300,000 and above.<br />
Only 5 homes have been sold, so the company decides to lower the price by<br />
$20,000. Only 3 more homes are sold in the next month. Why?.
Lesson 1: ConsumerMarketplaceDecisions<br />
TIME REQUIRED: 45-50 minutes<br />
RECOMMENDED GRADE LEVEL: 9-12<br />
MAJORCONCEPTS: Scarcity and choice<br />
Opportunity cost<br />
RELATED CONCEPTS: Economic wants<br />
InstructionalObjectives:Studentswill<br />
• Make better individual decisions through a con<br />
scious process;<br />
• Evaluate the costs involved when they make a<br />
decision;<br />
• Understand more fully the relationship between<br />
consumption and work.<br />
Rationalefor the Activity: Students are faced with an<br />
increasingnumber of products and services which they<br />
feel they need. One obvious way to obtain the money<br />
to buy these products and services is to earn money by<br />
working. However, students must realize the costs of<br />
choosing to work and of choosing other alternatives<br />
before making a decision.<br />
Materials: A copy of Handout 1-1for each student<br />
Procedure:<br />
1. Introduce the lesson with a series of warm-up<br />
questions for the students:<br />
a. How many of you work to earn money?<br />
b. What types of jobs do you have?<br />
c. How many hours per week do you work?<br />
d. Why do you work?<br />
e. Have you ever missed any school activities be<br />
cause of work?<br />
2. Distribute the case study and have students read<br />
It.<br />
3. Conduct class discussion using as a guide the set<br />
of questions at the end of the case study.<br />
NOTE: During the discussion reinforce the fact<br />
that time is a scarce resource and that there is<br />
an opportunity cost involved in allocating time.<br />
When discussing question 5 try to have each stu<br />
dent state the criteria used to make the necessary<br />
decision.<br />
Evaluation: Assess quality of student contribution to<br />
class discussion (use case study answer sheet as a<br />
guide).<br />
Teacher’s Answer Sheet for Handout I-I<br />
I. John has to decide how best to use his time (a<br />
scare resource). He must choose to own a car and<br />
spend time earning money to pay for it or choose<br />
to have time for basketball and the student coun<br />
cil.<br />
2. To continue as he is or to get a part-time job.<br />
Students may think of several other options that<br />
include lookingfor ajob that does not conflict with<br />
basketball practice.<br />
3. If he does not work, he cannot have his own car. If<br />
he does work he has far less free time and will<br />
have to cut down on his school activities.<br />
4. The time for student activities and other spare<br />
time he must give up are opportunity costs. He<br />
may also damage his chances for a scholarship to<br />
junior college.<br />
5. The answer will vary with the individual stu<br />
dent. Ask each student to identify the opportunity<br />
costs associated with his/her answer.
INDEPENDENT PRACTICE WORKSHEET<br />
CHAPTER10<br />
Name________________________________________ Class____________ Date__________<br />
Numberof<br />
Cheeseburgers<br />
0<br />
1<br />
2<br />
3<br />
4<br />
5<br />
10.1CONSUMERBEHAVIOR<br />
TOTAL UTILITY AND MARGINAL UTILITY<br />
The table belowshowsthe total utility and marginal utility that BillyBigeater<br />
gains from eating different quantities of cheeseburgersand hot dogs. It also shows<br />
the marginal utility per dollar, that is, the extra satisfactionhe receivesfor each<br />
dollar spent. Marginalutility per dollar is a useful concept for consumers in<br />
making purchasingdecisions.It is derived by dividing the marginal utility by the<br />
price of the product.<br />
Cheeseburgers, price= $2 Hot Dogs,price = $1<br />
Total<br />
Utility<br />
0<br />
24><br />
>—<br />
62<br />
78<br />
90><br />
Marginal<br />
Utility<br />
—24<br />
—20<br />
—a. —<br />
b. —<br />
—c.<br />
Marginal<br />
Utthiy<br />
perDollar<br />
12<br />
10<br />
d.<br />
t —<br />
f._<br />
Number<br />
of Hot<br />
Dogs<br />
0<br />
2<br />
3<br />
4<br />
5<br />
Total<br />
Utility<br />
0<br />
18?<br />
25<br />
3’<br />
35<br />
Marginal<br />
Utility<br />
—10<br />
8<br />
—<br />
2:::<br />
Marginal<br />
Uniny Pe<br />
Dollar<br />
1. The first two rows of the table have been completed. Use them as an exampleto completethe remaining<br />
rows. You will notice that marginal utility is derived by subtracting the last figure for total utility from the<br />
new figurefor total utility.<br />
2. Why does the total utility increasewhile the marginal utility decreasesas BillyBigeaterconsumesmore<br />
units of cheeseburgersand hot dogs?<br />
3. What would Billy’sdemand curves for cheeseburgersand hot dogs look like?<br />
4. Explainhow the marginal utility columns relate to Billy’sdemand curves for cheeseburgersand hot dogs.<br />
S. Which Ofthese foods, cheeseburgersor hot dogs, givesBillythe greater extra satisfactionfor each dollar<br />
spent?<br />
6. If Billyhad $10 and wanted to spendit all consumingboth hot dogs and cheeseburgers,how many of each<br />
would he purchase to gain the greatest total utility for his $10?<br />
7. Would the total utility, marginal utility, and marginal utility per dollar be the same as Billy’sfor each<br />
person who might buy cheeseburgersand hot dogs?Explain.<br />
10<br />
8<br />
—<br />
::
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER10<br />
Name Class____________ Date__________<br />
10.2CONSUMERBUYINGSKILLS<br />
EVALUATINGADVERTISEMENTS<br />
How many advertisingtechniques can you recognize?Someof the ads below<br />
provide useful information. Others employdeceptivesellingpractices. Some<br />
simply do not tell enough to be useful. Next to each ad, write “useful,”<br />
“deceptive,” or “not enough.” Then explain your answer, naming the technique<br />
being used in the case of a deceptivesellingpractice.<br />
1. Drink milk. Milk providescalcium, vitamin D, and severalother 1.<br />
necessaryminerals.<br />
2. Buy our long-lastinglightbulbs. They’re made in sheltered 2.<br />
workshopsby handicapped workers. Every bulb you buy will help a<br />
handicappedworker earn a living.<br />
3. Today, for one day only, you can buy our convertiblesofa beds at 3.<br />
the incrediblelow price of $999. Don’t wait! The offer ends<br />
tomorrow.<br />
4. The new Handy Home computer comescompletewith a 13” 4.<br />
(measureddiagonally)color monitor for $800. This personal<br />
computer has a one-piecedesign, 5¼”disk drive, 256 RAM, and two<br />
voiceswith a built-in circuit. Each computer comeswith a software<br />
packagethat includesword processing,spreadsheetanalysis,and a<br />
graphicseditor.<br />
5. Is your child fallingbehind classmatesin school?Will your child be 5.<br />
able to get into college?Giveyour child the educationaladvantageof<br />
a lifetime. Help your child get ahead in the world. For the sake of<br />
your child’sfuture, buy an XS47 PersonalComputer today!<br />
6. We are offeringyou a specialdeal on our Super Brain encyclopedia 6.<br />
act. Order yours and give us the names of others who might be<br />
interested in buying their own encyclopedias.For each person you<br />
referred who buys a set, we’lltake $25 off your price.<br />
7. This garment is made of 55% polyesterand 45% cotton. It is 7.<br />
guaranteed for one year or your money back. Wash in machineor by<br />
hand in lukewarmwater with mild soap. Made in the United States.<br />
8. Think of warm breezeson a spring day, of fresh blossomspushing<br />
through the earth, of the scent of new-mowngrass. Nature’s Child<br />
Shampoois all of these. And more.<br />
8.
Handout1-1<br />
CASESTUDY:TRANSPORTATIONFORJOHN<br />
Johnis beginninghissenioryearof highschool.Heis activelyinvolvedin basketballand<br />
withthestudentcounciLHeintendsto startjunior collegeafterhighschoolandbelieves<br />
that hewill receivea scholarshipbecauseof hisbasketballabilityandschoolleadership.<br />
Lately,Johnhasbeenveryunhappybecausehemustbegridesfromhisfriendsandmust<br />
sharethefamilycarwithhisparentsandoldersister.Whathewantsisacarof hisown.He<br />
hasinvestigatedthesecond-handcarsavailableandmustdecidehowto paythe$500for<br />
the car he hasselected.Hehasbeenoffereda job at a gasstationwherehecouldwork<br />
weekdayafternoonsfrom 5 p.m.to 7 p.m.and four hourson Saturday.Hecould earn<br />
enoughin threemonthsto payoff a loanhisdad is willing to givehim.<br />
ShouldJohntakethepart-timejob at thegasStationin orderto purchasea car?<br />
Ouestions:<br />
1. Whatis the dilemmaencounteredbyJohn?<br />
2. Whatoptionsor alternativesdoeshe have?<br />
3. Whatarethe costsassociatedwith eachalternative?<br />
4. If hechoosesto startworkingright away,whatarehis opportunitycosts?<br />
5. Whatoptionwouldyouchooseif youwereJohn?Why?Whatwouldyouropportunity<br />
cost be?
Handout1-1<br />
CASE’STUDY: TRANSPORTATIONFORJOHN<br />
Johnisbeginninghissenioryearof highschool.Heis activelyinvolvedin basketballand<br />
withthestudentcouncil.Heintendsto startjunior collegeafterhighschoolandbelieves<br />
thathewill receivea scholarshipbecauseof hisbasketballabilityandschoolleadership.<br />
Lately,Johnhasbeenveryunhappybecausehemustbegridesfromhisfriendsandmust<br />
sharethefamilycarwithhisparentsandoldersister.Whathewantsisacarof hisown.He<br />
hasinvestigatedthesecond-handcarsavailableandmustdecidehowto paythe$500for<br />
thecar hehasselected.Hehasbeenoffereda job at a gasstationwherehecouldwork<br />
weekdayafternoonsfrom 5 p.m.to 7 p.m.and four hourson Saturday.Hecould earn<br />
enoughin threemonthsto payoff a loanhisdadis willing to givehim.<br />
ShouldJohntakethepart-timejob at thegasstationin orderto purchasea car?<br />
Questions:<br />
1. Whatis thedilemmaencounteredbyJohn?<br />
2. Whatoptionsor alternativesdoeshe have?<br />
3. Whatarethe costsassociatedwith eachalternative?<br />
4. If hechoosesto startworkingright away,whatarehisopportunitycosts?<br />
5. Whatoptionwouldyouchooseif youwereJohn?Why?Whatwouldyouropportunity<br />
costbe?
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER10<br />
Name __________________________________________<br />
Class Date___________<br />
(A)<br />
EXPENSE<br />
CATEGORY<br />
10.3CONSUMERMONEYMANAGEMENT<br />
WORKINGWITHA BUDGET<br />
In the budget in the text (Figure 10.3),the family’snet income was $1,549a<br />
month. Use the gures from that budget to decide what expensesyou would<br />
increaseif it were your familyand your income went up. Column A givessome<br />
categoriesfrom the originalbudget. Column B givesthe budgeted figuresfrom the<br />
old budget. ColumnC supposesthat a raise brought the family’smonthly net<br />
income up to $1,723. Column D supposesthat an additionalwageearner brought<br />
the family’snet incomeup to $2,430.<br />
Fill in the columnsto make two new budgets. Remember, the total cannot be<br />
more than the family’snet income.<br />
(B)<br />
BUDGETED<br />
AMOUNT=<br />
$1,549<br />
(C)<br />
BUDGETED<br />
AMOUNT=<br />
$1,723<br />
Gasoline $100.00 $ $<br />
Car Payment $300.00 $ $<br />
HomeGas $ 96.00 $ $<br />
Electricity $ 90.00 $ $<br />
Insurance $ 78.00 $ $<br />
Rent $480.00 $ $<br />
Water $ 30.00 $ $<br />
Groceries $180.00 $ $<br />
Fun $120.00 $ $<br />
Other — $ $<br />
Subtotal<br />
Expenses $1474.00 $ $<br />
Savings $75.00 $ $<br />
Net Income $1549.00 $ $<br />
1. Which expensesdid you increasethe most?<br />
2. How does a budgethelp show how money will be spent?<br />
(D)<br />
BUDGETED<br />
AMOUNT=<br />
$2,430
SKILLSWORKSHEET<br />
CHAPTER10<br />
Name Class Date___________<br />
THE CONSUMERIN THE AMERICANECONOMY<br />
MARGINALDECISIONMAKING<br />
We all make decisionsabout how to spend our money. As you know, many of<br />
these decisionsinvolvechoosing“on the margin” and acceptingopportunity costs.<br />
Follow the instructions belowfor an exercisein marginaldecisionmaking.<br />
1. On a separatesheet of paper, list ten items you would like to buy now or over the next few years. Number<br />
the items in the order of their importanceto you.<br />
2. Rewritethe first fiveitems on your list in numericalorder. Leave space beside each item for noting a<br />
current price.<br />
3. Usingsourcesof consumerinformationavailableto you, “shop” for the items on your list. Your worksheet<br />
will look somethinglike the examplebelow.<br />
Item Sourceof Information Price<br />
1. AM/FM ConsumerReports, $119<br />
StereoCassette October 19--<br />
Player<br />
2. Bookcase newspaperad for $65<br />
Furniture Design<br />
4. When you have completedyour shopping, add up the total cost of the items on your list.<br />
5. Assumethat you have three-fourthsof the money listed as your total cost. If the items cost $100, for<br />
example,assumethat you have $75 to spend for purchases.<br />
6. Applythe conceptsof opportunity cost and marginal decisionmaking to determine which items you will<br />
purchase. List these items and write their opportunity costs. Write a brief paragraph explaininghow you<br />
used marginaldecisionmaking to arrive at your final choices.
Handout2-1<br />
CEREAL MARKET ANALYSIS FORM<br />
Name(s)of person(s)completingthis survey<br />
Informationobtainedondrycerealsexaminedat__________________________ on ___________________<br />
(storename) (date)<br />
Pleasecompletethis formbymeansof retailmarketandlibraryresearch.Chooseapproximatelythe same<br />
netweightsper box for eachbrandof dry cereal.Completeoneform for eachbrandselected.<br />
BRANDNAME<br />
A. Manufacturer<br />
B. Isthe companyownedby anothercorporation?If yes,nameof parentcompany<br />
YesO NOD<br />
C. Sizeandweightof package<br />
Specifyothersizes,weights,andpricesfor this samebrand __________________________________<br />
D. Priceperpackage<br />
E. Unitprice<br />
F. Arepromotionsofferedwith this brand? Yes0 No0<br />
It yes,howaretheymadeknownto the consumer?<br />
1. Insidethe package0<br />
2. Onthe packageitself0<br />
3. In a specialdisplayQ<br />
4. Bymail[J<br />
5. Throughnewspapers,magazines,circulars,or othertypesof advertising0<br />
G. Locationof cerealsectionin store _________________________________________________________<br />
H. Locationof this brandof cerealwithinthe cerealsection — ______________________________<br />
I. Approximatepercentageof cerealshelfspaceallotedto this brand _____________________________<br />
J. Numberof otherbrandsof cerealon the shelves __________________________________________<br />
K. Towhomdoesthis company’sadvertisingappeal:to children,teenagers,parents,the aged,adultsin<br />
general?<br />
L Whatdoesthe advertisingstress? ______________________________________________________<br />
M. Otherobservationsor informationon howthis brandof cerealis marketed
Teacher’sCopyof Handout2<br />
COMPARISON-SHOPPINGPRODUCTEVALUATIONFORM<br />
Step1. Statetheproblem:ChoosewhichcerealIsthebestbuyfor me.<br />
Step2. LIstthealternatives(usegridberow)<br />
Step3. Statethecriteria(use grid below)<br />
Step4.<br />
step5.<br />
.1<br />
Afternatives<br />
/4 t(.<br />
8A.mS7 4<br />
DECISION.MAKIPIGRID<br />
•<br />
(6w<br />
4CL<br />
Criteria<br />
8o<br />
?*idt& th &4<br />
dU .ø..<br />
+ — - .‘ + 4.<br />
+ *p 4. +<br />
Evaluatethealternativesagainstcriteria(useplusor minussignsIntheappropriateboxto indicate<br />
your assessment).<br />
Selecthe bestchoice<br />
Explainwhythisisthe<br />
.L4RJL Al 1..41<br />
Ø#RL Z I2L<br />
L *€4 ft4 ffl .L<br />
OI £i<br />
V V<br />
‘.
Handout2-2<br />
COMPARISON-SHOPPINGPRODUCTEVALUATIONFORM<br />
Step1. Statethe problem:ChoosewhichcerealIsthe best buy for me.<br />
Step2. Listthealternatives(usegrid below)<br />
Step3. Statethecriteria(usegrid below)<br />
Alternatives<br />
DECISION-MAKINGRID<br />
Criteria<br />
Step4. Evaluatethealternativesagainstcriteria(useplusor minussignsintheappropriateboxto indicate<br />
yourassessment).<br />
Step5. Selectthe bestchoice _______________________________________________________________<br />
Explainwhythis is the bestchoicefor you.
Lesson3: To Paint or Not to Paint<br />
TIMEREQUIRED:Two or three class periods plus<br />
timeto collectpriceestimates.<br />
RECOMMENDEDGRADELEVEL: 9-12<br />
MAJORCONCEPTS:Opportunitycost<br />
Taxation<br />
Gross income<br />
Work-leisuretrade-off<br />
RELATEDCONCEPTS:Productivity<br />
Marginal tax rate<br />
Instructional Objectives: Studentswill<br />
• Choose intelligentlybetweenhiringsomeoneto do<br />
a neededtask and doingit themselves;<br />
• Understandthe impactof taxes whendetermining<br />
the grossincomerequiredto pay for an item;<br />
• Justifytheir choicesin terms of the benefitscom<br />
paredto the opportunitycosts.<br />
Rationale for the Activity:In the Americaneconomy<br />
the costs of services and of producinggoods and<br />
services which require much individuallabor have<br />
oftenincreasedsharplybecausethe rate of productiv<br />
ity increasehas been slowerin labor-intensiveindus<br />
triesthanin capital-intensiveindustries.For example,<br />
even withbetter rollersand newlydesignedspraying<br />
equipment,it takes almost as manyhours to paint a<br />
room today as it did twenty years ago. Thoughthe<br />
work performed per hour (labor productivity)has<br />
remainedabout the same over the years, painters’<br />
wageshave risen along with the general increase in<br />
wages. This phenomenon has resulted in many<br />
people’sbecomingdo-it-yourselfersaroundthehouse.<br />
Lesson 3 gives students an opportunity to think<br />
systematicallyabout such consumerchoices.Does it<br />
pay to do it yourself?That dependsupon howpeople<br />
valuetheir spare time and the amountof satisfaction<br />
they gainfrom personalaccomplishment.It also de<br />
pendson theincometax bracketof the individual.For<br />
example,as incomesincrease,taxratesrisebecauseof<br />
the progressivenatureof the federalincometax. The<br />
activity shows how tax rates can influencea do-ityourselfspendingdecision.<br />
Materials:One copy of Handout3-1for each student.<br />
Pro dure:<br />
I. Giveeach studenta copy of Handout3-1.<br />
2. Ask studentsto select a project that they could<br />
either dothemselvesor couldhiresomeoneelseto<br />
do for them,for example,painting a room,chang<br />
ingan automobilemuffler,cookinga meal,clean<br />
ing rugs and carpets, making clothes, baking a<br />
cake, fixinga faucet, or buildingbook shelves.<br />
Have studentsfillin the appropriateblankon the<br />
worksheet.(NOTE: In selectinga project, stu<br />
18<br />
dents should assume that they can do about as<br />
good a job themselvesas if they hired someone<br />
else.)<br />
3. Have students make estimates of the outlays<br />
neededin each approachin order to completethe<br />
project. Give students time to collect cost esti<br />
matesfromstores, repairshops,etc., beforecom<br />
pletingPart I of the worksheet.This mayrequire<br />
timeoutsideof classunlessyouhavean extensive<br />
collectionof newspaperads, catalogs,and other<br />
sourcesof informationstudentscan use in class.<br />
4. Have each student completePart II of the work<br />
sheet in class. This requirescalculatingthe gross<br />
incomerequiredto payforhis/herproject.Explain<br />
the formulato be used as follows:If the marginal<br />
tax rate (MTR)—theamountpaidonthe lastdollar<br />
of incomeearned—isassumedto be 25 percent,<br />
then the familymust earn $4 in order to have $3<br />
leftaftertaxes.Ifthefamilyfallsintothe50percent<br />
tax bracket(MTR)then it wouldneed $200of in<br />
come,at the margin,to payout $100fora roomto<br />
be painted.Go over formula.<br />
Cost of servicesor materials = Incomerequired<br />
— Marginaltax rate(MTR)<br />
Example:<br />
If the cost is $100andthe tax rateis 25percent,<br />
the gross incomerequiredwillbe:<br />
$100 — $100 = $133.33<br />
1—.25 —<br />
If some students have great difficultyusing the<br />
formulato maketheirown calculations,assign more<br />
capablestudents,perhapsequippedwith a pocket<br />
calculator,to giveassistance.<br />
5. HavestudentscompletePartIII. Smallgroups(two<br />
or threestudents)canworkouttheanswerstogether<br />
in class or the assignment may be given for<br />
homework.Discuss the answers. (NOTE: Make<br />
surestudentsunderstandwhytheanswerstoPartIll<br />
shouldbe in termsof hourlyearningsbeforetaxes,<br />
not totalincome beforetaxes.)<br />
6. After all parts of the worksheethave been com<br />
pleted,concludethelessonbyaskingstudentswhich<br />
of the alternativesthey wouldchoose and why.<br />
Evahiation:<br />
1. Reviewqualityof studentresponses to the work<br />
sheet. Individualstudentresponseswillvary.<br />
2. Assessqualityof studentclassdiscussionassociated<br />
with procedures 5 and6.
C<br />
YOUTHECONSUMER<br />
WORKSHEET<br />
GOVERNMENTREGULATION<br />
Name<br />
Class Date<br />
In the American economy, the questions of what to produce and how to produce it are<br />
not answered completely by market forces. Government also plays a role by<br />
establishing regulations to guarantee the quality of goods and services. Considering<br />
the government regulations involved in making a simple consumer item, such as the<br />
pizza, will give you some idea of the role government plays. Study the pictogram<br />
below, and then answer the questions that follow.<br />
Crust—Each<br />
poundof flour<br />
mustcontaIn2.9<br />
mgthiamine,24<br />
mgniacin,andat<br />
least13—butnot<br />
morethan16-mg<br />
of iron.<br />
Italian<br />
sausage—Un.<br />
cured,unsmoked<br />
sausagemustbe<br />
at leastB5°/o<br />
meat.If it conS<br />
sistsof morethan<br />
l3% extenders,<br />
mustcarrythe<br />
notice“texturized<br />
soyflouradded.”<br />
1. List the ingredients that go into making your favorite type of pizza. Beside each in<br />
gredient, summarize the government regulations that control their use.<br />
2.<br />
Mozzarella<br />
cheese—Mustbe<br />
at least300/,, but<br />
no morethan<br />
45%,fat and<br />
comefrompas<br />
teurizedcow’s<br />
Pepperoni—18 to milk.,<br />
21%proteincon<br />
tent required.<br />
Meatusedin<br />
schoollunches<br />
mustpassdaily<br />
USDAinspections<br />
at the plant.<br />
Tomato<br />
sauce—Mustbe<br />
of the “reddish”<br />
variety,withat<br />
least24%<br />
“naturaltomato<br />
solublesolids.”<br />
The Food and Drug Administration and the Department of Agriculture have about<br />
310 regulations concerning pizza ingredients. What reasons can you think of for all<br />
of these regulations?<br />
Anchovies—Must<br />
bepackedIn oil<br />
andin a solution<br />
of at least12%<br />
salt.<br />
3. How do regulations on food quality benefit consumers?<br />
Beef—Ground<br />
beefmustbeno<br />
morethan30%<br />
fat.<br />
Mushrooms—On<br />
ly vitaminC—up<br />
to 37.5mgper<br />
ounce—andwater<br />
allowedIncanned<br />
mushrooms.<br />
4. What negative effects might such regulations have on consumers?
418<br />
The mechanisationof mankind<br />
Today’sargumentsaboutmachinesdestroyingjobsappearsimilarto manythat havebeenvoiced<br />
overthe past700 yearsat othertimesof advancingtechnology.Butthe adventof the microchip ,<br />
unlikethe previoustwo Industrialrevolutions,will probablyleadto long-termunemployment<br />
PeterMarsh “During the next few years,we<br />
shall probably see more and more<br />
robots, so that ultimately businesses and factories will be<br />
run by only a small proportion of the people now em<br />
ployed.” “It is precisely because robot labour rejects the<br />
intelligence that it humiliates a man, injures his spirit and<br />
his dignity and makes him the victim of mass forms of<br />
play, mass emotionalism and the excitement of mass<br />
sport.”<br />
When were these statements written? In the past few<br />
years, as people in the West became excited about robots?<br />
Wrong—theydate from 1933and 1943respectively ’.<br />
The following comments sound even more familiar. “We<br />
are entering into a second industrial revolution, the era<br />
of automation. This time it is not man’s musdes that are<br />
to be replaced and extended, but rather man’s brains.”<br />
“Our choice does not rest between automation and full<br />
employment but between prompt automation with the<br />
possibility of moderate, temporary employment, and de<br />
layed automation with the certainty of grave, perennial<br />
employment, until our progress has caught up with that<br />
of our competitors.” “They tchildren] are not being<br />
trained . . . in the basic abilities which are necessary for<br />
easy adjustment to the rapidly changing technological<br />
nditions through which they will live.”<br />
These statements appeared, in fact, in books published<br />
between 1952and 1957,which marked the first time that<br />
people became concerned about automation.Today,nowthat<br />
people are expressing similar fears, we are dearly repeat<br />
ing many of the arguments that have been put forward<br />
during the past 50 years. So in what ways has the debate<br />
about automation changed? And are the fears about<br />
machines destroying jobs any more justified today than in<br />
the past? Because of the way patterns of work, and the<br />
world’s economy, have changed, the answer to the last<br />
question is probably “yes”.<br />
The fear that machines take away work is embedded<br />
deep in the human psyche. In one of the first Gallup polls,<br />
in the US in 1939, people were asked to name the culprit<br />
for the high level of unemployment at the time. Rather<br />
than blame the government, the world economy or indus<br />
try, most people blamed machinery. In another survey in<br />
Detroit during the 1950s, men and women were asked<br />
whom or what they feared most. “The Russians” came<br />
first—automationsecond.<br />
But the fears stretch back a lot further than the 20th<br />
century. On several occasions over the past 700 years,<br />
governments deliberately held back technical advances<br />
because they feared, often with good reason, that<br />
machinery—and the unemployment which resulted—would<br />
cause civicunrest. Thus in 1397,the authorities in Cologne<br />
banned the use of a device that automatically pressed<br />
pin heads. In the 16th century, the English parliament<br />
passed an act “touching weavers” that stopped merchants<br />
-<br />
tablishing factories: the law makers wanted to continue<br />
right of English citizens to make cloth in their own<br />
homes free of competition from capitalists. Anthony<br />
Muller, one bright German inventor of the early iSOOs,<br />
might have expected officialsupport when he devised new<br />
spinning machinery that made cheap cotton cloth. This<br />
was far from the case: the local mayor feared unemploy<br />
ment and had MUllermurdered.<br />
Latex, during the first industrial revolution in England,<br />
innovators such as Richard Arkwright and James Har<br />
greaves were physically attacked and their machinery<br />
destroyed as mobs, this time without the connivance of<br />
the authorities, demonstrated their fears of a future with<br />
out work. The uproar reached a crescendo during the<br />
Luddite riots of 1811-12when workers in the Midlands<br />
destroyed some 1000 stocking frames and 80 lace<br />
machines. There was much hardship. One group, the hand<br />
weavers, saw many of its members starve while its num<br />
Machinesthroughthe ages<br />
‘.<br />
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4prox.<br />
Country dote<br />
Device responsible introducedPou’er Action Control<br />
$ Walking — 2SM BC Body togs Brain<br />
Handwriting Egypt 3500BC Body Mends Brain<br />
Handweaving Egypt 3500BC Body Hands Brain<br />
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Ox plough Mono- 3000BC Animal Plough Brain<br />
•ocania<br />
Lathe Unknown 3000 IC Body Cutting Brain<br />
tool<br />
Hors, andcart Mono- 2300BC Animal Wh.et Brain<br />
Spinningwheel India c.I000 Body Wheel Brain<br />
Typewriter US 1167 Body Typeface Brain<br />
Sailbeer Egypt 3300BC Wind Boat hull Brain<br />
Water mlii Greece 16 BC Water Grindstone Brain<br />
Wind mill Persia 564 Wind Grindstone Brain<br />
Arkwrighcs UK 1769 Weter Frame Brain<br />
water frame mechanism<br />
Steamtrain UK l9 Steam Wheel Brain<br />
engine<br />
Car Germany 1185 Internal Wheel Brain<br />
combustion<br />
engine<br />
Aeroplane US 1903 Internal Propeller Brain<br />
combustion blade<br />
engine<br />
Flour mill US 1755 Steam<br />
engine<br />
Conveyor Machine!<br />
brain<br />
Elock.inaking<br />
machinery<br />
UK SOB Steam<br />
engine<br />
Conveyor Machine!<br />
brain<br />
Biscuit-makingUK<br />
machinery<br />
lS3O Steam<br />
engine<br />
Conveyor Machind<br />
brain<br />
Meatpacking<br />
equipment<br />
US 1580 Electricity! Conveyor<br />
eceamengine<br />
Machind<br />
brain<br />
Assemblyline US l3 Electricity Conveyor Machind<br />
brain<br />
Clock Europe c. 1300 Clockwork MechanicalMachine<br />
PressurecookerFrance 1580 Openfire Steam Machine<br />
Steampump UK 1705 Steam Pump Machine<br />
onsginl<br />
Jacquardloom France 1101 Steam Pump Machine<br />
engine<br />
Automatic US 1160 Electric Cutting Machine<br />
machinetool motor tool<br />
Electronic US 1950 Electric Typeface Machine<br />
Typewriter motor<br />
Transferline UK l30 Electric<br />
motors<br />
Cutting Mackin, with<br />
mechanismsystems<br />
fconveyor approach<br />
Computer<br />
controlled<br />
moclsinetool<br />
US 1950 Electric<br />
motor<br />
Cutting Programmable<br />
uu,echarnssnmachine<br />
RoBot US c.I%O Elec,rit<br />
motor<br />
MechanicalPrOpMMabIS<br />
boids. machine<br />
Robot with UK 1110 Electric<br />
motor<br />
MechanicalMachinewith<br />
hands 1eedbick ’.
I OSS*old £U?C9I<br />
Isurl.. S DsP, Capc<br />
How the world’sthree industrial revolutions over the past 200 years hove left their mark on civilisation<br />
bers declined from a quarter of a million in 1820to 50000<br />
30 years later. Machinery,however, was not totally to<br />
blame. The low wages paid by employers, and political<br />
repression by the government,contributedto the dismal<br />
livingstandardsof the time.<br />
Clearly,<br />
19 3<br />
sSimate<br />
the workers of the early 19th century were<br />
concernednot about automation,but mechanisation.It is<br />
important to clarify how these two terms differ from, yet<br />
‘re relatedto, each other—ifonly to define exactly what is<br />
.neant when people talk about the first, second and third<br />
industrial revolutions.<br />
Mechanisation,or the use of machinesto do work pre<br />
viously done by people or anim 1s , has been with us for<br />
centuries. As the Table opposite shows, there are several<br />
types of mechanised contraption. The dassification<br />
The machinerevolution,1750.1860<br />
The scientificrevolution, 1880-1920<br />
Thecomputerrevolution,1945-1990<br />
2<br />
1r dstriai rnicrocompulers<br />
1 US<br />
4(mlrnans)<br />
1977 1980<br />
,Pio ,<br />
419<br />
dependson whether machinesor combinationsof animals<br />
and people are responsible for the three fundamental<br />
elementsthat occurin every activity (humanor otherwise)<br />
—power,action and controL Thusin one of the very early<br />
mechanised devices, the horse and cart, an animal is<br />
responsiblefor the power,while a person controlsthe con<br />
traption. But the element responsible for the “action”—<br />
the cart’s wheels and axles—is mechanical.The horse and<br />
cart is a simple example of a mechanism that saves the<br />
human body the effort of doing something—inthis case<br />
movingits legs to propelitself.<br />
In other instances of mechanisation,hardwareis respon<br />
sible for both the power and the action. In a car, for<br />
example, the wheels, gears and so on provide action at<br />
the same time as the engine provides power. When you<br />
0<br />
S<br />
I,<br />
C<br />
0<br />
I<br />
LU<br />
0 C
420<br />
drive a car, therefore, you are saved the trouble both of<br />
movingyour legs and of burning up your own personal<br />
supplyof energy.<br />
“md and water mills are other mechanical devices<br />
..chinvolve Inanimatesources of power, either currents<br />
of air or of water.But these power sources are not within<br />
man’s complete control. Thus while a medieval miller<br />
could not grind his corn without wind, a modern car<br />
drivercan travel in any conditions,providinghis vehicle’s<br />
mechanicalpartsare workingproperly.Hence the further<br />
subdivisionin the Table.<br />
All the activities mentioned above need a human to<br />
control them. If a mechanical device is responsible for<br />
control, however, we have a self-acting or automatic<br />
device. The pressure cooker, invented in 1680 by the<br />
FrenchmanDenis Papin, is one such contraption.Another<br />
is the dock—in which a control device automatically<br />
ensuresthat the handspoint to the correct time. The clock<br />
in Salisbury Cathedral has worked automaticallyfor 700<br />
years (requiringonly that people periodicallywind it up)<br />
proving that automatic devices have been around for a<br />
long time. Later examples of the genre are the Jacquard<br />
loom,which dates to 1801,and the automaticmachine tool,<br />
invented last century.<br />
But there is another important distinction. Automatic<br />
devices are not the same as automated ones. The die.<br />
tionary defines “automation” as a series of automatic<br />
steps. But to get a moreprecisedefinition,we can say that<br />
automation equals mechanisationplus automatic control<br />
plus one (or more) of three extra control features—a<br />
“systems”approach,programmabilityor feedback.<br />
t. s<br />
Extras that make automation<br />
With a systemsapproach,factories make parts by passthemthroughsuccessivestages<br />
of a manufacturing pro<br />
without people intervening.Thus the transfer lines of<br />
car factories in the 1930s count as automated systems.<br />
These conveyed componentsalong lines of machine tools<br />
which each automatically cut, drilled or otherwise<br />
fashionedthe partsin a specifiedway. The semi-automatic<br />
conveyorsystems of the 19th century and the early 1900s<br />
narrowlymiss being described as automatedhardware:in<br />
this kind of apparatus,with which, for instance, the Royal<br />
Navy in 1808 made pulley blocks and Henry Ford’s first<br />
factories assembled cars, people have to be present for<br />
somestagesof the operation.<br />
Withprogrammability—thesecond of the three “extras”<br />
that defineautomation—enautomaticsystem can do more<br />
than one kind of job. Hence an industrialrobotis an auto<br />
mated, not an automatic,device. The computerthat con<br />
trols it can be fed differentsoftware to make the machine<br />
do differentthings—forexample spray paint or weld bits<br />
of metal together. Finally, feedback makes an automatic<br />
machine alter its routine accordingto changes that take<br />
place around it. An automatic lathe with feedback—in<br />
which, for instance, a sensor detects that the metal it is<br />
cutting is wronglyshaped and so instructs the machineto<br />
stop—isthus an automateddevice. it is clearly more use<br />
ful than a lathe without this feature. The latter would<br />
carry on with its job even if the part was defective, and<br />
mightdamagethe machinein some way.<br />
With this rigorous view of how mechamsation relates<br />
to automation, episodes in the industrialisation.of the<br />
world that people have labelled “revolutions” now take<br />
ew meanings.<br />
he first significant step involved an advance in power<br />
generation.The seeds of the first industrial revolution of<br />
1760-1860were sown on 25 July, 1698with the publication<br />
of a patent for a simple steam engine devised by Thomas<br />
Savery, an engineer from Totnes. Nicknamedthe “miners’<br />
friends”, Savery’s engines were not all that useful. For<br />
ne thing,they sometimes blew up. After substantial modi<br />
—<br />
- .‘:<br />
‘R I L.2i i’<br />
T-<br />
7 ,,s. I<br />
rL iJ ’<br />
Ford workers 11tthe petrol tanks to the Model T in 1914<br />
flcations by Thomas Newcomen, however, about 100 such<br />
steam engines were working in the pits of northern<br />
England and Scotland by 1769. It was only after James<br />
Watt modified the engines still further—by adding a<br />
separate condenser to make them more efficient and by<br />
making them deliver rotating power—thatthey were of<br />
much use to the ownersof factories.<br />
The new, controllablesourceof powerfreed these early<br />
industrialists from having to site their factories near fastflowing<br />
streams. In particular, the new engines powered<br />
the textiles factories that, more than anythingelse, drove<br />
Britain into a new industrialera. But steam power would<br />
not have had much impact by itself. The new engines had<br />
to be allied to the mechanical inventions in spinning and<br />
weaving that men like Arkwright and Hargreaves de<br />
veloped. Thus the first industrialrevolutionwas a product<br />
of advancesin both the “action”and “power”elements of<br />
the activities that madetextiles.<br />
In the revolution that followed, from 1800 to 1820,<br />
electricity was the chief technical factor. The new power<br />
source brought an even greater flexibility to factories.<br />
During the time of the steam engine, each machine in a<br />
workshop had to be linked to the plant’s central steam<br />
engine by belts and pulleys. But with the electric motor,<br />
invented in 1834 by Thomas Davenport, an American<br />
blacksmith, each machine could have its own source of<br />
power. The revolution was marked also by the growing<br />
importance of science-based industries such as chemicals<br />
and electrical goods,and the use of scientificallydesigned<br />
productionmethods (for instance the first semi-automatic<br />
assembly lines). Britain played only a small part in the<br />
industrial changesof the late 19thcentury.The US became<br />
the leading industrialpower in the 1890s;by 1913, it was<br />
responsiblefor one-third of the world’sfactoryoutput.<br />
There was a certain fanaticisminvolvedin the technical<br />
advances of the period, shown by this commentfrom one<br />
American steel engineer, quoted in a 1939 magazine<br />
article: “I can’t watch our experimental laboratory roll<br />
Outmolten steel for more than a few minutes. It almost<br />
makes a fellow go crazy thinking about the millions of<br />
dollars worth of equipmentit will make obsolete, and the<br />
thousands of jobsit will eliminate.It’sterrific.”<br />
The advent of the electronic computerafter the Second<br />
World War ushered in what could be termed the third<br />
industrial revolution. In this, the main features were<br />
advances in the control of manufacturingprocesses. Auto<br />
ination, a term invented only in the l930s (by executives<br />
at e Ford car company),entered the language.<br />
Abt mation undoubtedly has the potential to make<br />
redunda t manypeople now needed to control sections of<br />
manufactluing industry—anything from chocolate-making<br />
to welding ‘metal parts. However, after the first “auto<br />
-.•-<br />
:-..<br />
‘<br />
-
_. _.,4.l_-.t. __ .•<br />
Figure31: CONSUMER SPENDING INARECENT YEAR<br />
besal Soc —<br />
I<br />
Hous oIl<br />
. :<br />
t,act At cftheU, 1ina Cuiu &<br />
Qwr t &shiess, 8urea Ecoi onic Ai1<br />
‘en.<br />
--.<br />
al<br />
Food
Figure3-1:CONSUMER SPENDING INARECENT YEAR<br />
fr-<br />
•<br />
b aidSoc —<br />
Other<br />
Medi aid<br />
Frson re<br />
-i<br />
U<br />
$swce: aI t Abstract d theU, aeau theCin<br />
Bureau<br />
&RbWd Cwivit&sh*ess,<br />
aid<br />
Househoid<br />
1a
FREENTERPRISE<br />
WORKSHEET<br />
USING ARBITRATION<br />
Name<br />
Class Date<br />
Collectivebargaining between management and unions is a process of compromise.<br />
However, sometimes management and workers are still far apart when a strike deadline<br />
is approaching. If that happens both parties may agree to submit their cases to an<br />
impartial arbitrator. The arbitrator considers the merits of each side’s arguments as well<br />
as the settlements made by other companies in the industry. The arbitrator then dictates<br />
an agreement that both sides are bound to accept.<br />
The following information was given to an arbitrator in a dispute between Big Board,<br />
Inc., the largest producer of finished lumber in the state, and its 200 workers,<br />
represented by Local 14.<br />
Current Agreement Union Demands Management Demands<br />
Wages $10/hour 15% increase 5% increase<br />
Hours 40-hour week 36-hour week 40-hour week<br />
Overtime Time-and-a-half<br />
after 40 hours;<br />
Double-time after<br />
36 hours<br />
Time-and-a-half<br />
after 40 hours;<br />
double-time on<br />
double.time on<br />
Sunday Saturday and Sunday<br />
Breaks 15 minutes in<br />
afternoon<br />
15 minutes in<br />
morningand<br />
afternoon<br />
15 minutes in<br />
afternoon<br />
Paid holidays 7 10 8<br />
Health insurance All paid by All paid by company First$250 of bills<br />
company<br />
paid by employees<br />
Dental insurance None All paid by company First $500 of bills<br />
paid by employees<br />
Uniform allowance None $200 $50<br />
INDUSTRYINFORMATION:<br />
Average industry wage is $9.50 an hour, but Big Board employees have not had a<br />
raise in two years. Other companies have a 40-hour week, but most of them pay<br />
double-time for work on Saturday and Sunday. These companies have only one<br />
15-minute break, but longer lunchtimes. Most of the industry provides 7 or 8 paid<br />
holidays, complete health insurance, no dental insurance, and a $100 uniform<br />
allowance. In general, the industry has been increasing its profits. Big Board, however,<br />
has been losing some of its customers to younger competitors.<br />
Assume that you are the arbitrator in this case. What demands seem reasonable?<br />
Which ones should be given up or modified? On the following lines, state how you<br />
would decide the case.
YOUTHECONSUMER<br />
WORKSHEET<br />
BUYINGSTOCK<br />
Name<br />
Class Date<br />
The following passage describes what happens when an investor buys stock through a<br />
broker. Read it carefully, then describe each step of the stock-buying process. Some of<br />
the steps have been done for you.<br />
At 10 A.M.,an investor calls her stockbroker, who is a member of the American Stock Exchange<br />
(AMEX).She tells the broker that she wants to buy 500 shares of XYZCompany stock “at the market”<br />
(the best possible price). The broker calls in this order to the main office of the stock. The main office<br />
then transmits the order to its booth on the trading floor of the AMEX.The clerk in the booth signals the<br />
floor broker, who does the actual trading or buying. The clerk sends the order to the floor broker by<br />
hand signal or by an order slip placed on a conveyor belt.<br />
At 10:03, the floor broker hurries to the trading post where XYZstock is traded. Here he finds other<br />
brokers with orders to buy and sell. The broker hears another broker calling out a bid to buy XYZstock<br />
for 44¾, and another calling out an offer to sell at 44½. Since his instructions are to buy at the best<br />
possible price, he makes an offer to buy at 44 3/ • Still another broker accepts that price, and shouts<br />
“Sold!” The two brokers note each other’s badge numbers, and then report the sale to their booth clerks,<br />
who notify the main office.<br />
Back at the trading post, a clerk enters the transaction into a computer. Within seconds, the deal ap.<br />
pears on the electronic screen above the trading floor and in brokers’ offices around the world<br />
At 10:07, the main office is notified of the purchase. It calls its branch office, which notifies the in<br />
vestor of the purchase and the price of the stocks. The transaction was completed only minutes after the<br />
investor placed the order.<br />
On the following lines, briefly describe each step of the stock-buying process. Some of<br />
the steps have been provided.<br />
1. Investor places order with local stockbroker for stock “at the market.”<br />
2.<br />
3.<br />
4.<br />
5.<br />
6.<br />
7.<br />
8.<br />
9.<br />
10.<br />
Floor broker goes to trading post.<br />
11. Stockbroker at local branch notifies investor of the purchase.<br />
.
___________<br />
INDEPENDENTPRACTICEWORKSHEET ___________<br />
CHAPTER8<br />
Name Class Date___________<br />
8.1 BUSINESSENTERPRISES<br />
COMPARINGFORMSOF BUSINESSENTERPRISES<br />
Use the chart belowto compare the three waysAmericanbusinessenterprises are<br />
owned and organized. Fill in the chart.<br />
Proprietorship<br />
Partnership Corporation<br />
Owner la lb. ic<br />
Decision-makingand<br />
managerialfunctions<br />
2a. 2b. 2c.<br />
Debt liability 3a. 3b. 3c.<br />
Advantages 4a. 4b. 4c.<br />
Disadvantages Sa. Sb. Sc.<br />
Other characteristics 6a. 6b. öc.
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER9<br />
Name__________________________________________ Class_____________ Date<br />
9.1 WORKERSANDTHE INDUSTRIALREVOLUTION<br />
THECHANGINGNATUREOFWORK<br />
A. As the Industrial Revolutionspread across the United States, the experienceof working changed for many<br />
people. Use the chart to outline somedifferencesbetweenworking conditions before and since the<br />
Industrial Revolution.<br />
Sizeof the<br />
production unit<br />
WorkingConditions<br />
Relationsbetween<br />
employerand employee<br />
Securityof<br />
employment<br />
Placeof employment—<br />
urban or rural<br />
Method of making<br />
a product<br />
Beforethe<br />
IndustrialRevolution<br />
1*. lb.<br />
2a. 2b.<br />
3a. 3b.<br />
4a. 4b.<br />
* Sb.<br />
SincetheIndustrialRevolution<br />
.<br />
B. Use the facts belowto compare certain working conditionsduring the early years of the Industrial<br />
Revolution with those in 1986.Answerthe questions that foiiow.<br />
Median Income<br />
for a Skilled<br />
Worker<br />
Hours Worked 60—70a<br />
week<br />
1818 1986<br />
$9.00a week $430.00a<br />
week<br />
less than 40<br />
a week<br />
1. What happened to wagesbetween 1818and 1986?<br />
2. What happened to the length of the work week?<br />
3a. What generalstatement can you make about working conditionsin the early nineteenth century compared<br />
to conditionsin the late twentieth century?<br />
3b. Suggestsome reasonsthese changesmay have come about.
FRE ENTERPRiSE<br />
WORKSHEET<br />
BUSINESSAND.GOVERNMENT<br />
Name<br />
Class Date<br />
In Chapter 2, you learned that government plays an important role in regulating<br />
business and industry. However, businesses also influence government. For example,<br />
national business associations often use lobbyists to impress their ideas on our elected<br />
representatives. Businesses also contribute money to the election campaigns of people<br />
who agree with their ideas. And government is usually very sensitive to the needs of<br />
business, for if businesses are hurt, their employees are also hurt.<br />
Assume that you own a factory that makes children’s clothes for both the U.S. market<br />
and for export. State whether or not you would want your elected representative to<br />
support the following proposals, and explain your reasons.<br />
1. Stricter pollution controls on electric generating stations<br />
2. Higher standards of quality for clothing<br />
3. A tax on imported clothing that will raise its price by 15 percent<br />
4. Additional government aid to single parents with children<br />
5. An import tax on inexpensive foreign fabrics raising the price by 20 percent<br />
6. Deregulation of the trucking industry designed to increase competition among firms<br />
that transport manufactured goods<br />
7. An increase in the business tax to help reduce the federal budget deficit<br />
. I__I
SELLING ASSETS<br />
FRE ENTERPRISE<br />
WORKSHEET<br />
Name<br />
Class Date<br />
In Chapter 11, you learned that companies in need of financial assistance raise money<br />
in several different ways. One way is to sell assets. The following announcement is an<br />
offer to sell stocks in a company called Hollywood Shoes, Inc. Use what you learned in<br />
Chapter 11 and the information in the announcement to answer the questions below.<br />
NEW ISSUE 1986<br />
Philips, Arnold & Walden, Inc.<br />
Bronson, Weill, Labouisse, March<br />
La Rosa & Co.<br />
Branch, Murphy and Company<br />
B. G. Wykosky & Co.<br />
Chan Investment Company, Inc.<br />
Fisk Affiliated Securities, Inc.<br />
Schultz & Company, Inc.<br />
Krantz, Lesser & Ross<br />
Jeffrey Adams & Company<br />
990,000 Shares<br />
HOLLYWOODSHOES, INC.<br />
Common Stock<br />
Price $5.25 per Share<br />
Brown & Company Incorporated<br />
Craig-Stein, Inc.<br />
Jessup & LaRosa Securities Co. Inc.<br />
Rosen, Olmstead, Kennedy & Marcus<br />
Moore & Kim Corporation<br />
Smith, Herman & Co.<br />
Schneider, Hall, Sale & Associates, Inc.<br />
First Oregon Securities, Inc.<br />
R. Myers & Co.<br />
Martin, Viner, Gonzalez & Co. Inc.<br />
1. Interested investors are urged to send for the company’s prospectus, which gives<br />
information about the company and the securities that will be sold. What do you<br />
think the prospectus would tell an investor about Hollywood Shoes, Inc.’s plans to<br />
use the capital it hopes to raise? _____________________________________________<br />
2. What other methods of raising capital are available to the company?<br />
3. The other company names on the announcement represent investment firms that are<br />
underwriting the stock. That is, they are distributing the new shares to the general<br />
public. These companies guarantee the sale of the entire issue. An underwriter will<br />
either buy the whole issue itself and sell it to the individual investors, or they will<br />
form an underwriting syndicate with other dealers, who will all sell the stock. Why<br />
do you suppose that underwriting is a risk-filled business?
O FRE ENTERPRISE<br />
WORKSHEET<br />
Name<br />
CHOOSINGA BUSINESSORGANIZATION<br />
a.<br />
I,.<br />
C.<br />
C’ass Date<br />
When people think about starting a business, they usually choose one of three main types of<br />
businessorganization.Each type of businesshas its advantages and disadvantages and willfit<br />
certain situations better than others. The following questions are about different types of<br />
business organization.<br />
1. Name the three main types of business organization. Besides each type of<br />
organization, describe its major characteristics (number of owners, degree of<br />
liability, ability to raise capital, ease of decision-making, pride of ownership).<br />
2. For each of the followingcases, tell which form of organization you think is best for the<br />
people involved, and why.<br />
a. Gina and Charlotte have just graduated from law school, where Gina concentrated on<br />
familylaw and Charlotte on tax law. Betweenthem, they have enough savings to lease<br />
an officeand equipmentin a smallcity. John, a friend of theirs, is interested in criminal<br />
law and has about $5,000 which he could contribute to their start-up costs.<br />
b. Stephen Lee has invented a new machine that he thinkswillgreatly reduce the amount<br />
of limeand labor needed to package industrialproducts. He needs to raise $2.5 million<br />
to develop the machine. Several friends have offered Stephen $250,000 to help him<br />
get started. In return, they want a share of the profits. Stephen still needs to raise the<br />
rest of the money, but he doesn’twant to risk his personal assets (his home and car).<br />
c. After taking courses in horticulture and hearing his neighbors complain about the<br />
amount of time they spend on their lawns, Bainón, a high school student, has decided<br />
to start a lawn-care business. He can use his family’stools and buy the extra itemshe<br />
needs out of his savings. If Ramónwants, he can put all his profits into a college fund,<br />
or he can expand his business if he does well and likes the work.
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER8<br />
Name Class____________<br />
________________________________________<br />
8.3 MARKETORGANIZATIONS<br />
CANYOU COMPETE?<br />
A. Use the chart to comparea perfectlycompetitivemarket with a monopoly.<br />
How many producers?<br />
How is price determined?<br />
.<br />
How easyor difficultis it to<br />
enter or exit market?<br />
Is informationabout the market<br />
readilyavailable?<br />
PerfectCompetition Monopoly<br />
la lb.<br />
2a. 2b.<br />
3a. 3b.<br />
4a 4b.<br />
B. Answerthe followingquestionsabout monopolies.<br />
Date__________<br />
1. Why is a monopolymore likelywhen massiveamounts of capital are needed to enter a market? __________<br />
2. How can governmentencourageor discouragemonopolies?<br />
3. What is meant by the term naturalmonopoly?<br />
4. Can a monopolyset a price as high as it wants? Why or why not?<br />
5. Do you think governmentshould try to eliminateor control monopolies?Why or why not?
2<br />
INDEPENDENT PRACTICE WORKSHEET<br />
CHAPTER8<br />
Name__________________________________________ Class_____________ Date___________<br />
8.2 THE SECURITIESMARKET<br />
READING A STOCKTABLE<br />
You can find informationabout most stocks every day in major urban newspapers.<br />
The followingreport wastaken from the New York Stock Exchange. Reviewthe<br />
meaningsof the individualentries, and then completethe exercise.<br />
High<br />
52½<br />
37½<br />
Low<br />
31’/8<br />
25%<br />
Stocks<br />
Borden<br />
CIGNA<br />
CSX<br />
Div<br />
1.12<br />
2.60<br />
P.E.<br />
Rate<br />
J<br />
...<br />
11<br />
lOOs<br />
2543<br />
5385<br />
4385<br />
High<br />
51’/g<br />
60%<br />
31½<br />
Low<br />
50%<br />
59¾<br />
30 /8<br />
Last<br />
51¾<br />
60 /8<br />
30 /s<br />
Net Change<br />
+7/s<br />
EJ3<br />
/8<br />
45½<br />
21<br />
36½<br />
49<br />
9½<br />
15½<br />
25½<br />
37<br />
CanonG<br />
Cst]c fl<br />
DanaCp<br />
Dover<br />
...<br />
.90<br />
1.28<br />
.92<br />
17<br />
...<br />
16<br />
20<br />
307 11½<br />
421 21¼<br />
11874136½<br />
694<br />
11<br />
20%<br />
35%<br />
21¼<br />
35¾<br />
50<br />
..<br />
+½<br />
—½<br />
+1<br />
27<br />
43<br />
16¾<br />
27%<br />
Downey<br />
EGG<br />
.12<br />
.56<br />
4<br />
17<br />
192<br />
526<br />
22 /s<br />
30¾<br />
22½<br />
30<br />
22 /8<br />
30%<br />
+/8<br />
+ ½<br />
I The high and low price for the past year<br />
2 The dividend currently being paid<br />
3 “An issue of preferred stock”<br />
4 The number of shares in hundreds sold during the day<br />
5 Price-earningratio, that is, the price of a share of stock divided by a year’searnings<br />
6 The changein price during the day<br />
7 The price at the rime the stock market closedfor the day<br />
8 The highest and lowestprice paid that dayfor a share of stock<br />
1. What was the highest price per share paid for EGG during the past year?<br />
2. How many shares of Borden stock changed hands during the day?<br />
3. What was the net change in the price of Dover stock for the day?<br />
4. Which stock had a price-earningratio of 11for the previousyear?<br />
5. Which stock showedthe widest swingin price over the previousyear?<br />
6. Selectone of the stocks listed. On a separate piece of paper, chart its price changesover the next two<br />
weeks. Then show the price changeson a graph.<br />
/
Figure9•2:STRUCTURE OFATYPiCAL. CORPORATION<br />
I
_________________<br />
SKILLSWORKSHEET<br />
CHAPTER8<br />
Name Class Date___________<br />
BUSINESSORGANIZATIONS INTHEMARKETSYSTEM<br />
INVESTINGIN STOCK<br />
One way to understand how the stock market works is to suppose that you have<br />
$10,000to invest in stocks. Part of it must be used to pay the stockbroker’s<br />
commissionwhen you buy and sell shares. One way to chooseshares is to select<br />
companieswith products you like or companiesin your community. Continue this<br />
exercisefor the rest of the semester.<br />
Rules for this practice investment:<br />
1. Selectone to fivestocks. Divide your $10,000in any way you like.<br />
2. Include the moneypaid as commissionin your total cost.<br />
3. Sellany stock when you like and buy somethingelse with the moneyor hold all the stocks you buy at the<br />
beginningwithout making changes.<br />
4. Write down the date you buy or sell each stock and the price paid or received.Add the commission.<br />
5. Use the day’slow for the purchase price and the day’shigh for the sale price.<br />
6. Keep track of your stock. Check its closingprice at least ten times before the end of the semester.<br />
(1)<br />
Name of<br />
Stock<br />
(2)<br />
Purchase<br />
Date<br />
(3)<br />
Priceper<br />
Share<br />
A. INITIALINVESTMENT<br />
(4)<br />
Numberof<br />
SharesBought<br />
I. ,<br />
2.<br />
3.<br />
4.<br />
5. 1<br />
Name of<br />
Stock<br />
I.<br />
2.<br />
3.<br />
4.<br />
5.<br />
Dates<br />
Checked<br />
Closing<br />
Price<br />
(5)<br />
Costof<br />
Shares<br />
B. FOLLOWINGYOURINVESTMENT<br />
Up (+),<br />
Down (-),<br />
Unchanged(...)<br />
1. What was the valueof all your shares at the end of the semester?<br />
2. What was the total cost of all commissions? _________________<br />
Priceat<br />
End of<br />
Semester<br />
3. Did you end up with more or less than your original investment?<br />
(6)<br />
2%<br />
Commission<br />
(7)<br />
Tow!<br />
Cost<br />
Price<br />
TimesNumber<br />
of Shares<br />
(8)<br />
Reason<br />
Purchased<br />
Gain or
ENRICHMENTWORKSHEET<br />
CHAPTER8<br />
Name__________________________________________ Class Date___________<br />
BUSINESSORGANIZATIONS INTHEMARKETSYSTEM<br />
CHARACTERISTICSOFMARKETORGANIZATIONS<br />
Each statement belowdescribesa market situation. For each statement, identify<br />
the market situation as:<br />
PC—Perfect competition<br />
PM—Pure monopoly<br />
MC—Monopolisuccompetition<br />
0—Oligopoly<br />
An answermay be used more than once.<br />
1. If a singlefirm raisesits price it will not be able to sell any of its output.<br />
2. ________ A market that has a few sellersof basicallythe same goods.<br />
3. _______ It is extremelyeasy to go into and get out of the business.<br />
4. ______ One singlefirm controls the entire industry.<br />
5. A market where brand-name loyaltyis more important than product differentiation.<br />
6. Only fivefirms produce this product in the United States.<br />
7. _______ The actions of an individual sellerdo not affect the overallsupply or price of a good or service.<br />
8. ______ In this market, the producer is the least responsiveto buyers’needs and wants.<br />
9. ______ Firms in this kind of market produce goods that are very close substitutes.<br />
10. In this market, both buyers and sellersmust be price takers.<br />
11. _______ All buyers and sellershave sufficientinformationto maximizeself-interest.<br />
12. ______ In this market, a good is protected from competitionby a patent.<br />
13. ______ An action by one seller in this market will alwaysaffect all the others.<br />
14. _______<br />
A singlefirm must take the market price for its product.<br />
15. ______ Public utilities are an example.
-<br />
1•<br />
-7<br />
fTh Mtip1!&ion 7T T<br />
The interaction of the multipliereffectand<br />
the accelerationprincipleaffectsthe econo<br />
myof each state and each cityas wellas the<br />
national economy. South Dakota’s Gover<br />
nor William Janklow may never use the<br />
term multipliereffect, but he knowshow it<br />
works. Encouragingfirmsto moveto South<br />
190<br />
I’<br />
C) i<br />
‘“ II)<br />
CASESTUDY<br />
Dakota means that investment spending<br />
will bring more jobs for his citizensand<br />
more money to the state.<br />
South Dakota has several traits that<br />
industry finds undesirable. The cold win<br />
ters. erratic rainfall, and rugged landscape<br />
create problems that other areas need not<br />
I, $<br />
4<br />
I
confront.SouthDakota is consistentlynear<br />
the bottom of the country’s per capita<br />
incometables.<br />
UnderGovernor.Janklowsomesurpris<br />
ing things are happening to the nation’s<br />
45thmost populous state. South Dakota’s<br />
twolargestcities.SiouxFallson the eastern<br />
edgeand Rapid Cityon the westernfringe.<br />
are booming.Big banks, led by Citicorp,<br />
are movingin. investing millions in con<br />
structionand payroll. Smallmanufacturers<br />
are relocatingto South Dakota. The state<br />
wideunemploymentrate is less than half<br />
the nationalaverage.<br />
This growth is not an accident. When<br />
Citicorpannounced several years ago that<br />
i: wanted to escape some of New York’s<br />
consumerloan rate restrictions, South Da<br />
kotatook advantage of this economic op<br />
portunityto attract the banking industry.<br />
Whileother states debated over banking<br />
legislationto attract Citicorp, South Dako<br />
tas legislaturepassed a billwelcomingoutof-statebanks.<br />
Citibank built a $25million<br />
SiouxFallscomplexthat brought jobs and<br />
moneyto South Dakota. With 1,300work<br />
ers.Citibankis nowthe state’sthird largest<br />
privateemployer.<br />
T<br />
After Citicorpmoved<br />
intoSouth Dakota,investment<br />
spending<br />
broughtmorejobsfor<br />
citizensandmore<br />
money to the state.<br />
States like South Dakota that have few<br />
large cities have a capital shortage prob<br />
lem. Without largecitiesto attract industry<br />
and business,almost no investmentspend<br />
ing occurs. Since the multiplier effect re<br />
quires spending original dollars, the more<br />
money available to spend, the greater the<br />
effect of the multiplier. After Citibank<br />
opened in SiouxFalls.bank depositsin the<br />
cityof 81.000residentsincreasedfrom S650<br />
million to $6 billion. These bank deposits<br />
are a fund from which other firms can<br />
borrow in order to investin South Dakota.<br />
This increase in deposits also represents<br />
additional money individualsand business<br />
es have been able to save because of an<br />
increase in income. Governor Janklow re<br />
fers to his state’s banking and insurance<br />
legislationas jobs bills.<br />
In addition to attracting banks, South<br />
Dakota has encouragedother businessesto<br />
relocate there. The state has no corporate<br />
or personal income tax, lowworkers’com<br />
pensation and real estate taxes, and a com<br />
paratively low cost of living.<br />
“What’s wrong with our lot in life?”<br />
Governor Janklow asks. “We never really<br />
got to prosper. Fm tired of being the farm<br />
1<br />
4_I
It<br />
ii<br />
- 4 —<br />
lII<br />
team for the rest of America.” The invest<br />
ment spendingof bigbusinesscoupledwith<br />
the multipliereffect on the original invest<br />
ment and salaries to workers are bringing<br />
prosperity to South Dakota.<br />
ANALYZING ThE CX E STUDY<br />
L<br />
STEP I Gather Evidence<br />
1. What steps has South Dakota taken to<br />
attract new business? What were the<br />
economictradeoffsof each of itsactions?<br />
2. Explain how the addition of new busi<br />
nesses will help South Dakota become<br />
more prosperous.<br />
TEP 2 EzamineChange<br />
1. What changes are taking place in the<br />
type and number of jobs available in<br />
South Dakota?<br />
23<br />
2. Citibank spent S25millionon construc.<br />
tion costs alone. If the multiplierwas3.<br />
how much additional spending was<br />
added to South Dakota’seconomy?<br />
3. Explain the effects of the additional<br />
money available in bank deposits in<br />
Sioux Falls.<br />
STEP 3 PredIctFurther Change<br />
1. What additional changes may occur in<br />
the job market in South Dakota?<br />
2. What changes may occur in the popula<br />
tion of South Dakota?<br />
3. Explain how the changes may affect<br />
South Dakota’stwo large cities.<br />
4. How mightthe successof South Dakota<br />
in attractingbusinessaffectother states?<br />
Describe changesother states may take<br />
in order to compete withSouth Dakota.<br />
I<br />
5:
I<br />
-<br />
. .T-<br />
I 1 z-U”i<br />
110WDO MY BENEFITS STACK UP?<br />
It’s hard for most people to tell whether their benefits<br />
program is munificent, so-so or pinchpenny. To furnish a<br />
yardstick, U.S.Newsasked benefits consultants Towers,<br />
Pemn, Forster & Crosby to work up a description of the<br />
benefitsmost employes might get at variouslysized,pro-<br />
gressive firms. “Large” refers to a company with more<br />
than 3,000employes,“medium” to a company with 500to<br />
800and “small” to a company with fewer than 100.<br />
MAJORMEDICAL<br />
Employecontributes10%ofyearlypremiumafter<br />
retirement<br />
atage65,20%forfamily<br />
Upto$250,000maximumlifetimebenefit,offsetby<br />
medicarecoverage<br />
-_________________<br />
M7T$ i<br />
Retmbur sement<br />
100%for“reasonableandcustomary”preventiveand<br />
diagnosticcare<br />
80%forbasicdentalwork.60%formajorwork;totalof<br />
$1,500yearlyforindividuals, $4,000forfamilies<br />
60%forjuvenileorthodontia; one-timedeductibleof$50;<br />
$1,000separatemaximumlifetimebenefit<br />
- —<br />
---- -w--- --- .- —<br />
80%ofhospitalandsurgicalexpensesreimbursed<br />
plus<br />
80%of “reasonableandcustomary” nonhospital medical<br />
expenses<br />
Unlimitedmaximumlifetimebenefit<br />
Deductible:<br />
$300forindividuals, $600forfamilies<br />
Planpaysforallcostsaftermaximum$1,500Outof<br />
pocketforindividualsor$3,000forfamilies(including<br />
deductible)<br />
Who8yS:<br />
Companycoversbasicandmajormedical forindividuals;<br />
familiespay10%to 15%ofpremium, $15to$20/month<br />
HEALTH-MAINTENANCE ORGANIZATION<br />
100%of hospitalandsurgical<br />
expensesreimbursed<br />
plus<br />
80%ofmostnonhospital expenses<br />
inexcessofbasichospital/surgical<br />
$500,000maximum<br />
$100individuals, $300families<br />
Sameaslargecompany, except<br />
$1,000forindividuals<br />
Coveragexpiresatage65.Same<br />
coverageasactiveemployesfor<br />
earlyretirement beforeage65<br />
NA<br />
-same-<br />
80%forbasicdentalwork.50%for<br />
majorwork;totalof$1,000yearlyfor<br />
individuals, $2,500forfamilies<br />
50%forjuvenileorthodontia; one<br />
timedeductibleof$50;$750<br />
separatemaximumlifetimebenefit<br />
— sameasmedium -<br />
plus<br />
- sameasmedIum -<br />
$250,000maximum<br />
— sameasmedIum —<br />
— —<br />
sameasmedium<br />
— same — Companypaysbasicand<br />
majormedical<br />
Reimbursement:<br />
Noout-of-pocketemployexpenses. Allpreventive, majormedicalandhospitalexpensescovered<br />
— same-<br />
HMOnotoflered<br />
Unlimitedmaximumlifetimebenefit<br />
— — same NA<br />
Whopays:<br />
Employepaysanypremiumovergroup-health plan — — same NA<br />
PSYCHIATRIC<br />
50%ofoutpatient<br />
expensesreimbursed<br />
Inpatientpsychiatriccarereimbursed likeotherhospital<br />
expenses, butsubjecttomaximumstayof30or60days<br />
$50,000to$70,000maximumlifetimebenefit<br />
RETIREE HEALTHCARE<br />
U.S.NEWS &WORLDREPORT. March28.1988<br />
— same —<br />
— same —<br />
$25,000to$50,000maximum<br />
50%ofoutpatient expenses<br />
reimbursed$20/visit<br />
— same —<br />
— sameasmedium —<br />
Noformalpolicy<br />
NA<br />
NA<br />
NA<br />
NA<br />
-<br />
71
I<br />
Oeductib le:<br />
Nonefor“reasonableandcustomary”<br />
diagnosticare.Forothercare,$50qeductiblefor<br />
individuals, $150forfamilies<br />
Whopays:<br />
Companypayspremiumforindividuals, familiespay<br />
10-15%ofpremium, $5to$6/month.Contributions may<br />
beinpretaxdollars<br />
-<br />
...I t_ t<br />
PENSION PLAN<br />
Company-paid defined-benefit planthatguarantees<br />
benefitequalto:<br />
60%offinal5years’averagearningsafter30years,<br />
offsetby50%ofemploye<strong>Social</strong>Securitybenefits<br />
or<br />
2%ofanemploye’s finalaveragearningsforeveryyear<br />
ofservice,offsetby1.5%oftheemploye’s<strong>Social</strong>Security<br />
benefitsforeachyearofservice<br />
Earlyretirement at60or62withoutreductioninbenefits,<br />
retirement at55with80-85%ofbenefitsdueatage65<br />
SAVINGS OR PROFIT SHARING<br />
401(k)savIngsplan:<br />
Employermatches50centsperdollarofemploye<br />
contribution,<br />
upto6%ofemployebasesalary<br />
Employecancontributeuptoadditional 10%ofbase<br />
salaryunmatched<br />
Contributions canbeinpretaxdollars,butpretax<br />
contributions cannotexceed$7,313annually<br />
Employeis100%vestedafter3or5yearsofservice<br />
Emp loye determineshow401(k)contributions areinvested<br />
invariousvehicles<br />
Pmflt-sharlngplafl:<br />
Either401(k)planoraprofit-sharing plan<br />
Employer contributes10-15%ofemploye’sbasepayto<br />
savingsplan,basedoncompany’syearlyprofit<br />
10to 12paidholidays, 3 to5ofwhicharefloatingandcan<br />
betakenwhenemployechooses<br />
2 weekspaidvacationforito 4years’service;3weeks<br />
paidvacationfor5to9years’service;4weekspaid<br />
vacationfor10to 19years’service;5weekspaidvacation<br />
br 20ormoreyears’service<br />
Occasional unpaidsabbatical leave<br />
_______<br />
li1t —‘ —, ‘-“. .- W-<br />
A<br />
preventiveand — same — — same —<br />
-same- NA<br />
Defined-benefit planthatguarantees<br />
benefitequalto:<br />
50%offinal5years’avg.earnings<br />
after30years,offsetby50%of<br />
employeSoc.Securitybenefits<br />
Earlyretirement with80%of<br />
benefitsdueatage65<br />
same —<br />
— same —<br />
— same —<br />
Nodefinedpensioncoverage<br />
NA<br />
NA<br />
— same NA<br />
— same - - same -<br />
— same — NA<br />
Noprofit-sharing plan<br />
10to 12paidholidays, Ito 2<br />
floating<br />
-same-<br />
LIFEINSURANCE. ACCIDENTAL DEATH&DISMEMBERMENT<br />
Company paysfortermpolicy,faceamountequalto 1to<br />
2timessalary.AD&Dequaltolifecoverage<br />
U.S.NEWS &WORLDREPORT,March28. 1988<br />
NA<br />
No401(k):mayhavesavings<br />
planinwhichemployer<br />
matches50centsperdollar<br />
of ernployecontributionon<br />
after-taxbasis<br />
Companycontributes8-10%<br />
of basesalaryto employe’s<br />
account<br />
5to 10paidholidays, none<br />
floating<br />
2 weekspaidvacation,<br />
3 weeksformanagers<br />
NA<br />
— same — Companypaysfiat$10,000to<br />
$20,000oramountequalto I<br />
timessalary<br />
73
Nonefor“reasonableandcustomary”<br />
diagnosticcare.Forothercare,$50deductiblefor<br />
individuals, $150forfamilies<br />
Whopy8:<br />
Companypayspremiumforindividuals, familiespay<br />
10-15%ofpremium, $5to$6/month.Contributions may<br />
beinpretaxdollars<br />
r —- . —- ’ -- zr—-<br />
SAVINGS OR PROFIT SHARING<br />
481(k)savIngsplan:<br />
— Jjp fl:<br />
Deductible:<br />
PENSION PLAN<br />
Employermatches50centsperdollarofemploye<br />
contribution,<br />
upto6%ofemployebasesalary<br />
Employecancontributeuptoadditional 10%ofbase<br />
salaryunmatched<br />
Contributions canbeinpretaxdollars,butpretax<br />
contributions cannotexceed$7.313annually<br />
Employeis100%vestedafter3or5yearsofservice<br />
Employedetermineshow401(k)contributions areinvested<br />
invariousvehicles<br />
Proflt-shaflng plan:<br />
Either401(k)planoraprofit-sharing plan<br />
Employer contributes10-15%ofemploye’sbasepayto<br />
savingsplan,basedoncompany’syearlyprofit<br />
10to 12paidholidays, 3to5ofwhicharefloatingandcan<br />
betakenwhenemployechooses<br />
2 weekspaidvacationfor1to4years’service;3weeks<br />
paidvacationfor5to 9years’service;4 weekspaid<br />
vacationfor10to 19years’service;5weekspaidvacation<br />
for20ormoreyears’service<br />
Occasional unpaidsabbatical leave<br />
J* .’1 t JN’ .<br />
-IT ji1Th<br />
t_..__—- r—--—. — .- .-.s*LtZAaJã&A1S1<br />
Company-paid defined-benefit planthatguarantees<br />
benefitequalto:<br />
60%offinal5years’averagearningsafter30years,<br />
offsetby50%ofemploye<strong>Social</strong>Securitybenefits<br />
or<br />
2%ofanemploye’s finalaveragearningsforeveryyear<br />
ofservice,offsetby1.5%oftheemploye’s<strong>Social</strong>Security<br />
benefitsforeachyearofservice<br />
Earlyretirement at60or62withoutreductioninbenefits,<br />
retirement at55with80-85%ofbenefitsdueatage65<br />
— same —<br />
— same —<br />
— same —<br />
— same —<br />
— same —<br />
— same —<br />
.<br />
__________<br />
preventiveand — same — — same —<br />
- same —<br />
Defined-benefit planthatguarantees<br />
benefitequal to:<br />
50%offinal5years’avg.earnings<br />
after30years,offsetby50%of<br />
employeSoc.Securitybenefits<br />
_________<br />
No401(k);mayhavesavings<br />
planinwhichemployer<br />
matches50centsperdollar<br />
ofemployecontributionon<br />
after-taxbasis<br />
NA<br />
— same —<br />
NA<br />
Noprofit-sharing plan<br />
NA Companycontributes8-10%<br />
ofbasesalarytoemploye’s<br />
acCOunt<br />
10to 12paidholidays. I to2<br />
floating<br />
— same —<br />
thEINSURANCE ACCIDENTAL DEATH&DISMEMBERMENT<br />
-same-<br />
\Companypaysfortermpolicy,faceamountequalto 1to<br />
2 timessalary.AD&Dequaltolifecoverage<br />
1<br />
Earlyretirement with80%of<br />
benefitsdueatage65<br />
NA<br />
.<br />
NA<br />
5to 10paidholidays, none<br />
floating<br />
2weekspaidvacation,<br />
3 weeksformanagers<br />
NA<br />
‘1Vvr’-<br />
Nodefinedpensioncoverage<br />
. U.S.NEWS &WORLDREPORT, M•rch28,1988 73<br />
NA<br />
NA<br />
Companypaysflat$10,000to<br />
$20000oramountequalto 1<br />
timessalary<br />
-
YOUTHECONSUMER Name<br />
WORKSHEET<br />
THE JOBMARKETIN THEYEAR2000<br />
Class Date<br />
Most high-school students are concerned with the type of career they will have when<br />
they graduate. What is needed to get the job of your dreams? Samuel Ehrenhalt, a<br />
commissioner of the U.S. Bureau of Labor Statistics, indicates that specializing in a<br />
narrow field is not as desirable as it used to be. He says, “What you can train for is to<br />
be ready, to develop your ability to learn, and to be flexible. In a technologically ad<br />
vanced society, knowledge becomes the most valuable tool of the trade” (Scholastic<br />
Update, December 1, 1986).<br />
The Bureau of Labor Statistics estimates that manufacturing will produce only 10 per<br />
cent of the 16 million new jobs by 1995. Most people will work for small businesses,<br />
moving from company to company instead of up the corporate ladder. Dr. David Birch,<br />
career expert at the Massachusetts Institute of Technology, states, “You’vegot to<br />
assume you’ll have at least 15 to 20 jobs, eight to 10 different employers, and change<br />
careers five to six times” (Scholastic Update, December 1, 1986).<br />
Study the information on trends in the American labor market in the following charts.<br />
Then, using this information and what you have just read, answer the questions about<br />
your possible career choices.<br />
WHERENEWJOBSWILLBE<br />
Job growth forecast for top 10cities, 1985.2000<br />
1. LosAngeles .Long Beach,CA 1,032,000<br />
2. Bostonarea,MA 754,700<br />
3. .Santa Anahelm Ana,CA 701,500<br />
4. SanJose,CA 539,200<br />
5. Phoenix,AZ 537,000<br />
6. Washington,DC 509,000<br />
7. Houston,TX 497,700<br />
8. Chicago,IL 493,500<br />
9. Defies,TX 485,000<br />
10.Atlanta,GA 462,700<br />
1. How would you describe the fastest-growing occupations?<br />
Th. 20Fast.st.GrowingOccupations,<br />
ProJ.ct.dto 1995<br />
OCCUPATION<br />
ComputerServiceTechnicians<br />
LegalAssistants<br />
ComputerSystemsAnalysts<br />
ComputerProgrammers<br />
ComputerOperators<br />
Oflice MachineRepairers<br />
PhysicalTherapyAssistants<br />
ElectricalEngineers<br />
CivilEngineeringTechnicIans<br />
Operatorsof ElectronicDigital<br />
ProcessingEquipment<br />
InsuranceClerks,Medical<br />
ElectricalandElectronics<br />
Technicians<br />
Occupational Therapists<br />
SurveyorHelpers<br />
CreditClerks,BankingandInsurance<br />
PhysicalTherapists<br />
JobInterviewers<br />
MechanicalEngineers<br />
MechanicalEngineeringTechnicians<br />
Operatorsof Compressionand<br />
InjectionMoldMachines, for Plastic<br />
PERCENTGROWTH<br />
96.8%<br />
94.3%<br />
85.3%<br />
76.9%<br />
75.8%<br />
71.7%<br />
67.8%<br />
65.3°/.<br />
63.9%<br />
2 What types of characteristics and skills will you need in the future job market?<br />
63.5%<br />
62.2%<br />
60.7%<br />
59.8%<br />
58.6%<br />
54.1%<br />
53.6%<br />
52.5%<br />
52.1°/ .<br />
51.6%<br />
3. What is your preferred occupation? Is it listed above? How will the growth (or lack<br />
of growth) in your field affect your career?<br />
4. What areas of the country will experience the greatest growth in jobs? How will<br />
where you live affect your career decisions?<br />
50.3‘I .
Figure16 2: CLEARING ACHECK<br />
JoséRodriguez inDallasorderscampingequipment bymailfromaspoilingoodsdote<br />
inMinneapolis. Hesendsa$25.00checkdrawnonhisaccount inDallasbank.<br />
:<br />
check to<br />
sportingoods<br />
store<br />
Federal Reserve<br />
_______<br />
bank<br />
Minneapolis<br />
[FederalReserve<br />
bank<br />
Dallas<br />
-.<br />
-<br />
-. -<br />
-<br />
-<br />
I ,e(umedtojose<br />
stalemeni
Name<br />
YOUTHECONSUMER<br />
WORKSHEET<br />
WHEREDO JOBSCOMEFROM?<br />
might happen to the demand for superstars?<br />
a. <strong>School</strong> teachers.<br />
b. Military officers.<br />
c. Daycare attendants<br />
d. Flight attendants<br />
e. Correction officials<br />
f. Tax preparers<br />
Class Date<br />
Jobs exist because consumers want and buy certain goods and services. One factor that<br />
can cause an increase or decrease in the demand for labor is a change in consumer<br />
demand for the final product that labor produces. If consumers demand more of a par<br />
ticular good or service, more workers are hired to produce this good or service. The<br />
reverse is also true. If consumers choose not to purchase a good or service, the workers<br />
who produce them are laid off. Completing the following exercise will help you to<br />
understand how consumer demand affects employment.<br />
1. If professional sports lost its popularity with the American public, what do you think<br />
2. What might happen to the salaries of professional superstars?<br />
3. What do you think could cause an increase in the demand for individuals in the<br />
following occupations?<br />
g. Data-processing machine mechanics<br />
4. You and your family are consumers who contribute to the demand for workers when<br />
you decide to buy some goods and services rather than others. List 3 items you or<br />
your family have purchased recently and the workers who were affected by your<br />
decision.<br />
a.<br />
b.<br />
C.
AUTOMATION<br />
Name<br />
YOUTHECONSUMER<br />
WORKSHEET<br />
Class Date<br />
In Chapter 11, you read about the technological advances that have changed the world<br />
economy over the last 300 years. Today the mechanization of industry has increased to<br />
a point where automation is changing the nature of work for many people. Not only<br />
have robots become a major factor on the assembly line, but computers have taken<br />
over much of the repetitive work done by office and factory staffs.<br />
The automation of the work place has resulted in both costs and benefits to society.<br />
These costs and benefits differ, depending on whether one is an employer, an<br />
employee, or a consumer. To help clarify the costs and benefits of automation for each<br />
of these three groups, complete the chart below. One cost benefit in each group has<br />
been done for you.<br />
Role in the Economy Cost of Automation<br />
Benefits of Automation<br />
A. Employer increased productivitiy<br />
B. Employee loss of jobs<br />
C. Consumer prices may be lowered
INDEPENDENTPRACTICEWORKSHEET ____________<br />
CHAPTER9<br />
Name__________________________________________ Class_____________ Date___________<br />
9.3 LABOR—PAST,PRESENT,AND FUTURE<br />
REACHINGA CONTRACTAGREEMENT<br />
1. Managementand labor usuallyhave different ideas about the fairnessof a contract’sterms. Each side may<br />
suggestterms before a compromiseis reached. Look at the terms suggestedby managementand labor for<br />
semi-skilledworkers in the WowieWidget Company.After studying the demands of managementand<br />
labor, find a fair solution.<br />
CONTRACTFOR SEMI.SKILLEDFACTORYWORKERSAT WOWIEWIDGETS<br />
Items ManagementTerms UnionTerms My Solution<br />
Wages 3% increasein salary<br />
Hours<br />
Length of<br />
Contract<br />
Length of<br />
Vacation<br />
Holidays<br />
Other<br />
Benefits<br />
Fair<br />
Dismissal<br />
Procedures<br />
8 hours a day with an hour<br />
off for lunch<br />
5 years<br />
2 weeksa year, 3 weeks<br />
after 10 years<br />
10 holidaysselectedby<br />
company<br />
Companypays half of<br />
health insurance policy;<br />
providesprofit sharing for<br />
employeesof more than 10<br />
years; offers discount on<br />
company products.<br />
Companymay fire anyone<br />
it considersunsatisfactory.<br />
5% increasein salary, plus<br />
a cost-of-livingincrease<br />
for inflation<br />
36 hours a week, with a<br />
right to work 4 days of 9<br />
hours each<br />
3 years<br />
2 weeksafter 1 year, 3<br />
weeksafter 5 years, 4<br />
weeksafter 10years<br />
10holidays, 6 selectedby<br />
company, 4 selectedby<br />
each employee<br />
Companypays all health<br />
insurance; provides profit<br />
sharing beginningafter 2<br />
years; offers discount on<br />
company products; offers<br />
scholarshipsfor<br />
employees’children.<br />
Companymay fire anyone<br />
during first 30 days of<br />
employment;after that, it<br />
must give employeea<br />
hearing with union<br />
officialspresent.<br />
2. Which terms was managementmost successfulin winning in your contract?<br />
3. Which terms was labor most successfulin winning in your contract?<br />
4. How might this contract affect the sellingprice of WowieWidgets?
Handout4-1A<br />
THE STORYOF THE BIG WAVE BOATCOMPANY<br />
TheUnitedIslands(U.l.)isoneoftheworld’smost<br />
powerfulanddynamiceconomies. TheUnitedIslands<br />
hasadiverseeconomythatdoesmuchexportingand<br />
importing. It isa richnationbymoststandards, andof<br />
lateithasconsistentlybeenexperiencinganunfavora<br />
blebalanceof trade.<br />
OneofthemajorindustriesoftheUnitedIslandsis<br />
theboatmanufacturing industry.Theindustryisanoli<br />
gopolyin whichfivelargecorporationsdominatethe<br />
market.Theinhabitantsof theUnitedIslandsdepend<br />
onboatsastheirmajormeansof transportation. The<br />
federalgovernment, whichis locatedon BulkheadIs<br />
land,hasinvestedheavilyinimprovingwaterways, in<br />
lets,harbors,etc.,to facilitatebothpersonalandbusi<br />
nesstransportation. Asaresult,theUnitedIslandshas<br />
anup-to-datenetworkof interconnectedwaterways.<br />
Theboatmanufacturing industryemploysmany<br />
INTRODUCTIONTOTHENEWSPAPER ARTICLES<br />
Article1<br />
Big WavePostsItsWorstQuarter<br />
THESTRAITS(lPl) — Initsworstquarterlyperform<br />
anceinhistory,BigWaveBoatCompanyesterdayre<br />
portedasecondquarter1979lossof$206.1million —<br />
morethanthe company’sentire1978deficit — and<br />
askedgovernment helpto regainstability.<br />
On BulkheadIsland,the TreasuryDepartment<br />
saidit isstudyingthefinancialsituationofthenation’s<br />
thirdlargestboatmakerin advanceof a rulingonthe<br />
firm’srequestfor$1billionintaxrelief.<br />
BigWave’sdisastroushowingwasblamedon<br />
slumpingsalesofitsbigboats,whicharelessfueleffi<br />
cientthanits competitors’ boats,andon government<br />
regulations,whichChairmanJohnRuddersaidcost<br />
twiceasmuchforBigWaveto meetthanforitslarger<br />
competitors.<br />
BigWave’spersistent saleslaghasledtospecula<br />
tionamonganalyststhata mergerwithFolkboatsmay<br />
beintheoffing,a rumorbothcompanieshavedenied.<br />
skilledandsemiskilledworkers.TheUnitedBoatWork<br />
ersisalargeandpowerfulunionthathasbargainedef<br />
fectivelyforitsmembersformanyyears.Boatworkers<br />
areamongthehighestpaidworkersinthenationand<br />
enjoyanoutstandingfringebenefitpackage.Manyre<br />
latedindustriesprovidepartsandmaterialsfortheboat<br />
manufacturers, andsubcontracting isacommonprac<br />
ticeintheboatindustry.<br />
Profitsoftheboatcompaniesgenerallyhavebeen<br />
excellent.Recently,however, importsof foreignboats<br />
and new governmentregulationshave had a de<br />
pressingeffecton allfiveboatcompanies, especially<br />
thenumberthreefirm,theBigWaveBoatCompany,<br />
whichnowfindsitselfin seriousfinancialdifficulty.In<br />
fact,it is on the vergeof bankruptcy.Thefollowing<br />
newspaperarticlesdescribethe company’situation<br />
andthevariou solutionsthathavebeenproposedand<br />
debated.<br />
Directions:Readthearticlescarefully, takea positionfororagainstassistancefromtheU.l.government<br />
totheBig<br />
WaveCompany,andbepreparedto defendyourposition.<br />
Mr.Ruddersaidthefirmwashitbytwoeventsover<br />
whichit hadnocontrol.“First,theUnitedIslandshave<br />
managedtodevelopa hysteriaaboutheadequacyof<br />
gasolinesuppliesthathurtsthemarketsinwhichwe’re<br />
strongest.Andontopofthat,wearenowinarecession<br />
thatmakesallourproblemsworse.<br />
“Youcouldn’twriteatougherscenarioforthethirdlargestboatcompany.We’reinatoughperiod,butwe<br />
intendto makeit,” Mr.Ruddersaid.Ruddersaidthat<br />
thecompanyhaslobbiedin Bulkheadforanacceler<br />
atedtaxcreditplanthatwouldgiveit$1billionintaxre<br />
liefin 1979and1980.<br />
Healsosaidthecompanywantstodelaytheappli<br />
cationoffederallymandatedexhaustemissionrequire<br />
mentsfortwoyears.Boththetaxreliefandtheemission<br />
controlwaiverwouldrequirespecialfederalegislation.<br />
Mr.Ruddersaidgovernment regulationcostBig<br />
Wave$620perboatcomparedwith$340perboatfor<br />
theGeneralBoatsCorporation, whichhesaidisableto<br />
spreadmandatedcostsovera greateramountof pro<br />
duction.<br />
BigWavePresidentLeeBarracudosaidthecorn-<br />
FromMasterCurriculumGuidein <strong>Economics</strong>:TeachingStrategiesfor Consumer<strong>Economics</strong>(Secondary).1985. Joint Councilon Economic<br />
Education,2 ParkAvenue,NewYork,NY 10016.<br />
91
Handout 4-1A (continued)<br />
wy hasnotscrappedplanstospend$1billionayear<br />
.. .iring thenexttwoyearsto producethesmall,fuelefficientboatsthatarewidelyacceptedbythepublic.<br />
BigWave,traditionallya leaderin salesof tight<br />
freightersandrecreational boats,also.sawthatmarket<br />
virtuallycollapse. Inthesecondquarter,BigWave’sdo<br />
mesticboatsalesweredown23.2percentfromlast<br />
year,whilefreightersalesdeclined53.8percent.The<br />
companyreportedworldwidedollarsalesinthesecond<br />
quarterat$3.2billion,down13.6percentfrom$3.7bil<br />
lioninthesecondquarterof 1978.<br />
TheTreasuryDepartment saidit hasbeenmoni<br />
toringBigWave’sfinancialsituationinthepastseveral<br />
months,andisconcernedaboutitspossibleimpacton<br />
theentireeconomyaswellasontheemployeesofBig<br />
Waveanditssuppliers.<br />
Article2<br />
Big WaveAid PleaGettingScrutiny<br />
BULKHEAD(IPI) — Congress should deter<br />
mine that the Big Wave Boat Company is doing<br />
everything possibleto help itself before consider<br />
ing a billion-dollar tax subsidy or loan guarantee,<br />
the chairman of the House Banking Committee<br />
Id %%‘ednesday.<br />
But Big Wave got a somewhat more sympa<br />
thetic response from the chairman of the Senate<br />
Finance Committee, Russell Shore. He may sup<br />
port such a request because, he said, “the<br />
alternative for BigWaveis going out of business.”<br />
“Before Congress considers a billion dollar<br />
tax subsidy or loan guarantee for Big Wave like<br />
that Congress once extended to an aircraft firm,<br />
members need to be convinced that Big Wave is<br />
doing everything possibleto help itself,”said Sen<br />
ator Shore. “Congress would also want to be con<br />
vinced that the company has definitive and realis<br />
tic plans for getting back on solid ground.”<br />
He said Big Wave’s announcement “of its<br />
enormous current and prospective losses raises a<br />
serious question concerning the continued viabil<br />
ity of this major corporation, the fate of its<br />
250,000 employees, and the effects on their ma<br />
jor suppliers and their employees.”<br />
Senator Donald Rower, who represents the<br />
Straits, said he met with Treasury Secretary-<br />
designate G. WilliamMooring in Washington and<br />
-<br />
cussed Big Wave’ssituation.<br />
in the end, the fate of the proposal, which is<br />
sure to face extensive congressional scrutiny, is<br />
92<br />
likelyto depend on convincing Congress thai Big<br />
Wave had done all it could to help itself and that<br />
the consequences of a bankruptcy on the U.I.<br />
economy would be severe.<br />
Article3<br />
GBChiefFightsAid to BigWave<br />
THE STRAITS (IPI) — Thomas A. Anchor,<br />
chairman of the General Boat Corp., said Thurs<br />
day that he opposes special government financial<br />
aid to the Big Wave Boat Company. He urged in<br />
stead a complete review of federal regulations<br />
that have forced heavy spending by the boat in<br />
dustry.<br />
The GB chief executive said that Big Wave’s<br />
request for up to $1 billion in federal aid “pres<br />
ents a basic challenge to the ‘private enterprise’<br />
philosophy of the United Islands.”<br />
Mr. Anchor also said that GB now expects<br />
new passenger boat sales in the United Islands to<br />
fall to 10.8 million units for the 1979 model year<br />
ending Sept. SO,and that the figure would proba<br />
bly be the same for the calendar year. About 20<br />
percent of these boats, he estimated, would be<br />
foreign-built. Previously, the company had per<br />
sistently maintained that total new boat sales this<br />
year would reach 11.5 million units, considerably<br />
more than the forecasts of its competitors.<br />
in other developments Thursday regarding<br />
Big Wave’s financial plight:<br />
— Big Wave President Lee A. Barracuda<br />
said he plans to meet with United Boat<br />
Workers President Douglas A. Floater and<br />
the union’s negotiating team at a special bar<br />
gaining session on Friday, a meeting union<br />
officials called unprecedented.<br />
— BigWave’sboard of directors, meeting in<br />
New Dock,voted to omit payment of a thirdquarter<br />
dividend on its common stock.<br />
— Big Wave stock fell again on the New<br />
Dock Stock Exchange.<br />
Article4<br />
WIll the RubberBandof the Boat IndustrySnap<br />
Back?<br />
THESTRAITS (IPI) — CrisisinBigWaveisalmostas<br />
familiararoundthestraitsasnew-model time,laborne
Handout4-lA (continued)<br />
otiationseverythreeyears,or the up-to-the-second<br />
waterwaybillboardsgivingthe year’sproductionfig<br />
ures.<br />
“BigWaveislikearubberband.Youstretchit,and<br />
itsnapsback.Buteachtimeit’salittleweaker.Andyou<br />
knowthatsomedaytherubberbandisgoingtobreak,”<br />
astaffmemberoftheUnitedBoatWorkersaidnotlong<br />
ago.<br />
BigWavesuffereda losslastyear,lost$53.8mil<br />
lionintheMarchquarter,andanindustry-record $206<br />
millioninthesecondquarter.WallStreampredictionsof<br />
thelossfortheyearstartat$500million,adismalpros<br />
pectthathaspromptedtheboatmaker to pleadfor$1<br />
billioninloanguaranteesfromthegovernment. Along<br />
withthat sensational request,on FridayBig Wave<br />
askedtheUnitedBoatWorkersto freezewagesand<br />
benefitsfortwoyears.<br />
Somehavearguedthat Big Wavewouldn’tbe<br />
snaredin thecoilsof thelatestcrisisif it wereselling<br />
moreboats.FiguresforlateJulyshowthatBigWaveis<br />
stillhavingsalesproblems.<br />
Julysalesfigures,releasedFriday,showedthat<br />
BigWave’stotalboatsalesdeclined22.7percentfrom<br />
thesameperiodlastyear.<br />
“Thekeyissueistheirmarketposition,ofcourse,”<br />
aysJoanBrook,headoftheNationalWaterwayTraffic<br />
SafetyAdministration.<br />
“Theeconomicsofthisbusinessneverchanges,”<br />
BigWavePresidentLeeBarracudasaidin May.One<br />
percentofamarketthattotals11millionboatsayear“is<br />
stillworthabout$200millionnetto usperquarter.We<br />
needonemorepercentagepoint,andwearen’tgetting<br />
thatyet.”<br />
Allmanufacturers havebeenpummeledbytheef<br />
fectsoffuelshortages. BigWave’smarketpositionison<br />
thewayto becomingitsworstsinceWorldWarII.For<br />
thefirstsixmonthsoftheyear,BigWave’ shareofthe<br />
totalboatmarketwas9.2percent.ApplyingBarracu<br />
da’sformula,BigWavewouldavoidalossthisyearifit<br />
werekeepingits 1976shareof 10.2percent.<br />
Thecompanyhasalwaysbeenmorevulnerable<br />
thanothersintheindustrytorecessions. Thoughprofitablein<br />
1960and1966,it wasin theredin 1957and<br />
1958,andagainin 1970,1974,and1975.<br />
UptonowBigWavehasbeenabletocutexpendi<br />
turesfornewfacilitiesduringslumps.Forexample —<br />
thoughplantscannotbeturnedoff likewatertapsbe<br />
causeitnowtakesthreeyearsfromthetimetheneces<br />
saryequipment is orderedto producea newboat —<br />
suchspendingfellfrom$125millionin1957to$63mu<br />
on in1959,andfrom$331millionin1973to$164mil<br />
donin 1975.<br />
Now,however,BigWavesaysitmustspendmore<br />
93<br />
inordertomeetgovernment pollutionandfueleconomy<br />
standards.Whatwouldbe normalnew-productex<br />
pensesof$500millionthisyearandnextwillbeabout<br />
doubledtomeethestandards, thecompanysays.That<br />
isthecompany’s justificationforaskingthegovernment<br />
to help,sinceBigWaveis likelyto producerelatively<br />
fewboatsoverwhichtospreadtheadditional expendi<br />
turesto meetthegovernment requirements.<br />
ArtIcle5<br />
UnionNixesBig WaveWage-FreezeAppeal<br />
THE STRAITS (IPI) — The Big Wave Boat<br />
Company has asked the United Boat Workers for<br />
a two-year freeze on wagesand benefits for some<br />
124,000 Big Waveemployees who are covered by<br />
the union contract. The union rejected the ap<br />
peal, but scheduled a meeting of its Big Wave<br />
council for next Thursday to discuss what finan<br />
cial relief labor might be willing to give the com<br />
pany.<br />
Lee A. Barracuda, Big Wave’spresident, ap<br />
pealed Friday morning for the two-year wage<br />
freeze during an unusual appearance at a union<br />
bargaining session with Douglas A. Floater, the<br />
UBW president, and a rank-and-file union<br />
negotiating committee. The meeting lasted an<br />
hour and 40 minutes.<br />
“Becauseof the complexities and short-term<br />
uncertainties of the boat market and the ternpo<br />
rary financial stress being experienced by Big<br />
Wave,” Barracuda said in a statement before he<br />
entered the union meeting, “1 felt it was in the<br />
best interests of all concerned for me to come<br />
here personally to outline the details of the com<br />
pany’s present position and our future plans to<br />
restore us to profitability.”<br />
Besides announcing that the union had<br />
turned down the request, Mr. Floater reasserted<br />
his position that the government should make a<br />
$1 billion investment in Big Wave through the<br />
purchase of stock in the company<br />
rather than<br />
give direct financial aid. Mr. Floater also strongly<br />
criticized Thomas A. Anchor, chairman of the<br />
General Boat Corp., for his statement Thursday<br />
opposing any special government aid to Big<br />
Wave. Mr. Anchor said such a move would pose a<br />
basic challenge to the private enterprise system.<br />
Mr. Barracuda had requested the meeting<br />
with the UBW’sbargaining committee, including<br />
Mr. Floater, to discuss the company’s faltering
Handout 4-lA (continued)<br />
tatus. The company and the union were already<br />
negotiating a new contract to replace a three-year<br />
pact that expires at midnight Sept. 14, but the<br />
presence of top leaders from both sides of the ta<br />
ble during preliminary talks is unusual for the in<br />
dustry.<br />
Meanwhile, in brighter news for the boat in<br />
dustry, sales of boats in the United Islands were<br />
brisker in early August than in several weeks,<br />
prompting hopes that the market is regaining<br />
strength after a four-month slump.<br />
Article6<br />
Old-FashionedHardSell CutsDealer’sBacklog<br />
LENOXSHORES(IPI) — “There is no enter<br />
tainment, no free soft drinks here. . . . We arejust<br />
wheeling and dealing in boats.”<br />
Fred Brill, the 36-year-old president of Dell<br />
Boats, was sitting under a canopy at Lenox<br />
Shores, where he and other dealers were starting<br />
one of the biggest weekend inventory reduction”<br />
ales ever held.<br />
As Mr. Brill put it, financially troubled Big<br />
Wavehas gone back to the old-fashioned hard sell<br />
to cut its nationwide dealer backlog of more than<br />
88,000 craft.<br />
To pave the way for the special weekend<br />
sale, company dealerships mailed out 120,000<br />
“sneak preview”invitations to prospective buyers<br />
to come in on Wednesday and Thursday nights<br />
and trade in their old boats for one of the crafts<br />
that covered the docks. In addition, there were<br />
close to 300 craft in a nearby staging area to<br />
resupply those sold by the various dealers who<br />
were using spotlights — and a strong media cam<br />
paign — to attract customers on both nights.<br />
“This is the fifth sale of its type we’veheld in<br />
the islands,” explained Mel Hew, zone manager.<br />
“Next Wednesday through Friday, we will have<br />
the same kind of sale at the Century Quay Mall.”<br />
Mr. Hew said 154boats and other Big Wave<br />
craft were sold to invitation-only customers dur<br />
ing the first four hours of the sale, which started<br />
on Wednesday night. The high initial sales gave<br />
credence to the upbeat scenario about the local<br />
.conomy and boat salesoffered by GillOat, presi<br />
dent of Marietta Boats. “There is no recession!”<br />
94<br />
declared Mr. Oats, whose dealership calls itself<br />
the largest in the V.1. He added that the buying<br />
public, as it did in 1974—75,is returning to the<br />
larger, more comfortable boats now that the fuel<br />
situation is,more stable.”<br />
Mr. Brill, whose family operates six other<br />
dealerships, says the government and the islands<br />
really can’t afford to have Big Wave go broke. “If<br />
they don’t give the company some financial help,<br />
they’ll have to pay out more in unemployment<br />
compensation and take in less in taxes. And just<br />
think of the Big Wave dealers and suppliers that<br />
will go under!”<br />
ArtIcle7<br />
BigWave:WeAreNotGoingBroke<br />
NEWDOCK(IPI) — ThechairmanoftheBigWave<br />
BoatCo.assertedWednesday thathiscompanywas<br />
notabouto gobankrupteventhoughit hadaskedfor<br />
$1billioninfederalaidas itsonlylong-termhopefor<br />
survivalasa full-lineboatmaker.<br />
Thechairman,JohnRudder,reiteratedhisbelief<br />
thatthegovernmentwouldprovidethecompanywith<br />
somemeasureofreliefromthecostsoffederallyman<br />
datedfuelmileageandair-pollutionstandards.Hecon<br />
tended,however, thatnomatterhowthegovernment in<br />
Bulkheadresponded, the company’slinesof credit<br />
wereadequateto meetshort-termcashneeds.“The<br />
questionweareaddressinginBulkheadisthelongertermsituation,”Mr.Ruddersaidinaninterviewshortly<br />
beforehemetwiththeexecutivecommitteeofthecom<br />
pany’sboardof directorsherein NewDock.<br />
LastTuesday,BigWavereporteditslargestquar<br />
terlylossever:$206.1milliononsalesof$3.15billionin<br />
thesecondquarterof 1979.That,coupledwitha firstquarterdeficitof$53.8million,meansthecompanyhas<br />
alreadylostmoremoneyinthisyear’sfirsthalfthanin<br />
all of 1975,whenIt postedits largestpreviousloss,<br />
$259.5million.By someestimatesbasedon sales<br />
trendssincethesecondquarterended,BigWavemay<br />
loseup to $600millionthisyear.Thesedisclosures<br />
haveraisedfearsthatBigWavemightgobankruptand<br />
shakeuptheoveralleconomyof theislands.<br />
Mr.Rudderappearedto be treadinga thinline.<br />
Turningtothegovernment forassistance isconsidered<br />
anextremestep,andBigWavemustshowCongress<br />
thatitsrequestis its lastresort.Mr.Rudder indicated<br />
thatthecompanyneededaidIf it wasto remainfully<br />
competitiveintheboatindustry.<br />
Ontheotherhand,heemphasizedthatitscurrent<br />
problems,especiallyfinancingitsowninventoryanda<br />
supplyatdealersthatisstillexcessive,weresimply,as
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER9<br />
Name__________________________________________<br />
Class_____________<br />
Date<br />
9.2 RESPONSESTO INDUSTRIALIZATION<br />
MANAGEMENTAND LABOR—COLLECTIVEBARGAINING<br />
Certain conditionsin the workplaceor the Market can improve the bargaining<br />
power of either employersor employees.Beloware examplesof these conditions.<br />
First decidewhich group would benefitfrom each condition, and circle empkryers<br />
or employees.Then explainwhy.<br />
1. The company’sinventoryof unsold products is at an all-timehigh. The situation will benefit<br />
employers’/employees’bargainingposition because _______________________________________________<br />
2. The union announcesits strike fund is at an all-timehigh. The situation will benefit<br />
employers’/employees’bargainingposition because<br />
3. The company’slabor costs are higher than averagefor the industry. The situation will benefit<br />
employers’/employees’bargainingposition because<br />
4. An increasingamount of work in the industry is done by non-union labor. The situation will benefit<br />
employers’/employees’bargainingposition because<br />
5. The union threatens to strike if no settlementis reached by midnight. The situation will benefit<br />
employers’/employees’bargainingposition because<br />
6. The union begins a public advertisingcampaigndescribingunfair companypractices. The situation will<br />
benefit employers’/employees’bargainingposition because<br />
7. The companyis consideringmovingpart of its operation overseas.The situation will benefit<br />
employers’/employees’bargainingposition because<br />
8. The companybuys full-pageads explainingits position to the public. The situation will benefit<br />
employers’/employees’bargainingposition because<br />
9. Workers have needed skills that few others have. The situation will benefit employers’/employees’<br />
bargainingposition because<br />
10. A new companyin town has offeredhigher wages, and many workers have left the old companyfor the<br />
new one. The situation will benefit employers’/employees’bargainingposition because
___________<br />
INDEPENDENT PRACTICE WORKSHEET<br />
CHAPTER6<br />
____________<br />
Name __________________________________________ Class_____________ Date___________<br />
6.4 AMERICANAGRICULTURE:A STUDYOF CHANGEIN SUPPLYAND DEMAND<br />
USINGTHEORYTO EXPLAINFACTS<br />
Read the facts belowabout farms in the United Statesin 1982.Then use the facts<br />
to answer the questions that follow.<br />
• In 1982,there were approximately2,400,541farms in the United States.<br />
• Of all U.S. farms, approximately25 percent produced 74 percent of all<br />
agriculturalproducts.<br />
I Of all U.S. farms, 1.2 percent produced 32.5 percent of all U.S. agricultural<br />
products. Each of these farms had salesof $500,000or more.<br />
• Of all U.S. farms, 71 percent had salesof less than $40,000.<br />
• Of all U.S. farms, approximately49 percent produced 2.7 percent of all<br />
agriculturalproducts. Each of these farms earned less than $10,000.<br />
• Farms that earned more than $500,000averaged3,727 acres of land. Farms<br />
that earned less than$10,000averaged 110acres of land.<br />
1. What general statementsabout Americanfarms canyou make using these facts? _________________________<br />
2. What do the facts tell you about the nature of the farm problem in the United States? __________________<br />
3. Basedon what you know about economics,what would be a Market economysolution to the farm<br />
problem?<br />
4. Whatwould be some socialcosts of using a Market economysolution to the farm problem?
Handout4-lA (concluded)<br />
heputit,an interimsituation”resultingfromfuelshort<br />
agesthathavecausedsalesto dryup.Henotedthat<br />
boththeGeneralBoatCorp.andtheFastBoatCo.also<br />
hadlargestocksof boatsonhand.<br />
it is no secretthat the boat industryis going<br />
throughasdifficulta salesperiodasit hasfacedsince<br />
the1974—75 recession, whensalesofbigboatsvirtually<br />
evaporated. Andthegovernment regulationshaveex<br />
acerbatedtheseproblems.Rudderhas constantly<br />
stressedthat the cost of compliancewith these<br />
standardshurtBig Wavemorethanits competitors<br />
sincethecompanyproducesfewerboatsoverwhichto<br />
spreadthosecosts.<br />
Sayingthatthecompany“hadborrowedthelimit,”<br />
Mr. Rudderforcefullystatedthat management had<br />
doneeverythingprudentlypossible,shortof shrinking<br />
thecompany’size,beforeturningtothegovernment.<br />
Norcanthecompanyhopeto borrowmoneywithout<br />
95<br />
government guarantees, “notwiththekindoflosseswe<br />
arerunning,”Mr.Ruddersaid.<br />
Article8<br />
S & P CutsRatingsonBigWaveIssues<br />
NEW DOCK(IPI) — Stoddard & Port’s Corp.<br />
yesterday lowered its ratings on two Big Wave<br />
Company bond issues, citing the loss-plagued<br />
boat maker’s “financial problems” stemming<br />
from slowboat salesand high inventories. The ac<br />
tion by Stoddard and Port followed by one day a<br />
decision by Portside Investors Service Inc. to<br />
downgrade some Big Wave credit ratings. “In<br />
view of the severity” of Big Wave’s problems,<br />
Portside towered its rating on the Big Wave Con<br />
sumer Credit Corporation commercial paper to B<br />
from A-2.
Of the 2 millionfarmers In the , U.S.<br />
only 634,000 are farmers full time.<br />
Their numbers are getting<br />
smaller every day. Will the<br />
family farm survive?<br />
by Deborah Gore<br />
IOWACiTY.IOWA — The leaves<br />
on thetiees herehaveturnedto or<br />
angeand yellow.There is a chillin<br />
the early-morningair. Throughout<br />
theruralMidwest. thesesignsoffall.<br />
meanharvesttime.<br />
Harvestingcropsmeanslongdays<br />
andnightsforfarmers.Theyriseat<br />
daybreak.dochores,andthenhar<br />
vest cropsuntil late at night. On<br />
most farms.eveiyonepitchesIn to<br />
I Rbwt F Sd n TV
1<br />
I<br />
help.Includingthekids.<br />
This faWsharvestis es<br />
pecially Important for<br />
Amerlca s familyfarmers.<br />
For many. It will decide<br />
whethertheystayinfarm<br />
ing—or have to give It<br />
up. Everyweek,as manyas<br />
1.600 U.S. farmers lose<br />
their farms when they<br />
cannotpay theirdebts.A<br />
recentU.S.Departmentof<br />
Alculturc (USDA)report<br />
foundthatalmosta third<br />
of the 634,000 full-tIme<br />
farmersIntheU.S.arein<br />
seriousfinancialtrouble.<br />
Whenfarmersgounder.<br />
rural small towns are<br />
hurt. Farm equipment<br />
dealers,stores,and other<br />
localbusinesses may also<br />
beputoutofbusiness.<br />
Junior Scholasticrecentlyvisited<br />
twofamilyfarmstoseehowfarmers<br />
werecopingwith today’srural farm<br />
crisis.<br />
“AlwaysFarmedThis Land”<br />
Afewmilesoutsideof LoneTree.<br />
Iowa, in the southeastern part of<br />
the state. Nancy and EldonMotz<br />
grow corn and soybeanson their<br />
320-acrefarm. Their children —<br />
Jeremy.15:Ben.10:andAbby,6—<br />
help themraise about7.000 hogs.<br />
800chickens.and a fewcalves.<br />
“We have always farmed this<br />
land.”NancyHotztoldJS. “Myhus<br />
band grewup here.”<br />
Likemostfarmers.theHotzesare<br />
concernedaboutthefutureoffarm<br />
ing. “The farming crisis defln teiy<br />
hashurt a lotof peoplein thisarea<br />
In different degrees,”said Nancy.<br />
“Someare struggling.a lot are tak.<br />
lug secondjobs.wivesareworking<br />
whentheydidn’tbefore.”<br />
Howdid the farm economyg:<br />
into trouble?“Our real problem<br />
started Inthelate1970 . whenag<br />
riculture was prosperous.” ex<br />
plainedEldon Hotz. “Economists<br />
wereoptimistic.Farmersalso were<br />
optimisticand tookout loans toex<br />
pandtheirfarms.”<br />
Farmersweregettinggoodprices<br />
for their crops In the 1970’s.There<br />
was a shortageof food In many<br />
Mostfarmkidsworkseveralhoursa day,helpingwithchores<br />
suchasmilkingandfeedingof animals.<br />
countries, and U.S. farmers were<br />
abletosella largepart oftheircrops<br />
overseas. Big profits encouraged<br />
manyU.S.farmerstobuymoreland<br />
and increasethesizeoftheir crops.<br />
Many farmers borrowedlarge<br />
sumsofmoneytoexpandthesizeof<br />
their farms.“Bankerssaid. ‘Goout<br />
and buy moreland. Grab nowbe<br />
fore the land value goes up. up.<br />
up.’“EldonHotzexplained.<br />
Troublehit in 1981 and 1982.<br />
Other countries stepped up their<br />
farmproduction,takingawaysales<br />
fromU.S.farmers.Also.high inter<br />
est rates drovethevalueof theU.S.<br />
dollar higher. making U.S. crops<br />
more expensive to buy In other<br />
countries. Result: Sales of U.S.<br />
cropsto othercountriestooka nosedive.<br />
Pricesforwheat,corn, and other<br />
crops fell, and farmers’ earnings<br />
droppedsharply.Since farmingno<br />
longerwassoprofitable. landvalues<br />
began plummeting.“Noneof us<br />
dreamedthe valueofland wouldgo<br />
lown. down,down.Whenit did,we<br />
allgotcaught.”saidEldon.In1981.<br />
land in Johnson Countysold for<br />
$3,500 an acre.Todaythat land Is<br />
ialuedat 81.600.<br />
Manyfarmersare caught In a<br />
tough financial bind. They have<br />
hugedebtsto pay.yet their income<br />
has fallen.SInce 1981, total farm<br />
debt in theU.S.has increasedfrom<br />
about $150 billion to<br />
about $212billion.<br />
“Wehave debt on Just<br />
about everything,” said<br />
Eldon. “Wehave money<br />
borrowedonthe land,ma<br />
chinery. buildings, live<br />
stock.”<br />
A big problemis that<br />
farmers are growing too<br />
much grain. The grain<br />
surpluskeepscropprices<br />
low. When supply (the<br />
amount availablefor pur<br />
chase) Is larger than de<br />
mand (theamountpeople<br />
want to buy), market<br />
pricesfall.<br />
Thesedays. farmersare<br />
findingthat oftenItcosts<br />
more to grow the crops<br />
than theycanearnbysell<br />
ing them. Corn,form<br />
pIe.maycost about$2.50 a bushel<br />
to produce.It sells foronly$1.20.<br />
Expertsfear that a big fallharvest<br />
coulddrivegrain prices evenlower<br />
andput morefarmersout of busi<br />
ness.<br />
WorkingTogether<br />
Notall farm familiesare in trou<br />
ble. The Hotzfamilyis among the<br />
luckyones.Theyhaveother income<br />
tohelpthemout.<br />
“We’velucked out because we<br />
raise hogs.”said Eldon.Withlow<br />
costsforfeedcornand highmarket<br />
prices for hogs. the Hotz-.family<br />
hopes to earnenough moneythis<br />
)ear to reducetheirdebts.<br />
Their familyworks togetheron<br />
the farm. Nancy raises chickens<br />
and sellstheeggs.Thechildrenhelp<br />
with the chores.“WhenI gethome<br />
fromschoolI havetofeedthethick<br />
ens,pickuptheeggs.and thkecare<br />
of thepigs.”BentoldJS. BothBen<br />
and his brother. Jeremy.cleanthe<br />
barn and do otherchores on the<br />
weekends.<br />
Likemanykids at school.Jeremy<br />
takes a class calledvocationalagri<br />
culture.The students learn about<br />
farming.livestock,and leadership.<br />
The FordFamily<br />
At anotherfarm. JS talkedwith<br />
Robert Ford and hIs 14-year-old<br />
son. Rob.TheFordsfarm510acres<br />
NOVEMBER3. 19863
of soybeansand corn. They also<br />
raiseabout 1.000hogs.<br />
Barbara Ford. Robert’swife,<br />
works fulltime at a collegetesting<br />
firm in IowaCity to help supple<br />
mentthefamily’sIncome.<br />
“Our IncomeIs less thanhalfof<br />
what It was In 1981.” said Robert<br />
Ford.“Ourcostshaveremainedthe<br />
same, but whatwe’rereceivingfor<br />
ourcrops Is lessthan haiL”<br />
Likethe Hotzfamilyand many<br />
otherfarmers,theFordsparticipate<br />
InthefederalPayment-In-KInd(P1K)<br />
program.Theyagreednot to plant<br />
20 percent of the land on which<br />
theynormallyraisecorn.Theaimof<br />
the P1KprogramIstoraisepricesby<br />
lowerIngproduction..In return, the<br />
Fordsreceivesurplus government<br />
grain. which theyuse to feedtheir<br />
hogs.<br />
SincetheGreatDepressionofthe<br />
1930’s.the U.S. governmenthas<br />
providedhelptofarmers.Price-sup<br />
port programs pay farmers to re<br />
duce production.In 1985, these<br />
federalfarm programs cost about<br />
822.5billion.<br />
LosingFarms<br />
Notall U.S. farmersareas lucky<br />
as theHotzand Fordfamilies.Many<br />
RobFord,14 and dad. Roblikes liv<br />
ing on a farm: “Youhave more free<br />
m ona farm.Anda lot of space.”<br />
areforcedto sell theirfarmswhen<br />
they cannot pay their debts. In<br />
1985. almost 400.000 peopleleft<br />
farming.<br />
This can be devastatingto farm<br />
kids. A generationof ruralyouths<br />
facestheprospectofbeinguprooted<br />
from farm life against their will.”<br />
said a recentarticlein The Des<br />
Moines Register.<br />
Counselingexpertssay thestress<br />
ofthefarmingcrisishas resultedin<br />
more runaways, decliningschool<br />
grades.and poorattendance.<br />
VIrginiaMolgaard.a familyspe<br />
cialistwith theIowaStateUniversi<br />
ty CooperativeExtensionService.<br />
has produced a videotapeto help<br />
ruralyouths. Thetape, called“The<br />
RuralCrisis Comesto <strong>School</strong>,”en<br />
couragesdiscussionofthe ruralcr1sis<br />
in the classroom.<br />
“We’re findingthatwhenkidstalk<br />
aboutit atschool,theygohomeand<br />
help othermembersof the family<br />
openup about the problem.”said<br />
Molgaard. “Often,the kids aremore<br />
maturethantheparents realize.”<br />
TheFutureof Farming<br />
i’m optimistic about agricul<br />
ture,”said RobertFord.“Ithink the<br />
next twoto threeyearsaregoingto<br />
be prettyrough.I thinkit willturn<br />
aroundand whenItdoes.It’sgoing<br />
to be goodagain.”<br />
In the meantime, the Motzand<br />
Fordfamiliesare workinghardto<br />
keep theirfarms. Likemostfamily<br />
farmers.strong ties hold them to<br />
theland.I think our kidswillprob<br />
ablygrowup and stayon the farm,”<br />
said NancyHotz.“It’sJust a really<br />
goodlife.”<br />
WoiMcA<br />
— 1. plummeta.<br />
amount forsale<br />
_2. supply b. fallsharply<br />
3. demand C. excess<br />
_4. surplus d. grownup<br />
_5. mature e. amountpeople<br />
want to buy<br />
o_ UoM<br />
1. Inyourownwords,explainwhy<br />
many farmersare in such financial<br />
troubletoday.<br />
2. What do you think is the re<br />
sponsibility of the government to<br />
help familyfarmers?<br />
An abandonedfarmin Kansas.Many<br />
familyfarmshavegonebankruptdue<br />
to bl debts and lowgrainprices.
HARD TIMESAMIDPLENT<br />
Today.onlyabout twoout of every 100AmerIcanslive<br />
on farms. YetU.S. farmers continue to produce an out<br />
standing amount of food — enough to feed notonly the<br />
rest of the U.S. population, but many peopleIn foreign<br />
countriesas welL<br />
Qr1O NS<br />
1. How did the total amount of<br />
U.S. (armdebt change between be-<br />
tween 1977 and 1983?Totaldebt<br />
(a) Increased;(b) decreased:(c)<br />
stayed aboutthesame.<br />
— 2. Thegreatest IncreaseIndebt<br />
occurred between (a) 1977 and<br />
FARMSCARRYA‘HEAVYBURDEN OFDEBT<br />
FARMERSAREFEEDINGMOREPEOPLE<br />
Thesearehardtimes formany farmers, however.Huge<br />
debts and low rop prices have put manyIn a bind.<br />
These facts are shown In the graphsand tables on this<br />
page. Answerthe quesuons by writingthe letterof the<br />
correctansweron the line before each question.<br />
1979: (b) 1979 and 1981; (ci 1981<br />
and 1983; (d) 1983 and 1985.<br />
3. When was farm debt at Its<br />
highestlevel?(a) 1977;(b) 1981;(C)<br />
1983; (di 1985.<br />
— 4. SInce 1951.the percentage of<br />
Americans livingon farms has (a)<br />
Increased;(b) decreased: (cistayed<br />
about the same<br />
.. 5. Compared wIth 1985. the<br />
percentageof Americansliving on<br />
farms In 1951 was almost (a) two;<br />
5 (b) three: (ci four: (d) six times as<br />
6. The percentageof Americans<br />
livingon farmsdroppedfrom 8.1%<br />
to 2.2% in (a) three years; (b) 25<br />
7. Inwhatyear did U.S. farmers<br />
feed the greatest total number of<br />
people? (a) 1960: (b) 1970;Ic)1980:<br />
(di1984.<br />
— 8. Inwhatyeard ldU.S.farniers<br />
feed the largest number of people<br />
abroad? (a) 1960: (b) 1970: (ci<br />
1980: (d l 1984.<br />
—<br />
9. The biggest Increase in the<br />
number of Americans each U.S.<br />
farmer feeds occurredbetween(a)<br />
1940 and 1950: (b) 1950 and 1960;<br />
(ci 1960 and 1970; (di 1970 and<br />
1980.<br />
10. In 1984. the numberof per<br />
sons fed abroad (a) Increased: (b)<br />
decreased; (c) showed no change<br />
from 1980.<br />
PERCENTAGE OFAMERICANS WHOLIVEONFARMSPLUMMETS<br />
• igueOigu a.i a Co.<br />
O2. NOVEMBER3. 1986 5
NAME______________________________<br />
[CHAPTER 1101 REiNFORCEMENT:<br />
DATE_________ CLASS_____ SCORE_____<br />
Chapter 10 Review<br />
I S I<br />
Government RegulatoryActivities Activit40<br />
ReviewChapter10,thenanswerthe questions<br />
below.<br />
COMPREHENSIONDevelopingVocabulary<br />
Complet eachstatementwiththecorrectterm<br />
fromthelistthatfollows.<br />
tingpersonswhoareneitherbuyersnorseUers.<br />
10. A ______ takesplacewhentwobusinesses<br />
jointoformoneenterprise,withoneincontrol.<br />
publicgoods . mediation APPLiCATION RecognizingCauseandEffect<br />
regulatoryagencies patents<br />
merger copyrights<br />
Listedbelowaresomeoftheimportant lawsthat<br />
interstatecommerce monopolies havehelpedestablishgovernment regulatoryagen<br />
third-partybenefits unfaircompetition<br />
ciesandprotectivelawsfortheeconomy.Matchthe<br />
lawswiththedefinitionsbywritingthelettersinthe<br />
1. usuallyhelpssolvemostdisputesbe- blanks.<br />
tweenlaborandmanagement.<br />
a. InterstateCommerceAct,1887<br />
___________________________________________ b. ShermanAntitrustAct,1890<br />
2. <strong>School</strong>sare<br />
c.PureFoodandDrugActandMeatInspection<br />
providedbygovernment. Act,1906<br />
________________________________________ d. ClaytonAct,1914<br />
e. NationalLaborRelationsAct,1935<br />
3. protectinventors fromlosingcontrolof • Robinson-Patman Act,1939<br />
their ideas.<br />
g. Celler-Kefauver Act.1950<br />
4. _____ is businessconductedbetweentwo — 11. Lawthattightenedcontrolsonmergers<br />
ormorestates.<br />
— 12. Legislationthat establishedagenciesfor<br />
inspectingthe qualityof food and med<br />
5. protectwriters’,artists’,and musi- icine<br />
clans’work.<br />
13. Setup theInterstateCommerceCommis<br />
sion to supervisecommercebetween<br />
6. supervisetheeconomicactivitiesof states<br />
thenation.<br />
14. Prohibitedindividualsor companiesfrom<br />
settingupmonopolies<br />
7. The FTCprosecutes betweenbus- .<br />
messes. — 15. Formedthe NLRBto mediatein labor<br />
______________________________________________<br />
disputes o<br />
8. _____ aresellersthatsupplyallthedemand — 16. Outlawedpricediscriminationthatfavors<br />
foraproductorservice, certaincustomers<br />
— 17. P.’eventedmanufacturersfrom charging<br />
9. ______ arethe kindof transactionsbenefit- onecustomermorethananother<br />
40 REINFORCEMENTACTIVITY
NAME____________________________ DATE________ CLASS_____ SCORE_____<br />
CHAPTER.1101<br />
SectIon3 REINFORCEMENT: Re ing<br />
Promoting the GeneralWelfare Activity39<br />
ThePieambleto theConstitutionassignsto the — 10.Judicialsystem<br />
government a veryimportantfunction:“to promote<br />
thegeneralwelfare.”Onewaythegovernment tries 11. Spaceexploration<br />
topromotethegeneralwelfareistoprovideservices<br />
knownaspublicgoods.Theseservicesaregener- — 12. Telephoneservice<br />
allyfree.<strong>School</strong>s,parks,roads,policeandfirede<br />
partments,and librariesare someof the public — 13. Lunchprogramforschools<br />
goodsweenjoy.<br />
Stateand federalgovernmentsfund theseser<br />
vicesthroughtaxesandotherincomes.Recently,<br />
APPUCATION Providing Examples<br />
someprivatebusinesseshavesponsoredparks, 14. Nametwopublicgoodsthatyouusein your<br />
publicart,healthservices,andblooddonordrives, community.<br />
Thesecontributionsremainpublicgoods,sincethey<br />
____________________________________________<br />
arefreeand ‘promotethegeneralwelfare.”<br />
Therearesomecritics,however,whobelievethat<br />
certaintypesofpublicgoodscanbebetteradmin- 15. Howdoestheprivatehealthcaresystempro<br />
isteredby privatecompanies.An exampleof this<br />
videagoodalternativeto publiccare?Explainyour<br />
kindofprivatemanagement isinhealthcare,where<br />
opinion.<br />
HealthMaintenanceOrganizations(HMOs)have<br />
beenverysuccessful.HMOsarehealthcarefacili<br />
tiesrunbyprivatebusinessesforprofit.Todaysome<br />
300HMO servicesome10millionpeopleefficiently<br />
andreasonably.<br />
COMPREHENSION Mastering Facts<br />
SYNTHESIS Forming Generalizations<br />
Readthelistofgoodsandservicesbelow,Ifthey 16. Whichsectorin society,governmentor pri<br />
are providedby government,writeG; if by private<br />
vate,could betterservethe educationalsystem?<br />
sector,writePS;ifprovidedbyboth,writeB.<br />
Explain.<br />
—<br />
—<br />
—<br />
—<br />
—<br />
—<br />
—<br />
—<br />
—<br />
1. Nationaldefense<br />
2. Securityguards<br />
3. Healthcareprograms<br />
4. Ambulanceservice<br />
5. Policeandfireprotection<br />
6. Oilandgasexploration<br />
7. <strong>Social</strong>security<br />
8. Postalservice<br />
9. Television<br />
__________________________________________<br />
17. Whatkindsof goodsandservicesdoesthe<br />
government bestprovide?<br />
PIIEINFORCIENEP4’T ACTIV !
7:30 A.M.<br />
8:00 A.M.<br />
8:30 A.M.<br />
9:30 AM.<br />
Noon<br />
2:00 P.M.<br />
4:00 P.M.<br />
7:00P.M.<br />
YOUTHECONSUMER<br />
WORKSHEET<br />
Name<br />
Class Date<br />
HOWGOVERNMENTAGENCIESAFFECTOURLIVES<br />
As you read in Chapter 10, federal agencies try to maintain fair prices and the quality<br />
of products by establishing regulations. Everyday, our lives are influenced by these<br />
regulations. Read the following summary of one family’s activities on a Saturday. Then,<br />
for each activity, choose the agency whose regulations are involved in the situation.<br />
Write the name of the agency on the line next to the activity. Table 10-3 in the textbook<br />
lists the agencies involved. Some situations may include more than one agency.<br />
Linda Lee is getting ready for her part-time<br />
job. However, the curling iron she is using is<br />
not heating properly. She checks to see when<br />
the warranty runs out.<br />
Over breakfast, Linda’s father shows the fami<br />
ly the newly designed helmet he has to wear<br />
at the plant.<br />
Linda’s mother backs her car out of the<br />
garage. The automatic garage door closes<br />
when she presses the button on the car’s<br />
radio transmitter.<br />
Mr. Lee goes to the supermarket to do the<br />
food shopping. He checks the labels on<br />
several boxes of cereal to compare their<br />
nutritional content.<br />
At lunch hour Linda goes to an electronics<br />
store to buy a new stereo. This store’s ad<br />
seemed to give truthful, complete informa<br />
tion.<br />
Mr. and Mrs. Lee attend a special meeting at<br />
the town hail. The townspeople are attempt<br />
ing to clean up the pollution in a nearby<br />
lake.<br />
Cable TV service has just come to the area.<br />
Linda’s younger sister enjoys the children’s<br />
programs that the community college pro<br />
duces for the cable company’s “public ac<br />
cess” channel.<br />
Linda’s parents watch a business report on<br />
the investigation of investment counselors ac<br />
cused of defrauding their customers.
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER14<br />
Name________________________________________ Class Date__________ In what two wayscan householdsobtain money to spend on goodsand services?<br />
a.<br />
b.<br />
14.3CAUSESOF INSTABILITY<br />
WORKiNGWITHA CIRCULAR FLOWMODEL<br />
What happens to the moneythat householdsdo not spend on consumption?<br />
Why does businessneed to borrow money?<br />
Use the circular flowmodel to answerthe questions that follow.<br />
4) HouseholdsReceiveGoodsand Services<br />
Householdsare Paid Income—Rent, Wages,InterestandProfit<br />
1. What aspects of the real world are not included in this simplified model of the economy?<br />
2.<br />
3.<br />
4.<br />
5. If businessesdo not borrow the income saved by households,what is the effect on the economy?<br />
6. Think about the demand-pulltheory, which states that inflationis sometimescaused when household<br />
spendingand businessinvestmentare greater than the amount of goodsand servicesproduced at current<br />
prices. How is it possiblefor householdsand businessesto spend more than they earn?
(<br />
SIMULATION:<br />
CongressionalBudget-Making/Lobbying<br />
Instructionsto theTeacher<br />
Thisisa simulationofbudgetplanningandtaxation,It maybeusedwithagroupof15<br />
to30studentsandwilltaketwotothreeclassperiods.Thestudentshouldreadthe<br />
textcoverageofthesubjectinChapter17priortoundertakingthisactivity.Theywill<br />
needtoknowthetypesoftaxescurrentlyusedbythenationalgovernment, andthey<br />
alsowillneedinformationabouthowmuchrevenueisraisedbyeachofthetaxes.<br />
Thestudentswillbeplacedina mocklegislativenvironment inwhichtheywillseekto<br />
plantheannualbudgetforthenation,giventhefactspresentedinthesimulation.<br />
Studentswilltakea roleoflegislatorsorlobbyistsforspecialinterestgroups.The<br />
studentswhowillbeportrayinglobbyistswillfindtheirroledescriptionsinthefollowing<br />
pages.Thestudentswhowillassumetheroleoflegislatorshouldbedividedinto<br />
threeroughlyequalgroups:urbanrepresentatives, suburbanrepresentatives, andrural<br />
representatives. A roledescriptionfortheselegislatorsalsoisincludedhere.<br />
Thesettingforthesimulationwillbea Congressional budgetcommitteemeeting<br />
hearing,andthelobbyistswillseektogiveinputtothemembersastheypresentheir<br />
testimony. Thebudgetcommitteewillthendiscusswaysinwhichtoimplement the<br />
newtaxpolicy.<br />
STARTING THESIMULATION<br />
1. Hand out complete role assignmentsatleasttwoto threedays before you<br />
begin so that the students have time to prepare their positions and the<br />
argumentsthey plan to use.<br />
2. Prepare a handout of name tags designating each student and the role he or<br />
she is portraying.<br />
LOBBYIST ROLEDESCRIPTIONS<br />
The Minority Coalition: Yourjob is to protect the interests of minoritygroups,<br />
who largely reside in the large cities. Most of your clientele are poor and live in<br />
rental housing or public housing projects. Manyalso need governmental help to<br />
survive—inthe form of unemployment compensation, aid to dependent<br />
children, and welfare payments. Sales taxes on retail items and excise taxes tend<br />
to hurt your clients the most, and therefore you willseek to prevent any increase<br />
in these taxes on such items as gasoline and clothing. Youalso want to increase<br />
the amount of personal income which would not be subject to any income tax.<br />
The Good Business League: Yourjob is to protect the interests of large<br />
manufacturing companies. Most of your clientele are leaders of corporations<br />
who are very concerned that their businesses willbe hurt by new taxes or<br />
higher taxes. Yourinterest is in finding a wayto stimulatethe economy without<br />
havingthe business community bear the financialburden of doing so. Ideally,<br />
you willtry to convince the members of Congress to create investment tax<br />
credits for a wide range of businesses and have most of any new revenue come<br />
fromvarious forms of personal taxes, such as excise taxes and the personal<br />
income tax. Tosupport your position you willargue that investmenttax credits<br />
will spur increased business activity,which will increase jobs and bring in more<br />
revenue to the federal government.
•<br />
•<br />
.•.. - - —<br />
The Brotherhood of American Labor: Yourjob is to protect the interests of the<br />
blue-collar working peopla Yourepresent several millionworkers in a number<br />
of industries, and youwantto make sure that their paychecks are not too heavily<br />
taxed. Since many ofyour members are faced with temporary layoffsor<br />
permanent loss of work, your goal is to try to stimulatethe economy by helping<br />
businesses, and yet keep as much income as possible in the hands of the<br />
workers in the nation.Youcould propose that the rate of taxationbe raised<br />
slightlyin all forms oftaxes in order to produce the additional revenue needed<br />
to balance the budget. Atthe same time you could suggest that incentives be<br />
given to businesses which use capital to investin the creation of jobs. Thistactic<br />
would require businesses to pay the same rate or slightlyhigher corporation<br />
taxes and would result in the creation of new jobs for your members.<br />
The Federation of American Mayors and Governors: Yourjob is to represent<br />
the interests of the states.Yourviewpoint is that the greater the amount of taxes<br />
collected at the nationallevel,the less money is availableto states for taxation<br />
and the funding of local projects. Youwilltry to make sure that the general level<br />
of taxationallowsstates to raise enough revenue to operate effectively.Thus, it is<br />
importantthat any new federal tax increase be smallor moderate in order to<br />
allowthe states to continue to collect taxes to meet their needs. Moreover,states<br />
which are trying to expand their industrialbase would want to encourage the<br />
nationalgovernment to create tax credits for business investments.<br />
The Amalgamation of American Agriculturists: Yourjob is to protect the<br />
interests of rural and farm-relatedbusinesses. Mostof your clientele live in rural<br />
areas or smallfarmingcommunities,and many of them are already struggling to<br />
surviveeconomically.Youwillseek to exempt farmincome and investmentin<br />
farmequipment and machinery from as manytaxes as possthIe while urging<br />
that government programs to support farmprices be continued.<br />
TheConsumerAwarenessLeague:Yourjob is to represent the interests of<br />
consumers. Most of your members seek to limittaxationof consumergoods and<br />
otheressential householditems.Manyof yourmembersfavoran outright<br />
reductionin governmenttaxes.Governmentsales andexcise taxeswillbe one<br />
of your main targets.Anotherfocus of your planshouldbe to havethe new<br />
budget include highertaxesforbusiness by eliminatingtaxcreditsfor<br />
businesses oratleastreducingthem.A reductionin governmentspending for<br />
defense could also be one ofyourrecommendationsin order to cutthe need for<br />
highertaxes. S<br />
The Citizens for Economic Freedom: Yourjob is to representthe positionthat<br />
the governmenthasno rightto taxatall,andthat the governmentshouldabolish<br />
allformsof monetaryand fiscalcontrolsoverpeople’sincomes. Yourprimary<br />
goal is to abolishthe income taxand allsales taxesandexcise taxes.Your<br />
membersclaimthattheywant few ifanygovernmentservices and therefore<br />
should nothaveto pay forthe enormousnumber of governmentprograms<br />
included inthe budget.<br />
MEMBER OFCONGRESS ROLEDESCRIPTION<br />
Youare a member of Congress who is working to draw up the new national<br />
budget. The nation is facing an anticipatedbudget deficitof over$200billion<br />
dollars. It also faces the problem of high unemployment. Current revenue<br />
sources are unable to provide for the services that manypeople have come to<br />
— expect fromthe government.Yourjob is to create a new taxing and spending<br />
budgetary plan which willprovide for the people’s basic needs and also reduce<br />
the budget deficit. Youwillneed to decide ifadditional revenue must be raised<br />
through new or increased taxes. Youalso may face the possible need to reduce<br />
government spending to provide for nationaldefense and for the welfare of the<br />
people.
Urban Representatives: Yourposition willbe to protect the programs which<br />
provide for poor people in the cities of your district. As a result, you need to be<br />
concerned about the level of real estate taxes. Youwillalso work to maintainthe<br />
level of aid being provided by the nationalgovernment in the areas of education,<br />
police protection, and familyand housing subsidies. Youbelieve that the budget<br />
crunch should be solved by increasing taxes on corporations and those<br />
individuals with high incomes.<br />
Suburban Representatives: Yourposition willbe to work to reduce the level of<br />
federal spending in the areas of welfare payments, as well as defense and<br />
foreign aid. Youare strongly opposed to higher taxes and are seeking a fairway<br />
to distribute the tax load.<br />
Rural Representatives: Yourposition willbe to protect farminterests and make<br />
sure that the nationalgovernment increases its tax revenues in order to reduce<br />
the deficit. Youwillsupport certain higher taxes, although you wantto protect<br />
farmincome fromincreased taxation.It would also be helpful, you believe, ifthe<br />
government would reduce federal spending in the areas of welfare programs<br />
and new militaryweapons programs.<br />
THEFEDERAL BUDGET BEINGCONSIDERED<br />
MAJOREXPENDITURES<br />
HUMANSERVICES $369,000,000,000 (<strong>Social</strong> Security, welfare, etc.)<br />
DEFENSE EXPENDITURES $402,000,000,000 (militarymaintenance, weapons acquisition)<br />
GOVERNMENT ADMINISTRATION $228,000,000,000 (running thegovernment, salaries, national debt,etc.)<br />
TOTAL EXPENDITURES $999,000,000,000<br />
MAJOREVENUE SOURCES<br />
PERSONAL INCOME TAX $402,000,000,000 (thefederal income tax1040booklet canbeusedfor<br />
information here)<br />
CORPORATE INCOME TAX $218,000,000,000 (calculate business incomeasbeingtaxed<br />
hypothetically at34%,with30%ofallbusiness<br />
investment notbeingtaxed)<br />
EXCISE ANDOTHER TAXES $151,000,000,000<br />
TOTAL REVENUE COLLECTED$771,000,000,000<br />
CONCLUDING<br />
THESIMULATION<br />
A group of students should be selected who willbe responsible for proposing<br />
tax revisions or new taxes needed to try to balance the budget. These students<br />
are responsible for a report in which they explain the changes they are<br />
proposing in the revenue and tax policies. They also should explain their<br />
rationale in changing existing taxes or adding new sources of revenue. A<br />
discussion of this report should provide you the teacher with documentation of<br />
students’ mastery of the objectives of the simulation.<br />
Ifthe teacher wishes, he or she mayhave the students write an essay reacting to<br />
the outcome of the simulationin which the followingpoints are highlighted:<br />
1. Howthe proposed changes in the new law willaffect the interests of the<br />
various lobbyists.<br />
( 2. The insights students have gained aboit taxes and about the role of government<br />
spending on the nation’seconomy.
DATE_________ CLASS_____ SCORE_____<br />
CHAPTERI101Section1 REINFORCEMENT:MainIdeas]<br />
PromotingEconomicActivity Activity37<br />
The economy of the United States is a free enter- 3. Whatagencywatchesthe moneysupplyand<br />
prisesystem,ormarketeconomy. Itscornerstoneis triestocontrolinflation?<br />
theindividual’sfreedomtoownprivatepropertyand<br />
to engagein privatebusiness.Toencourageand<br />
protecthisfreedom,thefederalgovernment takes 4. Nametwoagenciesthatwoulddealwithalong<br />
anactiveroleinpromotingthemarketeconomyand labordispute.<br />
privateenterprise.<br />
Tomanagetheeconomy, thegovernment hasset<br />
upagenciesto aideconomicdevelopment, aswell<br />
asprotectbusinesses.Hereareafewofthem.<br />
APPLICATIONProvidingExamples<br />
• FederalTradeCommission(FTC);seesthat<br />
thereisfreeandfaircompetitionandthatconsumersare<br />
protectedfrom unfair business<br />
practices.<br />
• FederalReserveSystem(FRS);supervises<br />
bankingpracticesaswellaswatchesoverthe<br />
moneysupplyandcredit.TheFRSalsokeepsa<br />
closeeyeoninflationanditseffectsonmoney.<br />
• NationalLabor RelationsBoard (NLRB);<br />
helps labor and businesssettletheir differ<br />
ences.The NLRBarbitrateslabor disputes<br />
5. Writethenameofthegovernment agencythat<br />
publishesfigureson the stateof tradewith other<br />
nations.<br />
6. DescribeasituationinwhichtheFederalTrade<br />
Commissionwouldintervene<br />
_________________________________________<br />
uponrequest.<br />
• UnitedStatesPatentOffice;protectsthenew<br />
ideas and inventions of persons and busi<br />
nesses, so they can profit from their creativity.<br />
_________________________________________<br />
7. HOwwouldtheU.S.PatentOfficeprotectyouif • Departmentof Commerce;publishesstatis- youjustinventedanewwrench?<br />
tics on business and trade, and promotes com<br />
mercenationallyandinternationally.<br />
• Departmentof Labor;publishesstatistics<br />
abouttheworkforce,andworkstopromotehar<br />
monybetweenlaborandmanagement.<br />
__________________________________________<br />
_________________________________________<br />
COMPREHENSIONMasteringFacts<br />
1. Howdoesthe EVALUATIONUnderstanding CurrentEvents<br />
government encourage private<br />
enterprise? 8. Bankfailureshappenchieflyduringeconomic<br />
hardtimes.Suchfailuresconcernnotonlydeposi<br />
torsbuttheentirecommunity.Writewhichagency<br />
____________________________________________ wouldbeinvolvedinabankfailure,andhowitwould<br />
2. Whatagencyofthegovernment<br />
help.<br />
getsinvolvedin<br />
labor-management disputes?
DATE________ CLASS_____ SCORE_____<br />
CHAPTER1101 SectIon2 REINFORCEMENT: Mainideas<br />
Protecting Economic Rights<br />
Oneof the constitutionalpowersof the federal<br />
government isthepower“toregulatecommercewith<br />
foreignnations,andamongtheseveralstates. .<br />
Thegovernment hasexpandedthemeaningofthat<br />
powertohelpruntheeconomybybothregulationof<br />
businesspracticesandby promotionof faircom<br />
petition.<br />
Thegovernment, forinstance,placesrestraintson<br />
monopoliesandactstoregulatethem.Thepurpose<br />
ofthisistoavoidtheeconomicdangersthatmono<br />
poliespresentwhenthereis noformofgovernment<br />
control.<br />
A numberof federalagencieshavebeenestab<br />
lishedto controlbusinessactivity.Thechartlists<br />
theseagenciesandtheirduties.Someoftheirduties<br />
overlapwiththoseofagencieslistedintheprevious<br />
exercise.Thereasonisthattheirprotectivefunction<br />
oftenmesheswiththeencouragtflgfunctionof the<br />
otheragencies.<br />
Studythechartthenanswerthequestions.<br />
AGENCIESOFThEFEDERALGOVERNMENT<br />
Agency Decription<br />
FederalWade<br />
Commission<br />
Setsandenforces standards for<br />
advertising, sellingandothertrade<br />
(Fit) practices<br />
FoodandDrug<br />
Administration<br />
(F )<br />
Testsandapprovesdrugs,<br />
cosmeticsandfoodadditives, and<br />
methodsofpreparing food.<br />
FederalCommu- Licensesandset standards for<br />
rdcatlonsCorn- radioandtelevision stations.<br />
mission(FCC)<br />
Environmental<br />
Protection<br />
Agency(EI )<br />
Setstandards andenforces<br />
regulations protecting the<br />
environment.<br />
Securities and<br />
Exchange<br />
Commission<br />
(SEC)<br />
Setstandards andenforces stocks<br />
andsecuritytrading,asll asthe<br />
issuingofstocksandbonds.<br />
Occupational<br />
Safetyand<br />
Health<br />
Administration<br />
(OSHA)<br />
Investigates andenbccesafetyin<br />
theworkplace, andsetstandards<br />
brsame.<br />
38 REINFORCEMENT ACTIVITY<br />
Activity38<br />
COMPREHENSIONInterpretingInformation<br />
Readthesituationsbelowandwritethenameof<br />
thegovernment<br />
agencythatwouldbeinvolved.<br />
1. Youwantostartyourowntelevisionstation.<br />
2. Youwantocomplainabouttheingredientsin a<br />
boxofcereal.<br />
3. Youfindoutthata localcompanyis dumping<br />
chemicalwasteintoanearbyriver.<br />
4. Youdecideto issuestocksin orderto raise<br />
moneyforyourcompany.<br />
APPLICATIONUnderstandingCurrentEvents<br />
5. TheSuperfundis a largeamountof moneyal<br />
locatedbythegovernment to cleanup toxicwaste<br />
dumps.Whichagencydoyouthinkoughtoadmin<br />
isterit?Explainyourreason.<br />
EVALUATIONEvaluatingIdeas<br />
6. Somecriticshavechargedthatgovernment su<br />
pervisionofcommerceofteninfringesonindividual<br />
liberty.Doyouthinkso?Explain.
The Dreyfus Worldof Finance Puzzle by Charles Barry Townsend<br />
fhis month’spuzzlemakesuseofnames,placesand termsfoundin today’sbusinessworld.Beloware54wordsgroupedaccordingto their length<br />
and listedin alphabeticalorder.Tosolveour puzzle,youmust usethewordsto fillin the missingwordsin our puzzlegrid. Whenwritingin your<br />
answers,drop an spacesbetweenwordsand any punctuation. Example:Youwouldwrite NEW MONEYas NEWMONEY.The wordCD’s<br />
wouldbe writtenCDS. You’llfind the completedanswerto thispuzzleon the back panelof this newsletter.<br />
3 Letter words<br />
BID<br />
BUY<br />
CD’S<br />
FED<br />
GNA<br />
iRA<br />
NA\<br />
PAR<br />
Letter words<br />
BEARS<br />
CALLS<br />
ERISA<br />
FADED<br />
FLOOR<br />
MONEY<br />
OFFER<br />
PRIME<br />
TREND<br />
YIELD<br />
7 Letter words<br />
BIDDING<br />
OPTIONS<br />
REVENUE<br />
SPINOFF<br />
TAKEOUT<br />
Letter words<br />
DEFLATION<br />
SHORTSALE<br />
SHORTTERM<br />
4 Letter words<br />
BOND<br />
EARN<br />
ESOP<br />
GOLD<br />
NOTE<br />
NYSE<br />
POOL<br />
RATE<br />
RISK<br />
SEAT<br />
SELL<br />
6 Letter words<br />
BIDDER<br />
BIGMAC<br />
CREDIT<br />
OFFSET<br />
POINTS<br />
SLetter words<br />
ADVISERS<br />
AMORTIZE<br />
FORECAST<br />
LATE TAPE<br />
LEVERAGE<br />
NEW MONEY<br />
zoLetter words<br />
BULL MARKET<br />
CAPITALISM<br />
NEW LEADERS<br />
PRICEINDEX<br />
THIN MARKET<br />
TURNAROUND
Figure18•2:UNEMPLOYED ASA<br />
PERCENTAGE OFTHECIViLIANLABORFORCE, 19251987<br />
Percentage of<br />
CivilianLabor Force<br />
30<br />
II’,<br />
IC_______<br />
CI 1111111 III<br />
192519301935 1940 194519501955196019651970 197519801985<br />
Years<br />
Source: Historical Statistics oftheU.S., Statistical Abstract oftheU.S.,Bureau oftheCensus<br />
1987percentage isanestimate
NAME_____________________________ DATE________ CLASS_____ SCORE_____<br />
CHAPTER 7 Section 3 REINFORCEMENT: MainIdeas1<br />
RightToWork Activity27<br />
A controversial sectionof theTaft-HartleyActof APPLICATIONDistinguishing Factfrom Opinion<br />
1947forbidsclosedshops,andthushasenabled Readeachof the statementsbelow.If thestatestatesto<br />
passright-to-worklaws.A “right-to-work” mentisfact,writeFact;if it isopinion,writeOpinion.<br />
lawstatesthatindividualsdonothavetojoinaunion<br />
inordertoholdajob. 4. Right-to-worklawsare the onlywayto fight<br />
Union stronglyopposeright-to-worklaws,argu- corruptunions.<br />
ingthattheyallowcompaniestohirenon-unionlabor<br />
whomightworkforlowerpay.Also,unionsclaimthat<br />
suchworkersbenefitfromgainsmadebyunions<br />
,yet 5. Unionsaretheonlymeansforworkersto get<br />
donotpayuniondLes.<br />
ahead.<br />
AftertheTaft-Hartley Actwaspassed,somestates<br />
passedright-to-worklaws,chieflyto attractindus<br />
triesto theirareas,wherewageswouldbe lower. 6. Unionsopposeright-to-worklaws because<br />
Duringthe1950s,unionsopposedpassageofmore<br />
theyencouragethehiringofnon-unionlabor.<br />
right-to-work laws,and31statesfailedtopassthem.<br />
Supportersofright-to-worklawsarguethatthese<br />
lawsprotectthe rightsof citizensto workwithout 7. TheTaft-HartleyActwasstronglyopposedby<br />
beingforcedto joina unionor to payuniondues.<br />
organizedlabor.<br />
Criticsseeunionsasoftenbeingcorrupt,constantly<br />
drivingup wages,and seekingmoreand more<br />
power. 8. Union succeededindefeatingmanyright-to-<br />
Today, right-to-worklawsremainthemostContro- worklaws.<br />
versialaborlegislationintheUnitedStates.<br />
9. Right-to-worklaws offer the individualthe<br />
COMPREHENSIONInterpretingInformation freedomtojoina unionornot<br />
1.Whatisthepurposeoftheright-to-worklaws?<br />
10. Union seeright-to-worklawsasantilabor.<br />
EVALUATIONEvaluatingIdeas<br />
2.Whydounionsopposeright-to-worklaws? 11. Whywouldsomestateswanttoattractindus<br />
trybypassingright-to-worklaws?<br />
______________________________________________<br />
3. Statesthat passright-to-worklawsare often<br />
seekingwhatbenefit?<br />
REINFORCEMENTACTIVITY 27
NAME DATE_________ CLASS_____ SCORE_____<br />
IC1 I’TE1 I7I<br />
HowAreBusinesses Formed?<br />
Therearemanydifferentwaystoorganizeabusi<br />
ness.Generally, the organizationdependson the<br />
kindof businessit is, andwhoownsit. A bicycle<br />
shop,anarchitectural firm,andafurniturefactoryall<br />
havedifferentneedsandoperations.<br />
inthechartatthebottomofthepageyouwillfind<br />
themaincharacteristicsofthethreebasicbusiness<br />
organizations: thesoleproprietorship, thepartner<br />
ship,andthecorporation.<br />
Comparethecharacteristicsby readingacross.<br />
Studythemandthenanswerthefollowingquestions.<br />
COMPREHENSIONSummarizingMainIdeas<br />
1. Which kind of organization is probablythe<br />
shortest-lived?Why?<br />
APPLICATIONInferringInformation<br />
Readthecasestudiesbelow.Decidewhichtype<br />
oforganizationwouldbebestineachcase.Write1<br />
forsoleproprietorship, 2 forpartnership,and3 for<br />
corporation.<br />
—<br />
2. BenAndrews,whohasconstruction-work<br />
Basic Kinds of Businesses<br />
—<br />
—<br />
—<br />
—<br />
REINFORCEMENT: Chapter 7Revtew<br />
Activity28<br />
experience,wantsto start his own busi<br />
ness.Heishavingtroubleraisingmoney.<br />
3. EllenCarterhasenoughmoneyto starta<br />
hobbyshop.Shewantsto runa personal<br />
kindof business,gettingto knowhercus<br />
tomersandtheirinterests.<br />
4. A group of peoplewantto start a depart<br />
mentstore.Theywanteightbranchesofop<br />
eration,eachwith its ownmanager.<br />
5. Twelvepeoplewantto startanelectriccom<br />
pany.Buttheycan onlyraisea littlemoney.<br />
Theyhaveto go to outsidesourcesto find<br />
enoughcapital to starttheir business.<br />
6. Mr and Mrs. Spivakwant to start a small<br />
computercompany.Theydecide that they<br />
can getenoughmoneybyborrowingitfrom<br />
their own savings accounts and from<br />
relatives.<br />
7. Threefriendsdecidetoorganizeacatering<br />
service. At first they do all the workthem<br />
selves.Thenthey realizethat they haveto<br />
hiremorepeople.Todothisthey needmore<br />
moneyand they pool their own resources<br />
to do this.<br />
SoleProprietorship Partnership Corporation<br />
Ownership Oneperson. Twormorepeople. Usuallymanypeople.<br />
Organization Simple. Fairlysimple. Complex.<br />
Financing Relativelysmallamountof<br />
capitalneeded:suppliedby<br />
owner.<br />
Relatively smallamountot<br />
capitalneeded:suppliedby<br />
partners.<br />
Largeamountofcapital<br />
needed:suppliedby<br />
stockholders.<br />
Management Ownerunsbusinessby<br />
himself/herself,<br />
Ownershareresponsibilities Managedbyboardofdirectors<br />
anddecision-making. andsalariedprofessional<br />
managers.<br />
Taxes Taxedasindividual. Taxedasindividual; Taxedascorporation.<br />
Liability Unlimited. Unlimited. Limited.<br />
Wansfer/<br />
Termination<br />
Byowner’sdecisionordeath. Partnersmustagreeon<br />
ownership changesor<br />
termination ofbusiness.<br />
Ownership easilytransferred:<br />
ispermanently incorporated.<br />
28 REINFORCEMENT ACTIVITY
Lesson 7: Producer’sChoice—Whereto Produce<br />
TIME REQUIRED: 45—50minutes. Some classes<br />
may require more time to com<br />
plete all three problems.<br />
RECOMMENDED GRADE LEVEL: 9-12<br />
MAJORCONCEPTS: Least cost of production<br />
Production cost<br />
RELATED CONCEPTS: Profits<br />
Instructional Objectives: Students will<br />
• List the factors of production—.-land,labor (includ<br />
ing entrepreneurship), and capital;<br />
• Select the least-cost producing unit;<br />
Rationalefor theActivity: Business firms must search<br />
for the lowest prices for the land, labor, and capital<br />
they need. Since their goal is maximum profits, prod<br />
ucts must be produced as cheaply as possible. Produc<br />
tion cost is least only when the lowest-priced combina<br />
tion of inputs to provide a given good or service is<br />
used. Students should understand this basic principle<br />
of conducting business because it helps explain busi<br />
ness decisions that affect employment of resources.<br />
Materials:<br />
1. Chalkboard.<br />
2. One copy of Handout 7-1 for each student.<br />
Procedure:<br />
1. Give each student a copy of Handout 7-1. Tell the<br />
students they are managers of a firm with two<br />
plants, one in Chicago and one in Memphis. Both<br />
plants produce the same product—metal boxes.<br />
Have them review the cost data before solving the<br />
problems.<br />
2. Assignindividual students or smallgroups to work<br />
on problem A. Using the information provided<br />
they are to choose the plant that can produce and<br />
sell the product so as to minimize cost and<br />
maximize profit, given a market price of $10.00.<br />
Assume that the manufacturer will pay for the<br />
transportation of the boxes to the buyers. Ask the<br />
students to choose which production location<br />
should be assigned to supply Milwaukee. Discuss<br />
the answers.<br />
3. Assignindividual students or smallgroups to work<br />
on problem B. Discuss the answers.<br />
4. Assignindividual students or smallgroups to work<br />
on problem C. Discuss the answers.<br />
Evaluation:<br />
1. Assess responses to problem worksheets and/or<br />
classdiscussion.<br />
30<br />
2. Problems B and C can be used as home assign<br />
ments or an in-class test if Handout 7-1is modified<br />
to include only Problem A.<br />
Teacher Answer Sheet to Case Study<br />
PROBLEMA:<br />
• The Chicago plant is the least-cost plant when<br />
transportation to Milwaukee is included, given the<br />
uniform selling price of $10 per metal box. If the<br />
product were shipped from Memphis, the profit<br />
would be only 45 cents per box, while shipment<br />
from Chicago yields a profit of 71 cents per box.<br />
Chicago: $9.10 + $0.19 ($0.10 + $0.09) = $9.29<br />
Memphis: $8.90 + $0.65 ($0.10 + $0.55) = $9.55<br />
• The Chicago plant has a 71-cent profit. Therefore,<br />
Memphis, the plant with the lowest cost of produc<br />
tion, does not supply Milwaukee.<br />
PROBLEMB:<br />
• With added capacity in the Memphis plant, average<br />
cost per box made in Memphis fell to $7.20. The<br />
Chicago plant will therefore close since it is<br />
cheaper to produce and ship to Milwaukee from<br />
Memphis ($7.20 + $0.65 = $7.85)than to produce<br />
in Chicago.<br />
• If the Chicago plant were used, the manufacturer<br />
would not make the maximum possible profit.<br />
Worse yet, the idleness at Memphis would be more<br />
of a loss because it now has more unused capacity.<br />
• The increase in firm profits may prompt an attempt<br />
by labor to obtain higher wages, since part of the<br />
profit increase came from greater labor productiv<br />
ity: labor costs per box fell from $2.80 to $2.00.<br />
(Note that the $2.00unit labor cost is a production<br />
cost for the manufacturer, not the actual hourly<br />
pay of workers. Hourly pay rates are not given in<br />
this exercise.)<br />
PROBLEMC:<br />
Computation will show that the Chicago plant can<br />
produce and deliver to the Des Moines market at a cost<br />
of $9.50per box. Therefore, at a price of$1 I per box, a<br />
net profit of $1.50 per box can be earned. Under these<br />
conditions the Chicago plant will be reopened.<br />
If the firm’s managers wanted to supply the Des<br />
Moines market without reopening the Chicago plant,<br />
they would have to expand production capacity at<br />
Memphis or they could give up the Milwaukee busi<br />
ness. The determining factors would be how much the<br />
new plant expansion would cost per unit of output and<br />
the relative transportation costs between Memphis and<br />
Des Moines as compared to costs between Memphis<br />
and Milwaukee.
Handout7.1<br />
SALESINFORMATIONAND UNIT COSTSOF<br />
PRODUCINGMETALBOXES<br />
Labor<br />
Capital<br />
Landcost (rent)<br />
Rawmaterialinputs<br />
Totalcostsperbox<br />
ChicagoPlant<br />
$3.00<br />
1.00<br />
0.10<br />
5.00<br />
$9.10<br />
MemphisPlant<br />
$2.80<br />
1.05<br />
0.05<br />
5.00<br />
$8.90<br />
Bothplantshavea productioncapacityof 1,000boxesperday.<br />
Sales<br />
Chicagoplantsells 1,000boxesperdayin Milwaukeefor $10a box.<br />
Memphisplantsells 1,000boxesperdayin Memphisareafor $10a box.<br />
Distance:<br />
Chicagoto Milwaukee<br />
Memphisto Milwaukee<br />
90 miles<br />
550miles<br />
Transportationcost: 10centsperbox plus10centsper hundredmiles.<br />
ProblemA: Giventhe informationon costsof pro<br />
ducing metalboxesand the salesinformationre<br />
producedonHandoutNo.7-1,answerthefollowing<br />
questions:<br />
• Whichplant shouldbe usedby the metalbox<br />
firm to supplythe Milwaukeemarket?<br />
• What is the profit per box that your firm will<br />
earn?<br />
• Whydid youfind thatthe plantwiththe highest<br />
productioncost per boxwill be usedto supply<br />
the Milwaukeemarket?<br />
ProblemB: Uponevaluationof thecostsof produc<br />
tion, It is discoveredthat addingplantcapacityof<br />
1,000boxesper day at the betterequippedMem<br />
phis plant would increasethe efficiencyof labor<br />
andreducethe costof rawmaterialsperbox.The<br />
newbuildingwill increasethecostof capitalgoods<br />
per unit.Theseadjustmentswill meana newpro<br />
ductioncostscheduleasfollows:<br />
Unitcostsof producingmetalboxesat Memphis<br />
afterdoublingthe productioncapacityof the<br />
Memphisplant<br />
Labor<br />
$2.00<br />
Capital<br />
1.15<br />
Land<br />
0.05<br />
Rawmaterials 4.00<br />
_____<br />
Totalcost $7.20<br />
• Giventhesenewlowercosts,whatwouldyoudo<br />
with regard to productionfor the Milwaukee<br />
marketandthe useof the Chicagoplant?<br />
• Whatwouldhappento firmprofitsiftheChicago<br />
plantwereusedafterthe capacitywasaddedto<br />
the Memphisplant?<br />
• If the Chicagoplantis closedandprofitsat the<br />
Memphisplantrise,whydo youthink Memphis<br />
wotkerscould askfor wageincreases?<br />
ProblemC: Assumethat the firm has closed its<br />
Chicago plant and is producing boxes for the<br />
Milwaukeemarketat itsMemphisplantandthatthe<br />
Memphisplant is sellingall the boxesit can pro<br />
duce. Then as a result of good word-of-mouth<br />
advertisingby a group of Milwaukeebuyerswho<br />
havemovedto DesMoines,Iowa,your firm finds<br />
thatit cansell1,000boxesperdayinDesMoinesat<br />
apriceof $11perbox.DesMoinesis300milesfrom.<br />
Chicago.You must now respondto the following<br />
questions:<br />
• IfyourfirmcouldreopenitsChicagoplantatlittle<br />
or noextracost,wouldyourecommendreopen<br />
ing the plant?<br />
• Will the unit price exceedthe unit costs of<br />
productionplus transportationfrom Chicago?<br />
HINT:Howmuchprofit per unit will therebe?<br />
• In what other waysmight the firm supplythe<br />
boxesdemandedif theChicagoplantcouldnot<br />
be reopened?<br />
FromMasterCurriculum Guide for the Nation’s<strong>School</strong>s, Pan II, Strategiesfor Teaching<strong>Economics</strong>:Basic Businessand Consumer<br />
Education(Secondary), 1979.JoIntCouncilon EconomicEducation,1212Avenueof the Americas,NewYork.NY 10036.<br />
31
Lesson8:.Mass Markets, Advertising,and the Product Cycle<br />
TIME REQUIRED: 45-50minutes<br />
RECOMMENDED GRADE LEVEL: 9-12<br />
MAJOR CONCEPTS: Specialization<br />
DivisiOnof labor<br />
Price<br />
Cost of production<br />
Product demand<br />
Instructional Objectives:.Students will<br />
• Define division of labor and cost of production;<br />
• Show how advertising can stimulate demand for a<br />
new product;<br />
• Explain the effect that advertising can have on the<br />
cost of a product at different stages of its history.<br />
Rationale for the Activity: Many products tend to<br />
follow a typical market pattern that students—as<br />
consumers—ought to know about. When first intro<br />
duced, demand for a new product is usually limited<br />
and the cost of production is relatively high. As a<br />
product’s market matures, demand increases and pro<br />
duction costs per unit tend to fall. Profits per unit and<br />
total profits therefore climb. Eventually the growth of<br />
demand slows, production costs per unit stop falling,<br />
and profits per unit tend to decline. Automobiles,<br />
television sets, and personal calculators are products<br />
that have followed a typical “life-cycle” pattern. Les<br />
son 8 shows the interrelation of demand, costs, and<br />
price during these various stages of production.<br />
Materials: Multiple copies of handouts 8-1, 8-2, and<br />
8-3.<br />
Procedure:<br />
1. Provide each student (or group of students) with a<br />
copy of Handout 8-1 and ask them to read it.<br />
2. Provide each student with a copy of Handout 8-2.<br />
Be sure students understand what the chart de<br />
picts. Make certain that the students understand<br />
the concept of expressing prices in constant dol<br />
lars (i.e., prices as of a given year) before they<br />
start answering the questions. Provide each stu<br />
dent with a copy of Handout 8-3 and have them<br />
work on the answers.<br />
3. Allowthe group or the class as a whole to react to<br />
the questions and then concentrate on discussing<br />
answers to the questions. Demand curves may be<br />
used to illustrate student responses if students<br />
have been introduced to them previously.<br />
4. Discuss questions 3—6using TV sales in the 1950s<br />
(black and white sets) and the 1970s(color sets) as<br />
the product. The analysis will parallel the Ford<br />
case study.<br />
32<br />
Evaluation:<br />
I. Assess quality of student contribution to class<br />
discussion.<br />
2. Assess quality of student responses to questions in<br />
Handout 8-3. Use the answer sheet below as a<br />
guide.<br />
Teacher Answer Sheet to Handout 8-3, Questions<br />
on the Case Study: The Ford Experience<br />
Ia. About 18,000cars.<br />
b. $3,400.<br />
2a. Approximately 8 million cars.<br />
b. $950.<br />
3. Ford developed the assembly line and other<br />
mass-production techniques. This raised output<br />
per man-hour because of specialization, and thus<br />
lowered costs. These same techniques substi<br />
tuted capital for labor, and the saving on labor<br />
also reduced cost. Ford also secured savings by<br />
producing many of the raw materials and parts<br />
in his own company—an organizational tech<br />
nique we now call vertical integration.<br />
4. It should have shifted demand, increased sales,<br />
and prompted even greater use of mass produc<br />
tion methods. Ford also wanted to lower prices<br />
to attract more customers. If advertising could<br />
have increased the market, it probably would<br />
have helped lower production costs even faster,<br />
thus also making it possible for more customers<br />
to buy the car. Since the incomes of Americans<br />
were rising, heavy advertising might have led to<br />
more car sales even if the price had not been<br />
lowered.<br />
UNIT<br />
PRICE<br />
3400<br />
-J +<br />
Additional $.l.<br />
Owing to<br />
Adv.rt ls lng<br />
and Nigh.,<br />
Consum., Incoins<br />
i., hoe<br />
4<br />
Additional $.i..<br />
Owing to<br />
Low*v Costs<br />
k,1$IO<br />
UNITS SOLD
5. By 1923the desire of the public to purchase a<br />
car designed in 1909 had declined. It looked<br />
obsolete even when new. As a result, an increase<br />
in advertising would have attracted few addi<br />
tional buyers. (Note that under the market condi<br />
tions depicted in the chart below, demand in<br />
1923and 1924 is for all practical purposes the<br />
same.)<br />
UNIT<br />
PRICE<br />
DEMAND 1923 —<br />
DEMAND 1124<br />
UNITS SOLD<br />
33<br />
However, the cost of additional advertising<br />
would have added to the total cost of producing<br />
and marketing the car. This would have required<br />
some increase in the sales price and such an in<br />
crease might well have reduced the number of<br />
cars sold.<br />
6. If a good has not yet been mass produced and<br />
the economies of mass production therefore not<br />
yet achieved, then advertising, by causing<br />
people to become aware of the product, can in<br />
crease sales and lower costs, which can lead to<br />
a reduction in price. The reduction in prices may<br />
then lead to still greater sales and more adver<br />
tising, thus lowering costs and prices further,<br />
and so on. But if a good is already being mass<br />
produced and costs are already low, or if adver<br />
tising does not increase sales, the producer’s<br />
costs and thus the price to the consumer may<br />
both increase.
Handout8-1<br />
CASESTUDY:THEFORDEXPERIENCE<br />
In 1909HenryFordintroducedthe ModelT. Thecar hadlargewheels,a<br />
strongsteelframe,andwasexceedinglysimpleto repairandmaintain.Your<br />
grandfatherand great-grandfathermaywell havelearnedto drive, travel<br />
aboutthe country,and repairautomobileson the ModelT.<br />
HenryFord’sideawasto expandproductionin orderto lowercostsand<br />
increasesales.To meetthese objectives,Ford spent manyof the years<br />
between1909and 1927in developingthe assemblyline and other mass<br />
productiontechniquesto reducetheModell’s costs.Theeffortincludedthe<br />
useof subassemblylinesfor somecomponentssuchasmotors.<br />
TheFordcompanyalsobuilt plantsto producesteel,glass,andmanyothq,r<br />
basicitemsrequiredto producea car.Infifteenyears,nearly8 millionModel<br />
T’swereturnedout.Inalmosteveryyear,asmorecarswereproduced,costs<br />
were reducedand Ford could lower the selling price. (Of course,many<br />
improvementsweremadeon the originalModelT astime wenton.)<br />
Ford was so sure that the lower costs achievedby standardizingthe<br />
productwouldattractbuyersthathewentsofarasto say,“Youcanhaveany<br />
coloryouwantsolongasit’sblack.”Butheturnedoutto bewrong.By1923,<br />
others in the industry had developeda new concept for selling cars.<br />
Chevroletbeganto offera newmodelin a varietyof colorseveryyear.These<br />
stylechangesmadethe ModelT lookobsoleteandold bycomparison.Asa<br />
result,Ford’ssalesfell. In 1927,HenryFordfinallysawthat It wasnecessary<br />
to changecar styles.He closed his assemblylines for severalmonthsto<br />
retoolandrebuild.Theresultwasa newandrestyledcar.TheModelA was<br />
introducedin 1927.<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s,PartII.Strategiesfor Teaching<strong>Economics</strong>:BasicBusinessendConsumer<br />
Education(Secondary), 1979. Joint Councilon EconomicEducation.1212Avenueof theAmericas,NewYork,NY10036.<br />
34
PriceofModel1, 1909-1923(AverageUstpriceIn 1958dollars)<br />
!<br />
h .8<br />
I<br />
5<br />
4<br />
5<br />
z<br />
-<br />
lm<br />
In<br />
10,000<br />
15% $<br />
E<br />
2<br />
‘l<br />
h<br />
IC<br />
1$1i<br />
EEEEE<br />
3<br />
Cwnulaliveunits produc.d<br />
—<br />
4 5<br />
6 7 6 9 100,000<br />
Handout8-2<br />
2<br />
.<br />
r<br />
1 12<br />
E<br />
3<br />
EEE<br />
.<br />
‘<br />
•<br />
5 6 7 5 9 1.000.000<br />
—<br />
916<br />
lI<br />
2<br />
—<br />
E 3<br />
—<br />
I<br />
4<br />
---_<br />
J<br />
scf:’<br />
5 6 7 5 9<br />
Chart reprinted from WilliamJ. Abernathyand KennethWayne, “Limits of the LearningCurve,” Harvard BusinessReview,<br />
September-October1974.Copyright) by the Presidentand Fellowsof HarvardCollege:ill rightsreserved.<br />
35<br />
—<br />
E
1-landout<br />
8-3<br />
QUESTIONSTO ACCOMPANYCASESTUDY:THEFORDEXPERIENCE<br />
(Usespace provided for your answers)<br />
la. How many Model T’s were produced in 1909? ____________________________________________<br />
b. What was the price per unit in 1909? ______________________________________________________<br />
2a. What was the total number of cars produced from 1909through 1923? ________________________<br />
b. What was the price per car in 1923? ____________________________________________________<br />
3. What could havebeen some reasonsfor the decrease in the sales price from 1909to 1923?<br />
4. II Ford hadspent moneyon advertisingto make people more awareof his product in 1909,what might<br />
havehappened?<br />
5. Ford closed for several months in 1926 to retool his factory for a new line of cars. What<br />
might have happenedto sales and costs in 1926if the money had been spent on advertising the old<br />
model insteadof on retooling?<br />
6. What is a conclusion that can be drawn from the Ford situation about the effect of advertising on the<br />
price of a good?<br />
NAME ___________________________________________<br />
DATE _____________<br />
FromMasterCurriculumGuidefor theNation’s<strong>School</strong>s,Parti, Strategiesfor Teaching<strong>Economics</strong>:BasicBusinessandConsumer<br />
Education(Secondary), 1979.JointCouncilon EconomicEducation,1212Avenueof theAmericas,NewYork,NY10036.<br />
36
3-1<br />
Where Do You Stand?<br />
TIMEREQUIRED One or two class periods<br />
RECOMMENDEDGRADELEVEL Twelfth grade<br />
MAJORCONCEPTS Broad social goals of economic<br />
freedom, economic efficiency, economic security,<br />
economic equity, full employment, price stability,<br />
and economic growth; opportunity costs and trade<br />
offs<br />
RELATEDCONCEPT Externalities<br />
INSTRUCTIONALOBJECTIVES Students will<br />
I Make value judgments about the relative costs<br />
and benefits of government intervention and regula<br />
tion in the U.S. economic system;<br />
2 Specify the broad social goals affected by<br />
various government actions;<br />
3 Describe the trade-offs that must be made among<br />
broad social goals when different government ac<br />
tions have effects that result in conflicts among the<br />
goals.<br />
RATIONALE Individuals must be able to analyze<br />
public policy issues in order to make well-informed<br />
decisions in the polling booth or in civic organiza<br />
tions to which they belong. This lesson leads stu<br />
dents to examine both their personal beliefs regard<br />
ing the role of government regulation and to analyze<br />
how various public policies affect broad social goals.<br />
MATERIALS One copy of Handouts 3-IA and 3-lB<br />
for each student.<br />
PROCEDURE<br />
I Ask students to name ways in which govern<br />
ment regulation affects their lives. (Examples might<br />
include required school attendance, compulsory<br />
licensing of automobile drivers, cleanliness<br />
standards for restaurants.)<br />
2 Distribute Handout 3-lA and help the class to<br />
understand what the various broad social goals are.<br />
[If you need more information, see the appropriate<br />
section of the JCEE’sMaster Curriculum Guide in<br />
<strong>Economics</strong>: A Framework for Teaching the Basic<br />
Concepts.)<br />
61<br />
3 Distribute Handout 3-IB, which describes<br />
various existing or possible government policies.<br />
Have students determine individually or in groups<br />
whether they support or oppose each of these poli<br />
cies. Also have them determine which broad social<br />
goals are affected — positively or negatively — by<br />
each of the policies (they should refer to Handout<br />
3-IA for this assignment.) After students have fin<br />
ished, have a member of each group or several indi<br />
viduals report their views to the class.<br />
Answers to the question of trade-offs in broad so<br />
cial goals may run along the following lines:<br />
a Mandatory price and wage controls: In<br />
crease price stability in short run but probably<br />
not in the long run. Help prevent wages from ris<br />
ing rapidly in order to keep pace with prices.<br />
Price controls may adversely affect economic ef<br />
ficiency because the quality of goods and serv<br />
ices may deteriorate and the amount supplied to<br />
the market may become insufficient.<br />
b Publicly supported health care for all citi<br />
zens: Enhances personal security (and may pro<br />
mote equity) because people receive health care<br />
no matter how little income they have. Probably<br />
leads to inefficiencies because people are apt to<br />
use free medical services for minor conditions<br />
that they themselves can treat or that are not seri<br />
ous enough to require any treatment. Some peo<br />
ple in the middle-income brackets will probably<br />
have less freedom of choice than they would like<br />
because the additional taxes they must pay to<br />
support medical care for all could preclude them<br />
from having enough after-tax income to continue<br />
purchasing their own medical care in the private<br />
sector.<br />
c Guaranteed income above the poverty level<br />
forall: Provides economic security for those who<br />
do not find jobs or are unable to work. Increases<br />
freedom of choice in the marketplace for lowerincome<br />
people because they have more income<br />
to spend. Lessens freedOm of choice in the<br />
marketplace for those who pay taxes to support<br />
such programs because they have less to spend.<br />
May cause national economic efficiency to be<br />
lower than it would otherwise be and lessen the<br />
possibility of reaching full employment because<br />
low-paying jobs will be less attractive to those<br />
benefiting from the program.
d Jobtraining for the unemployed: Successful<br />
job-training efforts would help to achieve na<br />
tional full employment. The use of otherwise un<br />
used labor resources to produce needed goods<br />
and services would increase economic growth<br />
and personal welfare. The economic security of<br />
the unemployed would be enhanced because of<br />
their ability to secure an income-generating job.<br />
it is true, though, that previous job-training ef<br />
forts for people who are chronically unemployed<br />
have not achieved marked success. Those who<br />
pay taxes to support a job-training program<br />
would have less money to spend and save than<br />
otherwise.<br />
e Eased pollution emission standards for<br />
manufacturing plants: Policy could lead to re<br />
duced economic efficiency. Although fewer re<br />
sources would be devoted directly to pollution<br />
control and, therefore, the prices of the manufac<br />
tured goods would probably be lowered, more<br />
resources might be required to remedy the dam<br />
age to property and to health that might result<br />
from the increased pollution.<br />
f Minimum wage Jaw: Increases security for<br />
those who are employed at low-wage jobs be<br />
cause they are assured of a basic level of income.<br />
Hampers achievement of full employment to the<br />
62<br />
extent that jobs are eliminated because employ<br />
ers calculate that paying the minimum wage is<br />
paying some employees more than their work is<br />
worth.<br />
g Provision of tax incentives in order to in<br />
crease saving: Promotes economic growth and<br />
efficiency if the increase in savings results in<br />
new investment in more efficient machinery,<br />
buildings, and the like that improve productivity<br />
and thus make firms more competitive in domes<br />
tic and world markets. Increases security of indi<br />
viduals because they will have a source of money<br />
on which to rely in case of emergencies. Savings<br />
incentives contain an element of inequity be<br />
cause only individuals with sufficient income to<br />
put some of it aside can take advantage of the in<br />
centives. Savings incentives may merely shift<br />
savings from one form of holding to another and<br />
thus have little or no effect on the economy as a<br />
whole.<br />
4 Have students comment on the following state<br />
ment: Government policies often involve a trade-off<br />
between different broad social goals.<br />
EVALUATION Have students analyze how a spe<br />
cific government policy — preferably one recently<br />
passed by a state or local or the federal government —<br />
affects different social goals.
Handout3-lA<br />
IMPORTANTBROADSOCIALGOALSIN AMERICANSOCIETY<br />
1 Economicfreedom — includes freedomofconsumers, work<br />
ers,andproducers tomakechoicesinthemarketplace.<br />
2 Economicefficiency — relatestogettingthemaximumbenefits<br />
fromourlimitedproductive resources.<br />
3 Economicequity — pertains towhatisconsidered fairorunfair<br />
aboutheeffectsofeconomicpolicies.<br />
4 <strong>Economics</strong>ecurity — pertains tothedesireofpeopleforprotec<br />
tionagainst variouseconomic risksoverwhichtheyhavelittleorno<br />
control, suchasunemployment, bankfailures, destitution inoldage.<br />
5 Full employment — prevailswhenall of an economy’s re<br />
sourcesarebeingutilizedtocapacity.<br />
6 Pricestability — theabsenceofinflationordeflation inthegen<br />
eralpricelevel.<br />
7 Economicgrowth — theproduction ofincreasing amountsof<br />
goodsandservicesoverthe!ongrun.<br />
FromMasterCurriculumGuidein <strong>Economics</strong>: TeachingStrategiesforConsumer<strong>Economics</strong>(Secondary). 1985.JointCouncilon Economic<br />
Education,2 ParkAvenue,NewYork,NY10016.<br />
63
Handout3-1B<br />
WHEREDO YOU STAND?<br />
Name Class_____________<br />
Directions:Indicatewhetheryousupportoropposeeachofthegovernment regulationsorprogramslistedinthelefthandcolumn.Alsoindicatewhichbroadsocialgoatsarepromotedandwhichareheldbackbytheadoptionof<br />
the<br />
programorregulation.UseHandout3-1Atoassistyouinspecifyingthebroadsocialgoalsaffectedbyeachgovernment<br />
activity.<br />
GOVERNMENT<br />
PROGRAM<br />
ORREGULATION SUPPORT OPPOSE<br />
a Mandatorypriceand<br />
wagecontrols<br />
b Publiclysupported<br />
healthcareforallcitizens<br />
c Guaranteedincome<br />
abovethepovertylevelfor<br />
all<br />
d Jobtrainingforthe<br />
unemployed<br />
e Easedpollution<br />
emissionstandardsfor<br />
manufacturing plants<br />
I Minimumwagelaws<br />
g Sizabletaxincentives<br />
forsavingmoney<br />
Broad<strong>Social</strong>Goal<br />
Promoted<br />
TRADE-OFFS<br />
Broad<strong>Social</strong>Goal<br />
HeldBack<br />
FromMasterCurriculumGuidein <strong>Economics</strong>:TeachingStrategiesfor Consumer<strong>Economics</strong>(Secondary).1985.JointCouncilon Economic<br />
Education,2 Park Avenue,NewYork, NY 10016.<br />
64
32<br />
Private or Public?<br />
TIME REQUIRED<br />
One or two class periods<br />
RECOMMENDEDGRADELEVEL 9—I2<br />
MAJOR CONCEPTS Public goods; private goods;<br />
mixed market economy; exclusion; shared consump<br />
tion; economic equity; externalities<br />
RELATEDCONCEPTS<br />
offs<br />
Opportunity costs and trade-<br />
INSTRUCTIONALOBJECTIVES Students will:<br />
1 Explain the differences between private and<br />
public goods and services;<br />
2 Define the terms “nonexciusion” and “shared<br />
consumption” as they relate to the provision of pri<br />
vate and public goods and services;<br />
3 Explain how externalities (spillover effects) and<br />
equity issues can affect decisions about whether the<br />
private or the public sector should provide goods and<br />
services;<br />
4 Apply economic concepts and their own value<br />
structures (personal and social) to an analytic prob<br />
lem dealing with the role of government and busi<br />
ness in providing various goods and services.<br />
RATIONALE Questions relating to government par<br />
ticipation in providing goods and services have be<br />
come numerous and more controversial. In<br />
exercising their rights and responsibilities as citi<br />
zens, students will need to apply economic princi<br />
ples and analytic tools when they weigh arguments<br />
for more or less government participation. Students<br />
should also realize that they consume goods and<br />
services provided by both the private and the public<br />
domains.<br />
MATERiAlS One copy of Handouts 3-2A and 3-2B<br />
for each student.<br />
PROCEDURES<br />
I Ifthere are both public or private schools in your<br />
community, ask what differences there are between<br />
these two types of institutions in how they are sup<br />
ported. Ask why these differences exist.<br />
2 Explain how the education example above<br />
65<br />
illustrates the difference between private and public<br />
goods and services, along the lines of the following<br />
paragraphs:<br />
Private goods and services are those produced<br />
by businesses or nonprofit institutions and sold to in<br />
dividuals or groups of individuals who pay for them<br />
directly.<br />
Public goods and services are provided by gov<br />
ernment. In some cases, the government produces the<br />
goods and services, as is the case with the services of<br />
public schools. In the other instances, the items, such<br />
as new roads, may be produced by business but are<br />
provided by government to the public. The govern<br />
ment pays for the construction of the roads with tax<br />
revenues.<br />
3 Distribute Handout 3-2A. Go over the instruc<br />
tions with the students. Then allow them 5—10mi<br />
flutes to complete the worksheet.<br />
4 When time is up, have one student copy.a com<br />
pleted continuum on the chalkboard and explain the<br />
criteria used to decide where to place individual<br />
products. Examples of acceptable criteria students<br />
may mention include: importance for most or all citi<br />
zens, economic efficiency, spillover benefits, innova<br />
tion, difficulty in getting direct users to pay, flexibil<br />
ity, extent of profitability in providing the good.<br />
5 Ask rest of class whether anyone placed the<br />
products in other positions on the continuum. If so,<br />
ask those students to state the criteria they used to de<br />
cide where to place each product. Write the criteria<br />
on the board.<br />
6 Distribute Handout 3-2B. Allow time for dis<br />
cussing the reading and to provide additional exam<br />
ples of goods and services that meet the criteria of<br />
shared consumption and nonexclusion. <strong>Point</strong> out<br />
that there are some goods and services that could be<br />
classified as pure private goods but which are pro<br />
vided by the public sector. Elementary schools and<br />
recreational programs are examples. Yet, most<br />
communities obtain these from the public sector. The<br />
reason is prl nariIy because of positive spillover ef<br />
fects on the community and society as well as equity<br />
considerations. For example, citizens without chil<br />
dren can benefit from having educational and recrea<br />
tional facilities available for the children of the com<br />
munity because the effects on the children improve
the quality of life for all residents. That is why the<br />
cost is borne by the entire community through taxes.<br />
Economists call such a positive spillover effect a<br />
“positive externality.” In addition there is a prevail<br />
ing feeling that all individuals should be given cer<br />
tain opportunities to improve themselves, regardless<br />
of their own economic means. When such services<br />
are provided by the public sector, everyone can take<br />
advantage ofthem instead of only the people who can<br />
afford to buy these services in the marketplace.<br />
7 After you have covered the background material,<br />
ask students to re-evaluate their entries on the contin<br />
uum. Would they change any of their initial re<br />
sponses? Why or why not? (Watch for students’ use<br />
of the concepts of nonexciusion, shared consump<br />
tion, equity, and positive externalities to justify an<br />
existing or changed placement of items on the con<br />
tinuum.)<br />
8 For those goods and services about which there<br />
is much controversy among the students, the<br />
decision-making process outlined in Lesson 1-1 may<br />
66<br />
be used to help the class think through the<br />
alternatives.<br />
9 OPTIONAL:As a follow-up activity, you might<br />
focus on current issues that relate to whether the<br />
business sector and/or the public sector should be<br />
providing certain services. For example:<br />
a Should passenger and freight train transpor<br />
tation be provided by the government or by the<br />
private sector?<br />
b Shouki a public school’s football program<br />
be financed primarily by admission fees, tax dol<br />
lars, or some combination of both? Explain.<br />
c What are some of the advantages and disad<br />
vantages of converting all interstate highways<br />
into tollroads instead of financing them with<br />
funding from federal tax monies?<br />
EVALUATION Evaluation should be based on the<br />
quality of the response in the second round of the ac<br />
tivity.
Name<br />
Handout3-2A<br />
PRIVATEVS.PUBLIC<br />
Class_________<br />
Directions:indicateyourpreferencesandjudgmentsconcerningthedegreetowhichyoubelievethegoodsandserv<br />
iceslistedbelowcanbestbeprovidedbythegovernment orbyprivatebusiness.Dosobyplacingthecapitaletterthat<br />
precedeseachgoodor serviceonthecontinuumatthebottomof thepage.If youbelievethata particulargoodor<br />
serviceshouldbeprovidedbyprivatebusiness,placeitscapitaletteratorneartheleftendoftheline,wheretheword<br />
Private”appears.Placelettersforthegoodsorservicesyouthinkarebetterprovidedbygovernment towardtheright<br />
endoftheline.Ifyouregardtheanswerastowhoshouldprovidetheproductasatoss-up,placetheletterinornearthe<br />
middle.<br />
Whenyouhaveplacedallthelettersonthecontinuum, drawaverticalinetoseparatethosegoodsandservices<br />
whichyouwouldpreferto seeprovidedprivatelyfromthosewhichyouwouldlikegovernment to provide.<br />
A<br />
B<br />
C<br />
D<br />
E<br />
F<br />
Collegeeducation<br />
Electiicpower<br />
Nationaldefense<br />
Retailsellingof groceries<br />
Supplyingof water<br />
Professional sportevents<br />
G<br />
H<br />
I<br />
J<br />
K<br />
L<br />
Postalservice<br />
Interstatehighwayfacilities<br />
Elementaryschooling<br />
Policeprotection<br />
Garbagecollection<br />
Recreational facilities<br />
WHOSHOULDPROVIDETHEPRODUCT?<br />
Private Government<br />
kom MasterCumculumGuidein <strong>Economics</strong>: TeachingStrategiesforConsumer<strong>Economics</strong>(Secondary). 1985.JointCouncilon Economic<br />
Education. 2 ParkAvenue,NewYork NY 10016.<br />
67
OUR ECONOMICSYSTEM<br />
Handout32B<br />
PRIVATE OR PUBLIC? PUBLIC GOODS AND SERVICES<br />
Aneconomicsystemis thewayin whichpeople<br />
andsocietiesorganiz economiclifeto answerthree<br />
basicquestions:(1)Whatgoodsandserviceswillbe<br />
produced?(2)) Howwilltheybe produced?(3)) For<br />
whomwilltheybeproduced?<br />
IntheUnitedStatesandCanada,mostproduction<br />
decisions — what,how,andforwhom — aremadein<br />
themarketplace throughinteractionofbuyersandsell<br />
ers.Thisis calledtheprivatesectorof oureconomy.<br />
Otherdecisionsaremadebydifferent levelsofgovern<br />
ment.Thisiscalledthepublicsectorof oureconomy.<br />
Oureconomicsystemis oftencalleda mixedsystem<br />
sinceweproducea combinationof privateandpublic<br />
goodsandservices.<br />
WHATGOODSAND SERVICESHOULDBE<br />
PROVIDEDBYGOVERNMENTS?<br />
Whilemanygoodsandservicescanbeeffectively<br />
providedbytheprivatesector,a fewcanbeprovided<br />
effectivelyonlyby governments. Otherscanbe pro<br />
videdbyeither,andmanygoodsandservicesprovided<br />
bygovernmentsareactuallyproducedbyprivatefirms.<br />
Generallygovernments try to providethe goodsand<br />
servicesthatarenecessaryfor thewelfareof all the<br />
peoplebut that individualconsumersmightnot pur<br />
chasedirectlyontheirown.Therearetwocriteriathat<br />
canbe usedinjudgingwhethersomethingshouldbe<br />
providedbygovernments — nonexciusionandshared<br />
consumption.<br />
Nonexciusion. In somesituationspeoplecannot<br />
beexcludedfromthebenefitsofagoodorserviceeven<br />
iftheydonotpayforit.Ifonlypartofthepeoplebought<br />
nationaldefense,forexample, theotherscouldnotbe<br />
excludedfromthebenefits.Thenonpurchasers would<br />
beprotectedjustasmuchasthepurchasers.<br />
Sharedconsumption(orjointuse).Insomesitua<br />
tionsoneperson’suseor consumptionof a goodor<br />
servicedoesnotreduceitsusefulnessto others.The<br />
securityonepersonreceivesfroma streetlightis not<br />
diminishedbya neighboreceivingthesamesecurity.<br />
Theprotectionprovidedby the.streetlightis not re<br />
ducedbyadditionalpeopleusingit.<br />
Privatebusinesseswilt not producethingsthat<br />
peoplearenotwillingtobuy,andindividual consumers<br />
areveryreluctant topaydirectlyforgoodsandservices<br />
fromwhichotherswhodonotpaywillreapthebenefits.<br />
“WhyshouldIbetheonetobuythestreetlight,ifevery<br />
oneelseis gettingthebenefits?”Governments there<br />
foremustprovidesomegoodsandservicesuchasna<br />
tionaldefense, floodcontrol,andjudicialandlegalsys<br />
tems,whicharecharacterizedbysharedconsumption<br />
andarenecessarilyor shouldbenon-exclusive.<br />
PRIVATEAND PUBLICGOODS<br />
“Pure”privategoodsaresubjectoexclusionand<br />
not subjectto sharedconsumption.They are pur<br />
chase directlyinthemarketplace. “Pure”publicgoods<br />
arenotsubjecto exclusionandaresubjecto shared<br />
consumption. Theyare purchasedindirectlythrough<br />
taxdollars.<br />
Somegoodshaveelementsofbothprivategoods<br />
andpublicgoods.Fishingintheocean,forexample, is<br />
generallynot subjecto exclusion,butoncefishare<br />
caughtbyonepersontheyarenotavailabletoothers.<br />
Likewise,it is sometimespossibleto excludepeople<br />
fromtheaters,parks,orevenroadsbychargingadmis<br />
sionfeesortolls,buttheviewingofamovieortheuseof<br />
aparkorahighwaybyonepersonusuallydoesnotre<br />
duceitsusefulnesstoothers.Controversyoftenarises<br />
overhowthese“mixed”goods — sometimescalled<br />
“commonpoolresources”and“tollgoods”(seechart)<br />
— shouldbeprovidedandwhoshouldpayforthem.<br />
Combinations of ExclusionandSharedConsumption<br />
z<br />
0<br />
-J<br />
0<br />
x<br />
w<br />
C,,<br />
w >-<br />
SHAREDCONSUMPTION<br />
NO YES<br />
PUREPRIVATE<br />
GOODS<br />
“TOLL”GOODS<br />
Haircuts,bread,ice<br />
cream.<br />
Theaters,cableTV,<br />
parks,tollroads.<br />
COMMONPOOL PUREPUBLIC<br />
RESOURCES GOODS<br />
Fishtakenfromthe Nationaldefense,<br />
ocean,irrigationwatei floodcontrol,street<br />
takenfroma river, lights,airpollution,<br />
congestedroads. mosquitoabatement,<br />
judicialandlegalsys<br />
tem,publicTV,<br />
uncongestedroads.<br />
FromA GuidetoGive& Take(Bloomington,IN:Agencyfor InstructionalTechnology,1982),p. 16.Reprintedwithpermissionof the Agencyfor<br />
InstructionalTechnology. BoxA, Bloomington, IN 47401.
P C.LA5, 1A<br />
CHAPTea. 5<br />
ic Ec..a1..<br />
Gf.•<br />
A Tfrr : I<br />
C t<br />
‘‘ 2.) ’ t!<br />
, •. 1jTh<br />
-AV AC -’ P cL.A5S .<br />
dflMi1ru’ 1i C1’. oc rsc.m*’ø is<br />
Co, SIb st,Nd p4 v’u ,rs Fmy s<br />
To /tLA JDO<br />
ci t:<br />
F?AtD.<br />
LI5T 1tf.A oi3 WNp PL.6s A fllT’Et<br />
E4.%/SMIL ff:p4 f’it 7# ‘tn,’Mw Ce.,p.<br />
____ Iswo A aitp)<br />
21ø P:<br />
s..sr fteA3e $ aJN<br />
r3e Pc. 4cL 1a1<br />
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s<br />
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Li r lteA3..ls /A 4,v,tid Pi.iiprr P&.m.DA<br />
I ‘: • —:
. I.<br />
1F:’ 11<br />
ReadingtheFinancial<br />
Page<br />
Theexamplethat followsofthestockstradedon<br />
the New YorkStockExchangeis froma typical<br />
newspaperfinancialpage. AmericanStock Ex<br />
Activityonthestockmarket,aswellasonthebond<br />
andcommoditiesmarkets,i considereda signof<br />
thenation’seconomichealthManypeoplefollow<br />
themarketby fling li5t *0 rePortsonradioor tele<br />
viSionand by readingthe financialpagesof the<br />
newspapel.At a glance,thesepages mayseem<br />
veryconfusing.butonceyou understandthekeys.<br />
thy becomeeasyto read.<br />
changeQuotations aregivenas wellin mostpa<br />
pars.Somenewspapers alsocarryregional orlocal<br />
stockexchangelistings. In a listing, thenameof<br />
eachcompanyis printedinenabbreviated form.<br />
In thislisting,Texft,sreferstoTexasInstruments<br />
Nextto thenameof a stockyouwill sometimes<br />
seeOtherletters,suchaspf. Theselettersareex<br />
glainedinthekeyto thestock tablethat appears<br />
onthenewspaperpagealongwith thetable.For<br />
example. ’ pt meansthe issueisa preferredstock<br />
READINGSTOCKMARKET<br />
QUOTATIONS<br />
Althebeginningofeachtradingday, stocksopen<br />
stthesamepricestheyclosedatonthedaybefore.<br />
e pricefor a particularstockwill moveup o<br />
uwnthroughouthedayaspeople buyandsell<br />
aitaresof that stock At theendoftheday,each<br />
Pricesarelistedin dollarsandfractionsof a dollar<br />
Thefigure7OV,means$70.50.Thelabelsofthe<br />
variouscolumnsareexplained for youbelow.<br />
Stockstradedoverthecounterarealsolistedon<br />
thefinancialpage.Theinformationvarie slightly<br />
fromthat givenforstockstradedontheNewYork<br />
andAmericanexchanges.Over-the-counter Quo<br />
tationsusuallylistthe highestbidandthelowest<br />
stockhas a closingprice. Thisis the information askedpriceal theendof the dat. Thesampleon<br />
tht newspapers report.<br />
p. 190showsover•the-counter listings<br />
l4ghsst-<br />
0$ itoct dwleiçprsvfoui<br />
12w.ck s<br />
Aiviuaidlvldsndpershar .<br />
c I<br />
S6.W.sk<br />
S1 5h Lout Stock SW ¾<br />
¼ 37 TaxEsi4.10 7.6 7<br />
ía TiElpi 2.40 10.5<br />
*4 TpI 2.17 11.3<br />
17½½ TesOT2.12 ti B<br />
¼ IS Tsxktd JOb 2.5 12<br />
111½ 70½ T tOO II 20<br />
VIId: mualpsias.nags fst xn amkwu tinSnt<br />
.-.—xwewf 1w‘k1snd at thewrwl stock —<br />
Pt Soles<br />
Soda lOOs I law Lt Cltg.<br />
118<br />
40<br />
54½<br />
W4<br />
U*<br />
15<br />
5415 . St<br />
1$ 24 15 2415 24 15-St<br />
77 $114 SI 1114.14<br />
160 11% lOin 6115 +1<br />
1716 110 10654 110 4454<br />
l5gh.et rid low•<br />
set— for di i<br />
stock iifng<br />
di. day<br />
________<br />
Numberof sharestraded<br />
suit daym<br />
Pnc.Iuurnnngsratio cumuntutockprice<br />
divIdedbycompany’s.ammps put shari<br />
Oi.n . maio.rn<br />
— from<br />
previotutday<br />
Lampile.<br />
pflocl<br />
paid that day<br />
I
LABOR UNIONS<br />
DEBS<br />
—<br />
—<br />
vo<br />
l EIGHT L ___ -<br />
I1It I<br />
= ___<br />
__<br />
T<br />
•111<br />
_<br />
CLOSED -‘vi<br />
•::’\ w-•::<br />
19 1 ii 1 ST<br />
FRINGE BLUE<br />
n—<br />
_____ ___<br />
I’I L .<br />
L.. -<br />
I “ —<br />
TROOPS -: —•<br />
OPEN<br />
SLOW<br />
I] . __ __<br />
COOLING I25<br />
KNIGHTS<br />
GO<br />
BOYCOTT<br />
—<br />
r 1ff<br />
J<br />
r-<br />
___<br />
_<br />
!! M<br />
I I 26 I 271 NLU<br />
’EPS — L<br />
LOCKOUT 33<br />
CONTRACT — —<br />
AWS<br />
— — ACT<br />
—<br />
—<br />
— OFF<br />
35<br />
30 31 .“ 32 v1W<br />
GRIEVANCE 31 -‘ 39 40 dO<br />
—.<br />
PICKETING UAW<br />
.. 41 -<br />
tNJU CTION<br />
SU<br />
r<br />
BARGAINING - - -<br />
-<br />
ARBITRATION<br />
MOONLIGHTiNG 3 Workers are unlikely to be<br />
ACROSS<br />
1 A strikebreaker!<br />
4<br />
5<br />
hired if named on a black —<br />
Early union, the_of Labor<br />
Union of John L. Lewis (abbr.)<br />
3<br />
6<br />
10<br />
11<br />
When owners close their doors to workers<br />
Non—wagebenefits<br />
The “Wobblies” (abbr.)<br />
A<br />
7 A slowdownor “work—to— _____<br />
8 A yellow— _____ contract<br />
9 Court order prohibitingcert—<br />
“____ 13<br />
16<br />
18<br />
19<br />
20<br />
22<br />
shop” employs only union members<br />
Holding more than one paying job!<br />
Long—timelabor goal: the ____ hour day<br />
1947 anti—laboract, ____ —Hartley<br />
Patrollingnear workplace by union<br />
members to publicizelabor dispute<br />
Smith—Connallyor Taft—Hartley,for eg.<br />
Author of How the Other Half Lives<br />
12<br />
14<br />
15<br />
17<br />
21<br />
am union actionssuch as picketing<br />
Closed or open!<br />
Rotating,wildcat, or general, for eg.<br />
To approve, legally, the right of a<br />
union to representcertainworkers<br />
Sometimes used to crush strikes!<br />
The Taft—HartleyAct called for a 60<br />
day “<br />
—off period” before a strike<br />
23 A method of settling labor disputes by<br />
using an impartialthird party<br />
25 Check_: employer collects union dues<br />
26 Founder of American Federationof Labor<br />
28 Temporaryor permanent staff reductions<br />
30 Government measures!<br />
33 When a “work—to—rule” occurs, union<br />
members are _____ to do their jobs<br />
38 An<br />
23<br />
24<br />
27<br />
29<br />
31<br />
Goxnpers’ union (abbr.)<br />
An organized refusal to buy goods from<br />
a company in bad union standing<br />
Injunctionssometimesorder unions to<br />
____ pickets from a struck plant<br />
A tag showing that an item was made by<br />
union labor is a “union _____<br />
Often the main issue in labor disputes<br />
“ shop” hires all workers<br />
40 A complaintagainst management<br />
41 An agreementbetween union & employers<br />
42 Collar or “New Deal Eagle”!<br />
43 Seamen’sUnion (abbr.)<br />
DOWN<br />
32<br />
33<br />
34<br />
35<br />
Non—officers in a union are ‘.......& file”<br />
A — steward<br />
Unions_ to accept or reject an offer<br />
Labor leader and five—timepresidential<br />
candidateon the <strong>Social</strong>istticket<br />
Industrialunion formed in 1935 (abbr.)<br />
Union at Ford, GM, or Chrysler (abbr.)<br />
2 Negotiatingto reach an agreement<br />
National Labor Union (abbr.)<br />
“<br />
—<br />
—<br />
DOG
I - ___<br />
The Dreyfus World of Finance Puzzle by Charles Barry Townsend<br />
This month’s puzik uses the names of worldwide business corporations that were in the news in the fourth quarter of 1988. Below are words<br />
grouped according to iheir length and listed in alphabetical order. Th solve our puzzle, you must use these words to fill in the missing words in our<br />
puzzle grid. When writing in yout answers, drop any spaces between words and any punctuation. Example: You would write WAL-MART as<br />
WALMAKI: You’ll find the completed answer to this puzzle on the back panel of this newsletter.<br />
3 Letter words<br />
At&T<br />
(AF<br />
(.TE<br />
M(:A<br />
NIC<br />
NWA<br />
l’SA<br />
SAS<br />
5Lettc words<br />
Al ARt<br />
EPSON<br />
HUFFY<br />
HYATT<br />
IORAL<br />
I OTLIS<br />
MOBIl.<br />
I )MI( .A<br />
l’RIAM<br />
TON KA<br />
7 Letter words<br />
(ARtIER<br />
t)AtAK IV<br />
(,REYCOM<br />
.MAkr WAL<br />
9 Letter words<br />
KILL BIASS<br />
KRUNSwI(:K<br />
EQUITY (iii<br />
MILK 501:1<br />
SIEELCASI<br />
0<br />
4 Letter words<br />
AVIS<br />
AVON<br />
BASE<br />
IPYX<br />
Ftill<br />
()t.IN<br />
liME<br />
6 Letter words<br />
AKM°III ’<br />
LAKAIT<br />
MOt .51)N<br />
REVLON<br />
St I/U KI<br />
iIMKIN<br />
YAMA IIA<br />
ZENItH<br />
8 Letter words<br />
01.1<br />
t’ENNi OIl.<br />
50 1 II :UYS<br />
I XAS MR<br />
TY;o lOYS<br />
tO Letter words<br />
ASI lION -iA IL<br />
(:RA/y 11)1)11<br />
I lEVI IN (iKUt P<br />
hOllY I-ARMS<br />
SCOTT (<br />
I’Al’El
QUESTIONBANK<br />
UNITII<br />
(1) A nationalprogram, of freehousingfortheagedpooris established.The<br />
programis paid for by an increasein the incometax. Theseactions<br />
promoteone economicgoal,butworkagainstanother.Specifically, these<br />
actionsarelikelyto<br />
1) reducefreedombutpromotequity<br />
2) reduc equitybutpromotefficiency<br />
3) reducestabilitybutpromotegrowth<br />
4) reducesecuritybutpromotefficiency<br />
(2) Unexpected inflationismostlikelyto benefit<br />
1) personslivingon fixedpensions<br />
2) lifeinsurancepolicyholders<br />
3) savingsbankdepositors<br />
4) peoplewhoowemoney<br />
(3) Iffromtimeto timetotalspendingfallsshortof productive capacity,the<br />
rateof growthof theeconomyovera longperiodwillbe<br />
1) higherbecauseproduction willbe concentrated on necessarygoods<br />
ratherthanluxuries<br />
2) lowerbecauseof a heavierrelianceon the raw materialsof<br />
foreigncountries<br />
3) higherbecauseinefficient plants,equipment, andlaborno longer<br />
needbe employed<br />
4) lowerbecausesomeproductive resourceswillnotbe fully<br />
employed<br />
(4) “Americans area mixed—upeople.Everyoneknowsthatbaseballis farless<br />
necessarythanfoodand steel. Yet theypayballplayersa lotmorethan<br />
farmersandsteelworkers.” Why?<br />
1) Theemployersof theballplayersaremonopolists<br />
2) Ballplayersarereallyentertainers ratherthanproducers<br />
3) Therearefewerprofessional ballplayersthanfarmersor<br />
steelworkers<br />
4) Goodballplayersarescarcecomparedto thedemandfortheir<br />
services<br />
(5) If thegovernmentwereto levya taxof onedollaron everypairof pants<br />
sold,whichof thefollowingwouldmostlikelyresult?<br />
1) Supplierswouldsellmoreandchargea highprice<br />
2) Consumerswouldpaya higherpriceforpantsandprobablybuya<br />
smallerquantity<br />
3) Consumerswouldpaya higherpriceandas a resultsuppliers<br />
wouldmakelargerprofits<br />
4) Supplierswouldincreasethequantitysoldinordertomakeup<br />
forthetaxespaidto thegovernment
(6) Businessfirmswishto selltheirproductsat highprices.Households wish<br />
to buy productsat low prices. In a marketeconomythis conflictof<br />
Interests<br />
1) is resolvedby competitive markets<br />
2) is resolvedby governmentintervention<br />
3) is resolvedin favorof businessinceallhouseholdheadsare<br />
membersof firms<br />
4) doesnotexist;thereis reallyno conflictof interestbetween<br />
households andfirms<br />
(7) Thespecialization of laborresultsin<br />
1) increasedpriceinflation<br />
2) lessoutputperhourworked<br />
3) moreeconomicinterdependence<br />
4) moreequaldistribution of income<br />
(8) Of thefollowing, theprincipleof diminishing returnsis bestillustrated<br />
by<br />
1) anydeclinein theaveragerateof profit<br />
2) thedeclinein personalincomeas workersage<br />
3 smallfirmsbeingdrivenoutof businessby largefirms<br />
4 a slowingrateof increasein outputas farmersaddincreasing<br />
amountsof fertilizer to theirland<br />
(9) The rightto joina unionandelectrepresentatives to negotiatewiththe<br />
employeris referredto as<br />
1) a closedshop<br />
2 thesenioritysystem<br />
3 collective bargaining<br />
4) rightto worklegislation<br />
(10)Comon stocks,limitedliability, andunlimitedlifearecharacteristic of<br />
1) proprietorships<br />
2) corporations<br />
3) partnerships<br />
4) cartels<br />
(11)Oneof thereasonsa government mightreducetaxesis to<br />
1) slowdowntherateof inflation<br />
2) slowdowntherapidrisein interestrates<br />
3) increaseconsumerspendingandstimulatetheeconomy<br />
4) helpfinancespaceexploration andtripsto themoon<br />
(12)Whentheeconomybeginsa rapiddownturn,thepartof totalspendingthat<br />
changesby thelargestpercentis<br />
1) businesspendingon factories, machinery,andinventories<br />
2) stateandlocalgovernment spendingon allactivities<br />
3) spendingby familieson consumergoodsandservices<br />
4) businesspendingon wagesandsalaries
(13)Whichoneof thefollowingwouldusuallyreduceconsumerspending?<br />
1) a declineinconsumerincomes<br />
2) a reductionin personalincometaxrates<br />
3) an expectation thatpriceswillsoonrise<br />
4) Increasedgovernment paymentsto individuals<br />
(14)Whencommercial banksincreasetheirloansto businesses andconsumers, the<br />
resultis<br />
1) a decreasein thespendingpowerof consumersandbusinesses<br />
2) an increaseingovernment controlovertheeconomy<br />
3) an increasein thebanks’excessreserves<br />
4) an increasein thenation’smoneysupply<br />
(15)Ina marketeconomyhighwagesdependlargelyupon<br />
1) minimumwagelaws<br />
2) actionsof government<br />
3) highoutputperworker<br />
4) sociallyresponsible businessleaders<br />
(16)Governmentpoliciesdesignedto fostereconomicgrowthby encouraging<br />
greaterconsumption wouldprobablymeetwiththe greatestoppositionfrom<br />
whichgroup?<br />
1) laborleaders<br />
2) businessexecutives<br />
3 militaryleaders<br />
4 environmentalists<br />
(17)Whichstatementconcerning businessenterprisein theU.S.is an opinion?<br />
1) Thecorporation is an importantformof businessorganization<br />
2) Somecompaniescontrolallphasesof production fromthe<br />
acquisition of rawmaterialsto thefinalsaleof theproduct<br />
3) Monopoliestendto eliminatetheneedforpricecompetition<br />
4) Large—scale producersin an industryofferbetterpersonal<br />
servicesthando smallscaleproducers<br />
(18)IntheU.S.,whichGovernment actionto dealwitheconomicdepression would<br />
mostlikelybe favoredby largecorporations?<br />
1) establishing a Federalpublicworksprogram<br />
2) reducingthesupplyof moneyandcredit<br />
3) a Government programto helpdealwithrecession<br />
4) raisingtheminimumwage<br />
(19)Unemployment insurance, publicservicejobs,welfarepayments,andtax<br />
rebatesallmightlogicallybe a partof<br />
1) recentcontractdemandsof laborunions<br />
2) an anti—inflation plansponsoredby Congress<br />
3) a Government programto helpdealwithrecession<br />
4) a proposalby Industryto decreaseGovernmentinvolvement in the<br />
economy
(20)In the U.S.,governmenthas grantedtax creditsfor energyconservation<br />
measuresandhasleviedtaxeson alcoholicbeveragesandcigarettes.These<br />
provisions areevidencethattaxation<br />
1) affectsonlypoorpeople<br />
2) canbe usedto tryto influencepeople’sbehavior<br />
3) hasbecomeso complicated thattaxlawscannotbe enforced<br />
4) violatesthelibertiesguaranteed by theConstitution<br />
(21)An Illustration of the idea of redistributing wealththroughtransfer<br />
paymentsis theU.S.FederalGovernment payinga<br />
1) monthlycheckto a <strong>Social</strong>Securityrecipient<br />
2) salarycheckto a militaryofficeron activeduty<br />
3) billsubmittedby a supplierof officeequipment<br />
4) billfortravelexpensesubmittedby a congressional aide<br />
(22)Oneadvantageof a corporation overotherformsof businessorganization in<br />
theU.S.economyis thata corporation can<br />
1) acquirelargeamountsof capital<br />
2) operateas a monopoly<br />
3) operatewithoutbeingtaxed<br />
4) preventstrikes<br />
(23)Whichisan accuratestatementaboutadvertising in U.S.society?<br />
1) Advertising hashadlittl effecton theeconomyof theU.S.<br />
2) Thegreatestpercentage of advertising is doneby thewholesaler<br />
ratherthanthemanufacturer<br />
3) Therearenotgovernment regulations relatingto advertising<br />
4) Themassmediaindustryandtheadvertising industryhavebecome<br />
increasingly interdependent<br />
(24)“In our economicsystem,specialization in industryservesan important<br />
function.”The best argumentto supportthis statementis that<br />
specialization<br />
1) utilizesalltheavailablelaborsupply<br />
2) promotesindividual pridein accomplishment<br />
3) encourages efficientproduction throughdivisionof labor<br />
4) causesthecostof production to risein thelongrun<br />
(25)Whichbestaccountsfor the factthat in the U.S. in 1947,blue-collar<br />
workersoutnumberedwhite-collarworkers,whereasby 1985 white-collar<br />
workersoutnumbered blue-collar workers?<br />
1) White collarworkersreceivedhigherwages than blue—collar<br />
workers<br />
2) Theincreasein thenumberof collegegraduatesledto an<br />
increasein theneedforwhite-collar workers
3) Manyjobshavebeenreclassified fromblue-collar to white-collar<br />
status<br />
4) Technological advanceshaveincreasedthe needforwhite-collar<br />
workers<br />
(26)Concerning thetrendinwagescalesin theU.S.,it ismostnearlyaccurate<br />
to statethatwagesare<br />
1) decreasing as a resultof automation<br />
2) decreasing as a resultof theincreasein thelaborsupply -<br />
3) increasing as a resultof greaterproductivity perworker<br />
4) increasing as a resultof restrictions on immigration<br />
(27)Whichhas been a resultof the increasedapplicationof scienceand<br />
technology to farmingin theU.S.?<br />
1) rapidexhaustion of thesoil<br />
2) overalldeclinein farmprices<br />
3) increaseddemandforfarmlaborers<br />
4) replacement of smallfarmersby corporatefarming<br />
(28)The most validgeneralization concerningU.S. farm productsduringthe<br />
1980’sis that<br />
1) the U.S. Departmentof Agricultureis storingan increasing<br />
amountof basicfarmproducts<br />
2) thevolumeof farmproductsbeingexportedhas increasedto meet<br />
theworldwidedemandforfood<br />
3) a steadydeclinein farmpriceshaspreventedfarmersfrom<br />
keepingpacewiththeincreasedcostof living<br />
4) theincreasein thenumberof farmersin theU.S.hascauseda<br />
surplusof farmproducts<br />
(29)A majordifference betweenfarmersandindustrial producersis the<br />
1) existenceof overheadcostsfortheindustrialists<br />
2 needforcreditby thefarmerbutnotby theindustrialist<br />
3 needforskilledlaborin thefactorybutnoton thefarm<br />
4) difficulty of adjustingproduction to meetmarketdemand<br />
(30)Withrespecto agriculture in theU.S.,whichof thefollowingis a basic<br />
causeof theotherthree<br />
1) paritypricingof farmproducts<br />
2) scientific andmechanized methodsof farming<br />
3) overproduction of farmproducts<br />
4) declinein farmpopulation<br />
*(31)Local governments spendmostof themoneytheytakein for<br />
1) fireandpoliceprotection<br />
2) streetsandhighways<br />
3) parksandrecreation<br />
4) education
*(32)ThemainreasonwhyAmericanfarmersusetractor-drawn farmmachinery<br />
Insteadof horsesis that<br />
1 Tractorslastlongerthanhorses<br />
2 Tractorsgivemoreoutputperdollar<br />
3 Tractorsusuallygo fasterthanhorses<br />
4) Horsesusuallycannotworka wholeday<br />
*(33)Mr.Joneshassavedsomemoneyandusedit to buysharesof stockin a<br />
richmanufacturing company.He and otherswho haveboughtstockown the<br />
company.In electingcompanydirectors,theyhaveonevoteforeachshare<br />
of stocktheyown. Thecompanyis a<br />
1) partnership<br />
2) proprietorship<br />
3) corporation<br />
4) cooperative<br />
*(34)Mostof themoneythatAmericanbusinesses receiveby sellingtheir<br />
productsor servicesis paidas<br />
1) profitsto theownersof thebusinesses<br />
2) wagesandsalariesto employees<br />
3) rentto propertyowners<br />
4) intereston debts<br />
*(35)Whjch<br />
oneof thefollowingis likelyto causemorepeopleto be outof<br />
work?<br />
1) a decreasein taxes<br />
2) an increasein consumerspending<br />
3) a decreasein businesspending<br />
4) an increasein government spending<br />
*(36)Whatis therewardof thosewhotaketheinvestment risksin an enterprise?<br />
1) salaries<br />
2) wages<br />
3) profits<br />
4) rents<br />
*(37)Onwhichissuewoulda steelworkers’ unionanda largesteelcorporation<br />
mostprobablyagree?<br />
1) theextentof automationin theproduction of steel<br />
2) thesalariespaidto unskilledsteelworkers<br />
3) thenecessityforlimitson steelimports<br />
4) thelengthof theworkdayin thesteelplants<br />
*(38)During thelasttenyears,onemajorchangein thelaborforcein theU.S.<br />
hasbeenthe<br />
1) increasein thenumberof womenwhoworkoutsidethehome<br />
2) increasein jobopportunities forunskilledworkers<br />
3) decreasein thenumberof peopl employedby serviceindustries<br />
4) decreasein thenumberof collegegraduatesenteringthejob<br />
market
*(39)Durjng the20thcentury,laborunionsin theU.S.weremoststrengthened by<br />
legislation whichguaranteed workers<br />
1) therightto boycott<br />
2) therightto bargaincollectively<br />
3) adequateretirement pensions<br />
4) a shareof companyprofits<br />
*(40)Arecentmajorproblemof laborin theU.S.hasbeen<br />
1) recognition of theprinciplethatunionsarelawful<br />
2) exIstenceof a hardcoreof unemployed unskilledworkers<br />
3) government intervention on thesideof managementin labor<br />
disputes<br />
4) competitionfromthe influxof Europeanrefugeesfor available<br />
jobs<br />
*(41)IntheU.S.mostlabor—management agreements arereachedthroughthe<br />
1) serviceof theNationalLaborRelationsBoard<br />
2) processof collective bargaining<br />
3) useof strikesandlockouts<br />
4) effortsof arbitrators<br />
*(42)Whichsituationrepresented a victoryforthelaborunionmovementin the<br />
U.S.?<br />
1) Unionsgainedtherightto bargainwithmanagement<br />
2 Theclosedshopwasoutlawed<br />
3 Right—to-work lawswereusedin labordisputes<br />
*(43)Members of laborunionsoftenfindthatthebenefitsof wageincreasesare<br />
offsetby<br />
1) a lossof seniorityrights<br />
2) an increasein uniondues<br />
3) an increaseinworkinghours<br />
4) a risein prices<br />
*(44)Thebasiccharacteristic of a monopolyis thatit<br />
1) providesgoodsbutnotservices<br />
2) mustcompetewithmanyotherbusinesses<br />
3) is controlled by thegovernment<br />
4) controlsmarketsandprices<br />
*(45)Oneof thereasonsa government mightreducetaxesis to<br />
1) slowdowntherateof inflation<br />
2) slowdowntherapidrisein interestrates<br />
3) helpfinancespaceexploration andtripsto themoon<br />
4) increaseconsumerspendingandstimulatetheeconomy
*(46)Ifpractically allourworkershavejobsandourindustries areoperating<br />
at fullcapacity,but we want to increasethe productionof houseswhat<br />
mustwe do?<br />
1) decreasetheproduction of someothergoods<br />
2) putmoremoneyIntocirculation<br />
3) getpeopleinterested in sellingtheirhouses<br />
4) importbuildingmaterialfromforeigncountries<br />
*(47)If.we wereimporting mostof ourtransistor radiosfromJapan,an Increase<br />
Inthetariffon alltransistor radiosimportedintotheU.S.would<br />
probably<br />
1) makeno differenceto us becausewe couldget transistoradios<br />
fromothercountries<br />
2) increasethetotalnumberof jobsIntheeconomy<br />
3) makeus paymorefortransistor radios<br />
4) maketransistor radiosmoreimportanto us,becausewe would<br />
probablyhaveto getalongwithou them<br />
(48)Thefinalresultof a largedecreasein government spendingfornational<br />
defensewouldprobablybe<br />
1) muchunemployment in non—defense industries<br />
2) increasedproduction of non-defense goods<br />
3) an overalleconomicboomin thenation<br />
4) an increasein priceswithinthenation<br />
(49)“Unionsin the U.S.must put themselvesin the forefrontof a national<br />
effor to re-tooltheirworkersforthejobsof thefuture.”Theauthorof<br />
thisstatementwouldmostlikelyencouragelaborunionsto<br />
1) becomeinternational ratherthannationalgroups<br />
2) continueto stres salariesandbenefitsas theirmainconcerns<br />
3) seekto providetheirmemberswithtrainingto developnew<br />
marketableskills<br />
4) insis thatbusinesses transferunskilledjobsto theirfactories<br />
inforeigncountries
1) Processof negotiating a labor—<br />
management contract<br />
2) Processinwhicha neutralthird<br />
partyoffersspecifictermsto<br />
settlea contractdispute<br />
3) Moneypaidby a non-unionmemberto<br />
a unionforservicesrendered<br />
MATCHING<br />
4) Extrastheworkerreceivesfrom<br />
management e.g.vacation,sickleave<br />
5) A courtorder,sometimesusedto stop<br />
a strike<br />
6) A workstoppage<br />
7) A collective of worker seekingto<br />
improvepay,fringebenefits,etc.<br />
8) Processwherea neutralthirdparty<br />
listensto argumentsin a labor—<br />
management disputeandsuggestsa solution<br />
9) Incertainstates,youcannotbe forcedto<br />
joina union<br />
10) Amountof timein serviceby a workerfor<br />
a givencompany<br />
a. union<br />
b. strike<br />
c. collective<br />
bargaining<br />
d. fringebenefits -<br />
e. arbitration<br />
f. mediation<br />
g. seniority<br />
h. agencyfee<br />
i. injunction<br />
j. rightto worklaws
MATCHING<br />
1) A certificate representing partial<br />
ownershipof a corporation<br />
2) An association of twoor morepeople<br />
in -order to runa business<br />
3) Theefficiency withwhichgoodsand<br />
servicesareproduced<br />
4) A formof businessorganization inwhich<br />
goodsandservicesareproduced<br />
5) A paymento a stockholder<br />
6) A certificate<br />
promisingto paythe<br />
investormoneyon a certaindate<br />
7) An individually ownedbusiness<br />
8) A processwhenmechanicalor<br />
electronic devicestaketheplaceof<br />
humanservices<br />
a. automation<br />
b. conmonstock<br />
c. productivity<br />
d. proprietorship<br />
e. partnership<br />
f. corporation<br />
g. corporatebond<br />
h. dividend
ESSAYQUESTIONS<br />
1) BIgbusinesshasoccupieda significant placein theaffairsof theUnited<br />
Statesforover100years.<br />
a. ExplainwhytheperiodaftertheCivilWarwasmarkedby great<br />
industrial<br />
expansion.<br />
b. Discusstwospecificproblemscreatedby theriseof bigbusiness<br />
c. Showhowattemptsweremadeby groupsor theFederalgovernment<br />
to solveeachof theproblemsgiveninanswerto partB.<br />
2) Sincethe1790’s,theUnitedStateshaschangedfroma nationof farmersto<br />
a highlyindustrialized nation.Thisdevelopmenthas createdchangesin<br />
theUnitedStates.Someof theareasinwhichchangehasoccurredinclude:<br />
— Population distribution<br />
— Immigration<br />
- Standardof living<br />
— Agriculture<br />
— Businesstructures<br />
a. Selectthreeof the areaslistedabove. For eachone chosen,<br />
showhow industrialization broughtaboutchangein thatareaof<br />
UnitedStatessociety.<br />
b. For one of the changesidentifiedin answerto a, discussthe<br />
exten to whichthischangehashada positiveor negativeffect<br />
on UnitedStatessociety.<br />
3) Thepositionor statusof workersin theUnitedStateshasbeeninfluenced<br />
by a widevarietyof factors.<br />
Factors<br />
— Immigration<br />
— Laborunions<br />
— Nationalor international crises<br />
action<br />
— Government<br />
- Technology<br />
Choosethreefactorsfromthe listabove. Foreachone chosen,showhow<br />
that factorhas influencedthe economicand/orsocialand/orpolitical<br />
positionof workersin the UnitedStates. Use specificinformationto<br />
supportyourdiscussion of eachfactor.<br />
*4) Discusshow laborunionshavehelpedto improveconditionsforworkersin<br />
theUnitedStates.
5) Laborunionmembershiphasdeclinedin theUnitedStatesoverthe past30<br />
years.Discusswhyyouthinkthishashappened.Usethefollowingfactors<br />
as a guideinyouranswer.<br />
— Government policies<br />
— Thechangingnatureof oureconomy<br />
- WomenIn theworkforce<br />
— Competition fromforeignmarkets/nations<br />
to theUnitedStates<br />
— Immigration<br />
— Newtechnology<br />
— Laborunionmanagement<br />
*6) Describethe basicdifferencesin ownershipof the threebasicformsof<br />
businessorganization.<br />
— Proprietorship<br />
— Partnership<br />
- Corporation<br />
Discussone majoradvantageand one majordisadvantage of each of the<br />
above.<br />
7) In 1880,approximately 70%of theAmericanworkforcewereengagedin some<br />
formof agriculture.In 1980,approximately 7% of the work forcewas<br />
engagedinagriculture.<br />
Describeand discusswhy you thinkthis happened.Use the following<br />
factorsas a guideforyouranswer:<br />
— Newtechnology<br />
— Scientific discoveries<br />
— Government policies<br />
— Urbanization<br />
— WorldPopulation growth<br />
* Denotesquestionsappropriate forgeneralstudents<br />
-
Page 30<br />
jII. Macroeconomics: Measuring the Economy: money unemployment,<br />
Ski1ls<br />
distribution of income, inflation, taxation, and growth.<br />
(1) Concept of inflation<br />
(2) Working families are needed to meet economic obligations<br />
(3) Effects of population on an economy<br />
(4) Different forms of competition within a society<br />
(5) Leisure activities are increased by a higher standard<br />
of living<br />
(6) Concept of speculation (land and stocks)<br />
(7) Stock market<br />
(8) Business Cycle<br />
(9) Keynesian economics (new deal)<br />
(10) Supply side theory (trickle down)<br />
(11) Tax policy and deficit spending<br />
(12) Revenue sharing<br />
(13) Tax policy and deficit spending<br />
(14) Reagan New Tax Law (flat tax)<br />
(15) Government & private land use policy can affect the<br />
economy<br />
(16) Government agencies affect economic growth —<br />
ex: (NRA-FDR)<br />
t17) War creates economic expansion<br />
(18) Guns vs. butter concepts<br />
(19) Over the years the American Gov’t. has gained greater<br />
control over the economy — Ex.: WWI Wilson
Knowledge OBJ<br />
Page 31<br />
(1) Understand the basics — the economic system of the U.S.<br />
(2)<br />
(3)<br />
(4)<br />
(5)<br />
(6)<br />
(7)<br />
(8)<br />
(9)<br />
(10)<br />
(11)<br />
•‘ (12)<br />
(13)<br />
and how it operates<br />
What.fs the G.N.P. and its reporting problems<br />
Analyze production possibilities curves<br />
How do we use income<br />
Be able to diagram the U.S. economy<br />
Analyze Macroeconomic equilibrium<br />
Discuss how income is distributed by industry<br />
Describe functional and personal distribution of income<br />
Analyze Lorenz Curve of income distribution<br />
Important factors in choosing a career<br />
Characteristics of the poor<br />
Causes of poverty and probable solutions<br />
Analyze the economic, social, and personal costs of<br />
unemployment<br />
(14) How can government help retard the effects of<br />
(15)<br />
(16)<br />
.( 17)<br />
(18)<br />
119)<br />
(20)<br />
(21)<br />
(22)<br />
(23)<br />
unemployment<br />
How do we determine the unemployment rate<br />
Different types of unemployment<br />
What people benefit from inflation<br />
What people are hurt by inflation<br />
How do we figure out the Consumer Price Index<br />
How is the inflation rate figured<br />
Discuss ways of controlling inflation<br />
Describe the 3 main functions of money<br />
Analyze the demand and supply of money
Page 32<br />
(24) Explain the organization and function of the Federal<br />
Reserve Bank<br />
(25) Be able to identify 3 or more kinls of non—bank<br />
financial intermediaries<br />
(26) Explain the relationships between interest rates<br />
and money demand and supply<br />
(27) Describe the effects of tight and loose monetary<br />
policies<br />
(28) Describe the effects of the reserve requirement on<br />
the supply of money<br />
(29) Identify three ways the fed. can cause the money<br />
supply to change<br />
(30) Discuss the effects of monetary policy on investments<br />
in factories, inventories, housing market and personal<br />
spending<br />
(31) Discuss tax policy<br />
(32) Describe several ways we have taxes<br />
(33) List major sources and uses of revenue for state and<br />
local government<br />
(34) Discuss numerous ways in which the tax burden is<br />
distributed<br />
(35) Distinguish between direct and indirect taxes<br />
‘(36) Define fiscal policy<br />
(37) How can we change fiscal policy<br />
(38) What is expansionary fiscal policy<br />
(39) Identify the effects of expansionary and restrictive<br />
fiscal policies on aggregate demand, unemployment,<br />
and inflation
(40)<br />
(41)<br />
(42)<br />
(43)<br />
(44)<br />
(45)<br />
(46)<br />
Page 33<br />
What type of fiscal policy promotes economic growth<br />
Describe the national debt<br />
Explain why government might use wage and price<br />
controls<br />
Skills Obi ectives<br />
(1)<br />
Identify the record of growth in G.N.P. in the U.S.<br />
List factors that contribute to economic growth<br />
How does Gov’t. encourage economic growth<br />
What are the trade—offs involved in economic growth<br />
Analyze, evaluate and make generalizations about<br />
economic information based on relevant data<br />
Unit II — Macroeconomics<br />
II — Money<br />
(A) What is money<br />
(1) History of money<br />
(2) Nature of money in the U.S. today<br />
(B) Functions of money<br />
(1) Medium of exchange<br />
(2) Store of value<br />
(3) Measure of value<br />
(C) Creation of money<br />
(1) Importance of bank loans<br />
(2) Role of government borrowing<br />
(3) Effects of changes in the money supply<br />
(D) Federal Reserve System and money control<br />
(1) History and organization of Federal Reserve<br />
(2) Reserve requirements
(3) Discounting<br />
(4) Open market operations<br />
(5) Powers of the Fed.<br />
I. Measuring the Economy<br />
$<br />
(A) Looking at the economy as a whole<br />
(B) Gross National Product (GNP)<br />
(1) Elements of GNP<br />
(2) Uses of GNP<br />
(3) Limits of GNP as a measure<br />
Page 34<br />
(C) GNP or gross per capita income does not always<br />
measure accurately<br />
(1) Many beneficial activities not included<br />
(D) Fluctuations in the Economy<br />
(1) Business Cycle<br />
(2) Causes of fluctuations<br />
(3) Effects of fluctuations<br />
(E) Other indicators of the economy
Unit III— General Projects<br />
Page 35<br />
(1) Select three items in your home, such as a TV see, a<br />
rout-h, and refrigerator. Try to express the value<br />
of each item without referring to money. If you had to<br />
trade goods and services to get one of these items, what<br />
would you trade, and in what quantities? What problems<br />
would you encounter? flow would the use of money solve<br />
the problems?<br />
(2) Pretend that you, your family, and your friends live in<br />
a society without money . You use barter to exchange<br />
goods and services, but you soon realize that this is<br />
difficult and inefficient. You decide to use a commodity<br />
• commonly used by Americans as a form of money (commodj y<br />
• money). What commodity would you select? Why? To what<br />
extent would this item meet the criteria for money listed<br />
under “Charcteristics of Money” in the textbook? Why<br />
would it fail to meet some of the criteria? What problems<br />
would you have in using this item for money?<br />
(3) During World War II the soldiers in prisoner—of—war camps<br />
often used cigarettes as money . Why do you think they<br />
chose this item? How well do you think cigarettes served<br />
as money?<br />
I<br />
What problems do you think they had?<br />
(4) Since 1974, U.s. citizens have been allowed to own gold.<br />
Many people think of gold as being money , but we continue<br />
to use paper dollars, checks, and coins made of inferior<br />
metals. Why isn’t gold being widely used as money? List<br />
as many reasons as you can.<br />
•1
Page 36<br />
(5) “Money has no value unless it is backed by gold.” Discuss<br />
this statement. Do you agree or disagree? Why? Use some<br />
of the booklets published by the Federal Reserve to learn<br />
more about money and gold. For example: Our Money by<br />
James F. Tucker (Federal Reserve Bank of Richmond, 1986);<br />
The Story of Money and Money:Master or Servant ? (Federal<br />
Reserve Bank of New York, 1984).<br />
(6) Select five items that you buy quite often. Choose a recent<br />
year as a base period, and develop a price index for those<br />
items. See the textbook for instructions on developing a<br />
price index. What is the current price index for the Items?<br />
If prices are rising, Is your income keeping up?<br />
(7) List as many goods and services as you can think of that<br />
‘<br />
have risen in price in recent years, and that have affected<br />
you personally. Row might you try to protect yourself from<br />
future price increases<br />
? For example, you can try to improve<br />
your knowledge and skills and thus increase your future<br />
income. You might try to invest some of your savings in<br />
securities whose yield (rate of return) Is greater than the<br />
rate at which prices are rising.<br />
(8) ;Study the question of indexation<br />
. Give the arguments in<br />
favor of this method of dealing with inflation, and the<br />
1arguments against it. Draw your own conclusions and explain<br />
the reasons for your position on the issue.<br />
(9) To learn more about inflation go to your local library and<br />
try to find at least one book on this subject. For example,<br />
Inflation in Action by Adrian Paradis (New York: Julian
Page 37<br />
Messner, 1974) was written for secondary school students.<br />
Write a brief review of the book that you sle’t.<br />
(10) Draw graphs showing the growth rates of the USSR and the<br />
U.S. economies, and comparing their gross national<br />
products (GNPs).<br />
(11) Examine your own economic values and goals . Decide which<br />
economic system could best help you to achieve your goals<br />
and be in accord with your values. Would your goals be<br />
different if you lived in a communist or socialist economy?<br />
(12) Study the economic platforms of leading political parties<br />
in the United States. Where do they agree? Why? Where<br />
do they differ? Why? What do they illustrate about our<br />
economic ? system<br />
(13) Read a short book on the U.S. economy, such as Steven D.<br />
Lunt’s Free Enterprise in America (New York: Franklin Watts,<br />
1985, 104 pages). Write a brief review of the book,<br />
summarizing the main points about our economic system.<br />
(14) Make a list of the depository institutions in your area.<br />
Visit several of them and obtain their literature. Write a<br />
brief description of the services offered by each. Categorize<br />
each as being a commercial bank, savings bank (“thrift<br />
institution”)., or whatever. How might you make use of<br />
I<br />
these institutions? How do they serve the community?<br />
(15) Think about establishing a savings plan for yourself. Study<br />
the different ways of saving through depository institutions.<br />
List and describe the various types of accounts and savings<br />
certificates that are available. Compare and contrast them.<br />
What are the advantages and disadvantages of each type?<br />
Decide which type (r types) you would like to use, and<br />
explain your choice.
Page 38<br />
(16) Some day you ]. vii probably need a checking account .<br />
Study the different types of checking accounts or check<br />
able deposit accounts that are available in the depository<br />
institutions in your area. How are they similar? How do<br />
they differ? Which type would best meet your personal<br />
needs?<br />
(17) After reading the textbook chapter on banking, arrange to<br />
visit and interview officials of several banks. Prepare<br />
a list of specific questions, asking them to explain such<br />
things as the changes taking place in our banking system ,<br />
how banks affect the local economy, what local factors<br />
affect the banks, what national problems affect banking,<br />
etc. Write a report on your findings.<br />
(la) If you are thinking of setting up your own business, or if<br />
you might need a consumer loan , examine the possibilities<br />
of obtaining credit from the various financial institutions<br />
in your area. Compare the terms, conditions, and interest<br />
rates. Try to explain any differences that you find, and<br />
then decide which institution would be the best source of<br />
credit for you.<br />
(19) “The Federal Reserve has too much power and independence in<br />
setting monetary policy.” Study the Federal Reserve System<br />
and decide whether you agree or disagree with this statement.<br />
Give the arguments in support of the statement, and the<br />
arguments against it. Explain your own conclusion. You<br />
might want to refer to books on the Federal Reserve, such<br />
as Control1i<br />
Money:The Federal Reserve and Its Critics
Page 39<br />
by Ralph C. Bryant (Washington, D.C.:The Brookings<br />
Institution, 1983). To put the Federal Reserve in an<br />
historical perspective, read Chapter 8, “Money, Banking<br />
and the Price Level,” in Economic Issues and the American<br />
Past by Roger LeRoy Miller, Gary M. Walton, and Robert L.<br />
Sexton (New York:Harper 6 Row, 1985).<br />
(20) If the federal government or the Federal Reserve takes<br />
actions to save a huge bank (such ‘as Continental Illinois)<br />
from failure, should it not also do the same for small<br />
banks? Study this issue and, give reasons why, or why not.<br />
You might want to do case studies of specific bank failures ,<br />
using such books as The Failure of the Franklin National<br />
Bank by Joan E. Spero (New York:Coluinbia University Press,<br />
1980) or BeUI Up:The Col1ap of Penn Square Bank by<br />
Phillip L. Zweig (New York:Crown Publishers, 1985).<br />
(21) To supplement the banking chapter in your text, read Part 3,<br />
“The Art of Central Banking,” in Principles of Money,<br />
Banking, and Financial Markets , 5th edition, by Lawrence<br />
S. Ritter and William L. Silber (New York:Harper & Row, 1986.<br />
(22) List the various ways in which you see government playing a<br />
role in your area. (Don’t forget that your school is<br />
probably a government—owned institution.) In what ways is<br />
government affecting private enterprise? Bow are you person<br />
ally affected by government activities? What does this illus<br />
trate about government’s role in our economy?<br />
(23) List the goods and services that you commonly purchase.<br />
Check those that you consider to be poor in quality or over<br />
priced. What can you, as a consumer, do to change this
Page 40<br />
situation? What can you do directly, such as discussing<br />
the problem with the sellers? Where can you go to get<br />
help if your direct dealings with the sellers do not pro<br />
vide satisfaction?<br />
(24) The CNP is a measure of goods and services produced in the<br />
United States during a year. If you sold goods last year<br />
or if you worked and received money in payment, your income<br />
was part of the GNP. Try to calculate the contribution of<br />
your family to our GNP last year. (Do not include the<br />
value of goods and services that were not sold, such as your<br />
efforts in mowing your own lawn or taking care of a younger<br />
brother or sister if you were not paid to do so.)<br />
(25) You and others in your family probably produce goods and<br />
services that are not counted in the CNP. Try to identify<br />
these, such as the preparation of meals, making repairs in<br />
your house, cleaning or decorating your apartment, etc.<br />
What would it cost to have these things done by someone else?<br />
(That is, what is the estimated market value of these kinds<br />
of services?) How much would your “non—market production”<br />
add to the GNP if such production were included? Do you<br />
;think it ought to be included in the GNP? Why, or why not?<br />
(26) Select a foreign country that interests you. Using such<br />
sourcës as The World Almanac & Book of Facts , learn about<br />
its economy. How does its GNP compare with the United<br />
States GNP? What explains the difference? How does this<br />
nation compare with the United States in terms of standard<br />
of living? Military strength?<br />
a
Page 41<br />
(27) Imagine that your own area (your county, city, town or<br />
village) is a nation. How would you develop a “GNP” for<br />
your area? Use local newspapers, your own observations,<br />
and information from local government offices (such as a<br />
department of commerce or labor). Major firms in your area<br />
(such as the electric power company) might have information<br />
on the regional economy. Also try the chamber of commerce<br />
or other business organizations. Does the economy of your<br />
area appear to be growing? Declining? Why? What is the<br />
evidence of this trend? How can economic aggregates help<br />
governments and businesses in their planning?<br />
(28) Interview your grandparents or other people who lived<br />
through the Great Depression of the 1930s. Ask them to<br />
describe the depression and to compare life today with life<br />
during that period. Learn how young people in particular<br />
were affected by the depression. How was the economy as a<br />
whole affected?<br />
(29) Some industries are severely affected by business downturns<br />
while others have few problems because of a slump (recession).<br />
Consider the occupation or business that you plan to enter.<br />
How might it be affected by the business cycle ? How can a<br />
knowledge of business cycles help you to plan to cope with<br />
them?<br />
(30) Select a product that interests you, such as personal<br />
computers, automobiles, or television. Do research on the<br />
development of this item and learn how it affected our<br />
economy. How did it lead to the development of other new
Page 42<br />
products and businesses? (For example, the automobile<br />
led to such things as gasoline stations, motels, and<br />
drive—in movies. Television led to the VCR.) How have<br />
ja1 techno1o develop nts in general affected our economic<br />
? growth<br />
(31) Consider what rate of interest you would accept if you were<br />
lending money to others. (Remember that if you buy a U.S.<br />
Savings Bond or a corporate bond you are lending money to<br />
the government or to the corporation.) What economic<br />
factors will affect the rate of interest you can get? What<br />
has been happening to interest rates lately? Have they been<br />
going up or down? How can this trend be explained?<br />
(32) If you have money in a savings account or some other interest—<br />
bearing deposit, figure out the real rate of interest you are<br />
getting. (That is, compare the rate you are getting with the<br />
rate of inflation and adjust the rate accordingly.)<br />
,(33) List some expensive items that you might buy in the future —<br />
things for which you will probably have to borrow money or<br />
buy on . credit Which of these items will help to pay for<br />
themselves? (For example, a washing machine will reduce<br />
laundry bills and thus help to pay for Itself.) Which of<br />
the items will not help to pay for themselves? (A new<br />
stereo record and tape player, for example.) How might<br />
these considerations affect your decision to borrow and<br />
how much Interest to pay?<br />
(34) Interview several business people to obtain their views on<br />
the role of profits in our economy. Do they think that<br />
profits are too high? Too low? Ask the same questions of
Page 43<br />
labor leaders. Do their views differ from the views of<br />
business people? If so, how and why?<br />
(35) Try to identify the vernment services that you and your<br />
family use. List these under three headings: Federal;<br />
State; Local. Do you think that any of these services<br />
ought to be privately produced? Why, or why not? Are<br />
there any services that you think government ought to be<br />
providing in addition to those you listed? What are they?<br />
Why should they be provided by government?<br />
(36) What are some of the major problems in your area — problems<br />
being discussed in the news media? What are the economic<br />
implications of thse problems? (For example, why is crime<br />
an economic problem as well as a social problem?) What is<br />
government’s role in dealing with these problems? What are<br />
people saying that government ought to do about the problems?<br />
Who should pay for the costs of dealing with the problems?<br />
How?<br />
(37) Consider your own income (if any) and your expenditures.<br />
What taxes do you pay directly? What taxes do you pay<br />
indirectly? Can you identify any “hidden taxes” that you<br />
pay? (When you pay your income tax or a sales tax on an<br />
item you have purchased It Is quite evident that the tax<br />
1is affecting you; but some taxes are Included in the price<br />
of the product or service and thus may not be evident to<br />
you.) Do you think that the taxes you pay are fair? Explain<br />
your answer.<br />
(38) Assume that your state and local governments have decied to<br />
stop providing police protection, fire fighters, schools,
Page 44<br />
road repair, etc. How would you be able to obtain these<br />
services? Who would pay for them? How? What would be<br />
the impact of having these services moved from the public<br />
sector to the private sector?<br />
(39) Consider this statement: “<strong>School</strong> taxes should be paid only<br />
by people who have children in the public schools.” What<br />
arguments could you give to support the statement? What<br />
arguments could you give to oppose it? What theory of<br />
taxation does the statement seem to support?<br />
(40) Assume that your state badly needs more revenue to meet the<br />
needs of the people, and that the state government has<br />
decided to raise the revenue by imposing excise taxes .<br />
What goods and services should they tax? Why? What would<br />
be the effect of taxes on these items? (Consider such<br />
things as the effect of the tax on the price of the item,<br />
how poor people might be affected, the elasticity of demand<br />
for the item, etc.)<br />
(41) Obtain information on your state, county or local budget<br />
and on the tax systems used by these governments. What are<br />
the major sources of revenue for each government? What are<br />
the major expenditures? Which theories of taxation are<br />
they using? Evaluate the budgets and the tax systems. Do<br />
4you think they are economically sound? Are they fair?<br />
What changes, if any, would you suggest they make in their<br />
budgets and tax systems?<br />
(42) Study the issue of government regulation of business . Is<br />
there too much or too little? Give the arguments on both
Page 45.<br />
sides, and then draw your own conclusion. For a brief<br />
discussion, see “Should the Federal Government Deregulate<br />
American Business?” in Taking Sides: Clashing Views on<br />
Controversial Economic Issues by Thomas R. Swartz and<br />
Frank J. Bonello (Guilford, Conn.: The Dushkin Publishing<br />
Group, Inc., 1982), pages 74—95.<br />
(43) Some people believe that profits should be regulated by<br />
government. Examine this issue and write a paper in which<br />
you set forth both sides of the question. Then draw your<br />
own conclusions and give reasons for the position that<br />
you have taken. For an interesting discussion, giving two<br />
different views, see “Do Businesses Have Any Moral Respon<br />
sibility Beyond Making Profits,” in Taking Sides; Clashing<br />
Views on Controversial Issuej by Thomas R. Swartz and<br />
Frank J. Bonello (Guilford, Conn.:The Dushkin Publishing<br />
Group, Inc., 1982), pages 18—35.<br />
‘(44) Does your community (village, town, city, or county) have<br />
a poverty problem? If so, who is affected by this problem?<br />
What do you see as the causes of poverty in your area? What<br />
programs currently exist to deal with the problem? How are<br />
they financed? What are your proposals for dealing with<br />
poverty?<br />
4<br />
(45) “If people are unemployed or poor it is their own fault.”<br />
Discuss this statement. To what extent are the poor respon<br />
sible for their own status? To what extent are they the<br />
victims of conditions over which they have no control? What<br />
can the poor do to help themselves? What additional help,
Page 46<br />
if any, do you think they ought to receive? Who should<br />
provide this help? How should the assistance be financed?<br />
(46) Identify the health care problems in your area. Why have<br />
medical costs increased faster than the costs of most<br />
other things? What should be done about the rising costs<br />
of health care? What can you do as an individual? What<br />
are the responsibilities of the local, state, and federal<br />
government s?<br />
(47) Discrimination not only affects women, black people, and<br />
other minority groups, but harms the economy as a whole.<br />
Why is this so?<br />
(48) “If everyone had an equal income, poverty would be elimin<br />
ated.” “Equal incomes for all are not only impossible, but<br />
would be harmful.” Which of these statements would you<br />
support? Why?<br />
(49) Contact your local historical society to obtain information<br />
on the history of your town, city, or local area. What<br />
economic factors led to its founding and its growth? How<br />
and why has it changed over the years? What is its economic<br />
situation now? For guidance on studying the economy of a<br />
;region see Chapter 41, “How to Do Regional Analysis,” and<br />
Chapter 42, “Studying Your Region’s Economy,” in The<br />
4Economy of New York State , edited by Sanford D. Cordon<br />
(Cincinnati:South—Western Publishing Co., 1987).<br />
(50) What are the major economic problems of your town, city, or<br />
nearest urban area? What caused these problems? What do<br />
you think ought to be done to solve them? In addition to<br />
4
Page 47<br />
using local newspapers for information, contact state<br />
or local government agencies that are concerned with<br />
commerce, industry, or labor. A local chamber of commerce<br />
or other business organization might also have useful data.<br />
(51) Has your area been gaining or losing population<br />
? Has it<br />
been gaining or losing industry ? Are there other economic<br />
changes in evidence? How are these changes affecting your<br />
area? Will you be personally affected? In addition to<br />
information available from local and state governments and<br />
business organizations, go to the library and ask for<br />
federal government publications, such as the State and<br />
Metropolitan Area Data Book and the County and City Data<br />
Book (U.S. Government Printing Office).<br />
(52) Study the overnment of your village, town, city, or<br />
county. What economic problems does it deal with? How<br />
does it obtain revenue? Are there local problems that<br />
this government is unable to handle? Why?<br />
(53) Examine our nation’s economic goals as discussed in the<br />
textbook. Now list your own personal economic goals. To<br />
what extent are your personal goals in accord with the<br />
national goals? Do your personal goals conflict with any<br />
of the national goals? If any of our national goals are<br />
not achieved, how might you be personally affected? (For<br />
example, if our economy fails to grow, it might be harder<br />
for you to find a good job or to create your own business.)<br />
(54) Study the various ways in which the government can try to<br />
control the business cycle , such as through changes in
Page 48<br />
taxes or government spending. Which ways would have<br />
the most direct effects on you and your family? How?<br />
(55) Nobody likes to pay taxes, and we all rejoice when taxes<br />
are Cut. But suppose that the government needs to raise<br />
taxes to control inflation, to reduce the federal deficit,<br />
or to meet some urgent national need. Which tax (or taxes)<br />
would you suggest that they raise? Why?<br />
(56) What are your state’s policies toward budget deficits ?<br />
Perhaps the state legislator for your district can provide<br />
this information, or you can contact your state’s budget<br />
office. Do you consider these policies to be the<br />
appropriate ones? Why, or why not? How might you or your<br />
family be affected by the policies (such as a requirement<br />
that the state balance its budget every year)?<br />
(57) Pretend that you are going to appear before a Congressional<br />
committee to discuss the federal budget . What items would<br />
you want to reduce? Why? What items would you want to<br />
increase or leave unchanged? Why? Is there anything that<br />
you would want to add to the budget? What arguments would<br />
you expect to hear in opposition to your proposals? How<br />
would you answer them?<br />
(58) Interview several business people regarding government<br />
(regulations<br />
. Which regulations do they favor? Which ones<br />
do they oppose? Do regulations add to the costs of produc<br />
ing their products or services? Do they raise the prices<br />
that they charge their customers? How do the views of the<br />
business people compare with the views of consumer organi<br />
zations and unions? Write a report on your findings, and<br />
I
Page 49<br />
give your own position on whether or not we have too many<br />
regulations on business.<br />
(59) Consult labor leaders or others in your area who are con<br />
cerned about unemployment<br />
. Is it a serious problem in<br />
your area? What is the unemployment rate there? What<br />
types of unemployment exist? How might teenagers planning<br />
to enter the job market be affected? What can be done<br />
about the problem?<br />
(60) Assume that economists are predicting a high rate of<br />
inflation<br />
. What might you do to protect yourself from<br />
the effects of rising prices? What do you think the<br />
government and/or the Federal Reserve ought to do? You<br />
might try such books as Full Employment Without Inflation<br />
by Tim Hazledine (New York:St. Martin’s Press, 1985) and<br />
Solutions to Inflation by David C. Colander (New York:<br />
Harcourt Brace Jovanovich, 1979).<br />
III. Unemployment, Inflation, and Distribution of Income<br />
4<br />
(A) Unemployment<br />
(1) Causes of unemployment<br />
(2) Effects of unemployment<br />
(B) Distribution of income<br />
(1) Functional distribution of income — wages<br />
and salaries, rent, interest, and profits<br />
(2) Personal income distribution<br />
(3) The problem of poverty<br />
(C) Redistribution of income is an important economic<br />
activity of government
4<br />
Page 50<br />
(1) Income is unevenly distributed in USA<br />
(2) US Gov’ts. programs to improve income distribution<br />
(3) Transfer payments keeps individuals on a minimal<br />
(D) Inflation<br />
level of consumption<br />
(1) There are many causes of inflation<br />
(2) Impact of US History<br />
(3) Inflation affects different groups in<br />
different vays<br />
(4) To stop inflation: fiscal policy, monetary<br />
policy, price controls<br />
(5) Anti—inflations sometimes causes unemployment,<br />
stimulating jobs causes inflation<br />
.’ IV Government becisions Affect Inflation and Unetnploynient<br />
(A) Government spending programs<br />
(1) Goods and services — social capital and consumption<br />
(2) Transfer payments<br />
(3) Expenditure increases stimulate the economy<br />
(4) Expenditure cuts have contractionary influence<br />
(B) Taxes can be used as a tool to manage the economy<br />
(1) Tax cuts stimulate the economy<br />
(2) Tax increases can be used to cut demand<br />
‘(C) Gov’t. decisions about fiscal policy affect the economy<br />
(D) Gov’t. financing has a monetary impact on the economy<br />
V. What is a Good Tax<br />
(A) Tax fairness<br />
(B) Promotion of social goals<br />
(C) Simplicity and efficiency
VI. Economic Growth is a National Policy Goal<br />
(A) Economic growth enables the nation to:<br />
(1) Create jobs and raise living standards<br />
Page 51<br />
(2) Carry out more easily the functions of government<br />
(3) Deal better with problems — ex. crime, poverty<br />
(B) Economic growth often involves important “trade—offs”<br />
(1) Some economic growth threateris the environment<br />
(2) Workers, businesses and farmers are often replaced<br />
by technological advances<br />
(C) Promoting economic growth<br />
(1) Improving labor by education and training<br />
(2) Investing in technology and research<br />
(3) Making investments in capital<br />
(B) Government encouragement of econ. growth<br />
• (1) Special tax exemptions for savings and investments<br />
(2) Monetary policy<br />
(3) Expenditures on social capital<br />
4
C<br />
IE<br />
U71 FREE<br />
ENTERPRISE<br />
WORKSHEET<br />
THEFEDERALBUDGET<br />
Which should be kept?.<br />
Representative B?<br />
Name<br />
Class Date<br />
In the 1980sthe federal budget has had deficits reaching $200 billion and beyond. In<br />
1985, Congress passed the Gramm-Rudman Act, which gave guidelines for balancing<br />
the budget by 1991. Unless the deficit each year is kept to the target levels, automatic<br />
spending cuts are made. In order to meet the guidelines, Congress can spend less or<br />
increase revenue (through taxes and fees).<br />
1. Imagine that you are a member of Congress. You are cutting spending to reduce<br />
the budget deficit. Here is a list of programs in the five major budget areas.<br />
*<br />
Defense: MXmissiles, space..based weapons, new submarines, new attack<br />
planes, foreign military aid<br />
<strong>Social</strong> Security: retirement benefits, cost of living increases, medical payments<br />
Other social welfare programs: free medical care, subsidized housing,<br />
unemployment insurance, food stamps, welfare payments<br />
• Other domestic programs: education, energy, price supports for farmers,<br />
foreign aid, health research<br />
Interest on national debt<br />
Which of the programs do you think should be cut? ________________________<br />
2. Your colleagues are all concerned with how spending cuts will effect the people<br />
back home. Here is how three other representatives describe their districts.<br />
Representative A: In my district, almost half of the workers are employed by companies that<br />
depend on defense contracts to survive.<br />
‘Representative B: My district has many older factories, a city that is trying to renew itself,<br />
high unemployment, and pollution problems.<br />
Representative C: Many of the voters in my district are farmers, but there is also a large<br />
nJmber of retired people.<br />
Which programs would Representative A favor keeping?<br />
Representative C?
L<br />
I. I<br />
I<br />
IJAIA DATE_________CLASS_____ SCORE_____<br />
ICHAPTERI 9 ISect on1<br />
Problemsof EconomicGrowth<br />
Readthe followingexcerptfrom an article by<br />
AlfredL. MalabreJr.,fromTheWa//StreetJournal,<br />
August19,1985,aboutheproblemsofgrowth.Then<br />
answerthequestions.<br />
COMPREHENSIONInterpretingInformation<br />
1. Whatisoneobstacletothecurrentincreasein<br />
economicgrowth?<br />
REINFORCEMENT:<br />
ReadingSkills<br />
Activity33<br />
2. Howmightthisphenomenonbedefined?<br />
ln theircontinualeffortomakesenseOutofthebusi<br />
nes scene,economists arewontoexpresstheirob<br />
servations in argon.Acaseinpointisthe[term]being<br />
appliedto the economy’sbehaviorso far this year:<br />
growthrecession; ,Justwhatdoesthatmean?Howdoes APPLICATION RecognizingCauseandEffect<br />
a growthrecessiondifferfromtherealthing?If there<br />
3. Whatare tworesultsof<br />
hasbeena growthrecession, is it<br />
a realrecession?<br />
stillunderwayand<br />
what’slikelytofollow?<br />
Thisis verydifferentfroma bonatide recession,<br />
whichisnormallycharacterizedbyanactualdeclinein<br />
econorpicactivityforat leastsix months.In themost<br />
recentull-fledged recession,in 1981—82, economic<br />
activity—gaugedby the grossnationalproduct,ad<br />
justedforinflation—fell fourstraightquarters.Alsoun<br />
employment soaredfromabout7%ofthelaborforceto<br />
nearly11%.<br />
Whatever theappropriatename,there’snoquestion<br />
thattheeconomyhasenduredaperiodofmarkedslug<br />
ghness. Butmost,economists, aswellasmostindi<br />
catorsof futurebusinessactivity,suggesthatbrisker<br />
4. On whatdoesthe cartoonblamethe coming<br />
growthi at hand.Onerecentsurveyofseveraldozen<br />
deficit?<br />
forecasters findsonaverage thatheyanticipategrowth<br />
ofcloseto4%annually throughthebalanceoftheyear.<br />
Ifthatmaterializes, thegrowthrecessionof1985would<br />
beaver.<br />
Withthe signalsmixed,the recordof pastgrowth<br />
recessionsay provideguidanceasto howtheecon<br />
omywillinfatt behaveincomingmonths.Andthelatest<br />
growthrecessionis by no meansunique;protracted<br />
sluggishspellshaveoftenoccurredduringexpansion<br />
phasesofth businesscycle.<br />
Insum,growthrecessionscanendhappilyandthis<br />
couldwellbesuchatime.<br />
z£1,<br />
—<br />
2<br />
“TI<br />
0 zn<br />
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IdALW DATE________ CLASS_____ SCORE_____<br />
ICHAPTERI 9 ISe 1on2<br />
CollectingFactson Unemployment<br />
REINFORCEMENT: GraphSkills<br />
Activity34<br />
Unemployment isaproblemthatconcernsnotonly COMPREHENSION InterpretingInformation<br />
theunemployed, butthegovernment aswell.Wash 1.Whatwasthe worstyear in this periodfor<br />
ingtonisalwaysconcernedwithunemployment fig unemployment?<br />
ures, for they affect productivity,taxes, and<br />
government spending.Monthlyunemployment sta<br />
tisticsfromthegovernment isoneofthemostkeenly 2. Whatwastheworstten-yearperiodfor unem<br />
watchedindicatorsoftheeconomy.<br />
ployment?Why?<br />
Tocompilethisinformation, theBureauof Labor<br />
StatisticsfromtheDepartmentof Laborsendsout<br />
interviewers eachmonth.Theseinterviewersgotoa<br />
selectednumberofhouseholdsandaskthosemem<br />
bersofthehouseholdssixteenyearsandolderifthey 3. Examinethewaryearperiods1915—1920 and<br />
areoutof 1work andlookingforajob.TheBureaualso 1940—1945. Whatdoeswarappearto doforunem<br />
getsfigu!esfrombusinessesandthegovernment ployment rates?Citefigures.<br />
unemployment agencies.<br />
TheBureautakesthe statisticsit gathers,ana<br />
lyzesthem,andthenissuesamonthlyfigure(italso<br />
issuesan annualfigure).Becausethereare so<br />
manyvariables, theunemployment rateisneverthe<br />
whojestory.Forexample,manypeoplewhoareout<br />
ofworkforlongperiodssometimesgiveuplooking.<br />
APPLICATIONProviding Examples<br />
Theyaree’ventually excludedfromthefigures. 4. Usethe blankgraphbelowandcreatea bar<br />
• Studytheunemployment ratesthatarelistedinthe graphforJanuary1984. Figures:Unemployed, plant<br />
1below chart (left)andanswerallofthequestionsthat closings:1.1million;Lookingforwork,1.3million;Left<br />
follow.<br />
workforce,700,000.<br />
4<br />
SelectedAnnual Unemployment Rates<br />
for the United States<br />
ar<br />
Numbers of Percent ofLaborForce<br />
Unemployed Unemployed<br />
1900<br />
I<br />
1.420,000 5.0<br />
1915 3,377,000 8.5<br />
1920 2132,000 5.2<br />
1925 1453,000 3.2<br />
1930 4,340.000 8.7<br />
1935 10,610,000 20.1<br />
1940 8,120,000 14.6<br />
1945 1,040.000 1.9<br />
1950 3,288,000 5.3<br />
1955 2,852,000 4.4<br />
1960 3,852,000 5.5<br />
1970 4,093,000 4.9<br />
1980 7,637.000 7.1<br />
Unemployment StatIstics, 1984<br />
Millions<br />
5.0<br />
4.5<br />
4.0 .<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
.5<br />
UnemplOyed Looking<br />
forWork<br />
LeftWork<br />
force<br />
I<br />
I i<br />
I<br />
I
Name<br />
OVERVIEW<br />
The 1930sweremarkedby penodsof chronically<br />
highunemployment in the UnitedStates.AfterWorld<br />
WarI, CongresspassedtheEmployment Actof 1946,<br />
whichstatedthatit wasthecontinuingpolicyandre<br />
sponsibflityofthefederalgovernment touseallpractical<br />
meansto promotemaximumemployment, production,<br />
andpurchasingpower.TheEmploymentActof 1946<br />
establishedthreeimportantgoalsfortheeconomy:<br />
• Fufiemployment (alsocalledhighemployment)<br />
existswhenmostindividualswhoarewillingtoworkat<br />
prevailingwagesintheeconomyareemployed.Even<br />
underconditionsoffullemployment, therewillbesome<br />
temporaryunemployment asworkerschangejobsand<br />
asnewworker seektheirfirstjob.<br />
• Price stablifly existswhenthe averagelevelof<br />
oricesin the eonomy is neitherincreasingnor de<br />
easing.Thegoalof pricestabilitydoesnotimplythat<br />
pricesof individual itemsshouldnotchangebutonly<br />
thattheaveragelevelof pricesshouldnot.Therefore,<br />
a conditionof pricestabilityusuallymeansthatsome<br />
•pricesarersing, othersarestable,andstillothersare<br />
falling.A sustainedrisein theaveragelevelof prices<br />
iscalledinilatlon a sustaine declineiscalleddefla<br />
.tloñ.<br />
• Economicgrowthexistswhentheeconomypro<br />
ducesincreasingamountsof goodsandservicesover<br />
the longterm.If the increaseis greaterthananyin<br />
creaseinpopulation, theamountofgoodsandservices<br />
availableperpersonWillrise,andthusthenation’slevel<br />
livingwillimprove.<br />
I<br />
MEASURINGTHEACHIEVEMENTOF<br />
ECONOMICGOALS<br />
Inorderto determinehowwellwe areachieving<br />
thethreeeconomicgoalslistedabove,wemustmea<br />
surechangesin employment,prices,and economic<br />
growth.Inthissectionwelookat howsuchmeasure<br />
mentsarecommonlymade.<br />
Handout15-1<br />
BROADECONOMICGOALS<br />
MeasuringEmployment<br />
Class _____________<br />
Thenationalcivilianunemployment rateandthe<br />
nationalemployment ratearethetwomostimportant<br />
meansweuseto measurehowwellweareachieving<br />
thegoaloffullemployment. Theunemployment rateis<br />
derivedfroma nationalsurveyof about60,000house<br />
holdsconductedeachmonththatasksabouttheem<br />
ploymentstatusofpeopleaged16orolder.Thenumber<br />
of peopleatworkor lookingforworkcanbeestimated<br />
veryaccuratelyfromthe surveydata.Thosepeople<br />
whoareatwork(theemployed)plusthosepeoplewho<br />
are lookingfor work(theunemployed)makeup the<br />
laborforce.(Thelaborforceis muchsmallerthanthe<br />
totalpopulation,sincemanyindividualsaretoo’young<br />
or too old to work,somepeopleare unableto work,<br />
andsomechoosenotto work.)Thepercentageof the<br />
total laborforcethat is out of workis computedby<br />
dividingthe numberof peoplelookingfor work(the<br />
unemployed)by the totallaborforceandmultiplying<br />
theresultby 100,asfollows:<br />
Unemployed<br />
Unemployment rate x 100<br />
Laborforce<br />
Theemployment rateis determinedbytakingthe<br />
numberof civilians16yearsof ageandolder—these<br />
datacomefromthemonthlysurveyof 60,000house<br />
holds—anddividingit by the numberof persons16<br />
yearsofageandolderinthenoninstitutional population<br />
oftheUnitedStates.(NOTE:Thenoninstitutional pop<br />
ulationincludesallpersons16yearsof ageandolder<br />
who are not inmatesof penalor mentalinstitutions,<br />
sanitariums,or homesfor the aged.infirm,or needy,<br />
normembersofthearmedforcesstationedintheUnited<br />
States.)<br />
Employment rate =<br />
Employed<br />
persons,aged<br />
16andolder<br />
. , x 100<br />
Non nstituUonal<br />
population,<br />
aged16and<br />
older<br />
FromMasterCumculumGuidein<strong>Economics</strong>: TeachingStrareg es forHigh<strong>School</strong><strong>Economics</strong> Courses. 1985.JointCouncilonEconomicEducation.<br />
2 ParKAvenue.NewYonc.NY10016.<br />
34c
Idlemachines rather than by buying newma<br />
chines and training new workers.)<br />
d Which periods of time In this century do<br />
you think werethe soundest In terms ofover<br />
alleconomicperformance?(Answerswillvan .<br />
but students should be looking for periods<br />
when the unemployment rate is low,inflation<br />
is low or nonexistent. and economic growth<br />
is high. Differences of opinion amonc, stu<br />
dents about the relative importance of ura<br />
employment, price trends. and economic<br />
growth should make for a good discussion.<br />
Op’rzoN, i.: In the 1970s. a new indicator<br />
of overall economic performance called the<br />
Mlseiylndex was created. The basic misery<br />
Index adds the inflation rate to the unem<br />
ployment rate. (Amore complicated version<br />
subtracts fromthis total the rate ofrealgrowth<br />
of real GNP.)The lower the index, the better<br />
the performance of .the economy. While the<br />
misery IndexIsoverlysimplistic as a measure<br />
ofeconomicperformance. students may gain<br />
some, additional insights Into overall eco<br />
nomic conditions by constructing a misery<br />
Index for each presidential term, using the<br />
data in Handout 15-2. (Noit: The misery in<br />
dexshoi. d be constructed using the absolute<br />
value ofchanges In the CPI.since falls in the<br />
general price level, which are generally ac<br />
companied by declines in economic activity<br />
and increases in unemployment. are no more<br />
desirable than rises in the general price level.)<br />
e Before 1947. tl e employment rate. the<br />
unemployment rate. and related data based<br />
on the national survey of 60.000 households<br />
were computed using the population of per<br />
Sons aged 14 and over. Beginning In 1947.<br />
the ratio has been computed using the pop<br />
ulation of persons aged 16 and over. Whydo<br />
you think this change was made?lln the ñrs:<br />
par: ofthe tw eth century. it wasverycorn<br />
mon for young people to start work as early<br />
as 4. and hence peoplewere counted as part<br />
of t’hepopula ion<br />
of working age starting at<br />
that age. Subsequently. however. fewer and<br />
feweryoung people left school to start work<br />
a: such an early ate. sc it became less ap<br />
pro3r:ate ic. treat people aced 14 and 15 as<br />
par: f the work ng ace oo uiation. The Fair<br />
Uabor Standards c: of 193 secifled that<br />
cnirer ‘noer a;e 14 could no: oc e:oved<br />
rt businesses involved in interstate com<br />
merce, and the emthovrnent of people aged<br />
14 to 36 was sub(ected to restrictive national<br />
regulations in situations where hazardous<br />
I<br />
employment conditions existed. The act also<br />
specifiedthe first minimum wage in U.S.his<br />
tory (25C per hour). and a penalty rate for<br />
overtime work (a workweek of more than 4C<br />
hours duration). By 1947. few 14—16-yearolds<br />
were looking forjobs or had jobs.<br />
f In looking at Handout 15-2. what rela<br />
tionship can you find between the rate ofun<br />
employment and the rate of price change?<br />
(Upuntil the I97C’s.we can observethat prices<br />
rose slowly or even fellwhen unemployment<br />
was high. and that when unemployment was<br />
lowprices tended to rise somewhat.The I970s<br />
weremarked by both high unemploymentand<br />
large price rises—i.e.. considerable inflation.<br />
Explanations as to why we had both high<br />
unemployment and inflation include the<br />
lumps in oI l prices beginning in 1973. the<br />
rapid increase and changing composition of<br />
the labor force. Increases in unemployment<br />
benefits. the time it takes people to react to<br />
unexpected changes in the economy, and a<br />
loss in market position by industries such as<br />
the steel and automobile industries, which<br />
faced competition from substitute materials<br />
aridor imports.)<br />
g The United States entered WorldWar I in<br />
l9I7andWorldWarIIin 1941. What impact<br />
did these two wars have on inflation In the<br />
United States? Why? (Prices increased dur.<br />
ing both wars as a result ofthe largeamounts<br />
of money that were created to help finance<br />
the war effortand the diversion of production<br />
fromgoods forpersonal consumption to goods<br />
for miiizarvuse. Prices increased much more<br />
rapidly during War I than \Vorid War<br />
Ubecause the economywas operating at high<br />
levels of outDu: a: the star: of the U.S. in<br />
.‘cr emen: in World War I. while a: the out<br />
break ofWorld War 11.the U.S. econorr.v was<br />
still recovering from the Great Depression.<br />
Hence prices rose much less rapidiy durin<br />
World War U. During both world wars price<br />
controls were in effect on many items. During<br />
WorldWar I the price controls came late and<br />
were not verv effective, whereas in World War<br />
L price controls were established earlY and<br />
were more effective. Much of the infiatior 1 that<br />
would have occuned duninr Vorid Wa-Il carn<br />
du ng the Roosevelt-Truman presidency after<br />
the wa ended. as controls were removed and<br />
prices shot up.<br />
EVAWATION Judge quality of responses to the<br />
questions in the handouts.<br />
34 ’
Handout15.1(continued)<br />
w wellhasthe U.S.economymetthe goalof full<br />
employment?Usetheformulasjustgivento flUin the<br />
lastthreecolumnsofFigure15-1.(Answersfortheyear<br />
1950aregivento guideyou )<br />
(1) Boththeunemployment rateandtheemploy<br />
mentratewerehigherin 1980thanin 1950and1960.<br />
Canyouexplainhowsucha resultcouldoccur?<br />
(2) Dothedataonthenationalunemployment rate<br />
givenIn the tablebelowreflectthe extentof unem<br />
ploymentamongaparticulargroupinoursociety,such<br />
asteenagersaged16—19?<br />
MeasuringPriceChanges<br />
Priceindexesareusedto measurepricechanges<br />
intheeconomy.Byusingapriceindex,onecan‘corn<br />
bine thepricesof a numberof goodsandiorservices<br />
andexpressinonenumbertheaveragechangeforall<br />
the prices.TheConsumerPriceIndexor CPIis the<br />
measureofpricechangethatisprobablymostfamiliar<br />
to mostpeople.It measureschangesin thepricesof<br />
goodsandservicescommonlyboughtbyconsumers.<br />
Itemsonwhichhe averageconsumerspendsa great<br />
dealofmoney—suchasfood—aregivenmoreweight<br />
(importance) in computingthe indexthanitemssuch<br />
newspapers.magazines,andbooks,on whichthe<br />
averageconsumerspendscomparatively less.Thein<br />
dexitselfisbasedonamarketbasketofapproximately<br />
400goodsandservices.Theyareweightedaccording<br />
to howmuchthe average,consumerspenton these<br />
goodsandservic s inagiven—or“base’—year.Other<br />
YEAR<br />
Figure 15-1<br />
CIVIUAN NONIN-<br />
. ST TI’UTIONAI<br />
POPULATION<br />
CIVIUAN LABORFORCE<br />
AGE 16AND<br />
OVER Employed Unemployed Total<br />
priceindexesusedintheUnitedStatesinclude(1)the<br />
ProducerPriceIndex,whichmeasureschangesinthe<br />
pricesof consumergoodsbeforetheyreachtheretail<br />
levelaswellasthepricesof suppliesandequipment<br />
boughtforusebybusinessesand(2)theGNPDeflator,<br />
whichisthemostinclusiveindexavailablesinceittakes<br />
intoaccountallgoodsandservicesproduced.<br />
Toconstructanypriceindex,somepreviousperiod,<br />
mostusuallyoneyear,is selectedasthebaseperiod.<br />
Thepricesofanysubsequent periodareexpressedas<br />
apercentofthebaseperiod.Forconvenience thebase<br />
periodofanyindexanditscomponentsarepractically<br />
alwayssetat 100.FortheConsumerPriceIndex,the<br />
formulausedto measurepricechangefromthebase<br />
periodis:<br />
=<br />
weightedcostof<br />
base-period<br />
itemsin current<br />
period<br />
weightedcostof<br />
base-period<br />
itemsin base<br />
period<br />
x 100<br />
We multiplyby 100to expressthe indexin percent<br />
form,whichalsomakestheanswereasilycomparable<br />
to thefigureof 100setfor thebaseperiod.To keep<br />
thingssimple,let’ssayan averageconsumerin our<br />
economybuysonlythreethings,asdescribedinFigure<br />
15-2.<br />
Unemployment Employment<br />
millions Rate Rate<br />
1950 105 59 3 62 4.8% 56.2%<br />
1960 117 66 4<br />
1970 137 79 4<br />
1980 168 99 .8<br />
ConsumerPrice<br />
index<br />
’<br />
34<br />
Continued
Handout 15-1 (continued)<br />
Quantity<br />
Bought<br />
In Base<br />
Year<br />
Figure 15-2<br />
UnitPricein<br />
BaseYear<br />
UnitPriceIn<br />
UnitPrice<br />
Year1<br />
Year2 ifl<br />
Wholepizzapie 30 • $5.00 • $7.00 $9.00<br />
Prerecorded 40 $6.00 $5.00 $4.00<br />
audiocassette<br />
6-packofsoft 60 $1.50 $2.00 $2.50<br />
drinks<br />
Total<br />
Firstcomputethecostofbuyingalltheitemsinthe<br />
baseyear:<br />
(3Ux $5 = $150)+ (40 x $6 = $240)<br />
+ (60 x $1.50= $90)= $480<br />
TocomputetheConsumerPriceIndexforYear1,find<br />
thecostofbuyingthosesameitemsinYear1.Trythis<br />
yourself.Youranswershouldbe$530.i.e.,thesumof<br />
(30 x $7) •(40x $5) — (60 x S2).TheConsumer<br />
PriceindexfdrYear1 isthenequalto ($530;5480)x<br />
100,whichequals110.4.This meansthat whatwe<br />
couldhaveboughtfor $100in the baseyearcosts<br />
$110.40in Year1. 11wesubtracthebaseyearindex<br />
of 100.0from110.4wegetthepercentagechangein<br />
pricesfromthebaseyear.Inthisexamplepricesrose<br />
10.4percentfromthebaseyeartoYear1.Remember<br />
thattheweightsusedfortheConsumerPriceIndexare<br />
mined dete byihat consumersboughtinthebaseyear:<br />
intheexampleaboveweusedbase-yearquantitiesto<br />
figuretheqxpenditures inYearAaswellasn thebase<br />
year.Therateofchangeinthisindexisdeterminedby<br />
lookingatthepercentchangefromoneyeartothenext.<br />
If,forexample, theConsumerPriceIndexwere150in<br />
oneyearand165;thenext,thenthepercentchange<br />
for thatyearwouldhavebeenapriceriseof 10percent.<br />
Thisiscomputedbyuseof thefollowingformula:<br />
S<br />
Pricechange=<br />
hangeinCPl<br />
x 100<br />
=<br />
BeginningCPI<br />
165 — 150 100= 10%<br />
150<br />
Nowtrytheseproblems:<br />
(1) Whatisthecostof buyingthebase-year itms<br />
inYear2 in thetableabove?<br />
(2) Whatis the CPIfor Year2?<br />
(3) Whatwasthe percentageincreasein prices<br />
fromthe baseyearto Year2?<br />
(4) In Decemberof 1982,the CPIwasat 292.4.<br />
andinDecemberof 1983,theCPIwasat305.5.What<br />
wasthe percentagechangein pricesfor thistwelvemonthperiod?<br />
MEASURINGECONOMICGROWTH<br />
To measureeconomicgrowth,we measurein<br />
creasesinthequantityofgoodsandservicesproducec<br />
intheeconomyfromoneperiodoftimetoanother.The<br />
GrossNationalProductorGNPiscommonlyusedto<br />
measur economicgrowth.TheGNPisthedollarvalue<br />
atmarketpricesofallfinalgoodsandservicesproduced<br />
in theeconomyduringa statedperiod.<br />
Finalgoodsaregoodsintendedforthefinaluser.<br />
Forexample.gasolineisafinalgoodbutcrudeoil,from<br />
whichgasolineandotherproductsarederived,is not.<br />
BeforeusingGNPto measureeconomicgrowth.we<br />
mustfirstadjustGNPfor anypricechangesthatnave<br />
occurred.Let’ssayGNPin Year1 is Si.000andin<br />
Year2 it is 51.100.Doesthismeantheeconomyhas<br />
grown10% betweenYearI andYear2? Notneces<br />
sarily.If priceshaverisen,partoftheincreaseinGNP<br />
in Year2 willmerelyrepresent theincreasein prices.<br />
WecallGNPwhichhasbeenadjustedforpricechanges<br />
realGNP:if it isn’tadjustedforpricechanges.wecall<br />
itnominalGNP.TocomputerealGNPinagivenyear,<br />
usethefollowingformula:<br />
RealGNPin Year1 NominalGNPinYear1<br />
100<br />
x<br />
Priceindexin Year1<br />
TocomputerealeconomicgrowthinGNP fromone<br />
yearto another,subtractrealGNPforYear2fromreal<br />
GNPin Year1.Dividetheanswer(thechangein real
Figure13.1:EMPLOYMENT STATUS OFUNITEDSTATES POPULATION<br />
16YEARSOLDANDOLDER<br />
$<br />
210.000 i<br />
r<br />
..flNV<br />
.1—I<br />
an Laboreics<br />
117.234.000 Kb<br />
orT 62914j 00 345%<br />
4D ‘2.?3 1<br />
-
4<br />
Name Date<br />
Inflation,Recession, andUnemployment<br />
SKILLMASTERY<br />
ANALYZINGA VIEWPOINT Toeffectivelyanalyzea viewpoint,youshouldfollowthese three steps.First.identify<br />
the mainideaorpremise.Second,note the detailsthat supportthe main idea.Thesesupportingdetailscanbe either<br />
factor opinion,or a combinationof both. Third.evaluatethe supportingdetails.Decideif the main ideais supported<br />
by factand whetherthe argumentispres ted logically.Topracticeanalyzinga viewpoint,readthe followingexcerpt<br />
by AnnaShapiro.a proofreaderat Fortunebeforebeinglaid offin January1986. Then in the spaceprovidedor on a<br />
separatesheet of paperif yourteacherso directs.answerthe questionsbelow.<br />
For nearlyten yearsI haveworked for a corporation<br />
knownfor itsbenevolentpolicies....<br />
We arenow beinglaidoff. All of us.Our job cate<br />
gory,inthe languageof our union,isbeingterminated.<br />
In the ageof the paperlessofficethere is nothingon<br />
which correctionsare markedandtherefore nothing<br />
for proofreadersto read.The editors havepersonal<br />
computers....<br />
I saidlightly,Well, I guessI’ll go backto doinglayout<br />
andpasteup—the graphicsdepartmentcounterpart<br />
of this’low-levelwhite-collar work But an acquain<br />
tancen the art departmentshookher head:no. She<br />
wasgoingto be out of a job too, just assoonasthe<br />
computersystemthat couldreplaceher wasinstalled.<br />
And in cameone of the typesetters,or, asthey are<br />
now known,page-coders.He waslearninghowto run<br />
1. Why was Ms.Shapirolaid off’<br />
2. What other categoriesof jobswere beingeliminatedat Fortune?Why?<br />
3. ‘According t Ms. Shapiro.how is automationaffectingemployment’<br />
the entire computer system because,of course,<br />
coderstoo wouldsoonbe a thingof the past....<br />
Where are we all to gop... [Wjhat happensto this<br />
greatmassof unemployedpeople,not just in publish<br />
ing but—applythe lesson—everywhere’Computers<br />
andautomationareclimbingup the job scale,lopping<br />
off jobsat higherandhigherlevels....<br />
Some people can find work buildingcomputers,<br />
runningthem, sellingthem and keepingthem going,<br />
but that will still leave... a lot of peoplewith nothing<br />
to do, howeverready,willing andablethey are.Will<br />
we haveto dependon variousformsof unemployment<br />
andwelfare?Will we deviseintricatesystemsof jobsharingin<br />
which the workweek will be a mere five<br />
hours’.. . Will wagesradicallydrop to a point where<br />
peoplearecheaperthanmachinesagain?<br />
AnnaShapiro<br />
4. FromMs. Shapiro’sviewpoint,what are three possibleconsequencesof fewerjob opportunitiesin the American<br />
economy?<br />
a.<br />
b.<br />
C.<br />
IS
4<br />
POPULATIONBELOWTHEPOVERTY<br />
LEVEL<br />
(IN MILLIONS)<br />
Year<br />
All<br />
People<br />
SKILLSWORKSHEET<br />
CHAPTER7<br />
Name Class Date___________<br />
In 1985,the proportion of Americanslivingin poverty ($10,989a year for a family<br />
of four) dropped to 14percent from 14.4 percent in 1984and 15.2percent in<br />
1983.Although progresswas made, the statisticson poverty show that these<br />
percentageswere higher than they were in the 1970’s.Moreover, the percentageof<br />
children living belowthe poverty level in 1985was much higher than it was ten<br />
years earlier.<br />
Children<br />
Under18<br />
1960 39.8 17.3<br />
1965<br />
‘<br />
33.2 14.4<br />
1970 25.4 10.2<br />
1975 25.9 10.9<br />
1980 29.3 11.1<br />
1985 33.0 12.5<br />
Source:U.S.CensusBureau.<br />
Year<br />
PERCENTAGEOFPOPULATION<br />
BELOWTHE POVERTYLEVEL<br />
All<br />
People<br />
(% of Population)<br />
Children<br />
under18<br />
(% of agegroup)<br />
1960 22.2 26.5<br />
1965 17.3 20.7<br />
1970 12.6 14.9<br />
1975 12.3 16.8<br />
1980 13.0 17.9<br />
1985 14.0 20.1<br />
1. During what year was the largest percentageof Americanslivingin poverty? During what year<br />
was the smallestpercentagelivingin poverty?<br />
2. How many Americanswere living in poverty in 1965? _____________ In 1975? _____________ In<br />
1985? ______________<br />
3. ‘Howmany Americansunder 18were livingin pnverty in 1970? _________ In 1975? _____________ In<br />
I<br />
1980? ______________<br />
4. Whattrend can you see in the poverty leveloverallbetween 1960and 1970?<br />
Since 1980?<br />
THE D$STAIBUTIONOF INCOME<br />
INTERPRETING DATA<br />
Between 1970and 1980?<br />
5. Comparethe percentagerate of all Americansliving in poverty to the percentageof children under 18 living<br />
in poverty. What generalizationcan you make about these two rates?
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER11<br />
Name __________________________________________ Class Date___________<br />
11.3GOVERNMENTEXPENDITURES<br />
EXPENDITUREORTRANSFER?<br />
Decide if each situation describedbelowis a governmentexpenditure or a transfer<br />
payment. Write GE (governmentexpenditure)or TP (transferpayment) in the blank<br />
besideeach number.<br />
______ 1. The U.S. Air Force purchasestwo F-IS fighter planes at a price of $3 millioneach.<br />
_______ 2. Two scientistsat the Universityof Texas receivea $1 milliongovernmentgrant to support cancer<br />
research.<br />
3. Once a month a blind widowreceivesa pension check in the mail.<br />
______ 4. Californiaprovides$6 millionto the public schoolsto support the training of bilingualteachers.<br />
5. After a distinguishedcareer in the U.S. Navy, AdmiralJones retires on a monthly government<br />
pension of $4,500.<br />
_______ 6. An unemployeddivorcedmother receivesa monthly governmentcheck to purchase food and<br />
; clothing for her two young children.<br />
_______ 7. The U.S. governmentmakes a $5 billioninterest payment on the national debt.<br />
______ 8. The city of Oakvillebuilds a public housing project.<br />
______ 9. The public library buys 100new books.<br />
_______ 10. A familyof four with an incomeof $9,000a year receiveswelfarechecksfrom the federal<br />
government.<br />
_______ 11. The federal governmentbuys surplus grain from farmers.<br />
______ 12. Local policeofficersreceivea $3,000-a-yearsalaryincrease.<br />
_______ 13. A student is awardeda state merit scholarshipto be used to help pay for collegetuition.<br />
______ 14. A town builds a new sewagedisposalplant.<br />
______ 15. The U.S. Department of Agriculturespends $4 billion developinga disease-resistantstrain of<br />
hybrid corn.<br />
______ 16. Retired people over age 65 receivemonthly <strong>Social</strong>Securitychecks from the federal government.<br />
______ 17. A man who hurt his back in an industrial accidentcan no longerwork. He receivesa monthly<br />
disabilitycheck from the federalgovernment.<br />
_______ 18. Five new typewritersare purchased for use in the county clerk’soffice.<br />
From the examplesabove, chooseone exampleof a governmentexpenditure and one of a transfer payment and<br />
explainwhy each is what it is.<br />
19. Governmentexpenditure:<br />
20. Transfer payment:
NAME_____________________________ DATE________ CLASS_____ SCORE_____<br />
CHAPTER 6 Section 2 REINFORCEMENT:<br />
Re&ingSkills<br />
TheCycleof Poverty Activity22<br />
Readingaboutpovertycanonlypartiallyconvey 2. Howdolow-payingjobscontributetopersonal<br />
whatliving in povertytrulymeans:Theexpression problemsforfamilies?<br />
“the cycleof poverty”is onewayto describethe<br />
never-endingproblemofpoverty.<br />
Accordingto 1983figures,afamilyoffourlivesat<br />
the povertylevelif theirannualincomeis $10,178. COMPREHENSIONSummarizingMainIdeas<br />
Thisincomeallows$848permonthforthefamily’s 3. Howdoespovertycontributetoahighdrop-out<br />
totalexpenses.Currently, theaveragefamilyoffour<br />
rateinschools?<br />
spends$280a monthonfood.Thisleaves$568a<br />
monthforhousing,utilitybills,medicalexpenses,’<br />
clothing,transportation, andentertainment. Savings<br />
rarely, ifever,enterintosuchabudget.<br />
____________________________________________<br />
Veryfewlow-payingjobsoffercompensationother 4. Howdoespoorhousingcontributetoincreased<br />
thanwages.Thusmostpoverty-level householdsdo illness?<br />
notshareinjobfringebenefits.Theyarenotcovered<br />
byemployer-paidor co-payhealthor dentalinsur<br />
ance.Moneyfor doctors,dentists,and drug pre<br />
sscriptior is not oftenavailable.Generally, then, APPLICATIONPovidIng Examples<br />
impoverrshedpeopleoftenavoidseekingmedical<br />
5. Giveanexampleofhowlackofpropereyecare<br />
carewhichcouldhelpofferabetter,longerlife.Dencanaffectachildatschool.<br />
talworkisneglected.Moneyforeyeglassesoftenis<br />
notavailable.<br />
A poverty-level incomeoftenputsthefamilyinto<br />
low-incomehousinglocatedin high-crimeareas.<br />
SYNTHESISFormingGeneralizations<br />
Oftensuchhousingisrundownandevendangerous.<br />
Inadequateheatduringthewintercausesproblems. 6. Howdo youthink povertyhas beenpassed<br />
Evidenceof fire,safety,andhealthstandardviola- downfromonegenerationtothenext?<br />
S<br />
tionsarecommonplace. Theft,vandalism,andfear<br />
‘forprsonaf safetyabound.<br />
Lackofadequatemedicalanddentalcare,poor<br />
housing,andinsufficientwinterclothingoftencause<br />
moresicknessamongpovertychildren.<strong>School</strong>is<br />
SYNTHESISDeveloping<br />
missedmor<br />
an Hypothesis<br />
frequently.As is the casewith any<br />
child,excessiveabsenteeismputsthechildfurther 7. Whymightso manypoorpeoplebecomeinbehindin<br />
schoolperformance. Leavingschoolbe- volvedincrime?<br />
coPiesan acceptableidea.Thedrop-outrate in<br />
someimpove shed-area highschoolsis50percent.<br />
Tiredandwithouta realistichopefora betterfu<br />
ture,manyimpoverishedpeoplegiveupandresign<br />
themselves toalifeofcontinuedpoverty.Povertybe- __________________________________________<br />
comesacyclethatisoftenunbroken.<br />
8. Offersomesuggestionsasto howthecycleof<br />
povertymightbe broken.Givesomeconcretesug<br />
gestionsinyouranswer.<br />
COMPREHENSIONMasteringFacts<br />
1. Whatwasthe1983poverty-level annualincome<br />
forafamilyoffour? __________________________________________
ENRICHMENT WORKSHEET<br />
CHAPTER7<br />
Name Class ____________ Date __________<br />
I<br />
-.<br />
THE DISTRIBUTIONOF INCOME<br />
INCOME DISTRIBUTION IN SIX COUNTRIES<br />
In this chapter you have investigatedincomedistribution in the United States.<br />
Now let’s see how that distribution compareswith distribution in other nations.<br />
The graph belowcomparesincomedistribution in six countries, including the<br />
United States. Study the graph. Then answer the questions that follow.<br />
100<br />
Household Income,<br />
After Taxes<br />
0 Lowest 20%<br />
I • Lowest 40%<br />
75 -j_. Top 20%<br />
V<br />
E<br />
8<br />
.S 60<br />
I<br />
° India (1975f76 )<br />
50 HongKongU980 )France (1975) _________________________<br />
(1982)___ _!_<br />
::Hungary<br />
1. . What country had the greatest per capita GNP?<br />
20<br />
0w1 10<br />
$260 $2,100 $6,330 $9,760 $11,860 $15,390<br />
Per Capita GNP<br />
Source:WorldBank andU.S.CensusBureau(data)andHarper’s Magazine(graph).<br />
2. Which householdincomereceivedthe greatest percentageof incomeafter taxes?<br />
3. In which country did the top 20 percent of the population get the largest share of the after-taxincome?<br />
C<br />
4. In any country shown on the graph, does the lowest20 percent get as much as 10percent of the after-tax<br />
income?<br />
5. The countries shown on the graph represent developedand developingnations, with Market, command,<br />
and mixed economicsystems. Givetwo reasonswhy the pattern of income distributions is similaramong<br />
these six countries.
$<br />
Figure12-2:CHANNELS OFDISTRIBUTION<br />
Consumer Goods<br />
Manufacturer Consumer<br />
er Eact<br />
Retailer Consumer<br />
Manufacture<br />
1 -biWholesaler 1 1J Retailer 1 Consumer<br />
RawMaterials andProducer Goods<br />
cer<br />
Business<br />
Wholesaler<br />
4<br />
.:<br />
-<br />
ii•<br />
.1
Figure7-1:PERSONAL SAVINGEXPRESSED<br />
ASAPERCENTAGE OFDISPOSABLE<br />
INCOME, 1918-1987<br />
Personal Saving asPercentage of<br />
Disposable Income<br />
ra<br />
4.C 1 I I I I I I I I<br />
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987*<br />
Years<br />
Source: Survey ofCurrent Business, Bureau ofEconomic Analysis<br />
Estimate<br />
I
Section 2. EFFECTS OF INFLATION<br />
Name<br />
Class Date<br />
We have all experienced inflation. The bus ride that cost 50 cents five years ago now<br />
costs $1.00 in many places. The shirt that was $15 last year is $17 this year. One way<br />
the government tracks inflation is with the consumer price index (CPI). This index<br />
measures the rise in prices of various goods and services. Using the information in the<br />
following table, answer the questions below about inflation. Circle the letter of the cor<br />
rect answer.<br />
United States Consumer Price Index, 1967-1987<br />
1967= 100<br />
All Trans- Medical<br />
Year Items Food Rent Clothing portation Care<br />
1967 100 100 100 100 100 100<br />
1977 182 192 154 154 182 202<br />
1987(est.)329 315 361 210 302 438<br />
1.Between1967and1987theUnitedStates experienced<br />
• a. defla tion b. recession c.depression d. inflation<br />
2.On average,pricesofallitemsince1967<br />
a. doubled<br />
b. increased by229percent<br />
c increased by329percent<br />
d. decreasedby229percent<br />
3. Ifyou comparewhatthedollarwillbuytodaywithitspurchasing powerin1967,to<br />
day’s consumers will find the best buys in<br />
a. clothing b. medical care c. food d. rent<br />
4. eTl dollar’s purchasing power has shrunk the most since 1967 in the area of<br />
a. transportation b. medical care c. clothing d. rent<br />
5. The information in the table shows that<br />
a. our standard of living has risen<br />
b. our standard of living has fallen<br />
c. the cost of living has fallen<br />
d. the cost of living has risen<br />
6. If your wages between 1967 and 1987 doubled, you would be<br />
a. about as well off today as you were in 1967<br />
b. worse off today than you were in 1967<br />
c. better off today than yo were in 1967
The prefixtiypermeans excessive.”Hyperactiveis<br />
thus definedas excessivelyactive.To a physicianIt<br />
meansso activeas to constitutean illness.In the<br />
sameway,hyperinflationmeansan excessivelyhigh<br />
rateofinflation.ButhowmuchinflationissimplyTM high”<br />
andhowmuchis excessivelyhigh?<br />
Somemodemeconomiesuchas Israel’sandTur<br />
key’shavehigh ratesof inflation.In 1980,Israel’s<br />
inflationrate was 131.5percentand Turkey’swas<br />
117.7percent.The averageconsumerin thosetwo<br />
countrieshad to spendmorethan twice as much<br />
moneyin 1980to buythe samequantitiesof goods<br />
andservicesasin 1979.Nevertheless, economistsdo<br />
notregardthatconditionashypenntlation.<br />
TheGermanHyperinflationafterWorld<br />
Wan<br />
Handout4-4<br />
Hyperinflati isinflationthatistotallyoutofcontrol.<br />
Theclassicexampleis Germanyfrom1920to 1923.<br />
Therearemanytheoriesaboutwhatcausedthe hy<br />
perinflation.Oneconcernsreparations.Germanylost<br />
WorldWarI andwasmadeto payforthecostsofthe<br />
war,thatis.topayreparations tothewinningcountries:<br />
France.GreatBritain.etc.TheheadoftheGermanCen<br />
tral Bankcontencledthatthe paymentswerebeyond<br />
Germany’sabilityto pay.Thebankproceededto print<br />
evergreaterquantitiesof papermoneyinorderto pay<br />
for the goodsandservicesthe governmentused,to<br />
makerequiPedgovernment paymentsforpensionsdue<br />
oldpersons.etc.,and,towardtheendoftheperiod,to<br />
providemoneyto workersengagedina gener&strike<br />
to protesthereparationspolicy.<br />
ItisoftensaidththInflationistoomuchmoneychas<br />
‘ing toofewgoods.”InGermany, thequantityofmoney<br />
bchasinggoodsreachedoverwhelmingproportions. Be-<br />
A READINGON HYPERINFLATION<br />
tweenJuly1920andJune1923,theaveragerateof<br />
inflationequaled933percentperyear!Theworstwas<br />
yetto come.InNovember1923,theannualrateof in.<br />
flationsoaredto morethan200,000percent.Workers<br />
wantedtobepaidtwiceadaysothattheycouldquickly<br />
exchangemoneyfor goodsbeforeIt lostmostof its<br />
value.A postagestampcost90billionmarks.A news<br />
papercost200biUionmarks.TheCentralBankwas<br />
increasing themoneysupplyby1300percentpermonth.<br />
Thirtypapermillsworkedovertimejustto providethe<br />
bankwith paperforprintingmoney.Oldbanknoteswere<br />
recalledsothatzeroscouldbeaddedto increasethe<br />
numberofmarksrepresented. Eventuallyfttookati-lilian<br />
marks(1,000,000,000,000) toequala singledollar.<br />
Hyperinflationin PersonalTerms<br />
Oneeconomisthasofferedaverygoodexplanation<br />
ofwhatsucnanexchangeratemeansinpractical terms:<br />
SupposeyouhadlivedinGermanyintheyearsbefore<br />
andafterWorldIandhadamillionmarksinyoursavings<br />
account.Hadyoutriedtochangethatmoneyintodollars<br />
beforethe inflation,sayin 1913,youwouldhavere<br />
ceived237,936U.S.dollars.Hadyoudoneso at the<br />
peakofthepostwarinflationinthatbleakNovemberof<br />
1923,youwouldhavediscoveredto yoursorrowthat<br />
yourI millionmarkswouldnotcommandevenasingle<br />
U.S.cent!<br />
Undoubtedly, thehyperinflationwreckedtheGerman<br />
monetarysystemandreducedtheGermanpeopleto<br />
barteringforgoodsandservicesinordertosurvivefrom<br />
daytoaay.Manyhistoriansandeconomistsaisobelieve<br />
thatthishypennflationruinedthemiddleclassin Ger<br />
manyandledto theriseof Hitler—and. eventually, to<br />
WorldWarIl.<br />
4:iu<br />
FromMalyzinpInflabonend fts Conbvl:A ResourceGuide,EP Series.1984.Publishedbythe JointGounoil on EconomicEducation, Two<br />
Pa t Avenue,NewYod, NewYork10016.
Economists differabouthemostimportant causesof<br />
inflation. Briefstatements abouthemostimportant ex<br />
_ons foflow.<br />
1.INFLATIONANDEXCESSIVELY RAPID<br />
GROW1HIN THESUPPLYOFMONEY<br />
Handout45<br />
Mosteconomists agreethathereisaconnection be<br />
tweenthegrowthof aneconomy’smoneysupplyand<br />
therateofinflationtheeconomyexperiences. Buthose<br />
whoarecalledmonetarists believethatheconnection<br />
betweenmoneygrowthandInflationis anespecially<br />
closeandstrongone.<br />
MPNEY—WHATiSIT’<br />
MoneyintheUnitedStatesismeasured indot<br />
lars.Butdollarsin whatform?Billsandcoins?<br />
Certainly. Checkingaccount balances?Yes.Any<br />
thingelse?Manythings, asItturnsout,andthe<br />
definition(s) ofthemoneysupplyusedbyecon<br />
ornistsqndtheFederal Reserve—which officially<br />
definesmoneyandcollectsmonetarydata—has<br />
beenchanging. Why?Becauseasfinancial prac<br />
tices, regulations, anddefinitions after,, sodothe<br />
number and kindsofthingsthatcanbeclassified<br />
asmoney. Themaindifference betweenthevar<br />
iousclassifications isthatthemorekindsof‘monet<br />
included, thefurther awaywegetfromwhatcould<br />
popularlybecallqd‘readycash.’<br />
Accordngto mor etarists, If the moneysupply(or<br />
stock)isgrowing atthesamerateastheproduction of<br />
goodsandservices(realoutput), inflation willnotresult.<br />
However, Inflation willresult ifthemoneysupplygrows<br />
morerapidlythanoutput. Forexample, Ifthegovernmerit(moreprecisely<br />
intheUnitedStates, theFederal<br />
Reserve) permitsthemoneysupply togrowat13per<br />
centperyearwhenthegrowthofrealo..tput is3percent,<br />
monetarists wouldpredict thataninflationof10percent<br />
r yearwouldresult. TheyreasonthatIfthemoney<br />
applygrowsat13percentannually then,onaverage,<br />
Incomewillalsogrowat 13percent.Butherewillbe<br />
only3percentmoregoodsandservices tospendthe<br />
THECAUSESOFINFLATION<br />
additional incomeon.Sincethedifference between the<br />
growthInincomeandthegrowthinproduction is10<br />
percent, theextraincomewilldrivetheaverageofall<br />
pricesupby10percent, thusestablishing a 10percent<br />
rateofinflation.<br />
2. GOVERNMENT BUDGETDEFICITS<br />
ANDINFLATION<br />
Manyplacedtheblameforinflationduringthe1970s<br />
andearly1980sondeficit spendingbygovernment.’ It<br />
Iscertainlytruethatfederalgovernment deficitswere<br />
largeduringthisperiod.<br />
Whatisa government deficit?Likeeachofus,the<br />
government mustpayforthegoodsandservices Itbuys.<br />
ByIatthemost important sourceofgovernment income<br />
Istaxrevenue. In1980,thefederal government spent<br />
$602billion; It hadreceiptsof $541billion, ofwhich<br />
approximately 90percentcamefromtaxes.Thegov<br />
ernment hasadeficitwhenever Itsreceiptsduringsome<br />
fixedperiodoftimearelessthanwhatItspends inthe<br />
sameperiod. Theamount ofthedeficitissimplythe<br />
difference betweengovernment spending andreceipts.<br />
Hence, in1980thefederal government’s deficit came<br />
to$61billion.<br />
Thefederal government candealwithadeficit itt one<br />
ormoreofthefollowing ways: (a)Itcanreduceitsspend<br />
ing;(b)Itcanraiseitsrevenues byincreasing thetaxes<br />
Itlevies; (c)itcanborrowmoneyfromothersbylefling<br />
themItsdebtsecurities (bonds, notes,orbills).<br />
Whenthefederalgovernment chooses to borrow<br />
money, Itauthorizes theU.S.Treasury toissueappro<br />
priatedebtsecurities. ThesearelOUs—promises that<br />
thegovernment Will repaytheprincipal tothelenders<br />
andwillpayinterest tothematstatedtimesinthefuture<br />
fortheuseofthefunds. TheTreasury triestosellas<br />
manyofthenewdebtsecurities aspossible tobanks,<br />
privatecitizens, andstatearidlocalgovernments, etc.<br />
However, inorder tosellreadilyallItneedswhenIthas<br />
a deficito meet,theTreasurymostalwaysmustsell<br />
someofitssecurities totheFederal Reserve (theFed).<br />
TheFed’spurchases arespecial Incharacter. When<br />
• Even when the Isderal government’s runninga sutplus forthe whole<br />
of a given yew. It may run short of money at various times during<br />
Si. yew and may borrow for short psflods. I.iowev.r, this reading<br />
is oonc.msd withd.ficits that persist forayear or mote.<br />
FromMD,p wtflabovi wd C’ot AResource Gilde,EP Ss.fos. 1064. Pii lished bytheJointCouridionEc* nornlc Fdu on , Two<br />
PeatAvenue, NewYeah,NewYeah10016.<br />
41
4<br />
Handout4-5 (continued)<br />
Name Class _________<br />
Questions:<br />
a. Namethreepossiblecausesof inflation. ______________________________________________________<br />
b. Whatwillmonetaristspredictabouthegeneralevelofpricesif realoutputisgrowingat2 percentperyearand<br />
themoneysupplyisgrowingat 10percentperyear?<br />
c. Whatagencyor organizationformulatestheofficialdefinitionof themoneysupplyandcollectsdataaboutit?<br />
d. Fromtimeto time,therehavebeenrevisionsintheofficialdefinitionof themoneysupply.Whatis thereason<br />
forsuchrevisions?<br />
e. Whati a govemmentdeficit”? ___________________________________________________________<br />
1. Howdoesthefederalgovernment dealwithdeficits?_______________________________________________<br />
g. Whatistheprincipalsourceofthefederalgovernment’s income? ____________________________________<br />
Pt Whymightthefederalgovernmentneedto borrowmoneyevenwhenitsannualexpendituresarenotgreater<br />
tha itsannualincome?______________________________________________________________________<br />
i. Whateffectcangovernment borrowinghaveonthemoneysupplyandonpriceinflation?_________________<br />
j. AnimportantcauseoftheinflationoftheI 970swas<br />
k. TheinflatiomoftheI 960swasa resultof both and<br />
Oiio t.: Explainyouranswer.<br />
4L<br />
FromMalyzingInflationandItsControl:A ResourceGide, EPSSries. 1984.Publishedbythe JointCoun<br />
l onEconomicEducation,Two<br />
ParkAvenue,NewYork.NewYork10016.
Handout4-5 (continued)<br />
Name Class_________<br />
Questions:<br />
a. Namethreepossible causesofinflation. ______________________________________________________<br />
b. Whatwillmonetarists predictabout thegeneral levelofpricesIfrealoutput isgrowing at2percent peryearand<br />
themoneysupply isgrowing at10percentperyear?<br />
c. Whatagencyororganization formulates theofficialdefinition ofthemoneysupplyandcollectsdataabout It?<br />
d. Fromtimetotime,therehavebeenrevisions intheofficial definition ofthemoneysupply. Whatisthereason<br />
forsuchrevisions?<br />
e. What agovernment deficit?_____________________________________________________________<br />
1. Howdoesthefederal government dealwithdeficits? _____________________________________________<br />
g. Whatistheprincipal sourceofthefederal government’s income? __________________________________<br />
h. Whymight thefederal government needtoborrowmoneyevenwhenitsannual expenditures arenotgreater<br />
thaQitsannual income? ______________________________________________________________________<br />
i. Whateffectcangovernment borrowing haveonthemoneysupplyandonpriceinflation’ ________________<br />
. Animportant causeoftheinflation<br />
k. Theinflati ofthe1960swasaresultofboth and<br />
OPiio. ..: Explainyouranswer.<br />
ofthe1970swas___________________________________________<br />
4L<br />
FromMatyzinpInflationand I Contiol: A ResourceGde, EP Sines.1984.PublishsdbytheJointCouncionEconomicEduce on, Two<br />
ParkAvenue,NewYork.NewYork10016.
(TOPIC:<br />
4<br />
1. who are the winners and losers during an inflationary period?<br />
2. how did the Johnson/Kennedy tax cut spur inflation?<br />
3. How did the Great Society war on poverty and the war in Vietnam<br />
effect inflation? WHY?<br />
4. WHY would a tax increase theoretically reduce the rate of<br />
inflation?<br />
5. What did the FED do to fight inflation? Why didn’t this work?<br />
6. What did Nixon do to halt inflation? Why wasn’t it effective?<br />
7. Defthe: STAGFLATION.
4<br />
I<br />
EXTENSIONACTIVITY 7<br />
TheHistoryoftheConsumer PriceIndex<br />
(usewithChapter7, Lesson1)<br />
ThefollowingtableliststheConsumer Priceindexfrom1860to 1983.Studythetable. Thenanswer thequestions<br />
onthefollowingpage.<br />
Year<br />
Consumer<br />
PriceIndex<br />
1967= 100 Year<br />
Consumer<br />
Pricelnde<br />
1967= 100 Year<br />
3A<br />
Consumer<br />
PriceIndex<br />
1967= 100<br />
1860 27 1891 27 1922 50.2<br />
1861 27 1892 27 1923 51.1<br />
1862 30 1893 27 1924 51.2<br />
1863 37 1894 26 1925 52.5<br />
1864 47 1895 25 1926 53.0<br />
1865 46 1896 25 1927 52.0<br />
1866 44 1897 25 1928- 51.3<br />
1867 42 1898 25 1929 51.3<br />
1868 40 1899 25 1930 50.0<br />
1869 40 1900 25 1931 45.6<br />
1870 ‘ 38<br />
1871 36<br />
1872 36<br />
1873 36<br />
1874 34<br />
1875 33<br />
1876 32<br />
1877’ 32<br />
1878 29<br />
1879 28<br />
1880 29<br />
1881 ‘<br />
29<br />
1882 29<br />
1883 28<br />
1884 27<br />
1885 7<br />
1886 27<br />
1887 27<br />
1888 2<br />
1889 27<br />
1890 27<br />
1901<br />
1902<br />
1903<br />
1904<br />
1905<br />
1906<br />
1907<br />
1908<br />
1909<br />
1910<br />
1911<br />
1912<br />
1913<br />
1914<br />
1915<br />
1916<br />
1917<br />
1918<br />
1919<br />
1920<br />
1921<br />
25<br />
26<br />
27<br />
27<br />
27<br />
27<br />
28<br />
27<br />
27<br />
28<br />
28<br />
29<br />
29.7<br />
30.1<br />
30.4<br />
32.7<br />
38.4<br />
45.1<br />
51.8<br />
60.0<br />
53.6<br />
Scott,ForesmanInvitationto <strong>Economics</strong> Thispagemaybereproduced.<br />
1932<br />
1933<br />
1934<br />
1935<br />
1936<br />
1937<br />
1938<br />
1939<br />
1940<br />
1941<br />
1942<br />
1943<br />
1944<br />
1945<br />
1946<br />
1947<br />
1948<br />
1949<br />
1950<br />
1951<br />
1952<br />
40.9<br />
38.8<br />
401<br />
41.1<br />
41.5<br />
43.0<br />
42.2<br />
41.6<br />
42.0<br />
44.1<br />
48.8<br />
51.8<br />
52.7<br />
53.9<br />
58.5<br />
66.9<br />
72.1<br />
71.4<br />
72.1<br />
77.8<br />
79.5<br />
157<br />
Consumer<br />
PriceIndex<br />
Year 1967100<br />
1953 80.1<br />
1954 80.5<br />
1955 80.2<br />
1956 81.4<br />
1957 84.3<br />
1958 86.6<br />
1959 87.3<br />
1960 88.7<br />
1961 89.6<br />
1962 90.6<br />
1963 91.7<br />
1964 92.9<br />
1965 94.5<br />
1966 97.2<br />
1967 100.0<br />
1968 104.2<br />
1969 109.8<br />
1970 116.3<br />
1971 121.3<br />
1972 125.3<br />
1973 133.1<br />
1974 147.7<br />
1975 161.2<br />
1976 170.5<br />
1977 181.5<br />
1978 195.4<br />
1979 217.4<br />
1980 246.8<br />
1981 272.4<br />
1982 289.1<br />
1983 300.1<br />
(continued)
158<br />
EXTENSIONACTIVITY7 (continued)<br />
1.Onthegraphbelow,plottheCPIfrom1860to 1980.<br />
0.<br />
U<br />
sen<br />
ou<br />
240<br />
—<br />
—<br />
220 —<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
—<br />
—<br />
— —<br />
—<br />
—<br />
—<br />
—<br />
—<br />
-<br />
4<br />
2. DuringwhattimeperiodsdidtheUnitedStatesexperience inflation?<br />
4 3. Duringwhattimeperiodswerepricesrelativelystable?<br />
4-<br />
1860870 18801890190019101920193019401950196019701980<br />
YEARS<br />
4. Duringwhattimeperiodsdidthenationexperiencedeflation?<br />
Scott,ForesmanIni itolion to <strong>Economics</strong> Thispagemaybereproduced.<br />
3’J
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER12<br />
Name __________________________________________ Class Date___________<br />
12.1THEGROSSNATIONALPRODUCT<br />
IS IT COUNTEDINTHEGNP?<br />
Somegoodsand servicesare counted in the GNP, others are not. If the item below<br />
is part of the GNP, write Y foryes;if it is not write N for no.<br />
_______ 1. Head of lettuce bought at the supermarket<br />
______ 2. House painted by you and your family<br />
3. New audio tape from the record store<br />
_____ 4. Tomatoesgrown in the familygarden<br />
5. Your baby-sittingfor your baby sister to help your parents while they work<br />
_______ 6. Day care for your neighbor’schild at $15 a day<br />
_______ 7. Pay for work at a fast-foodrestaurant<br />
_______ 8. Cookingby your friend at a classpicnic<br />
______ 9. Dr. Smith’sdental work on Mrs. Jones’steeth in exchangefor her decoratinghis officewithout<br />
money changinghands<br />
______<br />
10. Suitcasefull of $100bills from the sale of smuggleddrugs<br />
______ 11. 1%7 Ford Mustang convertiblein mint condition<br />
______ 12. A borne-bakedloafof bread<br />
_______ 13. Store-boughtloaf of bread<br />
_______ 14. U.S. governmentpurchase of new F-iS jet fighter<br />
______ 15. A ton of sheet metal to be used in making car doors<br />
_______ 16. New sneakersfrom the shoe store<br />
______ 17. Dentist’sbill for cleaningteeth and fillingcavities<br />
______ 18. New house your familybuys<br />
______ 19. 100additionalteachers hired for schoolsystem<br />
_______ 20. New GeneralMotors assemblyline operated by robots<br />
______ 21. 20 hours a week you contribute to working in a home for senior citizens<br />
______ 22. Mother teachingchild to read<br />
______ 23. 2,000 pounds of food bought by the U.S. Army<br />
______ 24. Four weekendsof town park litter cleanup done by the senior class<br />
Choosetwo items that are not counted in the GNP, write the numbers of the items, and explainwhy they are<br />
not counted.<br />
25.<br />
26.
A, I iJ<br />
I’1 eu Iiv ’ yc.usiii iccklcssciedit ‘ig<br />
exp.iiision by the Federal<br />
‘<br />
(1lie heeman. f )ctobcr I969) ‘Ihal fatal<br />
C \JUu’ ,jIbul. iiitiu lciilally . was less luau the iuillation to which we were<br />
1*Wd st,b ii.iulerJi,uuuny (‘aulet. I)r. Kutlihard placesinilatmu of themoney<br />
siu 1pls 11CIWCCII 1921and 1929at 61.8 peuem. or 7.7 percentperyear.<br />
(1vc 1 doubledigit ligiiiesnotlongago, ibisdoesn’tseemso bad.It was<br />
hiulal. Iluitisher Antony Fisherrecallsthe i*uuposeof the conspirators<br />
(cspunsIi)k Iir ii:<br />
“lo tuiceta declinein businessiii 1924.the Reserve8;uusksuddenly<br />
cicatedsonic$S(MJuiiillionof newmoneywhkh led inevitablyto a bank<br />
cucdil expansion of over S4,($M)million iii less than one year. The<br />
inu,ncdiateelkct was a temporarily ag.eea lde economic born,,.Predict<br />
ably.whenthetlucat ol iiiflatiun loomed up, die authoritiesprovokedthe<br />
worst world slump ever by equally suddeuilyrediici.igIdeflusing or<br />
,.gJ dv,in’s.ss the supplyof niu iicy aI)d raisingprotectivetariffs jsuch as<br />
l1uss’lev-Sn:aot<br />
. which invitedretaliaiio.slouisothercountriesandall bitt<br />
throttledinternationaltrade.EvesisuchaclassiccaseolgoverninentFolly,<br />
however,hasptu ,t pteventedthe legendthatthe worldshimp wascaused<br />
by the failure ul the free market!’’ (Must Ikuory<br />
Levittown.New Yo,k. TransatlanticArts, 1974)<br />
Repeat Itself?,<br />
But it wasn’t“ioiiy” from thepointof view of thelooters who were<br />
responsible. “huepunt to keepin mind is that thesuper-richbankerswere<br />
well awarethatthe aitificial boom of (lieRoaringTwentieswasboundto<br />
resultin bust becausetheFed’srecklesscreditexpansionencouragedbad<br />
investmentin unprolilahlefields.No iwe knows helter than a bankerthat<br />
poorinvcsliusents can not be keptafloat forever,inflation of motleyand<br />
creditby theFeileratReserveunealathatthe(all, whenit casi , wouldhe<br />
a hard ouse.To paraphraseIlerhert Spencer: lo shieldmen fonn the<br />
effectsof theirfolly is In fill the world with fools. In this case,poorfools.<br />
The Fed pumpedup the nioney andcredit balloon, for example,by<br />
easingthereserve-ratiorequiremciitsfor banksand by settingitselfupas<br />
thelenderof lastresort.ProfessorRotlibardeslinialesthatthis“combined<br />
toinflatethenionctarypotentialof theAu,ieric;uibankii ,g systemsix—fold.<br />
.‘‘ The inflation of the ‘rwe,sties.esplainsRothbard,”distoutedthe<br />
productionstructureandledIn (lieensuingdepression-adjustment period.<br />
It also pievcnted the whole populaceIronsenjoying thefniits olpiogress<br />
in lower pikes aiid insured that only those enjoying, higher nsnelary<br />
wagesand incomescould benefit from the increasedproductivity.”<br />
(Anu’rwa’sGreai 1).’pre.i.cuin)<br />
Whereasitiflatiunsis timeexpansion ni available money and credit.<br />
producingboom.depressionis a renhictiomi iii availablemooneyandcredit,<br />
poMlisciuig recessionorbust.In a freemarketa recessionis thecorrect’<br />
-; , — !‘I! I)eprec.riOn 183<br />
the marketmakesuntil pui Jiuction. wages,andpuices“clear’ by revcst<br />
ing to wherethey shouldhovebeenwithout theahnementiomwd inflation.<br />
If (hiscoruectionis hinderedby government,theeconomicdepression<br />
turnsto bust andwill continue.Theyankingof a tis)th may hurt, usother<br />
words,butit is betler(ha ,, letting theahcesspreadandpoisonthepatient.<br />
F.minentAustrianecononsist LudwigvonMises,in (act,arguesthateven<br />
the termsboom auidbust are misleading.The boom,saysMises,is<br />
actually“retrogressionandtheIrecessionj progress.Thehoonsquanders<br />
throughtnahinvestmeiitscarce factors of productionandreducesstock<br />
availablethrough overconsuunptiun;its allegedbkssingsarepaidlot by<br />
ianpoverislisnent.TheIrecessionl, ontheother hand,is thewaybackto<br />
a stateof affairsin whichall factors of productionareemployedfor the<br />
bestpossiblesatisfactionof the niost wgeffl needsof theconsumers.”<br />
(Human Action, Third RevisedEdition,Chicago,Regnery,1966)<br />
But rememberthat the extremismof inflation anddepressionare<br />
createdby govermueni(or via govetiimenthroughthebanks).And the<br />
U.S. wasnotoperatingin aneconomicvacuum afterWorldWarI. We<br />
had acquired morethatshalf the world’s supplyof gold,and foreign<br />
bankerswhonotedthis certainlyplayedapartin .ncouraging inflationof<br />
our gold-backedmoneysupply.Wall Street,commentedProctorhand,<br />
“was international-mindedandcouldseenohopefortheworldor proFit<br />
for itselfsavethroughadistributionof our stockof goldorthecreditthat<br />
madeit possiblethroughinternationalchannels.To effectthispurpose.<br />
however,requiredthesubservienceof the FederalReserveSystem.and<br />
this was readily obtainedthroughtheundergroundconnections thatran<br />
betweenWail StreetandWashington . . . (The bankersI proceededto<br />
carry out their (inflationaryj policiesof world rehabilitation without<br />
regardto consequences so tar asthisnationwasconcerned.”(Years(-!f<br />
Plunder)<br />
in essence, it wasdecidedthatsinceBritainwaslosinghergold,and<br />
her unionsrefusedto allow reductionsin wagesto makeher products<br />
competitive wilts -<br />
ours, the answerto reducedprofitsfor Britain’sEs<br />
tabjishniemit insiderswould be American inflation.SecretconFerences<br />
werearrangedbetween,lot — example.MontoguNorman headof the<br />
flank of -1- Enghand. and Bwjarnin Strong — Governorof the Federai<br />
ReserveBank of New York, who worked closelywith (heHouseof<br />
MorganandPaulWaiburg.In 1920.MontaguNorman“begantaking<br />
• annualtripsto Americato visit Strong.andStrongtookperiodictripe to<br />
-<br />
visit Europe.All theseconsultationswerekepthighlySct* t andwere<br />
alwayscamouflagedas‘visitingwithfriends,’ ‘takinga vacation.’and<br />
‘courtesyvisits.’The Bankof EnglandgaveStrongadeskanda private<br />
37i
184 Id IIisI4s, 5 (If (.‘nspuui lice (;,. sI 1.re.uüui t),<br />
secretarybr these1)ecasunes<br />
, as ibidthe Bankiii Fe a•icc acedliceGee<br />
Reiclisba,ik.’’t,lmeru a’s (;.a Ikpses slim)<br />
Secretaryof ( os.i.ncrvc I lerhert I louversekuiiii , ii (Invernier Strong.is<br />
a ‘‘mentalannex10Europe.”’<br />
In 1925• reiiosts mini Chamberlain, Britain went hackon thegiiltI<br />
standard atthewereaiistie prewarparityof $4.86to thepound.Asaresult<br />
exports suffered, iseiportsincreasedand IMlkIohlIntend itseH with great<br />
diflicuhies.Accordingly,the Bankof E.tghmdpkai led with Governor<br />
BenjaminStrong. . . to easethesituationby a ismacypolicy thatwould<br />
divedshort-termfunds(miscNew York to Lmsih,u.” ’ (TI, Fsuerpri.sl,cg<br />
Ame,ica,is: 4 BaasisaessHi wry Of Tue Visited Sian’s) In the springni<br />
1921, the Governorof the Bank of England, the Govetnorof the<br />
Rcichbank,andtheDeputyGovernorof the Bankof France cameto the<br />
United Statesto urgean easymoneypolicy.(They had previouslypled<br />
wilhsuccess(01 a roughlysimilarpolicyin 1925.)11ccFederalReserve<br />
obliged.” (Th Great Cra.i h, 1929, Third Edition,JohnKennethGal<br />
braith,Boston,floughionMilIlin, 1912)<br />
Thisdespie the fact thatlIce IJoitedStateswasalreadyhemorrhaging<br />
gold.Saida dissentingmemberof the FederalReserveBoard,thiswas<br />
“the greatestand boldest operationever undertakenby the Federal<br />
ReserveSystem,and. . Iis resultedinoneof themostcostlyerrorsjsicI<br />
committedby it or anyotherbankingsystemin thelast15 years!”(The<br />
GreatDrpressün, Lionel Robbimis, New York, Macjitillan,1934)01)the<br />
otherhand,FabianconspiratorJohnMaynardKeynesexultedII liceFed’s<br />
“Iriuniph’’ 01beingingabout ‘the successitil mnanageweact of the dollar<br />
• . . from 192310 1928.” Ii dependson yourpointol view, andKeynes<br />
was British.<br />
After all the U.S. inflationsupposedlyto help (heat Britainback to<br />
gold, andat our expense,Br atinia’s hankerspulledher oil the gold<br />
standardprecipitouslyin 19.31withoutevena by-your-leave,escalaticig<br />
thechaosthciiranipantin theinlcnlat.I).Iaiscc uket andputtingAmerica,i<br />
gold up for grabs.<br />
Shsmje d.cJ. 192$. bcla .c die bucs4u.g of .ch io IIu,wc ijikil<br />
1929” 1927-<br />
die<br />
Alt<br />
Mi% ès sp 5s tluhbk<br />
hi<br />
.f<br />
crypi .c kjlsss 1 w.s cipOu .rd away . buu.onso ..j,, esuw.sh. Siiamt.<br />
j woie<br />
n’a*c .e .cu ,. ••w j<br />
‘4th ,.J hi .ousi .Jci shevie .’<br />
juI<br />
p’sin .9<br />
keifrd<br />
d.c<br />
b,<br />
Ass.r .i .in<br />
die<br />
put ’t.c, whith<br />
.‘a .’uy .‘ ‘.4 the Ix .’pc ut N,Iiun 6urni .. .I<br />
• iucc,te,cncc.<br />
1k ISMUC ’JM by nihe.<br />
I wha . h wnuld tie<br />
uj.j<br />
p. a o.d sokiving die twjdv .4 ii’itcns,j) vI 4CI.’ M.cU4 banhilat<br />
,I*w IS* )IrNIC l .4 the wiwid hint’, ,4 i’,’,uc<br />
ate matk<br />
the<br />
hi<br />
sjme<br />
.ovef Ibe ’. draIsa v.45. .’by ’, ftskkd.cirri’, and :tsiIjccsjj ,’,<br />
iv<br />
.1st believe<br />
.cbs4. pa<br />
al..v.4<br />
t.ove ,., Sna. . c.lu ,k.J hi’,.i.Ifr,. ‘tj4<br />
ie4u*d tha i<br />
Iba,yelpSewpeople<br />
we<br />
imkcd<br />
wese how pjy n1 fin the iko’,sw. “1mb say .c bedcail<br />
Shew.nlJ<br />
ii. I’I4 hi help ihc levi<br />
lHrnp .’j, Su.ing. (vi,unj tSw .Lw,, Levi.’, V (hjndie,,<br />
,s IP ihiulas), l9M<br />
.’. in Wjvbuq I) C..<br />
‘lucrewere ilcosewho sawa stdMkmacLetceie ,le coming.•lhicecwas.br<br />
instance.Paul M. Wambimig. batherut the privatehiuikeis’ littlebustle<br />
calledtheFederalReserveSystesse. whobecausesolavosedbyIke Fed’s<br />
licatmilent of his InternationalAcceptanceBank.The mastercnnspiraton<br />
W.irhurgwasdescribedby a gushingbitigraphe.in (‘r’cuiuvmagazine in<br />
1915as “probablythe n.ildest-ucaeencrcd enact (teateverpersonallycon<br />
ducteda revolution.It wasa blta lkss revolution:hedid not attemptto<br />
rousethepopulaceto ames.lIe steppedbuuhasiesedsimply with anidea.<br />
Acedheconquered.This is theamazingthing.A shy, sensitiveman,he<br />
imposedhis idea on a nation of a bundiedinilhimuc peopk.” This<br />
mild-manneredman’swarnings,reallysignalsto hisfellowconspirators.<br />
naturallyfailedto slowthe generalspeculationin thestockmarketwhere<br />
he predicted.in 1929. therewouldbe a collapsewhichwould“biritsg<br />
abouta generaldepressioninvolving the entirecountry.” (The Carat<br />
Crash. 1929)‘Ihosewhoarenoton theinsideneverbelievethatSuitof<br />
thing in themiddleof a honsecmarket.<br />
Ileetliag the wamningof their co-conspitator. of course, “John D.<br />
Rockelelkr, BernardBausch.and other substantialholders had with<br />
,“ drawn front timeuuuket belote the Crash . . . (lice Isse’isihieScar,<br />
CarolineBird, New Yock, McKay. 1966)TheCrashdiii not causethe<br />
(heat l)epsrssionbutresultedsoiisit. Theinflationof theTwentieshod<br />
actuallyendedin 1928acidit tooktheeconomya shorttimetoreflecthe<br />
nsalinvesmments whichtheboomhadcreated.“For the firsttimesince<br />
June 1921 ,“ commentsMssrrayRoihbard,“the money supplystopped<br />
increasing,andremainedvirtuallyconstant.1hegreatbonusofthe 921)5<br />
was over,andtheGreat Dep(essionhadtiegusu.Thecountry,however,<br />
did no. reallydiscoverthechangeuntil mIceStock .mnukct ficcallycrashed<br />
in (ktoher.” (Ameriau’s Great Depresswn)<br />
In Augustof I92S,whenherbert hooveracceptedthe G.O.P. nomi<br />
elation for the Presidency,he declared:“We have not ye,reachedthe<br />
goal,butgivenachanceto go forwardwith thepoliciesof tImelasteight<br />
years,andweshallsoon,willsthehelpof God,hewithinsightol theday<br />
when povertywill bebanishedfromiithe nation.” And so it musthave<br />
appearedto thosewho trusted,say. the Ne’w lust Timesindustrial<br />
averagesasanindicatoroha healthyecouomimy. In threemonthsof l99,<br />
in thenormally kwer suwmnerseasijn.theinthss trials gainedonehundred<br />
tenpaints,morethansheentirepreviousboostsyear.Butnecjustoneday<br />
ii. October, the souseaverageswoulddropsosharplyustocancelall mM<br />
thegainsof ike yearbefore.(The GrruaiCrush. 1929uWhess the boiusist<br />
busted,reportsRobert1. lkilh uner:<br />
it-wasasil an enormousdam hadsuikienlycrumbled.All the<br />
frenzythat had stretchedout miveriwo yearsin %eskhesg stoicksup was<br />
lip.,’<br />
— —
.t’J .i hii.’i i.s O 1’.,,i. j,j,,, ,<br />
HMcJIlIaIt ’(l H)a lew *nciethhk weekstnr;,tiimthem dowi. Os. luesday,<br />
October 29. 1929 an avaksi .cI .e ol selling citished the excha,i es. ()u<br />
occasiontherewereno oilers to buy stockat all just in sell it. (,nltJ.nas,<br />
Sadis, a mmmd . sought-alter investment host, lust ;ihpnosthalf Its qUt)le(I<br />
value on this single day. By the end ol the tiatling session(the ticker,<br />
laggingbehind, stretchedow theagonytwoamtd-a-hah[ (tourslunger tha i.<br />
the actual miiar&ehtrausacQomis)16,4IO.($*I shares of stock had been<br />
dumped.hi a singleday, the rise in valuesof thecntirc precedingyearhad<br />
been wjgx d out. A few weeks hitci, 3 billion dollaus of ‘wealth’ had<br />
vanishedin thin air. Millions who countedtheir papergainsand thought<br />
themselveswell oil discovered they were pusr” (limeMa&iimgOf &o<br />
,wnmicSociety, Englcwuod Clifis, Pientiec-I lath, 1962)<br />
Previousbustshad been left to button. omit,and this is what Secretary<br />
of theTreasury Andrew Mellon reconunende(l:“I .iquidale labor, liqui<br />
date stocks, liquidate the larniers, liquidate real estate.” Though this is<br />
brutal, it would have beennwchikinder iii the long run. But President<br />
lkkwer ‘‘disagreed with this Ullcomprosnisinglaissez-faire mit.” viewj<br />
Above all else, I itwwernow soughtto ‘require ‘the co-ordination of<br />
businessandgovernmentalagenciesin concertedaction his last<br />
suggestionwas the very heartof thusprogram.” (lime Poverty Of Abut s.<br />
dwue)<br />
ihKWer, to reiterate, did not kk)k (or a FreeMarket solution. His<br />
admirers praisehim fur this. For example,biographersWilliam Starr<br />
Meyersand WalterII. Newtonare quoted as follows:<br />
“Presidentilooverwasthe first Presidentin our history to ofici Federal<br />
leadershipin nu)hihiziug the ecoiunmc •esuurccsof the people,asiti in<br />
calling upon individual initiative to acceptdefinite responsibilityfur<br />
meetingtheproblemof depression bedepressions thatarosein the<br />
Van Burei,,Buchanan,(hunt, Cleveland,TheodoreRoosevelt,or Wilson<br />
Administrationswere practically ignoredby the government in any<br />
oil icial action.’’ (The Iloo .’er ’) Pre.ridenci<br />
After the stockmarket crashed,the government,leadingfinanciers,<br />
labor umuns, and big businessagreedto act as thoughtherewere no<br />
dcpressmn.As we poimiledout in Chapter XV. rallier than allow the<br />
marketto reachits OWOlevel, therewerewell-publicizedWhite house<br />
conferenceswitl . busissesauthlabor jt ) “reassure” one and all in tIme<br />
economy.“And by pledgingto maintainwages,prices, andempk)ysnent<br />
they would niinisimizerather than auguiwntdie potentialdeflationary<br />
impactof themarketcollapse. ‘It was.’ asWalter Lippnmannremarked,<br />
‘<br />
‘anopenconspiracymlii i to deflate.’ (limePoverty Of Ahimdance)<br />
(Juinnunutely there was no one to protectthe countryfrom the pro—<br />
tech.rs. (larry Browne emphasizesthe pmsit: “Ibc 1929depression<br />
-<br />
Jh(’ af (,r ?, De’,nt’s.cu<br />
187<br />
evokedtimeultimate in goveimuncmn imuc,lt’memmcc. hiesbertlhm ve, hasbeen<br />
characterizedso oftenas a ‘d i, nothing’P,esidcntanti thesymbolof the<br />
‘muggedindividualist.’ But that isn’ttrue.tic reactedtothedepressionby<br />
calling for a fantastic prograssito keep wagesand priceshigh. and to<br />
prevent the liquidation of mistakes. lie vowedto reverseall previous<br />
government policies in lighting this depression. And I.edid. In the<br />
process,lie succeededin keepingthe economyimmobilized.”(IIimwYou<br />
Cm. Profit Frost. limeCoining.Devmulu ,timm, New Ruchehle, Arlington<br />
House, $910)<br />
ProlessorMurray Rothbardhasenumeratedthewaystointerfacewith<br />
recoveryfroni an economicbust: I. Preventor delayliquidation,suchas<br />
by grantingloansto falteringbusinesses;2. Furtherinflate by “easy<br />
money”creditexpansion;3. Maintainartificiallyhighwageroses,sothat<br />
whenbusinessdemandslackens,ummeasiployment is aggravated:4. Keep<br />
pricesabove the level of a tree market s*i sumpluses arecreated;S.<br />
Stimulateconsummmption through Food Stampprograms,reliefpayments<br />
and other increasedgovernment efforts, while discouragingsavings<br />
throughincome,corporate,andestatetax increases;and.6. Subsidize<br />
unemploymentso workersareencouragednot to shiftto the available<br />
Iseidsof work.Thesemeasures, henoted,“arc thetimehonoredfavorites<br />
of governmncalt policy, arid . . . they werethe policiesadoptedin the<br />
1929-1933depression,by a governmentknownto manyhistoriansasa<br />
‘laissez-faire’Administration.” hoover himselfcalledit a “program<br />
unparallelediii thehistoryof depressions in anycountryandinanytime.”<br />
Justso. Alas.<br />
Between1929and 1933the GrossNationalProductfell by almost<br />
one-hall.(After The Crash, JohnRublowsky. New York.Cruwell-Col<br />
her, 1910)Yet federalspendinghadincreasedby foslytwopercentin<br />
1930-1931alone.Becauseof WhiteIksusepressure.wagerateswerenot<br />
atlust reduced,forcingunemployment. iben hours-worked decreased<br />
and, finally, theratesalsodropped.Averageweeklyearnings tell bymore<br />
thantonypercentbetween1929and1933.Moreover,in 1932,thepeople<br />
aridtheireconomyweresubjectedto oneui the largest iaz increasesin<br />
peacetimehistory.To quoteAmerica’s Great lkprvi;ü’n:<br />
“The rangeof taxincreaseswasenormous:umiany waflhsne excisetaxes<br />
wererevived, sahetiaxesw imposedongasoline,tires,autos,electric<br />
‘energy, malt, toiletries, furs, jewelry, and other articles:admissionand<br />
stock transfertaxeswereincreased; new taxeswereleviedon bank<br />
checksbondtransfers,telephone,telegraph,andradiomessages; andthe<br />
.<br />
personal incometaxwasraiseddrasticallyasFollows: thenormalratewas<br />
increasedfroma rangeof 1½percent-Spercent.in 4 percent-Spercent;<br />
personalexemptionsweresharplyreduced,andanearnedcreditUI 25<br />
‘ Ii<br />
J (0<br />
.
•<br />
,%ri!ul. ’tl.r 11/ (on.pini v<br />
percenteliminated; anti suttaxes WC1Craised eiun motisly. from a maxi<br />
mum1)125percent to 63 perccnton theliftIlest incomes.IuhtIlclllu)re<br />
, the<br />
coqk)rate incotutelax was increased Irimi 12wnent to II !4 percent,auitl<br />
an exemption for suiiall corporat oI Is eliuiuulI uteil; the estate tax was<br />
doubled,andtheexemptionfloor halved:andthe gift trix, which hail been<br />
eliminated, wasrestored,and gradualcil up to 3i’/ percent.’’<br />
Ii wasthe surestway iiuiaginahleto Chokea treeeconomyto its kne’es,<br />
and govermnentwas doing the rhoking. lTht mtire iniscluiel was afoot.<br />
The FederalReserveSystemwhich had suupposetllybeeui“active, vigor<br />
ous, self-confident in the 1920swas followed by a passive,delensive,<br />
hesitantpdicy from 1929to 1933 ....‘‘‘llie total stiwk of money —<br />
defined as the seasonallyatljiustcd sum of cuirency and tieposits at<br />
commercialbanksheldby thepublic — ‘‘lell by overone-third 1ron 1929<br />
to 1933;commercialhank depositsfell by over 42 percent ....“ (The<br />
Gretsi Contraction: 1929-I 933, Miltosi Friedman and Anna Jacobsini<br />
Schwamlz,Princeton, National Bureau of Ico,iomic Research, l’)63)<br />
ProfessorKothhanlnotesthat what wasa 1.7 lrcent annualinflation rate<br />
in the Twenties(totaling 61.8 percentover eight years)wasturneil suiti)a<br />
16percenttot4hmonetarycontraction (depression)betweenJuuieol 1929<br />
andtheendof 1933.And amid the allegedeconomicpanaceascamethis<br />
gemfrom thetop economistat Business Week:‘‘Just aswe savedour way<br />
into depression,we must squanderour way out of it.’’ BankerFranklin<br />
Rooseveltwasto acceptthis advice.<br />
This Business Week‘‘wisdom’’ was aired before a Clmmnberof (‘o,ii<br />
mercecrowd. And it is to Mr. hoover’s credit that he resistedwhatcaine<br />
to he known as “Chamber of Comnierce fascism,” exemplified by the<br />
SwopePlami — namedfor the Estahlislimne,,t insider who waspresidentof<br />
GeneralElectric. This was the collectivisi isitervenlitmisnu(see(‘hapters<br />
XIII and XIX).irnplcmentcd in F.I).R. s New J)eal.As Mr. Hoover later<br />
recalled:<br />
‘‘Among the early Rissevelt fascistmeasureswasthe National Indus<br />
try RecoveryAct (NRA) 1)1June lb. 1931.‘Ike n.igms f this schemeare<br />
worth repeating.Theseideas were first suggestedby Gerard Swope(of<br />
the GeneralElectric Company) at a mneeti,igat the electrical industry in<br />
the winter of 1932. Following this, they wemeatlopicelby the (Jmted<br />
StalesChamberof Conunerce. During the cauulpaignof 1932, llcnry I.<br />
liarrimiman,presidentof that body, urgeil that I agree to support these<br />
proposals,inhtrmmg mc that Mr. Roosevelthul agreedto cI a so. I tried<br />
to showliiuii thatthis stuhfwaspurefascism:that ii wasmerelyaremaking<br />
of Mussolini’s ‘corpomatestate’ and relimseilto aglee to any ol it. lie<br />
informed me that in view of my attitude, the business world would<br />
list’ (;rt’t,, . I)e,isr.ssiø<br />
/89<br />
susp port Rooseveltwith imnumey amitliullime,,cc.‘lI,ai, for the nm,,slhiatt.<br />
proved tune.’’ ThebIes,soirs Of IIt’,I;e’riIloaic’r)<br />
And F.F).R. was elected, calling lhmver ‘‘the greatestspenderin<br />
history’’ anti a aim who refusedto cut taxes auuilbalancethe Budget.<br />
‘Stnp the deficits!’’ cied candidateRisisevelt. (11w Rqum’i’ ,’Ig Myth,<br />
JohnT. Flynn) Where hliswer’s deficits resultedfroni an unanticipated<br />
lack of revenue,F.I).R. would plan deficits. (Ac lYeGo Marelung) As<br />
PresitlentIloover lelt office, his AdministrationhadseentheG.N.P. fall<br />
by almost half, unemploymentwas at twenty-live percentof the labor<br />
torce, and“hardest liii wasinvcstnicuit.especiallybusinessconstruition,<br />
the latter Fallingfrom about$8.7 billion in 1929to $1.4 billion in 1913.’’<br />
(America’.c Great Ikpressiou) Investmentwas, amidis, thekeyto jobs.<br />
The EstablishmentLeft, including C. .R. founderColonelhouseand<br />
F.D.R. himnsell— who hailbeencloseto hoover in the WilsonAdmnin<br />
istration — had omicepromoted hoover lot the Presidency.But his<br />
Administration wasnow madeaimobjectiii ridicule asRooseveltcaineto<br />
power. Yet evenWalter Lippniann, anothemC.F.K. Inumimler, wouldadmit<br />
that “most of PresidentRoosevelt’srecovery program is anevolution<br />
from PresidentIloover’s.” (After TheCroci,)<br />
The new Prcsidemitopined that ‘‘too olien liberal govemnmnents have<br />
beenwreckedon tImerocks of loose fiscal policy.” ButtasJohnCham<br />
berlain, amwmgothers,hasnoted: “<br />
. . . therewasno ‘economy’assuch<br />
in the Agricultiurol AdjustmentAct, in the Civilian ConseuvationCorps.<br />
in the Works ProgressAdministration, in the lckes programmi of Public<br />
Works, or in the TennesseeValley Aumihomity. All of theseinvolved<br />
spendingby the stale iii order to expandthe market. The NRA, on the<br />
other hand, presupposeda consciouslimitation of maukets,of counpeti<br />
tion, 1)1tImenumnberof firms permittedto di) businessin a givenfield.”<br />
(The Roots0/ (.‘apilaiism)<br />
Boondgglimigwastheterni thatcaineto beideniilied with theW.P.A..<br />
for example.“In Cleveland,$179thiousauidwasspentcountingthesame<br />
trees a private Contractorwas willing to count for $5 •homtsanmJ. A ‘at<br />
exiernimnationproject in New Orleans ended up costing $2.91a rat.<br />
Twenty—onethousanildollars wasspentplacing two tlmnuusaumtl stucetsigns<br />
in Montgomery, Alabama, and ) $7$,tM to repair a dittimin Ikn%er.<br />
Colorado. After a 5 million-word history al New Ynik City waswritten<br />
undesthe supervisional the WPA-sponsnrcdFederalArts Progr;mns. tine<br />
critic pointedout that ‘timestoryof creation , written iii uN) words. hut<br />
not at governunentexpense’” Nevertheless,saul F.l),R.: “II we can<br />
boondoggleoumuselves out of the lkpressiumui. that word is giiimlgto he<br />
enshrined in the heads of people fur many years to cmii i’.’’ (list<br />
3T,
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER12<br />
Name________________________________________ Class Date__________<br />
12.2ADJUSTINGTHEGROSSNATIONALPRODUCT<br />
WHYADJUSTTHEGNP?<br />
A. Explainwhy the GrossNational Product has to be adjusted for each of the following.<br />
1. Price changes:<br />
2. Populationchanges:<br />
3. New products:<br />
4. Median familyincome: ______________________________________________________________<br />
B. The GNP does not alwaysreflectimprovementsin our standard of living. Technologicalchangesmay<br />
actuallyreduce the amount of money spent on a good or servicewhileimproving the quality of life. For<br />
example, a new pocket calculatorin 1971cost about $300.Today, some pocket calculatorsare availablefor<br />
as little as $5. Pick one of the following,and research how that technologicalchange affectedthe quality<br />
of life. Write a short paragraph telling what you found.<br />
television air conditioning videocassetterecorders frozen foods<br />
jet travel home computers wash-and-wearclothing laundry machines<br />
I<br />
%
SKILLSWORKSHEET<br />
CHAPTER5<br />
Name __________________________________________ Class_____________ Date___________<br />
SUPPLYAND DEMAND:A DESCRIPTIVEAPPROACH<br />
ANALYZINGCONDITIONSFORPRICECHANGE<br />
The lawsof supply and demand are often affectedby the politicsof the real<br />
world. In 1973,the United Statessupported Israel against its Arab neighborsin<br />
the Yom Kippur War. In retaliation, the Arab members of the Organizationof<br />
Petroleum ExportingCountries (OPEC) announced an embargoagainst the United<br />
States and its Western allies. The sudden and sharp drop in supply, coupled with<br />
a growingdemand for Middle East oil, had a powerfulimpact on prices. Although<br />
the embargowas eventuallylifted, OPEC regularly increased its oil prices<br />
throughout the 1970’s.<br />
Now examinecloselythe followingtable, and then answer the questions that<br />
follow.<br />
Year AveragePrice<br />
for a Barrelof<br />
CrudeOil<br />
U.S. Consumption<br />
of Petroleum<br />
(millionsof barrels)<br />
: 1965 $ 2.86 4,202<br />
1970 3.18 5,364<br />
1971 3.39 5,553<br />
1972 3.39 5,990<br />
1973 3.89 6,317<br />
1974 6.87 6,078<br />
1975 7.67 5,958<br />
• 1976 8.19 6,391<br />
1977 8.57 6,727<br />
1978 9.00 6,879<br />
1979 12.64 6,757<br />
1980 21.59 6,243<br />
1981 31.77 5,861<br />
Source:StatisticalAbstraaof the UnüsdSases, 1986.<br />
1. How would you describe the increasein the crude oil prices from 1965to 1972? ____________________<br />
From 1973to 1981?<br />
2. How would you describe the consumption(or demand) for petroleum between 1965and 1972? _________<br />
Between 1973and 1981? _____________________________________________________________<br />
3. Look at the figuresfor the years 1973and 1981.What do these figurestell you about the relationship<br />
betweenprice and demand?<br />
4. What factors, other than price, might help to explain the declinein petroleum consumption?
14.<br />
Inflation,Recession, andUnemployment<br />
IDENTIFYINGIMPORTAN TERMSI Usethe dues at the rightand informationin the textbookto help you find<br />
the terms in the columnat the left.Then in the spaceprovided,write the term.<br />
1. An Increasein the price level,of all goods and<br />
services<br />
0 2. Type of unemploymentthat is consideredto be a<br />
normalpart of a healthyeconomy<br />
— — — — 0<br />
— — .L. — 0<br />
— — — — El—<br />
—<br />
—<br />
3. A reductionof inflation<br />
4. Totalspendingin an economy<br />
5. FluctuatIonsin businessactivities<br />
6. The value of current dollars after adjusting for<br />
price .level fluctuations<br />
— — 7. A declinein the averagepricelevel<br />
— El<br />
— ..._ — — 0<br />
8. Typeof runawayinflationthat typicallyoccursjust<br />
beforethe collapseof a nation’smonetarysystem<br />
9. Percentageof Americans16yearsor olderwho are<br />
employed<br />
10. Type of Inflation in which aggregate demand<br />
increasesfasterthan aggregatesupply<br />
0 ii. Termfortheemploymentof95percentofthelabor<br />
force<br />
12. Index that measuresthe changesin the pricespaid<br />
by consumersforgoodsand services<br />
13. Typeof unemploymentthat occursbecausepeople<br />
are out of workdue to the changesof the seasons<br />
Typeof unemploymentthat resultsfromeconomic<br />
downturns<br />
IDENTIFYINGIMPORTAN TERMSU Usethe lettersIn the boxesaboveto findthe answerto the questionbelow.<br />
Thenin the spaceprovided,write the answer.<br />
Whatis the term for simultaneoushigh Interestratesand high employment
I<br />
Investment andInvestors<br />
SOLVINGA CROSSWORDPUZZLEABOUTINVESTMENTAND INVES1t)RS Belowthe puzzleare numbered<br />
statementsabouteconomicterms.Readeachstatement.Thenwrite thetermto whichthe statementrefersin the cor<br />
rect spacein thepuzzle.<br />
HI =<br />
[I I I I i I T<br />
HIIIHI<br />
ACROSS<br />
I, Existswhen the DowJonesIndustrialAveragehas<br />
declinedovera time period<br />
4. Anothernameforcommodities<br />
7. Purchasedbyan investorin a corpomtlonto earn<br />
Jnterest<br />
8. Paymentsstockholdersreceivefortheirinvestment<br />
9. Investment thatusesmoneyto createa new<br />
capitalgood<br />
I<br />
ii itit i<br />
L<br />
DOWN<br />
1. Existswhenthe DowJonesIndustrialAveragehas<br />
Increasedovera timeperiod<br />
2. Poolsinvestors’moneyinto many stocksand<br />
bonds<br />
3. Investmentthatdoes notproducenewgoods<br />
5. A shareof ownershipin a corporation<br />
6. Capitalinvestedin high-risk,butpromisingnew<br />
businesses<br />
r
TYPESOF UNEMPLOYMENT<br />
Name<br />
Class Date<br />
As you read in Chapter 18, there are four types of unemployment; cyclical, structural,<br />
seasonal, and frictional. Imagine that you are studying the unemployment patterns in<br />
the United States. You have discovered the following information about certain regions.<br />
For each region, tell whether the unemployment is cyclical, structural, seasonal, or<br />
frictional. Identify the factor that supports each answer.<br />
___________<br />
___________<br />
___________<br />
___________<br />
___________<br />
___________<br />
___________<br />
1. Many of the workers in Region A lost their jobs two years ago when<br />
the local steel mill automated much of its operations. Most of these<br />
people do not have the skills to qualify for other jobs.<br />
2. Region B is a resort area whose busy seasons are during the summer<br />
and the ski season. Many people in this region try to make enough<br />
money during these times of the year to tide them over during the<br />
slow times.<br />
3. The lumber companies in Region C have been hit hard by foreign<br />
competition. They are slowly regaining their market share. Until they<br />
do, however, they have had to lay off hundreds of workers.<br />
4. Several thousand people in Region D have moved there in the last six<br />
months. Quite a number of them remain unemployed, as they are still<br />
looking for the jobs they want.<br />
5. More and more coal miners in Region E have lost their jobs as<br />
natural gas and oil replace coal as the fuel in the nation’s factories.<br />
• 6. The government stopped funding for an advanced fighter plane. This<br />
caused major cutbacks at a defense plant in Region F and led to<br />
• layoffs at other companies that manufacture parts for the defense<br />
• plant.<br />
7. Many of the farm workers in Region G have steady jobs from March<br />
until October. In the other months, they either remain unemployed<br />
or travel to other regions in search of work.<br />
8. Unionized textile mill workers in Region H have been unemployed<br />
since they went out on strike and were fired by their bosses, who<br />
hired new nonunion workers.<br />
9. Many airline personnel in Region I have lost their jobs because of the<br />
mergers in the industry and the resulting drive to end overlapping<br />
jobs.<br />
10. Although the unemployment rate in Region I is high, many of the<br />
people have enrolled in technical schools to learn new job skills.
90<br />
80<br />
170<br />
60<br />
50<br />
What does Graph I show? _____________________________________<br />
SKILLSWORKSHEET<br />
CHAPTER14<br />
Name________________________________________ Class____________ Date__________<br />
100<br />
Graph 1<br />
What does Graph 2 show? ____________________________<br />
Approximatelyhow many more people were employedin 1985than in 1955?<br />
What are some reasonsfor this increasein employment?<br />
4. Name two years between 1970and 1985when employmentdecreased.<br />
S. Accordingto Graph 2, what percentageof employedpersons were producing goods in 1950?<br />
___________________________In 1985?<br />
6. Accordingto Graph 2, what percentageof employedpersons were producing servicesin 1950?<br />
______________________________ In 1985?<br />
ECONOMICINSTABILITY<br />
INTERPRETINGGRAPHS<br />
ExamineGraphs 1 and 2. Answerthe questions below based on informationin the<br />
graphs and your knowledgeof economics.<br />
U.S.NONAGRICULTURAL EMPLOYMENT<br />
40<br />
1950 1955 1960 1965 1970 1975 1980 1985<br />
Source:FederalReserveBank of Richmond.<br />
EconomicReview,May/June1986,p. 27<br />
la.<br />
lb.<br />
2.<br />
3.<br />
7. What is the employmenttrend in the U.S. economythat is illustrated by Graph 2? _________________<br />
8. Explainwhy you think that this employme*ttrend has occurred.<br />
U<br />
0..<br />
80<br />
60<br />
40<br />
Graph 2<br />
EMPLOYMENTDISTRIBUTIONOFGOODS<br />
AND SERVICESIN THE UNITED STATES<br />
——— —<br />
—<br />
—<br />
.——--——<br />
— —<br />
—<br />
N1<br />
—<br />
20<br />
1950 1955 1960 1965 1970 1975 1980 1985<br />
—<br />
-<br />
.,<br />
—<br />
Goods-producing Service-producing<br />
—<br />
-.<br />
—<br />
—
4<br />
ENRICHMENTWORKSHEET<br />
CHAPTER9<br />
Name C’ass____________ Date__________<br />
•0<br />
LABORIN THEAMERICANECONOMY<br />
THESHATTEREDSTEELWORKERS<br />
Labor unions were once very strong in the United States. Today, many are facing<br />
hard times. Read the article belowabout the problems facingsteelworkersand<br />
answer the questions that follow.<br />
PITTSBURGH, July 25—.<br />
Battered by imports and slack<br />
demand, many of the nation’slargest<br />
steel companieslookedto labor three<br />
years ago to cut costs and help them<br />
becomemore competitive.After<br />
painful negotiations,the United<br />
Steelworkersof Americareluctantly<br />
agreed to as much as $1.8 billionin<br />
concessions.<br />
This year, with the industry in<br />
even more woefulshape, the<br />
companieshave come back for more.<br />
Still willingto grant<br />
concessions,the union is demanding<br />
that the companiesopen their books<br />
to prove “dire” need, and provide<br />
stock, profit sharing or other<br />
compensationfor any new givebacks.<br />
And it contends that new cuts are<br />
only part of the solution, stressing<br />
the need for other kinds of company<br />
efficienciesand for greater protection<br />
against imports.<br />
High labor costs are just one of<br />
the problems facingthe American<br />
steel industry, along with the flood<br />
of imports, antiquated plants and<br />
equipment and the need to find and<br />
developnew markets. But the labor<br />
problem is perhaps the most<br />
intractable.<br />
1. What has happened to wagesand employmentin the steel industry?<br />
For three decades, said Hans<br />
Mueller, an economistand industry<br />
expert at Middle Tennessee State<br />
University, the union and the steel<br />
companieswere locked in a<br />
relationshipin which inefficiencies<br />
were countenancedand there was<br />
little incentivefor innovation.<br />
The companies,unchallengedby<br />
foreigncompetitorsor nonunion<br />
domesticcompetitors, could charge<br />
what the market would bear, Mr.<br />
Mueller said. Wagesand benefits<br />
were far more attractive than in most<br />
other manufacturingjobs.<br />
Beginningin the mid-1960’sand<br />
acceleratingin the 1970’s,the<br />
industry changed. European and<br />
Japanese steel companiesbegan to<br />
make inroads into the American<br />
market. Even lower-coststeel began<br />
comingin from less-developed<br />
countries. Domestically,highly<br />
productive, often nonunion,<br />
mini-millswere established....<br />
Tens of thousands of workers<br />
have lost their jobs and the union<br />
membershiphas dropped from a<br />
claimed 1.4 millionin 1979to about<br />
700,000today.<br />
To the union, the industry’s<br />
down-turn amounts to nothing less<br />
than a national emergency.<br />
Source:TheNew York Times,July 29, 1986.<br />
2. What are three of the factors that have contñbuted to the problems of the steel industry?<br />
3. What is the leadershipof the United Steelworkersof Americadoing to protect the jobs of its members?
t<br />
d<br />
10 . ScholaiticUPDATE<br />
-<br />
- - HISTO1W<br />
Lczztyear, consumers bought<br />
less, businesses cut back, and<br />
unemploymentinched close to<br />
11percent. This year. sales have<br />
picked up and the employment<br />
picture is improving.<br />
These swings are part of the<br />
U.S. economy’sToileTcoaster<br />
ride—a ride Americans have<br />
been on smce the nation beg.<br />
Economists call the ride the<br />
• “business cycle.” On the up<br />
side, jobs open up and people<br />
prosper. When. the economy<br />
slides down, businesses go un<br />
der, and the unemployed scram<br />
ble forwork.<br />
Behind the ups and down are<br />
long-termeconomic trends—the<br />
economy’s 1 direction aver a pen<br />
od of yeals. Many experts say<br />
that high joblessness among<br />
factory workerstoday is a symp<br />
tornof one of those trends. In the<br />
future, they say. the U.S. Will<br />
produce less steel and fewer<br />
—-- ---- -<br />
FrQmBirth, A Nation of<br />
Economic .<br />
Ups and Downs.<br />
bCU lb. p.ohs and .xplor.<br />
th valleys of U.S. economic<br />
history for a fresh view oft.<br />
day. bnsin.ss slump.<br />
cars, but more information and<br />
servicee.<br />
The tLS..economy has shifted<br />
before.. Each time, the change<br />
broughthardtimes forsome and<br />
new opportunitiesfor others. A<br />
look at our nation’s economic<br />
past will help you understand<br />
the changes we’refacing today.<br />
ShIft 1: r to Factory<br />
Abram hewitt was born on a<br />
farm in New YorkState in 1822.<br />
In thàse days, 90 percent of all<br />
Americans lived on farms. There<br />
were only a few factories in the<br />
whole country.<br />
Farmers produced most of<br />
what they used at home. If they<br />
bu<br />
had problems paying for their<br />
land, they moved west, where<br />
landwas cheaper and unsettled.<br />
Out there, lack of transportation<br />
made farmers even less depen<br />
dent on Eastern tradesmen.<br />
In-the1840g.when Hewitt was<br />
In his 20s, that situation<br />
changed. Canals and railroad<br />
tracks began crisscrossing-the<br />
nation, increasing trade be<br />
tween cities and farms. National<br />
trade expanded even further af<br />
ter 1849.That’swhen a gold rush<br />
attracted thousands oLprospec<br />
tors and settlers to Calilornia<br />
Eewitt took advantage of the<br />
railroad boom. With a friend.<br />
Peter Cooper, Hewitt started<br />
manufacturing iron in Trenton.<br />
New lersey. Thetwo men had no<br />
problemselling their iron gird<br />
ers to the expanding railroads.<br />
Thefactory was a success.<br />
In 1861, the U.S. Civil War<br />
broke out, and railroad construc
tlon slowed down. The U.S. dee<br />
perately neededHewitt’sironfor<br />
annons, guns, and warships.<br />
All aver the country—Northand<br />
South—factorieswere going full<br />
blast. Thewe spurTedmanyin<br />
novations in manufacturing.<br />
Hewitt wanted to improvehis<br />
uon. In1882.he went to England<br />
• to study iron productionthere.<br />
• Helearned of the “Open Hearth”<br />
process. a process that made<br />
•<br />
iron stronger. turning It into<br />
steel. In 1868,three years after<br />
the war ended, be introduced<br />
the process in the U.S. The U.S.<br />
steel industry was born.<br />
Steel, used in buildings and<br />
machines,became the backbone<br />
of13.8.<br />
manufacturing. Factories<br />
sprangup across the nation.<br />
Therewere no problems get<br />
ting workers for the factories.<br />
U.S. farmland was filling up in<br />
the late 1800s and Americans<br />
moved to the cities to find work.<br />
Immigrants pc ired into the U.S..<br />
competing for‘obs.<br />
The cbang from farmer to<br />
‘nachine operator was painful<br />
.r many. The flood of workers<br />
forcedwages down and working<br />
hours up. Factories were often<br />
‘dirty. noisy, and unsafe.<br />
•<br />
When hard times bit, workers<br />
suffered terribly. In the 1870s.<br />
Hewitt kept his workersproduc<br />
ing steel, despite low factory or<br />
ders. Few otherowners followed<br />
his lead. In the economic de<br />
pressionsof 1884,1893.and 1907.<br />
millions were thrown out of<br />
work. A farmer could usually<br />
feed his family. despite the eco<br />
nomicsituation.Withouta jab.a -<br />
factory worker and his family<br />
could starve.<br />
ShUt2: ladsaby Is<br />
Co mr Goods<br />
Abram Hewitt died’ in 1903,<br />
just after the U.S. became the<br />
world’stop industrial producer.<br />
Industrial production fueled a<br />
dramatic rise in national<br />
wealth—the value of everything<br />
all Americans own. Between<br />
1900 and 1912, U.S. national<br />
wealth morethan doubled.<br />
Atfirst, most of that money be<br />
longed to factory owners.But,as<br />
the 191Osprogressed. more and<br />
more people shared in the no<br />
tion’s wealth. Workersdemand<br />
ed, and got. better pay and<br />
shorter workinghours. Personal<br />
incomealmost doubled between<br />
1912and 1921.<br />
• . - — . •. .<br />
•<br />
. -•.3 ,• -. - ____<br />
:&:<br />
- - •• .:<br />
•<br />
I •<br />
•• .<br />
___<br />
_______________________<br />
_____________________________<br />
_______<br />
Consumers bad rnore mâney<br />
to spend. d businesses were<br />
eager to producegoods forthem.<br />
In 1914..Henry Ford perfected<br />
automobile assembly-line pro<br />
duction. By the 1920s.cars were<br />
cheap enough formany filies<br />
to afford. Refrigeratorsand tele<br />
phones—once’ luxuriós afford.<br />
able only by the very rich—b.<br />
came commonplace.<br />
The eight-hour working day<br />
caught on, and it gave Ameri<br />
cans moreleisure time, Families<br />
-bought and listened ‘to radios<br />
and spent time at the movies.<br />
Magazine sales zoomed.Ad<br />
vertising became important as<br />
companies reached out Ic con<br />
sumers.A wholenew industry—<br />
communications-<br />
—toök off.<br />
The oldest industry, agricul<br />
ture, was shrinking. New ma<br />
chines and better methods of<br />
farming meant fewer people<br />
were needed to work the land.<br />
The 1920 U.S. Census, for the<br />
first time in history. found more<br />
people in the cities than in the<br />
countryside.<br />
Industrial prosperity col<br />
lapsed in the 1930s.Businesses<br />
closed, banks went under, and<br />
unemployment skyrocketed. The<br />
;;;;<br />
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I
12. ScbolasticUPDATE<br />
depression was ao severe, the<br />
U.S.government stepped in..<br />
Programs—unemployment in<br />
surance. for example—werein<br />
troduced. In the future, these<br />
programs would help keep peo<br />
pie who couldn’t work from<br />
starving.<br />
WorldWar U (1939.45)ended<br />
the Great Depression. Weapons<br />
factories in the U.S.. the “arse<br />
nal of democracy,” ran 24 hours<br />
a day. seven days a week. After<br />
th. war, factories that had pro<br />
duced tanks and warplanes<br />
manufactured cars and TVsets.<br />
The automobile industry—<br />
along with the steel, tire, and<br />
car part&industries—took off.<br />
Autosbecame centralto the U.S.<br />
economy. In 1952. the head of<br />
General Motorspointed out that<br />
“What’sgood for General Motors<br />
is good for the country.”<br />
ShIft3: Industrialto Servic.<br />
At the same time, new tech-<br />
• noiogies— the transistorand the<br />
computer for example—were<br />
being developed. Thecomplicat<br />
ed technology required in<br />
creased education, and more<br />
people became teachers and<br />
professors. The desire for news<br />
F •. 4:::’<br />
and informatioü made the com<br />
munications industry an impor<br />
tant partof the US. economy.<br />
In the 1970s. an oil shortage<br />
raised the demand for small,<br />
fuel-efficientcars. The U.S. auto<br />
industry. whi h produced mostly<br />
large “gas-guzzlers.’ was hit<br />
hard. So were its suppliers—<br />
steel companies and tire-niak<br />
ers. forexample.<br />
Costly fuel caused many fac<br />
tories to slow down production.<br />
Workersat such factories often<br />
foundthemselves out of a job.<br />
Today, energy prices are<br />
cheaper. But some U.S. busi<br />
36L,<br />
nesses are still having a hard<br />
time. Formany factoryworkers,<br />
times are tough.<br />
Service workersare in better<br />
shape. As the U.S. economy<br />
climbsout of the recession, comr<br />
puter programmers and file<br />
clerks will have few problems<br />
finding work.<br />
Abram Hewitt’s innovations<br />
helped transform the U.S. froma<br />
nation of farms into a nation of<br />
factories. The shift was a hard<br />
one for many to make. Still, de<br />
spite setbacks, it broughtus one<br />
of the highest living standards<br />
in the world.<br />
Governmentprogr ns<br />
such as<br />
unemployment insurance and<br />
food stamps have made the<br />
down side of the business cycle<br />
less painful. Butthe permanent<br />
loss of manufacturing jobs will<br />
be tough on many workers.<br />
They’llhave reason to wonderii<br />
our shift to a service economy<br />
will be a move forthe better.<br />
aalon DIsc What’s the mainstay of<br />
your local economy—zndustr1es that<br />
provIdeser,ices. industries thatpro<br />
duce goods. or both? Which of your<br />
town’s industries are the younger<br />
ones—service industries or manu<br />
faeturing industries?Why’<br />
I
TheSpeculative<br />
Boom<br />
(7)<br />
In October,1929, the bottomfell out of the New<br />
York Stock Exchange — and with it the U.S.<br />
economy.The depressionushered in bythis crash<br />
was not America’s first — instability had long<br />
plaguedthe economy — but it wasthe worst.Before<br />
it ended in 1941, the Great Depressionand the<br />
governmentprograms establishedto cope with its<br />
causes and consequences, hadfundamentally al<br />
tered theface of the Americanmarketsystem.The<br />
philosophyof”Iaissezfaire” ‘Governmenthands<br />
ofi) was all but dead, andanew era of mixed<br />
capitalismbegan - one marked by a greatly in<br />
creased economicrolefor :he government.<br />
Excerptswe abridgedfrompp. .138-142q<br />
byFrederickLewisAllen.Reprintedwithpermis<br />
sion qr HarperandRow.© 1952byFrederickLewis<br />
Alien.<br />
The Boom20’s:EveryoneCould Get Rich<br />
Thesewer boomäzgyears, andforthisfactthere<br />
wasamplebasis.Foronething, therewasthe great<br />
growth of the auto nobile industry — whichmeant<br />
expandingbusinessnot only for automobileman<br />
ufacturers and carts manufacturers but also for<br />
dealers,garageiten.filling-stationoperators,truck<br />
ingcompanies,buscompanies.roadsidebusinesses,<br />
andsoohalmostindefinitely.There wasthe sudden<br />
bloomingofthe radioindustryafter Dr. Frank Contadputonthe<br />
first scheduledbroadcastin 1920;by<br />
theendofthedecaderadiosalestotaledoverthreequartersf<br />
a billiondollarsa year, and the radio<br />
advertisersfoundthey hadstruck pay dirt. There<br />
wasthe livelyrise oftheconstructionindustry, as a<br />
confidentbusinesscommunitycalledforbiggerand<br />
bettercx ce buildings,and a moreand more con<br />
‘<br />
gestedurban populationcalledfor new apartment<br />
house,,andthe motorizedsuburbs and boomingre<br />
sorts called for new real-estate developments....<br />
Bet r still, manufacturershad been learningwhat<br />
nev machinesand a carefulplanningof production<br />
coalddo to increase output Duringthe years be<br />
tveen1922and 1929the physicalproductionofthe<br />
igricultural,manufacturing,mining,and construedon<br />
industriesincreasedby 34 per cent — an a<br />
tonishingfigure — andbetween1920and 19 0, out<br />
putperman hourincreasedby 21 per cent!<br />
So far, so good. The stuffcouldbe producedall<br />
right. The questionwas whetherit couldbe sold.<br />
The consensuswas that a briskenoughsalesman<br />
couldsell it. And so the nineteen-twentiessawthe<br />
canonizationofthesalesmanasthebrightesthopeof<br />
America.<br />
Salesquotaswereimposedonyoungmensetting<br />
outto vendtheirwares.Contests amongsalesmen<br />
— oftenmercilesscontests.— .. weredevised.Execu<br />
tives told theirjuniorsthat the day of the order<br />
takerwas over,thatinstead of waitingforcustom<br />
ers, they mustgo outandfirsd them.“Lookdown<br />
there,” CharlesE. Mitchell, the sales-conscious<br />
headofthe NationalCityBank,wouldsay, leading<br />
oneofhisbondsalesmentoa window.“Thereare six<br />
million people with incomes that aggregate<br />
thousandsofmillionsofdollars.Theyare just wait<br />
ing for someone to come and tell them what<br />
todowiththeir savings.Takeagoodlook,eatagood<br />
lunch,andthengodownandtellthem.”Advertising<br />
firmsproducedcopy and picturesand layoutsso<br />
glossilypersuasivethat they madethe advertising<br />
pages of an earlier day lookamateurish, and exp<br />
loitedto the limitthe techniquesof frighteningthe<br />
consumerintobuyingand of appealingto the most<br />
primitiveformsofsocialambition.(“Fourout offive<br />
lose”— in sther words,they get pyorrheaif they<br />
don’tusethe righttoothpaste.“Oftena bridesmaid<br />
but never a bride”— because she has unpleasant<br />
breath fromnot usingthe right mouthwash....<br />
In 1926,the Big BullMarketin commonstocks<br />
began.It reallygot underway in 1927,wentinto<br />
high gear in 192S,andafter a seriesof convulsive<br />
setbacks rose to its majesticclimaxin September,<br />
1929.<br />
Just howmanypeoplewerespeculatingin stocks<br />
duringthosewildyears is unknown,butprobablya<br />
millionor so were buyingon margin — puttingup<br />
onlyafractionofthepriceofthe stockstheybought<br />
— and a millionor two more, thoughthey were<br />
payingcashinfullfortheirpurchases, werefollow<br />
ing the stock-marketquotationsin the financial<br />
pageswithalmostequallyrapt attention. Not only<br />
were financiersand businessmenof high and low<br />
degree speculating, but housewives, ranchers,<br />
stenographers, clergymen, elevator men<br />
— who<br />
ever couldlay hands onsomecashto put into Gen<br />
eral Motors or Radio commonor MontyWard or<br />
CaseThreshingor ElectricBond&Share.Thestory<br />
is told of a young man who went to a financierfor<br />
adviceon howto get a businesseducationand was<br />
told to buy sucl -and-such a stock and watch what<br />
happenedto it; a coupleofweekslater hecameback<br />
to the financierago “Howlonghas this beengoing<br />
on 7” heaskedinbewilderedrapture. Duringmostof<br />
1928and 1929buyingstocks was like betting at a<br />
racetrack at which,fantastically,mostofthe horses<br />
won. Prices climbedand climbedand climbed.The<br />
(con.tinuedon page32)<br />
36
(7) TheSpeculativeBoom(continued)<br />
Standard Statistics index of commonstock prices<br />
veraged100duringthe year 1926;byJune, 1927,it<br />
hadreached114;byJune, 1928,it hadgotto 148;by<br />
June, 1929,to 191;and by September, 1929,to the<br />
dizzyheightof216!<br />
As pricessoared, some of the current wise men<br />
saidthey hadreacheda permanentplateau;this was<br />
a New Era. Others advancedthe bright,idea that<br />
presently the wholenation wouldenrich itself by<br />
owningcommonstocks. Still others said that what<br />
washappeningwasa wildgamble,andalotofpeople<br />
wouldsurelylosetheir shirts, but a crash wouldn’t<br />
matter muchotherwise;after the smokehadcleared<br />
away,thingswouldhumalongas before.Whatthey<br />
did not realizewas the the speculativemarket had<br />
nowbecomesohugethat the mechanismsthat were<br />
supposedto makeit self-regulating — theautomatic<br />
sellingout of unluckybuyers, for example.which<br />
wassupposedto causea dropin prices whichwould<br />
invitenewbuyers — wouldbecomemechanismsfor<br />
compoundingdisaster; and that sucha large part of<br />
Americanbusinesswas gearedto theseinflatedval<br />
uesthat therepercussionsofa crashwouldshakethe<br />
wholeeconomy. TheCrash (8)<br />
Excerptis repriruedfrom Th’eluvisibleScarby Caroline<br />
Bird withpermisiionof David fcKay Company.inc. ©<br />
1966by CarolineBird.<br />
Marginwasa magicmi.atiplierthat cutbothways.<br />
A speculator with $1,(!)0could win the rise on<br />
$10,000worthofstockty buyingon90percentmar<br />
gin. His broker wouldbuy $10,000worth of stock<br />
andfinda lenderwhovouldtake it as collateralfora<br />
•loan of$9,000.A.broker’sloanwasregardedasa safe<br />
investMent,the neaiestthingtoreadycash.It wasa<br />
“callloan,”payabl y either borroweror lenderat a<br />
moment’snotice.‘Thestockthat was used as collat<br />
eral to secureit ciuldbe liquidatedinstantly onthe<br />
stock market Bayers gladly paid exorbitant in<br />
terest rates becaisethey expectedthe stocks they<br />
boughtwith the borrowedmoneyto go up so high<br />
that the interesiwouldbecomenegligible.As long<br />
as the marketkeptrising, everyonewasahead.If it<br />
dropped,howe’er,the borrowerimmediatelyhadto<br />
put upmorema ey tokeepthe “margin” of collateral<br />
required, or sold out by the lender. That was<br />
what happend at the Crash.<br />
Speculationdrove stock prices higher and<br />
higher. Smart moneypoured in to the New York<br />
Stock eExchan from all over the world. Indian<br />
princessent their wealthto the fabulousNewYork<br />
“call-moneymarket.” Bythe middleof 1929,halfof<br />
the $7billionworth ofbrokers’loansthen outstand<br />
ing came from individualsand corporationsrather<br />
than banks. Interest rates on brokers’loans rose as<br />
high as 20 percent. Corporate officersgenerally<br />
foundthey couldmake more moneyfor their com<br />
paniesbylendingto brokersthan through manufac<br />
turing or selling.Sometimesthey floatednewstock<br />
issuesin order to get the moneyto put out“oncall.”<br />
Someinformedobserversblamedthe Tuesdaydrop<br />
onpanickycompanyexecutiveswhowereafraidthe<br />
BoardofGovernorswouldclosethe NewYorkStck<br />
Exchangebefore they couldsell the stock against<br />
whichthey hadlent outcompanymoney.Afewhad<br />
quietly“borrowed”companyfundsto turn a quick,<br />
sate profitonthe call-moneymarket forthemselves.<br />
In October1929,$2.4 billion worthofbrokers’loans<br />
outstandingon the New YorkStockExchangewas<br />
liquidated.<br />
Mostofthe hard-pressedcustomerstried desper<br />
ately to save their holdings.They borrowedfrom<br />
relatives. They took money out of banks. They<br />
pawnedjewelry. In Novembera policemanfounda<br />
destitute parrot on Fifth Avenue crying, “More<br />
margin!”In KansasCity, a manwhocouldn’tget up<br />
the marginshot himselfthroughthe chest, exclaim<br />
ing, ‘Tell the boys I can’tpay!”Whenthe stock of<br />
the UnionCigarCompanyfellfrom£113.50to $4,in<br />
oneday, its presidentcrawledout ona ledgeofNew<br />
York’sBeverlyHotel.A waiter grabbed him bythe<br />
leg, but he wriggledfree and fell to his death.<br />
Margincalls exposedwivesspeculatingwith the<br />
grocery money, bookkeepers embezzling the<br />
company’sfunds, and bankers playingthe market<br />
with deposits. J. J. Riordan, head of the County<br />
Trust CompanyofNewYork,killedhimselfwhenhe<br />
couldn’treplace bank money he had “borrowed”<br />
fromthe tillandlostonthe market. Theboardofthe<br />
bank kept the suicidesecret whilethey passed the<br />
hat to make goodthe loss.<br />
* * *
TheUnderlyingCauses(9)<br />
ofTheGreatDepression<br />
£xcerp is repriraedfronxTheGreatCrashbyJohn Ken<br />
nethGalbran /i withpermissionofHougluonMfflin Com<br />
pany.© 19S4byJohnKennethGaibroith.<br />
As already so oftenemphasized,the collapsein<br />
the stockmarketinthe autumnof 1929was(caused<br />
by]the speculationthatwentbefore.... Sometime,<br />
soonerorlater,confidence... wouldweaken.When<br />
this happened,some peoplewouldsell, and this<br />
woulddestroytherealityofincreasingvalues.Hold<br />
ingforanincreasewouldnowbecomemeaningless;<br />
thenewrealitywouldbefallingprices.Therewould<br />
bea rush, peilmell,to unload.Thiswasthewaypast<br />
speculativeorgieshadended.Itwasthewaytheend<br />
cainein 1929.<br />
Itiseasiertoaccountfortheboomandcrashinthe<br />
markethan to explaintheirbearingonthe depres<br />
sion which followed. The causes of the Great<br />
Depressiqnare still far fromcertain.<br />
What.. . are the. .. causesofthedepression?The<br />
task of answeringcanbe simplifiedsomewhatby<br />
dividingthe problemintotwo parts. First thereis<br />
the questionof whyeconomicactivityturned down<br />
in 1929.Secondthere is the vastly moreimportant<br />
questionof why, havingstarteddown.onthis un<br />
happyoccasionit wez t downanddownanddownand<br />
remainedlowfora fulldecade.<br />
TheFederal Reserveindexesofindustrialac<br />
tivity and of factoryproduction,the most corn<br />
preheeisivemonthlymeasuresof economicactivity<br />
then available,reacheda peakin June. Theythen<br />
turneddownand continuedto declinethroughout<br />
therest oftheyear.. .. Theeconomyhadweakened<br />
in the earlyslunmer wellbefore the crash.<br />
• Thisweakeningcan bevariouslyexplained.Pro-<br />
• ductionofindustrialproducts,forthe moment,had<br />
outrunconsuqerand investmentdemandforthem.<br />
The mostlikelyreasonis thatbusinessconcerns,in<br />
the... enthusiasmof good times, misjudgedthe<br />
prospectiveincreaseindemandandacquiredlarger<br />
inventoriesthantheylaterfoundtheyneeded.Asa<br />
resultthey curtailedtheir buying,andthis ledto a<br />
cutbackinproduction. Inshort,thesummerof1929<br />
markedthe beginningof the familiarinventbryre<br />
cession.<br />
Alsothere is a chance... thatmore deep-seated<br />
factorswereatworkandmadethemselvesseriously<br />
evident for the first time duringthat summer.<br />
Throughoutthetwentiesproductionandproductiv<br />
ity per workergrew steadily. between 1919and<br />
1929,outputperworkerinmanufacturing industri s<br />
increasedbyabout43per cent.Wages,salaries,and<br />
pricesallremainedcomparativelystable,orin any<br />
case underwent no comparableincrease.Accord<br />
ingly, costs fell and with prices the same, profits<br />
increased. Theseprofits sustainedthe spendingof<br />
thewell-to-do,andtheyalsonourishedatleastsome<br />
of the... stock marketboom.Mostof all they en<br />
courageda very highlevel of capital investment.<br />
Duringthetwenties,theproductionofcapitalgoods<br />
increasedatanaverageannualrateof6.4per centa<br />
year; non-durableconsumers’goods, a category<br />
whichinclude suchobjectsofmassconsumptionas<br />
foodand clothing,increasedat a rateofonly2.8per<br />
cent. (Therate of increase fordurable consumers’<br />
goodssuchascars,dwellings,homefurnishings,and<br />
thelike,machofit representingexpendituresofthe<br />
well-offto well-to-do,was5.9percent.)Alarge and<br />
increasinginvestment incapitalgoodswas,in other<br />
words,a ncipal devicebywhichthe profitswere<br />
being spent. It followsthat anything that inter<br />
rupted theinvestmentoutlays — anything,indeed,<br />
whichkeptthemfromshowingthenecessaryrateof<br />
increase — couldcausetrouble.Whenthisoccurred,<br />
compensadonthrough an increase in consumer<br />
spendingeouldnot automaticallybe expected. The<br />
effect, therefore, of insufficientinvestment — in<br />
vestmentthat failedto keep pace with the steady<br />
increase ii — profits couldbe failingtotaldemand<br />
reflectedin turn in fallingorders and output.<br />
Thereseemslittlequestionthatin 1929,modify<br />
ingafamouscliche,theeconomywasfundamentally<br />
unsoundThisis a circumstanceoffirst-rateimpor<br />
tance. lany thingswere wrongbut (these]weak<br />
nessesem to havehadan especially(strong]bear<br />
ingonthe... disaster....<br />
1)Thibad distributionofincome.In1929the rich<br />
were(wry]rich.... It seemscertain that the 5 per<br />
cent ofthe populationwiththe highestincomesin<br />
that yearreceivedapproximatelyone thirdof all<br />
personaincome.Theproportionofpersonalincome<br />
receivedintheformofinterest, dividends,andrent<br />
— theineome,broadlyspea!dng,ofthewell-to-do—<br />
wasabotttwiceasgreatasintheyearsfollowingthe<br />
SecondVorid War.<br />
This lIghly unequal income distribution meant<br />
(continiad on page 34)<br />
• I P•
(9)TheUnderlyingCauses... (continued)<br />
that the economywasdependentona highlevelof<br />
investmentorahighlevelofluxuryconsumerspend<br />
ingorboth.Therichcannotbuygreatquantitiesof<br />
bread.Iftheyare to disposeofwhattheyreceiveit<br />
mustbeonluxuriesorbywayofinvestmentinnew<br />
plants andnewprojects.Bothinvestmentand lux<br />
uryspendingaresubject,inevitably,tomoreerratic<br />
influencesand to widerfluctuationsthanthe bread<br />
and rentoutlaysof the $25-a-weekworkman.This<br />
high-bracketspending and investmentwas espe<br />
cially(vulnerable]to the crushing news fromthe<br />
stockmarketin Octoberof 1929.<br />
2)Thebad corporatestructure.... Americanen<br />
terpriseinthe twentieshadopenedits. . . armstoan<br />
exceptionalnumberofpromoters,grafters.swind<br />
lers.impostors.andfrauds.This,inthelonghistory<br />
ofsuchactivities,was a kindof floodtideof corpo<br />
ratelarceny.<br />
Themostimportantcorporateweaknesswas.•..<br />
the vast new structureof holdingcompaniesand<br />
investmenttrusts. The holdingcompaniescon<br />
trolledlargesegments of the utility, railroad, and<br />
entertainmentbusiness.Here,as withthe invest<br />
menttrusts,wastheconstantdangerofdevastation<br />
byreverseleverage.Inparticular, dividendsfrom<br />
the operatin companiespaidthe interest on the<br />
bondsofupstreamholdingcompanies.Theinterrup<br />
tionof the dividendsmeantdefaulton the bonds,<br />
bankruptcy,and the collapseof the structure.<br />
Underthesecircumstances,the temptationto cur-<br />
• tailinvestmentin operatingplant in orderto con<br />
tinue dividends was.. strong. This added to<br />
deflationarypressures.Thelatter,inturn, curtailed<br />
earnings and helped bring down the corporate<br />
• pyramids.<br />
3)Theld bankingstructure. Althoughthebank<br />
erswerenotunusuallyfoolishin 1929,the banldng<br />
structurewas. .. weak.Theweaknesswas. . . inthe<br />
largenumbersofindependentunits. Whenonebank<br />
failed, the assets of otherswere frozenwhilede<br />
positorselsewherehad a... warningto goand ask<br />
fortheirmoney.Thus onefailure led to otherfail<br />
ures, ai d thesespreadwithadominoeffect.Evenin<br />
the best of times localmisfortuneor isolatedmis<br />
managementcouldstartsucha chainreaction.(In<br />
the first six monthsof 1929,346 banks failed in<br />
variousparts of the countrywith (total]depositsof<br />
nearly$115 million. Whenincome,employment,<br />
‘I<br />
and values fell as the result of a depressionbank<br />
failures could qucklybecomeepidemic.This hap<br />
penedafter1929.Againit wouldbehardtoimagine<br />
a betterarrangementformagnifyingthe effectsof<br />
fear.Theweakdestroyednotonlythe otherweak,<br />
butweakenedthestrong.Peopleeverywhere,rich<br />
and poor,weremadeawareof the disaster by the<br />
persuasiveintelligencethattheirsavingshad been<br />
destroyed.<br />
4)The[doubtful]stateofthe foreign(trade].This<br />
is a familiarstory. Duringthe FirstWorldWar,the<br />
United States becamea creditor on international<br />
account.Inthe decadefollowing,the surplusofex<br />
ports overimportswhichoncehadpaidtheinterest<br />
and principalonloansfromEuropecontinued.The<br />
hightariffs, whichrestrictedimportsandhelpedto<br />
createthissurplusofexportsremained.Othercoun<br />
tries whichwere buyingmore than they sold,and<br />
had debt paymentsto makein addition,had somehowto<br />
findthe means for makingup the deficitin<br />
theirtransactionswith the United States.<br />
Duringmostof the twentiesthe differencewas<br />
coveredbycash—i.e., goldpaymentstotheUnited<br />
States — and by new privateloansby the United<br />
States to other countries.Mostofthe loanswereto<br />
governments — national,state, ormunicipalbodies<br />
— and a large proportionwere to Germanyand<br />
Central and South America. The underwriters’<br />
marginsinhandlingthese loanswere generous:the<br />
publictookthemup with enthusiasm;competition<br />
forthe businesswas keen. If unfortunatelycorrup<br />
tionand bribery were required as competitivein<br />
struments,these were used.<br />
Countriescouldnot covertheir adversetrade bal<br />
ancewith the United States with increased pay<br />
mentsofgold,at leastnotforlong.Thismeantthat<br />
they had either to increase their exports to the<br />
UnitedStatesorreducetheirimportsordefaulton<br />
their past loans.PresidentHooverandtheCongress<br />
movedpromptlyto eliminatethe first possibility —<br />
that the accountswouldbe balancedby largerim<br />
ports — by sharplyincreasingthe tariff. Accord<br />
ingly,debts,includingwardebts,wentintodefault<br />
and there was a (sharp]fall in Americanexports.<br />
Thereductionwasnotvastinrelationtototaloutput<br />
ofthe Americaneconomy,butit contributedto the<br />
generaldistressandwasespeciallyhard onfarmers.
S<br />
ChapterXVI<br />
TheGreatDepression<br />
WllAT<br />
WE NEED,tekvision ’s Archie flusukersaid for years. is a<br />
Presidentlike herbert Hoover. b’s someNew York “Liberal’s” i(lea of<br />
ajoke, you see,for Bunkeris sooafish that he yearnsFora return to Free<br />
Enterprise — a policythat under I mover, asevery New York • I.iberal”<br />
knows,broughton theGreat1)epiession.Thatwasthedepressionsohad<br />
that, aseveryone knows, it could only havebeencuredby theprogressive<br />
policiesof Franklin Delano Roosevelt. For decadesthe cohlectivistidol<br />
ters of Ronse ckhave pointed to the hoover yearsas threadbareproof<br />
of why laissez-fairecan never again be tussledin American economic<br />
policy.<br />
The truth is that the Great Depressionwaspossibleonly becauseof an<br />
interventionistand inflationarygovernment.And, to theextentthat Mr.<br />
Hoover was guilty of counter-productive policies, he was more than<br />
matchedby Mr. Roosevelt,whoseeconomicmeddlingkept our economy<br />
seriouslydepresseduntil theoutbreakof World War II.<br />
• The cyclesof boom-and-buststartedwell heloreMr. Iloover took<br />
office.Buttheyare so much snoreuseful — for the favored few on the<br />
inside— whenthetiming of sucheconomicadjustmentscanhecontrolled<br />
bycreditandmonetaryinflationanddepression.Alterall, asProctor W.<br />
Hanslindicatedin $935:“In timesof depressionsutanychoicepluusus fall<br />
intothe handsof bankingor othermoney interests.In suchtimesshe<br />
foundaiionsni greatfortunesare haitIby thosewho areshrewdenoughor<br />
far-seeingenoughtotakeadvantageof thosewho atelessfortunateor less<br />
equippedwith foresightor Financialresources.Ii wasunder suchcondi<br />
tions thatRockefellerwasenabledto gatherin the units that enteredinto<br />
the StandardOil Company and, at a later day, followingthedepression<br />
of the Nineties,i.P. Morgan broughtaboutthe reorganizationof the<br />
railroadsystemof the country with emunuinissprolit to himselfand his<br />
./<br />
.‘•<br />
• •<br />
p<br />
• , sip<br />
) ‘ .,<br />
associates. And so it hasbecomeaxiossiaticthat thebankerpintits by the<br />
ilistressof thecoissssiunityas a whole authil he tasi ;usuuicip;ste or control<br />
theswingof ike pesliluslIsIui his$Misitionis oneof gicat advantage.’’(Year.;<br />
Of l’lumkr, New Yi,rk, I hutsisun SmithandRolw.t I laiss,1935)<br />
Controlof tIESIp. 1KI11l1t5t1is whatcreationol 1w Fctkral Reservewas<br />
all about.llansl continues:“limier usccxistsslgosulcithekey to inflation<br />
is creditamidin thiscountsythekeyto creditis the FederalReserveSys<br />
l’eun . .<br />
‘.<br />
. Led by I3cnjaunisi StrongIlater a nsesnberof thecon.;,nratorial<br />
Council an Foreigs.Rita tio,is asstIhead of theNcus’YorkFederalRescrie<br />
Bank which tame so dominate the Systesu)of the Bankersmist<br />
Company,and with theactivesupportof theMorganinterests,a deter<br />
minedeffort hadbeenput forth, evenprior to the;wkpiiimof theFederal<br />
Re.cerrelact, to divertthe control of the Systemto Wall Street.’’<br />
The Fed had beencreatedin 1913by hankiisginsidersto manipulate<br />
boomsandbusts.It was largelythewink of Paul Wambuig,a partnerof<br />
Kuhn, inch & Cosnpasiy.brother of Gerusiany’scentral hanker Maz<br />
Warhurg.and (‘hairsnanof the Boardof the InternationalAcceptance<br />
Bank — which greatlyhenefutiedfrom the susbsiulizetl and csisnpletely<br />
artilicial ratespaid for the credit.pruducisighills “bought” by the Fed.<br />
lncestwius? You bet. Those FederalReservelulls, tepuststhe distin<br />
guishedeconomist Murray Rothhard.“led the inflationary paradeof<br />
Reservecredit in 1921and 1922” and wereeven“snore isnpnrtanthan<br />
securitiesinthe 1924inflationaryspurt,andepmallyimportantin the $927<br />
spud. Furthersnore. hillsboughtalonecontinuedtheisullalionary stimulus<br />
in thefatal lasthalf of 1928.” (America’s GseatDepression)<br />
The UnitedStates.In be sure,hadsufferedearlierdepressions at the<br />
handsof the FederalReservemanipulators. Indeed,afterWorldWar I<br />
therewas an eighteen-monthslunipin 1920-1921.Bitt, aseconomist<br />
hlnwardKershnerhaspointedout, in thatshunt-lived(leprcssmn theU.S.<br />
had a flexible wage and price structure;the dollar was sound and<br />
convertibleto gold; and, both the populace and federalgoversiment<br />
emphasizedthrift insteadof large-scaledelicit spendissg. In 1929 and<br />
thereafter.notesDr. Kershner,we reversed“the policiesthathadproved<br />
soeffectivein 1920-21,Is.mi]theGreatDepressionwasfasteneduponus<br />
permanently. The severeunaladjustmesuts were not corrected. . .<br />
(Diuiding The Wealth, Old Greenwich, flevin-Aul;sir, 1971)<br />
To maximize the loosingin a bust there titlist be a hoonu— and the<br />
conspiratorsbackof the FederalReservesawin that in theTwentieswith<br />
a dehiheraleinflationary policy. It wasthis PolicY.reportsProfessorhans<br />
Sennholz,that “generateda lknmi thrnusgheasymooneyandcmedit,which<br />
wassoonfollowed by the inevitablebust . . . . 11wspectacularcrashof
Cycles Inthe United States<br />
thSIdIIS<br />
I-—<br />
1 ui?<br />
Wansparency<br />
.9<br />
BusinessCycles in the United States, 1790-1982 .. I<br />
4111<br />
0<br />
.e,conc<br />
I*nI k
theory.“Those people who say the<br />
theory hasn’t worked are only partly<br />
right,” he contends. “The government<br />
supposed to run cashsurpluseswhen<br />
the economy heats up, and it has not<br />
done so. The [federal)budgets have<br />
never been properly adjusted to match<br />
the (Keynesian)theory. Youcan’t keep<br />
pumping up budgets and pumping up<br />
spending to put people backto work if<br />
you aren’t reducing bud ets<br />
and reduc<br />
ing spending when the economy over<br />
heats. Supply-siders claimthat a large<br />
amount of output has been driven out<br />
of the — economy either driven out of<br />
existence or driven underground so it<br />
can’t be observed — in response to very<br />
heavy rates of taxation.”<br />
The more businesses and people<br />
aretaxed, supply-siders argue, the less<br />
willing they willbe to make more goods<br />
or provide more services.At some<br />
point, increasing taxeswillactually de<br />
aease tax revenues because people will<br />
become so discouraged that they will<br />
work less and produce fewer goods.<br />
That is one of the key ideas behind Rea<br />
gan’s plan to cut txes. The idea. Boris<br />
explains, is that under heavy rates of<br />
iation,Wpeoplewillrefrain from<br />
.g back to work, they’llrefrain from<br />
working harder, they’llreIran from talc<br />
ing risks, making new investments and<br />
hiring new people, and so on if they are<br />
‘simplygoing to act as a conduit for the<br />
tax collector.’ 0<br />
Supply-siders illustratewhat they<br />
believeto be the relationship be<br />
tween ta burden and taxreve<br />
nues with something calledthe “Laffer<br />
Curve.” Developed by Arthur Laffer,a<br />
professor at the Universityof Southern<br />
California, the curve is bell-shaped. Its<br />
message is that as tax rates rise tax reve<br />
nuts incrcaie — but only to a point.<br />
After that, taxes get so Igh that they<br />
discourage work and production and<br />
tax revenues begin to failoff.<br />
Borissays the true supply-sider<br />
would attack those taxes that moStdis<br />
courage businesses from producing<br />
more goods or discourage individuals<br />
from working harder.<br />
While they are concerned with re<br />
ng marginal taxrates, supply-siders<br />
“ant to make more investment<br />
/ availableto businesses so they<br />
can build new plants, hire more work<br />
ers, and make more goods. Rather than<br />
encourage consumers to spend, supply<br />
siders want them to save. That way,<br />
businesses can borrow those savings<br />
frombanksand use the money to ex<br />
pand their opciation.s.<br />
“There is a great deal of concern<br />
among economistsabout the low rate of<br />
savings, particularlypersonal sivings,<br />
in the Americaneconomy,” :ts says.<br />
“The idea is that people accumulate<br />
wealth through their savings. There<br />
have been a whole series of economic<br />
changes in this country which have dis<br />
couraged people from saving. One is<br />
the <strong>Social</strong>Securitysystem itself,al<br />
though the exactmagnitude of the ef<br />
fectis a subjectof very hot dispute<br />
among economistswho do research in<br />
that area.”.<br />
The supply-side approach favors<br />
taxcuts for those who are already well<br />
The big test:<br />
Can the program<br />
bring inflation:<br />
under control?”<br />
offbecausethey are more likelyto save.<br />
the extraincome.The poor are more<br />
likelyto spend it. “if you wer’•going to<br />
dcsign.a program to (it the supply<br />
siders, what you would do is t.y to re<br />
structure the tax system so that you<br />
would relymore heavily on ta rates<br />
that did not rise with reward,” Borts<br />
says.<br />
Somepeople havesuggested that<br />
that sounds likea program to benefit<br />
the richat the expense of the poor.<br />
Bortsdoesn’t flinchat the suggestion.<br />
The true supply-sider, he says, “would<br />
try to go as much as possible tc’ ward ex<br />
cise taxes,value-added taxes.‘kou<br />
would try to move away from tne grad<br />
uated incometax, which becomesa big<br />
ger burden the more successfulyou are.<br />
Youwould foc s on reducing tax rates<br />
for the high-incomepeople, riot tax<br />
rates foT the low-incomepeople. as an<br />
inducement to the low-incomepeople<br />
to improve themselves.”<br />
That, of course, assumes that<br />
everyone hal thf abilityto improve<br />
himself. “The realpart of the supplyside<br />
philosophy which is a break with a<br />
lot of economicthinking,” Borissays;<br />
“is that it is based on the assumption<br />
that people have the capabilityof deter<br />
mining their ,wn income, rather than<br />
having that incomeleveldetermined by<br />
a whole seriesof factors they have no<br />
control over.”<br />
Specifically,how might a pure sup<br />
ply-siderwork to restructure<br />
America’staxsystem?The heavi<br />
est burden of taxationin our society<br />
today is on the welfarerecipientwh..<br />
contemplatingjoining the workforce,<br />
Bortssays. “Becauseof the way the wel<br />
fare system is structured, that person<br />
loses so many benefits when he or sh<br />
enters the labor market that the effec<br />
tive rate of taxation to that person s<br />
more than 100percent. Allof a sudden,<br />
you not only have to pay taxeson your<br />
new income,but you loseallyour ben<br />
efits, allyour free goods and services,<br />
so the effectiverate of taxationis very<br />
heavy. The entire welfaresystem would<br />
have to be restructured to eliminate,or<br />
at least reduce, that heavy taxburden.”<br />
Another exampleofa taxsupply<br />
siders might attack is the taxon capital<br />
gains and income from interest and<br />
dividends. Bet!auseof inflation,under<br />
the present tax setup the government is<br />
levyinga taxon the principalof capital,<br />
not just capital gains, Bortsargues. “To<br />
give you a preciseexample,say the<br />
price leveldoubles in a given period.<br />
Over that period, say I bought some<br />
thing, a pieceof property, for$100and<br />
sold it for$200.I should have no tax.<br />
capital gain, because I simplyrecap- •<br />
tured the real value of the property. If!<br />
sold it for$250,th en Ishould be taxed<br />
on the $50.”<br />
Somesupply-siders might even<br />
view the <strong>Social</strong>Securitytaxas a 13-per<br />
cent taxon labor, Borissays. “Tosome<br />
degree it could be regarded as inhibiting<br />
the hiring of employees.”<br />
Okay. Let’ssay those taxesare lift<br />
ed, so wealthy people have more<br />
money to save. They save it, and pro<br />
ducers turn arbund and borrow it to<br />
build new plants and make more goods.<br />
Who is going to buy all the new pro<br />
ducts?<br />
The answer, accordingto Boris,is<br />
that the new higher-paid workerswho<br />
were hired to make the new goods will<br />
turn around and buy them. “People<br />
would be put to work making invest<br />
ment goods, new factories,new mines,<br />
research and development, whatever<br />
form the investment takes. The funds<br />
that go into saving willflowto finance<br />
capital formation,” Borissays.<br />
“You can’t worry about a glut e<br />
time you build a new factory,because<br />
the (increasedjcirculationof income<br />
continually absorbs the output that the<br />
economy is capable of producing. There<br />
are times when the economycannot ab
4<br />
S<br />
S<br />
S<br />
C U<br />
E<br />
I<br />
Name<br />
Section 3. PHASES OF THE BUSINESSCYCLE<br />
Class Date<br />
Although the GNP of the United States has been on an upward trend for many years,<br />
its rate of growth has varied. One explanation for the low points and high points in this<br />
output of goods and services is called the business cycle. The cycle is made up of four<br />
parts: peak (or boom), contraction (or recession), trough (or depression), and expan<br />
sion (or recovery). When one cycle ends, another begins. Fill in the following chart to<br />
show what happens to the economy during the four phases of the business cycle.<br />
What Happens During Business Cycles<br />
Economic<br />
Indicator Peak Contraction Trough Expansion<br />
Prices of<br />
Goods and<br />
1Services<br />
Employment<br />
Uneinployment<br />
Factory<br />
Output<br />
r<br />
Creation<br />
of New<br />
Businesses<br />
Business<br />
Failures<br />
,<br />
I’
C<br />
E<br />
U<br />
C<br />
Name<br />
MASTERY<br />
WORKSH EEl C’ass Dale<br />
_____________________<br />
Section 4. CAUSESOF THEBUSINESSCYCLE<br />
Although the peaks and troughs of the American business cycle are well documented,<br />
economists differ on the exact causes of the cycle. In Chapter 14 you read about some<br />
of the causes and their effects on the economy. Using this knowledge, explain why<br />
each of the following events might trigger a contraction or an expansion in the<br />
economy.<br />
1. After several years of heavy investment in new equipment, industries decide to cut<br />
back on the amount of machinery and equipment they buy.<br />
Z. The federal government decides to give more support to space exploration.<br />
3. A blockade of a major oil-producing country by one of its enemies seriously curtails<br />
the supply of oil that country exports. The world price of fuel oil and gasoline in-<br />
creases dramatically.<br />
r<br />
4. The end of a war causes great rejoicing and relief in the United States.<br />
I<br />
5. As foreign car manufacturers capture a greater percentage of the American market,<br />
domestic companies lose prdfits and lay off thousands of workers.
4<br />
I<br />
C<br />
Name<br />
Section 2. THE FUNCTIONS OF GOVERNMENT<br />
Crass Date<br />
Local, state, and the federal governments provide American citizens with many ser<br />
vices. They provide public goods, provide for public well-being, regulate economic<br />
activity, and try to maintain economic stability. Sometimes the various governments<br />
share responsibility for these services. Sometimes the responsibility belongs exclusively<br />
to one level.<br />
Demonstrate your understanding of the economic functions of American government<br />
by identifying which level of government is responsible for each of the services in the<br />
following table. Place a check mark (i .-)<br />
vice.<br />
in the appropriate column next to each ser<br />
S<br />
Responsibilities of Government<br />
I. Both<br />
Federal State and Local Levels of<br />
Government Government Government<br />
and technology<br />
hospitals<br />
urban renewal<br />
protection<br />
programs<br />
and highways
4<br />
S<br />
CONTRASTINGINFORMATION<br />
Name<br />
Class Date<br />
Read the following artièle and use the information to complete the chart below. The<br />
completed chart should show the benefits and costs of technology and the resulting<br />
economic growth.<br />
The use of technology has resulted in economic growth for the United States. Technological<br />
advances have resulted in new products, jobs, methods of production, and development in<br />
business and industry. All of these have allowed Americans to enjoy a higher standard of liv<br />
ing. Yet, some economists argue that this growth has not always improved the quality of life and<br />
may possibly have introduced new problems and dangers that the GNP does not measure.<br />
Advances in air travel enable more of us to travel at great speeds over long distances.<br />
Deregulation of air transportation has led to lower fares among airlines competing for patrons.<br />
However, we must deal with overcrowded airports and reduced air safety around the country’s<br />
busiest airports.<br />
Another benefit of technology has been the growth of the middle class with their spacious<br />
suburban homes and modern conveniences. Our dependency on automobiles to accommodate<br />
this lifestyle has also plagued us with traffic jams, overcrowded highways, rising highway death<br />
tolls, and high pollution levels.<br />
The flight to the suburbs has also increased urban problems—rising crime rates, increase in<br />
drug use, deterioration of our urban schools, inadequate mass transportation systems, and an in<br />
crease in the urban poor. Yet our cities are also our prime cultural and educational centers.<br />
Much of our economic growth can be attributed to the growth in the civilian labor force.<br />
Women working in new as well as traditional fields have resulted in the two-career family with<br />
increased spendable income for larger homes filled with modern household appliances. We also<br />
have nicer cars, more frequent vacations, designer labels, restaurant meals, and frozen foods.<br />
Though time is saved in the preparation of these highly processed foods, we are eating ad-<br />
• ditives and preservatives that are less nutritious than the farm-fresh meats and produce we once<br />
• enjoyed.<br />
• Technological advances in health and medicine allow us to enjoy healthier, longer lives.<br />
Prescription medicines now treat previously untreatable diseases. However, medical costs have<br />
risen tremendously—especially, for the elderly.<br />
C<br />
S<br />
E<br />
Change in the<br />
Standard of Living Benefits Costs<br />
1.AIR<br />
TRANSPORTATION<br />
‘<br />
2. SUBURBAN<br />
LIFESTYLE<br />
3. URBAN<br />
LIFESTYLE<br />
4. HEALTHAND<br />
MEDICINE<br />
•
‘<br />
___________<br />
INDEPENDENT PRACTICE WORKSHEET<br />
CHAPTER11<br />
___________<br />
Name_________________________________________ Class____________ Date__________<br />
11.2GOVERNMENTINCOME:TAXES<br />
UNDERSTANDINGTAXES<br />
A. Defineeach of the followingprinciplesof<br />
taxation andgivean exampleof each.<br />
1. Benefits-receivedprinciple<br />
2. Ability-to-payprinciple<br />
3. Progressivetax<br />
‘<br />
4. Proportionatetax<br />
5. Regressivetax<br />
B. Tell if each tax plan describedbelowis progressive,proportionate, or regressive.<br />
1. All wage arners must pay tax on 15percent of their earnings.<br />
2. ‘People pay no tax on earnings under $10,000, 15percent on earnings between$10,000and $50,000and<br />
30 percent on all earningsabove $50,000.<br />
3. Everybodypays a 5-percent tax on all purchases of food, clothing, medicine, and appliances.<br />
4. All wagesand other incomeis taxed 10 peicent for people earning $15,000or less. Taxes increaseby<br />
2 percent for each additional $10,000earned. ___________________________<br />
5. The governmentsets a 20-percenttax on all salesof gasoline.
NAME. DATE_________CLASS_____ SCORE_____<br />
CHAPTER1121 Section 1 REINFORCEMENT:<br />
Being TaxedIsTaxing<br />
Organ zuig Inlormation<br />
Activity45<br />
TheConstitutionempowersCongressto tax the<br />
Taxes 1970 1980<br />
Americanpeople.ArticleI, Section8 reads:‘The<br />
Congresshallhavepowertolayandcollecttaxes, Individual incometaxes $103.7 $287.5<br />
duties,imposts,andexcises,to paythedebtsand Corporate incometaxes 35.0 71.4<br />
provideforthecommondefenseandgeneralwelfare<br />
<strong>Social</strong>securitytaxes 45.3 157.8<br />
of the UnitedStates In addition,the 16th<br />
Amendment givesCongressthe powerto tax Excisetaxes 15.9 24.6<br />
per<br />
sonalincome.Anincometax is a directtaxonthe Estate&GiftTaxes 3.7 6.5<br />
individual.<br />
CustomsDuties 2.1 6.9<br />
States,too,havetheauthoritytotaxtheircitizens. Miscellaneous 3.4 12.7<br />
Somestatescollectafixedpercentageof personal Source.StatisticalAbstractof toe UoiteoSiates t984<br />
income.Illinois,forexample,assessesa 2.5%rate<br />
onthetotalnetincome.Moststates,however, have<br />
anescalatingorprogressivetax,withthepercent<br />
age rateincreasingwith<br />
COMPREHENSIONMasteringFacts<br />
higherincomes.Missis<br />
sippi,forexample,assessesa 3%tax onthefirst 1.Whatgivesthegovernment itspowertotax?<br />
$5000ofirome, 4%onthenext$5000,and5%on<br />
incomeov r $10,000.Onlysevenstatesdonothave<br />
astateincbmetax.<br />
2. ForwhatpurposesdoestheConstitutionpermit<br />
Somecitiesarealsotaxingincome.Citiescollect taxes?<br />
ingsuchtaxesincludeBaltimore,Cleveland,Colum<br />
bus,Detroit,NewYork,andPhiladelphia.<br />
A persons incomealone can be taxedthree<br />
times,—federal, state,city.Inaddition,anindividual<br />
whoownsa home-paysrealestatetaxesas well.<br />
COMPREHENSIONDevelopingVocabulary<br />
Propertyisassessed,assigneda value,andtaxed<br />
accordingly. Thispropertytaxisusuallyusedtofund 3. Whatismeantbya progressivetax?<br />
localscjiools.Inmanyareasofthecountry,residents<br />
are alsoassessedcountytaxesto fund services<br />
suchas communitycolleges,hospitals,libraries,<br />
parks,aswellasthecostofrunningthegovernment<br />
itself.<br />
APPLICATIONProvidingExamples<br />
Mostpeoplepayothertaxessuchassocialsecu<br />
4. Whatarethetwokindsof incometaxesmost<br />
rityandsalestaxes.Mostwageearnershavesocial<br />
secdritytaxes deductedfrom their<br />
Americancitizenspay?<br />
wages.The<br />
pumppriceof asoIine includesa taxwhichhelps<br />
fundfederaland statehighways.Pricesfor ciga<br />
rettes,telephonecalls,airlinetickets,andalcoholic<br />
beveragesalsoincludespecialtaxes.Assessments<br />
ontheseitemsmadeandsoldwithinthecountryare EVALUATIONChoosingRelevantFacts<br />
calledexcisetaxes.Manystatesalsohavea sales<br />
5. Howmuchmoresocialsecuritytaxdidthegov<br />
taxassignedtopurchasesofgoodsandserviees.<br />
Governments needtaxrevenuestofunction.With<br />
ernmentreceivein1980thanin1970?<br />
outtaxescitizenswouldnothavepublicgoodsand<br />
service suchasschools,parks,orhealthsystems.<br />
Usethetablebelowtocompareselectedsourcesof<br />
6. Whichtwotaxesseemtobethegreatestsource<br />
incomeforthefederalgovernment in1970and1980.<br />
offederalincome?<br />
Thefiguresareinbillionsofdollars.<br />
REINFORCEMENTACTIVITY 45<br />
rn<br />
Un<br />
0<br />
I,,<br />
3<br />
I,, 2-I<br />
I-i<br />
‘-4<br />
—<br />
LI,<br />
ci:’
READING Principles of Taxation<br />
by John StuartMill (1806-1873)<br />
Controversyovertaxationis asold astaxationitself.In the middleof the lastcen<br />
tury, BritishphilosopherandeconomistJohnStuartMill publishedhisviewson<br />
the basicprinciplesof taxation.Asyouread,think aboutthe majortaxespaidin<br />
the UnitedStates—personal income,property,andsalestaxes.Do thesetaxes<br />
followMill’sprinciplesof taxation?<br />
hefourqualitiesmostwantedin anysystemof taxationhavebeenset<br />
downby Adam Smith.Theseareasfollows:<br />
1.The citizensof everycountryoughtto helpsupporttheir govern<br />
mentasbesttheycanin proportionto their abilities.That is, theyshould<br />
give in proportionto the incometheyenjoyunderthe protectionof the<br />
state.<br />
2. The tax eachpersonis bound to pay ought to be certain, not<br />
arbitrary. The time, method,andamountof paymentmustbeclearand<br />
plain.If not, all will bemoreor lessat themercyof thetaxcollector,who<br />
maythenbewilling to raisethetaxor to threatenthesame.An uncertain<br />
taxation can only promote corruption. Certainty, by contrast,is so<br />
importantthatevensomedegreeof inequalityisto bepreferredto avery<br />
smallamountof uncertainty.<br />
3. Eachtaxoughtto fall dueat thetime,or in theway,it ismostfit for<br />
thesubjectto payit. A taxontherentof landor of housescanbepaidat a<br />
regularterm or whenmoneyis mostapt to be at hand.Taxeson luxury<br />
goodscan,of course,be paidat the time of sale.<br />
4. Everytax oughtto besomanagedthat it will takeout—andkeep<br />
out—ofthepocketsof thepeopleaslittle aspossiblebeyondwhatit brings<br />
in to the publictreasury.Wasteis lesstobe fearedwhenthe numberof<br />
officersin the tax serviceis keptdown;it is lesslikely whenthe tax does<br />
not offera temptationto smuggling;andit is lesswhenthepeoplearenot<br />
subjectto the frequentvisitsof tax gatherers,or to the restrictivetrade<br />
practicesthat createthem.<br />
Of the four maxims,equalityof taxationis leastunderstood.Why<br />
shouldequalitybetherulein taxmatters?Forthereasonthatit shouldbe<br />
therulein all stateaffairs.A governmentoughtnotto distinguishbetween<br />
personsor classesth the claimsthey haveon it. What sacrificesthe<br />
governmentrequiresfrom oneof themshouldbearasheavilyor aslightly<br />
on all. In this way,the leastsacrificewill be felt by the whole.<br />
If anyonebearslessthanhisor herfair shareof theburden,another<br />
mustsuffermore.The lighteningof theone’sshareis not sogreatagood<br />
as the increasedburdenon the other is an evil. Equality of taxation,
IJ<br />
4<br />
--<br />
The reasonisthat a marketwoulddevelopwhereii doesnot existtoday.<br />
Cities,states, and the federalgovernmenttoday[spendsubstantiallymorel<br />
on elementary and secondary schools. . . than the total amount sç<br />
annuallyin restaurantsfor food.The smallersumsurelyprovidesan ample<br />
varietyof restaurantsfor peoplein everyclassand place.The largersum,or<br />
even a fractionof it. wouldprovidean amplevarietyof schools.<br />
[Finally,opponentsjclaimthatvoucherswoulddestroythe publicschool<br />
system,which,accordingto them, has been the foundationand cornerstone<br />
of our democracy.Theirclaimsare neveraccompaniedbyanyevidencethat<br />
the publicschoolsystemtodayachievesthe resultsclaimedfor it—whatever<br />
mayhave been true in earlier times.<br />
The threat to publicschoolsarisesfrom their defects,not their accom<br />
plishments.In small,closelyknitcommunitieswherepublicschools,particu<br />
larlyelementaryschools.are nowreasonablysatisfactory,not eventhemost<br />
comprehensivevoucherplan would have much effect.The publicschools<br />
would remain dominant, perhaps somewhat improved by the threat of<br />
potentialcompetition.But elsewhere,and particularlyin [poverty-stricken<br />
urban areasj where the publicschoolsare doing such a poor job, most<br />
parents would undoubtedly try to send their children to nonpublic<br />
schools.<br />
AdaptedfromFreeto C’hoose:A Personal Statement,byMiltonandRoseFriedman.<br />
UNDERSTANDING THE READING<br />
1. Explainhowa voucherplan wouldwork. Towhat extent, if any, would<br />
a voucher plan change education from a public to a private good?<br />
U<br />
2. What are the Friedmans’responsesto the objections to vouchers?<br />
3. Do you support or oppose a voucher system? For what reasons?<br />
24i<br />
4 II
GOVERNMENT EXPENDITURES<br />
TAXES<br />
1. Local governments<br />
— schc’s:’ls,libraries. hosoitals. public welfare.<br />
police, fire departments, co*.Lrts, sanitaticiri. local roacs ard<br />
streets, parks, ation. recr<br />
The biggest expense for local<br />
governments is for schools. (in New York State schocils are<br />
funded largely through local property taxes. Additional money<br />
comes from State and some Federal aid.)<br />
2. State governments<br />
— state police, courts, highways, hospitals..<br />
parks, prisons. Also state aid to local governments for<br />
education and w•lfare.<br />
3. Federal government<br />
— national defense (armed forces, military<br />
equipment, research and development), foreign aid, space<br />
exploration, interstate highways, national parks, prisons, law<br />
enforcement, aid to farmers, workers, retirees, sick people,<br />
grants—in—aid to state and local governments for education,<br />
housing, anti—poverty programs.<br />
REASONS FOR THE TREND TOWARD INCREASING GOVERNMENTEXPENDITURES<br />
1. Increasing<br />
percentage<br />
population<br />
— not only are<br />
of the population over 6<br />
ther. more people but the<br />
and under 21 has increased<br />
and government<br />
for the aged.<br />
has to spend more money for education and programs<br />
2. ment Goverr Responsibility for <strong>Social</strong> Welfare — The 1529 de ression<br />
led peopl.<br />
greater part<br />
and government to believe that government must play<br />
in accepting responsibility for people’s welfare.<br />
a<br />
3. Cold<br />
and<br />
— War<br />
has<br />
After W.W.II the U.S.<br />
increased foreign aid<br />
became a leader of th. free world<br />
and national defense in an effort<br />
to stop the spread of communism.<br />
4. rovements Im<br />
in technology<br />
— Federal government has played a major<br />
role in space exploration, weapons development and regulation of<br />
• new technological products such as planes, televisions, nuclear<br />
• power, etc.<br />
CRITERIA FO GOOD TAXES<br />
0<br />
ConsLdering that taxes arte a necessary evil there are taxes which can<br />
be considered good and bad. A good tax should;<br />
1. g_._.fLt .— it should treat all taxpayers in the same category<br />
equally and it should not penalize any segment of the population<br />
or country.<br />
2. 9e easy to — collect red tap, and bureaucracy can cost more than<br />
the tax collected.<br />
3. difficult to — evade k.ep fraud and tax evasion to a minimum.<br />
4. YIeld sufficient — reVenue e worthwhile 00 1l,ctina.<br />
Ot<br />
IL<br />
discgurage<br />
:•I• 1<br />
individual<br />
pile than<br />
md businesS .nterori5<br />
not working.<br />
working<br />
A<br />
must<br />
- ———. —. ..•“ .••_ ____<br />
i pi I
c1Q SOURCEE OF REVENUE<br />
1.- ocal — sources Most local governments generally derive their<br />
largest revenue from property taxes, especially on real estate.<br />
There can also be property taxes on ca-s boats RV’s , etc.<br />
Other sources of income are taxes on Sales, transit farZ.s, water<br />
services.<br />
2. ate — Sources Most states, including New York, get most pf their<br />
taxes from income taxes and coMmodity taxes. They also receive<br />
some federal aid. S<br />
3. Fderal — Sources Most of it comes from federal income taxes<br />
(individual, corporate and social security). lse receives<br />
revenue from excise taxes, tariffs, estate and inheritanc, taxes.<br />
THEORIES OF TXPTION<br />
1. Pbilitv to — Pay according to this government should tax<br />
individuals according to their income. People with greater<br />
income pay the most. (underlies our income tax system)<br />
2. Bsnef its — v.d rece the more you use or receive the more you pay.<br />
(underlies taxes •uch al our gasoline tax which is used for road<br />
maintenance and construction.)<br />
TPX RATES S ERCENTPGES OF INCOME<br />
p! ODressive taxes—er graduated taxes — persons earning greater<br />
incomes pay taxes at a higher percentag•. This is based.upon the<br />
TM abilityto pay’ theory. Underlies our income tax system.<br />
2J Prppørtion.I<br />
— an income tax where everyone is taxed at the same<br />
rate or pe-centag•.<br />
3. sv.— Reare<br />
percentage<br />
a<br />
of<br />
person earning a smaller income pay a higher<br />
his income for the tax than does a person with a<br />
larger.incorne. (a flat tax— set amount)<br />
1PES OF TQXES<br />
1. Taxes on — .rsons<br />
a) poll tax— flat<br />
b) income tax<br />
tax per person<br />
S..<br />
2. tax,. on — thtrtas<br />
a) property— usually a iwiiferm rate for<br />
PFoperty such as real estate, or cars, boats,<br />
b) tariffs<br />
an •ntire<br />
etc.<br />
-<br />
male of<br />
C) commodity taxes or excise tues— these are taxes en specific•<br />
items such as lt uer, tebaco, gambling, or like the sales tax in<br />
N.Y. on non—food items. Excise taxes can also be collected as<br />
license fees.<br />
-.:_.a ..i%<br />
on acts and privileges<br />
a) busin taxes— might be imposed on the net nceme of a<br />
or the gross receipts of a business.<br />
b) death tax— imposed en the transference of property at death.<br />
May be an estate tax. if i s paid by the estate b.fev’e it is<br />
divided among the heirs, or it may bean inheritance tax if it is<br />
ColleCted on the amounts recived by each of the hetv .<br />
Co aQ4ity) special privilege or acts. taxes— such.a. registering.<br />
‘ ’ ‘ll license docr license-. —<br />
5
AN<br />
INTERVIEW<br />
WITH<br />
GEORGE<br />
BORTS<br />
I<br />
ELEMENTSOF<br />
SUPPLY-SIDEECONOMICS (I):<br />
Professor Reagan’s new<br />
course in an old subject<br />
Supply.side economics. A fancy<br />
new nar.ie.forsomestalepatent<br />
medicine?Or a potent new cure<br />
forthe snatión economicills?Those.are<br />
the questions being debated now in<br />
Washingtonis President Reagan’smas<br />
sivebudget and taxcuts go beforethe<br />
Congress.<br />
BrownprofessorGeorgeH. Borts,a<br />
leadingconservativeeconomistand for<br />
twelveyears the managingeditor of the<br />
AmericaitEconomicReview. thinks that<br />
Mr. Reagan’srrosram isn’tnecessarily<br />
a pure “supply-side” approach. Al<br />
‘Ihough he is heartened by the conserva<br />
tivebent of te Reaganprogram, he<br />
warns that it ias someserious short<br />
comings.<br />
Butthat s getting ahead of the<br />
story. Formo;t of us who grew up after<br />
the Great Depression, supply-sideeco<br />
nomicsis a decidedly unfamiliarwayof<br />
lookingat the world. “Supply-sideeco<br />
nomicsisbaseI on the notion that vari<br />
ations in output are a response, not to<br />
demand, but to the rewards of investing<br />
and working,” Bortsexplains. Ifyou<br />
went to schoo’after the 1930swere<br />
over, Bortssays, you probablylearned<br />
the economicospeI accordingtoJohn<br />
Maynard Keynes.<br />
Rememberthe explanationof what<br />
the roosevelt Administrationdid when<br />
ft was confron’ed with epidemicunem<br />
ployment and plummeting wagesin the<br />
early 1930s?Hiw it launched massive<br />
government spending programs to get<br />
the ravaged economy backon its feet?<br />
Well,the idea came from Keynes a<br />
Britonwho published his most impor<br />
tant book in 1936.It was calledTheGen<br />
eralTheoryof E,nplovsnent.interestand<br />
Money.<br />
Inbad times, went Keynes’s<br />
unorthodox argument. the government<br />
ought to intervene in theeconomyby 1<br />
spending morc money than it takes in.<br />
•That putscashin people’spockets.<br />
ByRober W.Stewart‘74<br />
With it, they will go out and buy goods<br />
and services,create new jobs,and stim<br />
ulate economicgrowth. In the current<br />
parlance,you might callKeynesa “de<br />
mand-side”economist.In any case, his<br />
message — stimulate demand and you<br />
stimulateeconomicgrowth — has been<br />
embracedby every administrationin<br />
Washingtonfor the last half-century.<br />
Untilnow.<br />
Supply-siderslookat the world in a<br />
differentway. They say the government<br />
is wrong to try to get people to spend<br />
more money. Rather, they say the gov<br />
ernment should fashion its taxesand<br />
regulationstoencourage producers to<br />
make moregoods — that is, stimulated<br />
the supply rather than the demand side<br />
of the economy.Supply-sidersreject<br />
Keynes’snotion that the government<br />
should prop up the country’sdemand<br />
forgoodsand servicesthrough govern<br />
ment spending policies.<br />
In fact,supply-sidersare not far re<br />
moved philosophicallyfromthe clas<br />
sicallaissez-faireeconomistAdam<br />
Smith, who wrote TheWealthof Nations<br />
in 1776.Smithonce said, “Theonly<br />
good budget isa balancedbudget.” It’s<br />
a doctrine that conservativeRepubli<br />
cans haveembraced foryears.<br />
Supply-siders.Bortsexplains,con<br />
tend that followingKeynes’sadvicehas<br />
gotten the United States intodeep,<br />
deep trouble.Today’srunaway in<br />
flation,they argue, is due largelyto the<br />
kind offederal economicintervention<br />
that Key ’es<br />
advocated. Thegrowth of<br />
the federalbudget under the Carter Ad<br />
ministration, from$336billionin 1976to<br />
more than S579billionin 1980,and the<br />
corTespondinggrowth of the annual<br />
deficitshave pushed the American<br />
economytoward collapse, the supply<br />
siders say.<br />
Tobe fair, Bortssays, we have to<br />
realizethat foryears the federalgovern<br />
ment has:appliedonly halfof Keynes’s<br />
25 ’.
sorbthat output. But thosearemo<br />
ments of financial cataclysm, when<br />
nie aretrying to build up their cash<br />
:csbecauseof somedramaticloss<br />
iancialwealth. At momentslike<br />
that you aregoing to run into gluts of<br />
output.<br />
“But normally.” Boils continues,<br />
If peoplearc happy with their cashbal<br />
ancesthen the incomeStreammaintains<br />
itself.The increasedoutput isautomati<br />
callymet by increasedwages,salaries,<br />
and profits.”<br />
Justhow closeto pure supply-side<br />
economicsis the Reaganprogram?“It’s<br />
close,” Bortssays,but thereareimpor<br />
tant differences.<br />
The Reaganproposalinvolves tax -<br />
cutsand spendingcuts — a 10-percent<br />
across-the-boardcut in personalincome<br />
taxesbeginning July 1, followed by two<br />
more10-percentcutsin following years.<br />
Governmentspendingwould becut by<br />
morethan 540billion in 1982,nearly580<br />
billion in 1983,and $123.8billion in<br />
1984.<br />
The taxon unearnedincomewould<br />
becutfrom 70to 50percent.<br />
Businesseswould beallowed to de<br />
date their capitalinvestment more<br />
ly. Thenew depreciationallow<br />
_eswould heretroactiveto anuarv 1,<br />
and would amount to savingsof S59.3<br />
billion a yearby 1986.<br />
The flat 10-percentincome-taxcut<br />
would, of course,favor the wealthy, be<br />
cause10percentof alargeincomeis<br />
muchmore than 10percentof a small<br />
one.In that sense,the tax-cutproposal<br />
is wholly consistentwith supply-side<br />
theory.<br />
But Bortssayshesee’ssomeprob<br />
lemswith the Reaganplan. First,<br />
the Reagancampappearsto be<br />
overly optimistic aboutits ability to in<br />
creaseoutput last enoughto makeup<br />
for the taxrevenueslosta a result of<br />
the taxcuts:“I think they’ve oversold it.<br />
I think they havegonetoofar in claim<br />
ing that taxcutswill sostimulate activi<br />
ty that tax revenueswill not suffer. And<br />
certainly if therewereany truth in it, it<br />
would not hold true in oneyear, par<br />
ticularly if the inflation rateis going<br />
down simultaneously.”<br />
He alsonotesthat Reaganhaspro<br />
i cutting taxeswithout fundamen<br />
....dyrestructuring the taxsystem.A<br />
pure supply-sider would cutsometaxes<br />
but increaseothers, Boils asserts.The<br />
taxesthat would beeliminated would<br />
betheonesthat aremost likely to curb<br />
investmentor production. Thego.’ern<br />
ment would makeup for the lost teve<br />
nuesby increasingother taxesor cios•<br />
ing taxloopholes.<br />
• One way would be to eliminate<br />
“tax favors.’ “I think it was [conscrva<br />
tive economistjMilton Friedmanho<br />
oncecalculatedthat if you got rid of all<br />
the little tax favorsin the personal.in<br />
come-taxstructure, all of the elements<br />
of deduction,all theexemptions.all the<br />
shelters,that you could havea flat,<br />
across-the-board,25-percentfederalin.<br />
come-taxrate, period, applicableto<br />
everybody.It would beeasierto admin<br />
isterand it would generateasmuch rev<br />
enueasyou’re getting now.”<br />
That, of course,would do aww<br />
with the ideaof the graduatedincome<br />
taxand the notion that the rich ought to<br />
pay proportionately more taxesbecause<br />
they arebetterableto pay.<br />
Whereelsecould the government<br />
look to increasetax revenues?Sta t with<br />
housing. Bortssays.“What tht govern<br />
ment hasdone is makehousing ‘nto an<br />
inflation shelLerby allowing peopleto<br />
deduct mortgageinterestand their<br />
property tax.” if the government ilimi<br />
natedthosedeductions, “you’d have<br />
morerevenue.I don’t think peop’e<br />
would stop buying houses.Th rnight<br />
changethe form in which they occupy<br />
houses,” Bortssays.<br />
What doesthat do to the Arrerican<br />
dreamof every family owning it own<br />
home?“I don’t know what pcopk”s<br />
dreamsare,” Bortssays.“l ’nl just tell<br />
ing you where the sheltersareai.d what<br />
shelterscanberemoved to gener?te<br />
more revenuefor the government.”<br />
Thebig testof the Reaganprogram<br />
will beits ability to fight inflation. If<br />
Reagan’splanned spending cuti :an<br />
bring inflation under control and his tax<br />
cutscanspur increasedsavingsa; d<br />
productivity, the prcgram will succeed.<br />
But if theadministration is tooortimis<br />
ticin estimatingthe added taxrevenues<br />
it will receiveasa result of the taxcuts,<br />
therecould bebig budget deficits and<br />
more rampantinflation.<br />
“The inflationary expectationshave<br />
gotten t the point now where I tiink<br />
they aredoing more damagethan any<br />
other economicproblem we face,” Borts<br />
says.“Nobody canmakeany kind of fi<br />
nancialplans for the future. That s what<br />
inflation does.It makesit an almostab<br />
solutecertainty that anyone who is<br />
working toda ’ can’t evencontemplate<br />
retirement. If you don’t destroy in<br />
flation, you’vegoing to destroy the eco<br />
d7 ,<br />
nornic securitypeopleFeelthey achieve<br />
on the basisof their own plans.I think<br />
they canknockout inflation. The ulti<br />
mate thing is to getto a balancedbudget<br />
soyou canstop putting pressureon the<br />
FederalReserveSystemto buy govern.<br />
ment debt.”<br />
Will the modified supply-sidepre<br />
scription written by the ReaganAdmin-.<br />
istration work? “If all you did wascut<br />
taxes,period, you’d havehugein<br />
flation. In that regard, the prescription<br />
of the supply-sidersis nonsense,” Borts<br />
says. “On the other hand,” he adds,<br />
“their analysisin an appropriate context<br />
makesperfectly good senseif you see<br />
where thereareareasthat taxationhad<br />
driven economicactivity out.<br />
“It is very complicated.”<br />
Bol’Stewartisaneconomicswriter for<br />
theProvidenceJournal. TIii artide<br />
isexpanded fromaearlieronein theJournal.
d<br />
The LafferCurve<br />
As Arthur Laffer has riotec. “There are ai<br />
ways wo tax ratesthat yield the samereve<br />
nues.”Whenanaideto Presicant GeraldFord<br />
asKedhim once to eiaoorate.Laffer who is<br />
Professorof Business<strong>Economics</strong>at the Uni<br />
versityof SouthernCalifornia)drewa simple<br />
curve . . shown here] . . . to illustrate his<br />
point. The point, too. is simple enough—<br />
:hough,like so manysimplepoints,it is also<br />
powerfulin 1ts .mpiications.<br />
Whenthetax rateis ICCercent. all rcduc<br />
tion ceasesin the moneyeconomy(asdistinct<br />
fromthe bartereconomy.whichexistslargely<br />
to esca e taxaziorn.Pecciewill not Nork in<br />
the mcneyeconomyif alt the fruits of their<br />
laoors ae confiscated cy the government.<br />
Anabecause:rocucticn ceases.thereisnoth<br />
ir.g ‘or the I00ercent rateto confiscate.so<br />
:cvernmentrevert..’ es are:erc.<br />
On the Qtherarc. f the tax ate s zero.<br />
peocie can ceeo tOOpercent of wnar they<br />
produce n the mcr.eyeconomy.Thereis no<br />
gcvernmental“wedge” betweenearningsand<br />
after-taxincome,and thus no governmental<br />
:arner to prccucticn. P”ocucticn is therefcre<br />
i:ed. maxi and the output of the money<br />
eccrtcmvis Hrn teo cn y by the desireof work<br />
ers ‘or ‘e!sure.Bt :ecause tre tax rate is<br />
:ero. en: ;cverr revenuesare again zero.<br />
and mere cn oc no government.So at a<br />
a-percentax ra:ethe economyis in a stateof<br />
anarchy.and at a 100-cercenttax rate the<br />
ec nomy is .Jncticning entirelythrough bar<br />
ter.<br />
;n betweenliesthe curie. It the government<br />
reducesits rate to something ess than ‘100<br />
percent.sayto point A. somesegmentof the<br />
bartereconomywill be ableto gain so many<br />
eflic encies by zeing in the moneyeconomy<br />
that, even with near-ccr.fisoatorjtax rates.<br />
Source: juce Wanr.Iski. Taxes. evenues. and the<br />
Lifter Curve’.” P.eprinteøwith permissionof the<br />
authorfromTHE PUBLICINTEREST.No. 50 (Winter<br />
1978 . p. 3— 5. . 1978byNationalAflairs.Inc.<br />
PRO<br />
100<br />
0<br />
U<br />
A<br />
TiI Z.a fei Curve<br />
Revenues<br />
after-taxproductionwculd still exceedthat of<br />
the bartereconomy.Productionwill start uc.<br />
anc revenueswill flow into the government<br />
treasury.By oweringthe tax rate,we find an<br />
;ncreasein revenues.<br />
On the bottomend of the curve,the same<br />
thing is happening.If peocle feel that they<br />
neeca minimal;overnmer.tandthusinstitute<br />
a :c tax rate.somesegmentof the economy,<br />
finding that the T.ar;inal !ossof incomeax<br />
:eecs :tte effic:enc:esgained n the money<br />
economy.s shifted mo either bar.er or el<br />
sure.But with mat tax rate.revenuesco flow<br />
r.zothe government:reas ry. Thisisthesitua<br />
tion at poii t 3. <strong>Point</strong>A recresentsa veryhigh<br />
tax rate and very low production. <strong>Point</strong> B<br />
representsa very low tax rate and very high<br />
prcducticn.Yettheybcth yieidthe samereve<br />
nueto the government.<br />
The same is true of points C and D. The<br />
governmentfindsthat byafurthericwerir.gcf<br />
the tax rate, say from point A to point C.<br />
revenuesncreaseN;th the furtherexDansion<br />
of output.Andbyraisingthetax rate.sayfrom<br />
point Bto point D.revenuesalsoincrease,by<br />
the sameamount.<br />
Revenuesandproductionaremaximizedat<br />
point E. If, at point E,the governmentlowers
the tax rate again.output wil icrease, but<br />
revenueswill fall. And if, at point E, the tax<br />
rate is raised,both output and revenuewill<br />
oeclina.The shadedarea is the prohibitive<br />
ranpe for government, where rates are un<br />
necessarilyhigh and can e reduced with<br />
gainsin both out ut andrevenue.<br />
Thenextimpo ant thinc to 3serve is that.<br />
except for the c-percent ant iOO-oercent<br />
rates.therearenc numbersalonathe “Laffer<br />
curve. <strong>Point</strong>E is not 50 percent.althoughit<br />
maybe,but rathera variab number:!Hs the<br />
point at which the eeiecrora desires to be<br />
taxed. At points B and 0. the electorateóe<br />
sires more governmentgoods and services<br />
and is wiiiinç—witnoutrecu:in; its produc<br />
tivity—topay the higherratescor.s stent with<br />
tne revenuesat point E. Ant a: po nts A anc<br />
C.the eiectorateaesiresmore privategooos<br />
anc services in the money economy. anc<br />
wishes to pay the lower rates consistent<br />
witr the revenuesat point E. It is the task of<br />
tne statesmanto oeterminetne io:ation of<br />
point E.andfollow its variationsascloselyas<br />
possible.<br />
ortne oolitica leade- or. tne nationa level.<br />
pointE canreoresen:a very low or a very ni<br />
numoe-. ‘rier the nation is at war. poin:<br />
car aocroa;h 100 percent. A: the siege of<br />
Ler.irgrad in World Wa ’ IL fo- exampie.the<br />
peo ie o’ the city oroducedio 930daysattax<br />
ratesapproachinc100 percent. Russian SO!.<br />
diers an: civ i:ans workec tc their pnys;ca<br />
ts. Tim receivinc as ’ ‘pa oniv tne Dares:of<br />
rations. Had the citizens of Leningrad not<br />
wishe: ic oc taxec at that hion rate. wh :r.<br />
was re3. :’ed I: hoidoff tne Naziarmy.thecity<br />
woulc rtavetalien.<br />
The easiest way for a politica! leader to<br />
• determinewnether an increasejr rateswifl<br />
producemoreratherthan lessrevenuesis to<br />
put the Dropositionto the electorate.It is not<br />
enoughfr the poIltic ar t: proposear in<br />
creasefrom. say. point S to point D on the<br />
curve. He must as: specify hov the anti :<br />
oated revenueswil oe soer t. Wner. voters<br />
aooroveC oon: ssue to- schoo!s ni;nwavs.<br />
o- orsoces they are citi’ exoi tehin; tne olit’<br />
::ar. tna: tne’ are wi!Iin: tc O3 the nigr ta ,<br />
ratesrecuiret tc fnan:e the ooncs.lr. re ect<br />
in; a bonc issue.however.tne electorateis<br />
not necessarilytelling the politicianthattaxes<br />
are alreadyhigh enough,or that point E (or<br />
beyond)hasbeenreached.Theonly message<br />
is that the proposedtax ratesaretoo hign a<br />
price to pay for the specific goods and ser<br />
vicesoffered by the government.<br />
The idea behind the “Laffer curve” is no<br />
doubt as old as :ivU zatior.. but unfo uratel ’<br />
politicianshive alwayshadtrouble graspinc<br />
it.<br />
Thechief reasonpoliticiansandeconomists<br />
throughout history have failed to grasp the<br />
ideabehindthe ‘Laffercurve” is their confu<br />
sion of work arid productivity.Through both<br />
introspectionand observation,the politician<br />
understandsthat when tax ratesare raised.<br />
thereis atendencyto work harderandlonger<br />
to maintainfier-tax income.Wnat is not so<br />
aoDarent.becauseit reauiresanasysisat the<br />
margTh,isthis: Astaxesareraised,individuals<br />
in tne systemmay indeedwork harder.but<br />
their productivitydeciin s.<br />
In Aoam Smith’s nyPotneticalpin<br />
fa:to . whatis imortant to anationisnotthe<br />
effort of individuals out the productivity of<br />
sni’v: ’a!s WorK /nc . toetne Wner trie tax<br />
rates are raise . tne worKerstnernseivesmay<br />
work harcer ir ar. ef ’fo tc maintair. their<br />
income eve. But if the pin-makingentrepre<br />
neur is a ma -c nal manufacturer, the in<br />
creasedtax ratewill causerim to shin intothe<br />
leisure sphere or into a lower level of<br />
economic activi . an: triesvsre wil lose a!:<br />
tne roouctior. o tne pin . fa:to The po!rt<br />
c;anwho standsin the midstof this situation<br />
may correctly con:iuoe trat trie increasein tax<br />
rates causes peooieto work harder.But it is<br />
no: soeasyfor him tc reahzethatthe ’ arenow<br />
lessefficient in their work arid are producing<br />
less.<br />
The worst mistakesin historyare madeby<br />
political leaoerswhc. insteadof realizingthat<br />
revenuescc’uid be gained by lowering tax<br />
rates.becomealarmedat the fall in revenues<br />
triat resultswher. citizensseeKto escaoehigh<br />
tax rates thrcu r oa er anc ac-it-yourself<br />
iaoo-. riC! !ou !se is tc imoosetaxestna:<br />
cannot oe escacec. tne mos: onerous of<br />
wnicr is a ta o flea: ta wntc must DC<br />
pal: annually for me mere privilege of liv<br />
ing.<br />
‘-I .<br />
- i_I •i
The LafferCurve<br />
the Laifer curve’ that under ies ar;u<br />
• mentsfor a familyf tax cuts s not :e ew<br />
2flnclpie some think it to 3e; ta a rcut r.e<br />
expressionf basic economicrelatior snics.<br />
•<br />
Yetits usein supportof across-the-boardtax<br />
• Cuts today is new, and the nature of the<br />
supportfor it is new... . wnataboutthe Laffer<br />
principle?Doesit hold up?<br />
Actually,in the right set of circumstances<br />
and subject to the right limitations.Laffers<br />
5<br />
3<br />
thesis has a lot going for it. We have one<br />
real-life example in New York state. where<br />
cigarette smuggling is big business,simply<br />
becausethe diflerent;albetweenNewYorks<br />
and North Carolina’staxes is too much to<br />
resist.Someestimatethat half the cigarettes<br />
smokedin New York are smuggieo.early,<br />
NewYork would collect more revenueif the<br />
rateweresharplylower.<br />
-<br />
Yetits onething to arguethatan inaividuai<br />
tax is levied at such an onerous rate that<br />
widescreadavoidanceor evasionoccurs.and<br />
another thing to contend that the totai :ax<br />
structureis high enougnto reducetotal ccc<br />
s nomicactivityto the pointwheretotal tax ccl<br />
:ectionsaresmailerthan theywould be if tax<br />
I rateswerecut acrossthe board. . . thisthesis<br />
is compieteiyunrealvis-e-visthe UnitecStates<br />
e _________________<br />
• t<br />
-<br />
•<br />
Source: From
BUSINESS<br />
OPINIONBYWARRENBROOKES<br />
Reaganomics Crosses the Ocean<br />
SUMMARY:West Germany’s unwillingness to lower<br />
Its sxcesdve tax rates has forced (tsecononiy to<br />
stagnate. However, U.S tax reform may lead West<br />
Germaneandothersto reconsidertheir tax policies<br />
— or watchtheir capital nish to the United States.<br />
Ilbe Reagan administration hasbeenpublicly— andprop<br />
edy — lowestaxburdenrelative tothegrossnational product(Japanand<br />
theUnitedStates, 30percentand32percent respectively) enjoyed<br />
thehighest totaloutputgrowth,16percent and 12percent.<br />
ThusitseemslikelythatheU.S.taxreformexerciseisalready<br />
being watchedwithgreat nervousnessand interestin Europe,<br />
especiallyin Bonn.<br />
Indeed, it may well explainBonn’sunwillingnessto jump<br />
impatientwithWestGermany’sunwillingness to prematurelytostimulate itseconomywithcheapermoney,as the<br />
stimulateitseconomyby1owe ing excessivelyhighmar UnitedStateshasasked.Bonnwantsto waituntilit hasaclear<br />
ginaltaxratesandrealinterestrates.<br />
ideaof thefinalnatureof thereform.WestGermanyknowsthat<br />
With WestGermanunemploymentstillat 9 percentby its simplyloweringitsownbankinterestrates,withoutloweringtax<br />
calculation(closerto 22percentif calculatedbyU.S. methods), rates,will havenoeffectexcept tostimulate evengreater capital<br />
a sicklyemploymentratioof 49 percent(ofalladults)compared flightto the UnitedStatesandpromotemoreinflationat home.<br />
with60.8percenthere,andahuge$22billionto$28billiontrade Wewouldbewillingtobetthatwithinweeksofthepresident’s<br />
surplustobolsteritsdeflation,ChancellorHelmutKohl’sgovern signingof the tax reformbill, the WestGermans,Britishand<br />
menthas noexcuseforcontinuedtight-money, high-taxpolicies Frenchwillallbeginto makeseriousnoisesabouttaxreform.<br />
thatlettheUnitedStatespulltheeconomictrainalone.<br />
In fact,the FinancialTimes of London, while editorially<br />
Indeed,the nonnallyrestrainedOrganizationfor Economic scorningsupply-side economics,isapplaudingtheU.S.taxreform<br />
CooperationandDevelopmentcameoutrecentlyinbehalfof the effortandhas evenfloateda reformplanof itsown<br />
Imperativeneed”forvigorousactionto improvegrowth.<br />
OECDwases ecially criticalofKohl’sanemictax-cutprogram<br />
andchidedhimforputtingoffcomprehensivetaxreformas“not<br />
fullyconsistentwiththeaimof thegovernment to improvesupply<br />
conditions:’<br />
Withanaveragemarginaltaxrateof60percent ofincomeand<br />
anaverageeffectivetax rate,includingsocial security,f 38<br />
percent,theBonngovernment isdeliberalely inflictingludicrously<br />
highlevelsofunemployment onitspopulaceinthenameof fiscal<br />
sobrietyandinflation-fighting.<br />
This,however, is all likelyto changeif Congresscompletes<br />
actionon a taxreformproposal,whichwillundoubtedlyprovoke<br />
aresponse byEurope’stagnantcounmes. Theywill havetoreact<br />
orseetheirentirecapitalstockdrainintotheUnitedStates.<br />
— onethat<br />
wouldroptopBritishratesbelow30 percent .<br />
Eveninlow-taxJapan,theTaxCommissionof PrimeMinister<br />
YasuhiroNakasone’s Uberal-DemocraxcPattyisnowcompleting<br />
amajorstudyofJapan’staxsystem.A completereformprogram<br />
is to be presentedbyDecember,a datethatcouldbe speededut’<br />
bythecombination of U.S.actionandthecurrentlynegati<br />
JapaneseGNPpicture.<br />
Thelatestissueof theKeidanrenReview(a publicationfrom<br />
the Japaneseequivalentof the NationalAssociationof Man<br />
ufacturers) leadswitha proposalfor“FundamentalTaxReform<br />
Towatdsthe21stCentury.”<br />
At the sametime, Canada’sPrimeMinisterBrianMulroney<br />
hascalledfora taxreformproposalfromhisownCabinet.<br />
TheReaganRevolutionis nowworldwide.<br />
UnderU.9.taxreform,toppersonaltax _________<br />
rateswillfalltoabout27percent compared<br />
withEurope’srangeof 60 percento90<br />
percent, andtopcorporaterateslikelywill<br />
fallto33 percentcomparedwithEurope’s<br />
50 percen;to55percent.<br />
S<br />
‘ Atthesametime,averagemarginaltax<br />
z Burden<br />
rates(forincomeonly,notcounting<strong>Social</strong> R (Relative to1983GrossNationalProduct)<br />
Security)willfalltoabçut18percentin the<br />
UnitedStatescompareawith45percentin<br />
WesiGeimanyand3OpercentintheUnited 15<br />
Kingdom.<br />
ThustheeffectofU.S. taxreformwill<br />
betoforceEuropetowakeup,withabang,<br />
to economicreality,as capitalflowsto the 10<br />
UnitedStatesbecomefloodsto gain the<br />
higherafter-taxratesof return.<br />
Asananalysisbythe U.S.Chamberof<br />
Cornmeivedemonstrates,irrespectiveof<br />
theexchangerazelevels,thereis a direct<br />
onelationbetweenlevelsoftaxburden(as<br />
s share of gross national product) and I<br />
growthratesinindustrialoutput(seetable).<br />
It is no identthat and West 0<br />
Germany,withthe highest taxrates (48<br />
percentand45percentrespectively);had<br />
the lowest1980-84industrialgrowth(0 _____West<br />
United United<br />
percentandminus0.7<br />
Germany Kingdom<br />
percent). ____ _____<br />
Arthesametimethosenationswiththe eOI cE: .LS.cI Y Mis ISSI Cni R<br />
GrowthRatesUnderTaxWeights<br />
•1
today.and ... It isactuauymischievousinthat<br />
it would be wildly inflationaryif it weretaken<br />
seriouslyaid aooptedas the foundationfor<br />
nationaleconomicpolicy.<br />
Rightoff the bat.the Lattermodelis in error<br />
in assumingno output at a 1OCpercenttax<br />
rate. Manyeconomiesao tax at or near ‘OO<br />
percentandyet manageto pettheir people to<br />
producesomething.Cambodiais one exam<br />
ple. It takesbrutal oppressionto get results.<br />
but they do get work effort with near-zero<br />
indivioualmonetaryincentive.<br />
For anotherthing. the thesisooesn’tstand<br />
utc the lest of inlernationa comparisons.If<br />
the UnitedStatesarid other in strializedna<br />
tions are inoeedat the point wherehign tax<br />
ratesare reducingthe tota tax take, then it<br />
st iouiJ be possible.Dylookingat the ratio of<br />
taxes.tonationaioutput.to spotthosenations<br />
whichhaveircreasec tneir socialservicesand<br />
other outlaysmost rapidly.Notso: growthof<br />
governmentservicesaric tne leve! of taxes<br />
tare aimostunreiateO.<br />
Similarly, those nations that have large<br />
cmmitments c socia benefitoutlaysShOUid<br />
be the ‘ones with the highest standardsof<br />
living, since only through low tax ratesand<br />
efficienteconomiescouldtheycoliectenough<br />
tax s to soort tneir expensivesocia benefit<br />
programs.Again riot so: living staricarcsin<br />
somewelfarestatesare high while staridar s<br />
in cthers are ouite low. Tne princioal differ<br />
ence is hw large a share of the nation’s<br />
outpu: is abie avai to tne itizeris versushow<br />
muchis at the dispositionof the state.<br />
Onebast problemwith the Latterthesisis<br />
that it concentrateson the output side and<br />
ignores what happensto nominal incomes<br />
whentaxesarecut.Soit givesa lopsidedview<br />
of the impactof taxes.and caneasilyleadto<br />
erroneousconclusionsif it is usedasthebasis<br />
for policy formation.Its correct in the basic<br />
contention that an across-the-boardcut in<br />
Federal taxes would stimulate private<br />
economic activity, but that would be true<br />
whetherwe’re on the top part or the bottom<br />
part of the Laffercurve.<br />
liow fast productionwould rise is another<br />
question.sinceit wouldtakesometimeto get<br />
tne economicmachinerymovingto produce<br />
more. But incomes would start rising im<br />
mediately.Scthe initial impactof anytax cut.<br />
whetherit wassponsoredbyLatteror byLord<br />
Keyneshimself,wouldbean increasein nom<br />
inal after-taxincomes.Andthe immediatere<br />
sult todaywould be inflationary.<br />
Intie versionsof the LatterthesisI’veseen.<br />
the immediateimpacta tax cut hason nomi<br />
na after-taxincomesis ignored,and the Se<br />
auencerunsfromthetax cutto tne increasein<br />
investrnen:,to the increasein output.aric only<br />
thento the increasein incomes.Ifwere onthe<br />
upperpartof the Laffercurve,ashecontends,<br />
the effect of a tax cut would be manytimes<br />
largerthan if were on tne bottom part. But<br />
inevitably there would be that transition<br />
perlo: curing wfli h the inflation rate would<br />
beaccelerated.Idon’tthink tnat,in its present<br />
state. the economy could stand to be put<br />
through anotherturn of the inflationwringer<br />
on the unlikelysuppositionthat,whileno one<br />
was noticing, tax rates had movedfrom the<br />
lower to the upper part,of that particular<br />
curve..<br />
I
4<br />
Name<br />
Class Date<br />
Section 1. GROWTH IN THE SIZE OF GOVERNMENT<br />
As you have read, the size of government at all levels has increased dramatically. Both<br />
the number of people employed by government and the cost of government have risen.<br />
Answer the following questions about this growth in size.<br />
1. What programs, buildings, or improvements in your community are funded by local<br />
government?<br />
2. Name three national programs that were begun after 1929, and that have since increas<br />
ed the federal government’s budget.<br />
,1I3• Why would an increase in government employees cause government spending to rise?<br />
4. Why did Americans accept a large expansion in government spending after 1929?<br />
5. In what areas of local government do you think expenditures should be increased?<br />
.<br />
,-<br />
In what areas sho uld spending be decreased?<br />
‘ ‘<br />
E<br />
I6. In what areas of the national government do you think spending should be increased?<br />
In what areas should spending be decreased?
3<br />
Section 3. THE BUDGET<br />
Name<br />
Class Date<br />
Every budget requires a. compromise between desires and limited revenues. The<br />
passage below illustrates a simple budgetary process. Bead the passage, and then<br />
relate it to government budget-making by answering the questions that follow it.<br />
Every year, Ian and Sonya make up a budget for their family. In general, Ian<br />
spends freely, while Sonya is careful about expenses. Therefore, they often end up<br />
compromising on their budget.<br />
“It’s going to be a good year at the company,” Ian says. “Since I’ll be getting a<br />
promotion and a raise, I think we can buy that living room furniture now.”<br />
Sonya replied, “You haven’t gotten the promotion yet, you know. Why don’t we<br />
wait until you actually get the raise before we buy the furniture? Our total salaries<br />
just cover our expenses as it is.”<br />
“Yes, but we can use our charge card at the furniture store, and then pay it off<br />
when we have the money,” Ian stated.<br />
“Oh, no,” Sonya reminded him “we still have the debt to pay off from our pur<br />
chase of the house last year. Our mortgage payments are high enough.”<br />
Ian countered, “What if we don’t spend so much on landscaping this year?” He<br />
wasn’t part iculary interested in landscaping, and therefore said, “We can use that<br />
money for the furniture.”<br />
Since the landscaping was Sonya’s favorite project, she agreed on one condition.<br />
“Well, airight,” she said, “but we have to do the landscaping next year. Airight?”<br />
“Airight,” said Ian.<br />
1. How does this passage illustrate the problem of scarce revenue? ___________________<br />
2. Is Ian’s first suggestion in keeping with good budgeting?<br />
‘.<br />
Explain your answer. _____________________________<br />
hy is Ian’s solution unacceptable to Sonya?<br />
4. What compromise do the two finally reach? —<br />
What does each give up?<br />
5. How is the budget process illustrated by the story similar to the federal government’s<br />
budget-making?<br />
2
wuiUcSIIEET<br />
Section 4. TAXATION<br />
Name<br />
Class Date<br />
Assume that you are deciding what kind of tax rates are needed to provide enough<br />
revenue for your state’s budget. To find out what kind of taxes other states use, you<br />
decide to determine the tax rates (percentage of income taken by the government) used<br />
by three different states. Calculate the rates for each state in the chart below. Then<br />
answer the questions that follow.<br />
A.<br />
1.<br />
2.<br />
3.<br />
B. Which of the states in the chart use<br />
1. a progressive tax?<br />
2. a proportional tax?<br />
3. a regressive tax? —<br />
Tax Schedule<br />
A B C D<br />
Yearly Salary $5,000 $25,000 $50,000 $100,000<br />
Total tax paid 500 500 500 500<br />
Tax rate<br />
Yearly Salary $5,000 $25,000 $50,000 $100,000<br />
Total tax paid 500 2,500 5,000 10,000<br />
Tax rate<br />
Yearly Salary $5,000 $25,000 $50,000 $100,000<br />
Total tax paid 50 500 2,500 10,000<br />
Tax rate<br />
C. 4Assume that you decide to add a tax of three cents to every gallon of gasoline sold.<br />
‘Assume also that every family in the state uses the same amount of gasoline. Would<br />
the gasoline tax be regressive, proportional, or progressive?<br />
t
I<br />
I<br />
C<br />
U<br />
I<br />
E<br />
Section 5. THE NATIONALDEBT<br />
C<br />
Name<br />
Class Date<br />
Use the information in the table at the left to plot the United States national debt on the<br />
graph at the right. Then answer the questions that follow.<br />
Debt (in billions<br />
Year of dollars)<br />
1930 $ 16<br />
1940 51<br />
1950 257<br />
1960 291<br />
1970 383<br />
1980 914<br />
1985 1,841<br />
$2,000<br />
1.800<br />
1,600<br />
1400<br />
1,200<br />
1,000<br />
800<br />
600<br />
0<br />
I I I I I I<br />
1930 1940 1950 1960 1970 1980 1965<br />
1. Although it is not shown here, the federal budget had surpluses in some years.<br />
Looking at the debt table, what can you infer about the number of surplus years as<br />
compared to the number of deficit years?<br />
2. The years 1930 to 1940 were the decade of the Great Depression. How might this ex<br />
plain the growth of the national debt during these years?<br />
U)<br />
cO<br />
400 —<br />
200 -<br />
The National Debt<br />
3. The United States was fighting World War II between 1941 and 1945. How does this<br />
help explain the growth of the national debt between 1940and 1950? _______________<br />
4. Whydo you think many Americans have become concerned with the growth of the na<br />
tional debt in recent years?<br />
Year
MAJORCONTENT<br />
CHANGES<br />
P. 216-218 THE UNDERGROUND<br />
ECONOMY<br />
For some time, economists have suspected<br />
that a significant amount of activity—some of<br />
it legal and some of it not legal—does not get<br />
reported in the United States gross national<br />
product. This activity has been called the un<br />
derground economy because it is neither re<br />
corded nor taxed by the federal and state gov<br />
ernments.<br />
In 1983, the Internal Revenue Service made<br />
a study of taxes lost in 1981 because of unre<br />
ported income. According to the study, at least<br />
$250 billion of income was earned but not re<br />
ported to the IRS. If the income had been re<br />
ported, the federal government would have col<br />
lected an additional $80 billion in taxes. The<br />
size of the federal deficit in 1981 was $57.9 bil<br />
lion. If th federal government had collected<br />
the $80 billion lost in the underground econ<br />
omy, it could have balanced the budget that<br />
year and had $22 billion left over.<br />
According to IRS estimates, private individ<br />
uals engaged in legal activities were responsi<br />
ble for most of the unreported income. For ex<br />
ample; approximately $95 billion of wages and<br />
salaries was earned but not reported to the IRS.<br />
Other major categories include small business<br />
profits ($58.4 billion), interest on bank, and<br />
other deposits ($20.5 billion) and capital gains<br />
—profits from the sale of property ($17.7 bil<br />
lion).<br />
The $250 billion did not include estimates of<br />
unreported illegal activities such as smuggling,<br />
gun-running, drugs, and counterfeiting. If these<br />
had heen included, the $250 billion would have<br />
increased by much as as $35 billion to $100 bil<br />
lion annually. Thus, the IRS found that the ma<br />
jor portion of unreported income is earned in<br />
perfectly legal activities. The problem, accord<br />
ing to the IRS, is that a significant part of total<br />
income is simply not reported. As a result, lawabiding<br />
taxpayers pay more taxes than they<br />
should.<br />
In an effort to better measure the perfor<br />
mance of our economy, the United States De<br />
partment of Commerce substantially revised its<br />
economic statistics in December, 1985. Among<br />
other things, GNP was adjusted upward for<br />
every year from 1929 until the present to c<br />
32<br />
count for the underground economy. In 1977,<br />
for example, GNP was revised upward by $72.2<br />
billion over previous estimates. In 1984, GNP<br />
was adjusted upward by $119.9 billion.<br />
While these adjustments were not large on a<br />
percentage basis (usually two to three percent),<br />
GNP statistics now present a better picture of<br />
the economy’s total performance—whether all<br />
activities are reported or not. At the same time,<br />
these adjustments are considerably smaller<br />
than those estimated by the IRS study. The<br />
IRS, for example, estimated that up to $250 bil<br />
lion had been earned but not recorded or taxed<br />
in 1981. The Commerce Department revision<br />
for that year was just under $100 billion.<br />
In addition to its concern with the under.<br />
ground activity, the IRS is also trying to collect<br />
taxes on as much income as possible. In 1985,<br />
the IRS began a major upgrade of its computer<br />
facilities which are now used to match lists of<br />
income earned with tax returns supplied by<br />
taxpayers. Voters generally prefer such a sys<br />
tem because it increases tax revenues without<br />
raising taxes.<br />
P. 218-219 SOCIAL SECURITY<br />
In March, 1983, Congress passed a $164.3 bil<br />
lion bill aimed at saving the <strong>Social</strong> Security<br />
program. A bipartisan committee headed by<br />
economist Alan Greenspan proposed the bill<br />
following more than a year of political debate<br />
and study.<br />
Over $39 billion, or about one-fourth of the<br />
package, will be raised by increasing payroll<br />
taxes. The tax rate in 1984 was 6.7 percent for<br />
the worker and 7 percent for the employer. In<br />
1985, it was 7.05 percent for both. By 1986, it<br />
had reached 7.15 percent. After that, the rate<br />
will continue to rise gradually until it reaches<br />
7.65 percent in 1990.<br />
The annual earnings limit will also increase.<br />
In 1983, Congress raised the ceiling from<br />
$35,700 to $37,800 for 1984. By 1986, the ceiling<br />
had reached $42,000. Some analysts predict<br />
that the ceiling may rise to $57,000 by 1990.<br />
Additional changes in the law affect workers<br />
and recipients. SeIf-employe4 persons will have<br />
to make higher <strong>Social</strong> Security payments. The<br />
tax rate for the self-employed will rise from<br />
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a
14.3 percent in 1986 to 15.3 percent in 1990.<br />
Federal workers hired after January 1, 1984,<br />
and employees of non-profit organizations, such<br />
as hospitals and charities, are now required to<br />
join the system. Also, for the first time since<br />
benefits were paid out in 1940, some recipients<br />
will be taxed on their pensions. All of these<br />
changes help to increase the amount of money<br />
paid into the <strong>Social</strong> Security system.<br />
Other changes in the basic law are designed<br />
to cut down the amount paid out to recipients.<br />
The new plan makes it more attractive for<br />
workers to postpone retirement. Currently, full<br />
benefits are paid to persons who retire at age<br />
65. An additional three percent in benefits is<br />
awarded for each year of delay from age 65<br />
through age 71. The new plan boosts the retire<br />
ment age. By the year 2009, the full benefit age<br />
will be age 66 and by the year 2027, it will rise<br />
to age 67.<br />
Other provisions in the law make it easier for<br />
<strong>Social</strong> Security recipients to make ends meet.<br />
In 1986, for example, a retired worker aged 65-<br />
69 can earn up to $7,800 without losing <strong>Social</strong><br />
Security benefits.<br />
I<br />
P. 229 TAX INDEXATION<br />
In 1981, Congress passed the Economic Re<br />
covery Tax Act to stimulate a sluggish econ<br />
omy. The feeling was that taxes were too high<br />
and should be lowered. Individuals and busi<br />
nesses then would have more money to spend<br />
and a high rate of growth in the economy could<br />
be restored.<br />
Among other things, this act provided for a<br />
series of tax reductions and for “indexation” to<br />
begin in 1985. Indexation, or the raising of tax<br />
brackets by an amount equal to the annual in<br />
flation rate, was passed to keep taxpayers from<br />
being pushed into higher tax brackets simply<br />
because of inflation.<br />
For example, a married taxpayer who made<br />
$16,000 nd filed a joint return in 1984 owed<br />
$1,741.00 federal taxes in that year. Since the<br />
taxpayer is at the top of the 16 percent mar<br />
ginal bracket, any additional income will be<br />
taxed in the next higher, or 18 percent bracket.<br />
(Note, the tables on page 217 of the text re<br />
flected tax brackets before the tax reductions<br />
took place. The tables used to compute the 1984<br />
taxes on the $16,000 above are not shown here.)<br />
Unfortunately, inflation also amounted to 4.06<br />
percent in 1984, so the taxpayer would need<br />
some kind of a raise to avoid falling behind.<br />
Now, suppose that a $650 raise is received in<br />
1985 to offset the inflation. The annu salary is<br />
now $16,650, but the taxpayer is no better off<br />
in real terms since the amount of the raise just<br />
offsets the inflation. In the absence of indexa<br />
tion, the taxpayer would have to pay the regu<br />
lar amount of taxes on the first $16,000, plus<br />
$650 at the next higher (18 percent) bracket.<br />
But, under indexation, the $16,000 bracket is<br />
increased by 4.06 percent to $16,650. Now the<br />
taxpayer who gets a raise just equal to the infla<br />
tion rate remains in the original bracket and<br />
pays taxes of $1,811.40. Since the individual<br />
made slightly more money, ($16,650 rather<br />
than $16,000), the total amount of taxes goes<br />
up. But, the individual is not pushed into a<br />
higher (18 percent) tax bracket simply because<br />
of inflation.<br />
In 1985, inflation amounted to 3.72 percent<br />
so the tax brackets were indexed again. This<br />
time, the top of the 16 percent bracket rose<br />
from $16,650 to $17,270 in 1986 (see update of<br />
Table 9—B on page 7 of this update). These<br />
brackets will again be adjusted in the future to<br />
keep pace with the rate of inflation.<br />
The advantages and disadvantages of tax in<br />
dexation are still being debated. An advantage<br />
of indexation is that taxpayers avoid higher tax<br />
brackets simply because of inflation. A disad<br />
vantage is that the federal government loses a<br />
traditional source of tax revenue with the mea<br />
sure. In its efforts to balance the federal budget,<br />
some lawmakers have suggested that indexa<br />
tion be repealed. Overall, however, indexation<br />
has proved popular so repeal at this time is not<br />
likely.<br />
P. 246-247 DEFICIT SPENDING<br />
Gramm- Rudman-Hollings<br />
Deficit Reduction Law<br />
By 1985, the size of the federal budget deficit<br />
was staggering—averaging over $200 billion<br />
over the last four years. As a result, Congress<br />
passed legislation that would force the federal<br />
government to have a balanced budget by 1991.<br />
The legislation, formally called the Balanced<br />
Budget and Emergency Deficit Control Act of<br />
1985, and informally known as GRH or<br />
Gramm-Rudman-Hollings, was enacted into<br />
law in December, 1985. Both critics and sup<br />
porters have called the act one of the most im<br />
portant pieces of legislation passed since the<br />
Great Depression of the i930 s.<br />
The law is unique for it comes into play only<br />
if the President and Congress cannot agree on a<br />
budget, which makes significant progress to<br />
ward reducing the federal deficit. The<br />
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Usersof<strong>Economics</strong>: Principles and Prscdces havethe publisher’s permission to reproducethispage.<br />
33
4<br />
following—from the Budget of the United States<br />
Government, Fiscal Year 1987—describes the<br />
process:<br />
GRH simply requires that the President’s<br />
budget meet the deficit targets. It does not<br />
impose any restrictions on how those tar<br />
gets are to be met. The President can pro<br />
pose as much or as little as he deems nec<br />
essary for defense or other budget<br />
categories. GRH does not mandate the<br />
budget mix, only the minimum deficit. The<br />
same freedom exists for the Congress. It<br />
may choose to reach the target in a differ.<br />
ent way from the one the President pro<br />
poses in his budget. GRH only requires that<br />
should the Congress depart from the Presi<br />
dent’s proposals, it must do so in such a<br />
way that the deficit still remains at or un<br />
der the targets.<br />
Basically, GRH sets up a schedule that forces’<br />
the Congressional Budget Office (representing<br />
Congress) and the Office of Management and<br />
Budget (representing the executive branch) to<br />
confer at specific times throughout the year and<br />
make etimates of the current deficit. If the def<br />
icit is in excess of legislated targets (see Figure<br />
3), then automatic spending cuts would take<br />
place.<br />
Figure 1<br />
GRAMM-RUDMAN-HOLLINGS<br />
EFICIT TARGETS<br />
Fiscal Year Deficn Targets<br />
(in billicos)<br />
1986 $171.9<br />
1987 144.0<br />
If the President and Congress agree on a<br />
budget that stays within the deficit target,<br />
nothing is affected. However, if the President<br />
and Congress cannot agree on the budget, GRH<br />
would take over and force automatic, acrossthe-board<br />
reductions to keep budget deficits<br />
within the specified targets.<br />
34<br />
19$8<br />
19<br />
1990<br />
19 v<br />
Scerce: li4gei of theU.,ü.d Swse.s<br />
Gov wne’u. 1987<br />
108.0<br />
72.1)<br />
36.0<br />
0.0<br />
Since Congress and the President often seem<br />
split over the way in which defense and nonde<br />
fense expenditures should be handled, GRH re<br />
quires that any forced budget reductions be<br />
split equally between the two. For example, the<br />
President’s 1987 fiscal year budget called for<br />
both a buildup in defense spending and a re<br />
duction in some social programs. Congress, on<br />
the other hand, seemed to prefer the reverse.<br />
The compromise in GRH requires that any re<br />
ductions be split so that 50 percent of the re<br />
ductions come from national defense, with the<br />
other 50 percent coming from non-defense<br />
items.<br />
Some budget items are specifically excluded<br />
from the mandatory budget cuts. In addition to<br />
the interest expense on the national debt, six<br />
programs designed to aid low-income families<br />
—aid to families with dependent children,<br />
child nutrition, food stamps, medicaid, social<br />
security, and WIC—are exempt. Several other<br />
programs including medicare, community and<br />
migrant health centers, Indian health services,<br />
and veterans’ medical care would be subject to<br />
mandatory budget cuts, but the size of these<br />
cuts would be less than other non-defense<br />
items.<br />
For fiscal year 1987, both the defense and the<br />
non-defense portions of the federal budget will<br />
have to be cut about 9 percent in order to meet<br />
GRH requirements. And, since some of the nondefense<br />
items are exempt from budget cuts, the<br />
cuts for the remaining items in this category—<br />
mass transit grants, subsidized housing, law en<br />
forcement, student aid, foreign aid, and com<br />
munity development grants, to name a few—<br />
will be closer to 13 percent. Since the man<br />
dated budget cuts under GRH are across-theboard,<br />
all items in the non-defense part of the<br />
budget will be reduced by an equal percentage<br />
amount.<br />
The timing of the budget cuts is also speci<br />
fied. Since the law was passed after the beginfling<br />
of the 1986 fiscal year (which began in Oc<br />
tober, 1985), the President was only required to<br />
cut $11.7 billion from the budget in March,<br />
1986. Since the 1987 fiscal year budget deficit<br />
target is $144.0 billion, the federal government<br />
will have to scale back its spending (or increase<br />
its revenues) by $40 to $50 billion in one year.<br />
At the present time, there is considerable de<br />
bate as to whether the deficit reduction legisla<br />
tion will actually force the President and Con<br />
gress to compromise on a budget that will have<br />
deficits low enough to satisfy GRH. For exam<br />
ple, many legislators who support social pro<br />
grams feel that it is better to have their pro<br />
grams cut 13 percent than risk having them<br />
eliminated. Many in this group prefer auto-<br />
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.0
4<br />
matic cuts rather than compromise with the<br />
President. On the other hand, the President has<br />
indicated little willingness to compromise on<br />
increases for national defense expenditures.<br />
Thus, a budget agreeable to everyone may not<br />
be forthcoming.<br />
There is also a chance that GRH will be de<br />
clared unconstitutional by the Supreme Court.<br />
The key issue is the authority of the General Ac<br />
counting Office. The GAO is required to carry<br />
out the spending cuts, which is normally an ex<br />
ecutive branch of government function. At the<br />
same time, the head of the GAO can only be<br />
fired by Congress. As a result, a federal district<br />
court in February, 1986, ruled that the law vio<br />
lated the separation of powers and was there<br />
fore unconstitutional. This ruling was immedi<br />
ately appealed to the United States Supreme<br />
Court where a final decision is expected in June<br />
or July. Until that time, however, GRH is in ef<br />
fect and the preliminary budget cuts of $11.7<br />
billion made in March are still legal.<br />
If the high court rules against GRH, a fall<br />
back provision in the bill requires Congress to<br />
prepare a joint resolution mandating the same<br />
percentage budget cuts. This would take the<br />
place of the automatic budget cuts which<br />
wou’d have been made by the GAO. Congress<br />
would have to vote for this provision—some<br />
thing most would prefer to avoid.<br />
P. 360-377 USING GOVERNMENT<br />
STATISTICS<br />
Economists make extensive use of Statistics<br />
tb help them understand the way in which the<br />
economy is performing. However, many of<br />
these numbers, often put out by the federal gov<br />
ernment, and other agencies, are constantly<br />
being revised and corrected.<br />
In December, 1985, the Bureau of Economic<br />
Analysis in the Department of Commerce com<br />
pleted a comprehensive revision of official gov<br />
ernment Statistics. Virtually all statistics were<br />
affected, including those used to compile the in<br />
dex of leading indicators, price indices, and<br />
GNP. The revisions of GNP were done, in part,<br />
to reflect the activity of the “underground econ<br />
omy.” The revisions in the price index were in<br />
tended to give better estimates of real changes<br />
over time.<br />
As a result of the revisions, the economy<br />
turned out to be much larger than originally<br />
thought, especially in recent years. For exam<br />
ple, GNP for each of the years from 1929 until<br />
1984 was revised upwards, sometii*s by as<br />
much as several percentage points. In 1984<br />
alone, GNP was increased by $111.9 billion<br />
over the previous figures.<br />
The Commerce Department now uses a new<br />
base year of 1982 to distinguish the new series<br />
from the old. In the future, it will publish esti<br />
mates of GNP and other economic time series<br />
in terms of 1982 dollars as well as in current,<br />
or non-inflation adjusted figures.<br />
While the revisions appear small on a per<br />
centage basis, they are often quite large when<br />
measured in dollar terms. For example, the<br />
$111.9 billion added to the 1984 GNP amounted<br />
to nearly $475 for every man, woman, and child<br />
in the United States for that year,.<br />
While more accurate numbers are welcomed<br />
by everyone, the revisions did make some ear<br />
lier projections less meaningful, especially<br />
those used to predict future GNP. Before the re<br />
vision, for example, it appeared as if the index<br />
of leading indicators was beginning to level off<br />
—the index went down for one or more months<br />
in a row during 1984 and 1985. After the revi<br />
sion, however, the index increased consistently<br />
for a period of nearly 18 months. Since the re<br />
vised numbers were much stronger than the<br />
earlier estimates, many economic forecasters<br />
decided to delay the predicted arrival of the<br />
next recession by as much as a year.<br />
Fortunately, revisions of this size are done in<br />
frequently. And, when they are done, the De<br />
partment of Commerce publishes revised fig<br />
ures for all years since 1929. This allows<br />
economists and others who use economic data<br />
to update their numbers and re-examine their<br />
projections and forecasts.<br />
Although major revisions cause more confu<br />
sion at first, the transition period to the new<br />
data does not take long. Short term revisions,<br />
on the other hand, pose different problems. For<br />
example, the Department of Commerce origi<br />
nally estimated the fourth quarter growth of<br />
real GNP in 1985 to be 3.2 percent. This figure<br />
was later revised to 2.4 percent, then 1.2 per<br />
cent and finally to 0.7 percent. As a result, the<br />
Commerce Department decided to discontinue<br />
its preliminary “flash estimate,” which was the<br />
earliest given for each quarter (the 3.2 percent<br />
above). The Department reasoned that the ini<br />
tial estimate was made on the basis of too little<br />
information and was therefore subject to too<br />
much revision. This pattern of using three, four,<br />
or more revisions to finalize the fourth quarter<br />
GNP for 1985 will be repeated every time new<br />
GNP figures are reported.<br />
At other times, researchers find that they<br />
simply have to live with conflicting estimates<br />
supplied by different federal agencies. For ex<br />
ample, in late 1983, the Labor Department<br />
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35
came up with two different estimates for the<br />
number of jobs created during that year. One<br />
showed 3.5 million new jobs, the other showed<br />
2.5 million. On another occasion, the Federal<br />
Reserve Board reported that personal savings<br />
increased $42.6 billion from 1980 to the second<br />
quarter to 1983. At the same time, the Com<br />
merce Department (which keeps similar fig<br />
ures). reported that personal savings decreased<br />
$17.9 billion over the same period. The FED re<br />
ported personal savings of $209.3 billion in the<br />
second quarter of 1983 and the Commerce De<br />
partment reported $92.3 billion. Given the pop<br />
ulation of the United States during that year,<br />
the difference between the two estimates<br />
amounted to nearly $500 for every man,<br />
woman, and child in the country. And, recently<br />
(noted in the update of the underground econ<br />
omy on page 32), the Commerce Department<br />
and the IRS estimates of the underground econ<br />
omy differed by $150 billion.<br />
Sometimes problems arise because the infor<br />
mation supplied to the Federal Government is<br />
in If error the error is large enough, it can dis<br />
tort an entire statistical series. When the FED<br />
compiles statistics on the money supply, for ex<br />
ample, it reJies on figures supplied by a number<br />
of the country’s largest banks. In October, 1979,<br />
one large ‘reporting bank sent the FED the<br />
•<br />
•<br />
wrong figures, causing the FED to overstate the<br />
growth of the basic money supply by $3.7 bil<br />
lion. The result, until corrected, caused consid<br />
erable confusion in financial markets.<br />
Budget cutbacks at federal agencies have<br />
also impactçd the quality and quantity of data<br />
collected. During the Carter administration, the<br />
Commerce Department’s Bureau of Economic<br />
Analysis had over 500 full-time employees. By<br />
1984, the nuthber had dropped to approxi<br />
mately 400. Even the FDIC, another federal<br />
agency that publishes information on banks,<br />
was not able to distribute its annual report ti<br />
tied 1984 Statistics on Banking until the Spring<br />
of 1986 (the information in Figure 11—4on page<br />
22 o this updjle comes from this publication).<br />
With fewer analysts available to collect, re<br />
view, and publish data, some series were dis<br />
continued. One of the discontinued series was<br />
used for Figure 2—3,“How the Dollar is Spent,”<br />
on page 38 of the text. Another discontinued se<br />
ries is “Potential GNP.” This series was com<br />
piled by the President’s Council of Econothic<br />
Advisors and subsequently was used to show<br />
the “GNP gap” in Figure 16—3on page 395 of<br />
the text.<br />
Despite the constant revisions of economic<br />
statistics, they are still extremely useful for<br />
analysis and explanation. When econom ts<br />
make projections about the future, they need<br />
36<br />
the most recent data available, even though<br />
they know that the data will be subject to some<br />
revision. Because of this, they sometimes try to<br />
look at trends rather than the size of a particu<br />
lar number. When they analyze the index of<br />
leading indicators, for example, they look for a<br />
trend over a three- (or more-) month period.<br />
Since newer data is more likely to be revised<br />
than older data, analysts make judgments<br />
based on developing trends. When newer data<br />
becomes available, the process is repeated and<br />
analyists make an effort to adjust to a more<br />
current forecast.<br />
In the end, some errors are always likely to<br />
take place. However, we are far better off with<br />
the current system—which is widely judged to<br />
be the best in the world—than we are without<br />
it.<br />
P. 368-377 THE BUSINESS CYCLE<br />
Figure 15—3on pages 370—371of the text il<br />
lustrates that business cycles have occurred on<br />
a fairly regular basis for at least a century or<br />
more. In order to look at business cycle activity<br />
in recent years, however, we need to look at<br />
changes in real GNP on a quarter-by-quarter<br />
basis. This is shown in the Figure 15—3Update<br />
given on the following page. The graph is differ<br />
ent from and more detailed than the original<br />
graph, which showed changes in real GNP in<br />
relation to the long-term trend line. (The graph<br />
also uses the December, 1982 revisions of real<br />
GNP.)<br />
Economists normally define a recession as a<br />
period during which real GNP declines two<br />
quarters in a row. For example, real GNP was<br />
negative during the last quarter of 1981 and the<br />
first quarter of 1982. It was positive the next<br />
quarter, and then negative after that. As a re<br />
sult, the latter part of 1981 and almost all of<br />
1982 was called a recession.<br />
The “official” dates for this and all other<br />
recessions were established by the National Bu<br />
reau of Economic Research (NBER), a nongov<br />
ernmental organization with a long history of<br />
business cycle research. The NBER, which uses<br />
monthly—in addition to quarterly—data, de<br />
cided that the recession started on July, 1981<br />
and ended on November, 1982. Since monthly<br />
data is used by the NBER, the starting and end<br />
ing dates of the recession do not always coin<br />
cide with the quarterly GNP data shown in the<br />
update Figure 15—3.<br />
The only exception since World War II to the<br />
“two-quarter rule” occurred in 1980. At the<br />
time, the decline in real GNP during the second<br />
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4<br />
I<br />
I<br />
g<br />
INTERPRETINGINFORMATION<br />
Name<br />
Class Date<br />
Pie graphs, like the ones below, are often used to show where federal revenues come<br />
from and on what they are spent. The graphs below illustrate the percent of the total<br />
of various categories. The accompanying tables give the actual dollars for each<br />
category. Review the graphs and tables, and then answer the questions that follow.<br />
Other<br />
Nat.Resources I<br />
SpaceandTech.1%.<br />
Agnculture2%<br />
Healthand<br />
24%<br />
Transportation<br />
3% \<br />
‘Federal Expenditures for a Recent Year<br />
(billions of dollars)<br />
FederalExpendItures FederalRevenues<br />
Interestonthe<br />
NationalDebt<br />
19%<br />
Defense $285.7<br />
Healthand welfare 150.7<br />
Interest on debt 142.5<br />
Education 29.3<br />
Transportation 25.9<br />
Agriculture 12.6<br />
Natural resources 11.9<br />
Space and technology 9.3<br />
Other (energy, justice, veteran’s<br />
benefits) 73.8<br />
Total $973.7<br />
OtherTaxes<br />
6% \.<br />
1. What is the largest source of revenue for the federal government?<br />
3. What are the total expenditures of the federal government?.<br />
Excise<br />
Tax Business<br />
Income<br />
Tax<br />
9%<br />
Federal Revenues for a Recent Year<br />
(billions of dollars)<br />
Personal income tax $358.9<br />
<strong>Social</strong> Security tax 289.4<br />
Business income tax 74.1<br />
Excise taxes 35.0<br />
Other taxes (estate, gift, customs) 36.2<br />
Total $793.7<br />
2. Assume that the pie graphs represent each dollar of federal revenues and expendi<br />
tures. Thus, each portion of the pie shows how many cents out of each dollar is<br />
spent on that category or is raised from that source.<br />
a. How many cents out of every revenue dollar are collected from <strong>Social</strong> Security<br />
taxes? _________________________ From excise taxes?<br />
b. How many cents out of ev ry dollar are spent on defense? On<br />
_______________<br />
health and welfare? _______________<br />
On education?<br />
The total revenues? _________________________________<br />
4. Which total is higher? Calculate the estimated deficit or surplus<br />
in the budget.
I<br />
___________________ SKILLS WORKSHEET<br />
CHAPTER9<br />
Name __________________________________________ Class Date ___________<br />
LABORINTHEAMERICANECONOMY<br />
ANALYZING A TABLE<br />
Study the table below. It showsunion membershipin selectedcountries. After<br />
studying the table, answerthe questions that follow.<br />
UNION MEMBERSHIPWORLDWIDE<br />
(% of total work force)<br />
DEVELOPEDCOUNTRIES LESSDEVELOPEDCOUNTRIES<br />
80—90%Finland, Sweden 40—50% Algeria,Tanzania<br />
70—80%Belgium,Denmark Argentina, Barbados,<br />
60-70%<br />
Austria,<br />
Luxembourg, Norway<br />
30—40%<br />
Chile, Ethiopia, Fiji,<br />
Guyana, Singapore,<br />
Sri L.anka,Venezuela<br />
40—5( 6<br />
Britain, New<br />
Zealand, ‘West<br />
Germany<br />
Colombia,Egypt,<br />
Gabon, Jamaica,<br />
20—30%<br />
Mexico,Trinidad &<br />
Canada, reece,<br />
Tobago<br />
30—40%Japan, Netherlands,<br />
Switzerland<br />
Botswana,Brazil,<br />
Costa Rica, Ecuador,<br />
France,<br />
30%<br />
Portugal,<br />
—<br />
spain, u.s.<br />
10—20%Kenya, Panama,<br />
Peru, Philippines,<br />
Zambia<br />
___________ ___________________________<br />
source:<br />
Internjuonal Labor Organization.<br />
Bangladesh,<br />
DominicanRepublic,<br />
Haiti, India,<br />
Below indonesia, Nepal,<br />
10% Pakistan, Papua New<br />
Guinea, Senegal,<br />
Sierra Leone,<br />
Thailand, Togo<br />
_____ _____________ _____ ___________ ____________________________<br />
1. How does union membershipin the United States comparewith union membership in other developed<br />
countries?<br />
2. How would you classifythe nations with union membershipover 60 percent? —<br />
3. What effectdo you think such high union membershiphas on these nations?<br />
4. Why do you supposeunion membershipis so low in many less developednations?
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER11<br />
Name Class____________ Date__________<br />
11.1GOVERNMENTINVOLVEMENTIN THE ECONOMY<br />
IS IT PRIVATEORPUBLIC?<br />
A. Decideif each of the items belowis a privategood or serviceor a socialgood or service. In the blank beside<br />
each number, write P (private), or S (social),or E if it could be either.<br />
______ 1. a lighthouse 11. automobile<br />
2. local telephonecompany<br />
12. national defense<br />
______ 3. candy bar ______ 13. haircut<br />
______ 4. interstate highwaysystem 14. Grand CanyonNational Park<br />
______ 5. dental checkup 15. independent boarding school<br />
_______ 6. policeservices _______ 16. bicycle<br />
________ 7. televisionset ________ 17. bicyclepath<br />
______ 8. garbagecollection ______ 18. city art museum<br />
_______ 9. televisionsignals 19. canvasand paints<br />
10. city subwaysystem<br />
20. county schoolsystem<br />
B. Tell whether each of the followingexternalitiesis a spilloverbenefitor spillovercost. Then explainwhy<br />
and who benefitsor pays the cost.<br />
1. Ten homeownerson a street with twelvehousespay a private guard serviceto patrol their street.<br />
2. Smogcausedby auto emissionsincreasesthe number of workerswho are sick with respiratoryproblems.<br />
3. A street kir raisesmoney for the village,but the sanitationdepartment must clean up a lot of litter.<br />
4. Union workers gain a raise in pay, ahd all salariesin the companyare increased5 percent.<br />
5. Much-neededfactoriesdischargetheir waste into a river. The resulting pollucionkills the shellñsh that local<br />
commercialfishermenused to gather and sell.
‘<br />
Name<br />
Section 4. REGULATINGTHEMONEYSUPPLY<br />
Class Date<br />
As you have read in Chaper 16 the Fed can use three main tools to control the nation’s<br />
money supply. It can change reserve requirements; change the discount rate, or rate of<br />
interest charged on loans to banks; and buy or sell Treasury securities. To demonstrate<br />
your understanding of these operations, answer the following questions.<br />
1. Howdoes changing reserve requirements affect the money supply?<br />
2. Why would charging banks a higher rate of interest on loans affect the money supply?<br />
3. Why does the money supply increase when the Fed buys Treasury securities on the<br />
open market? ________________________________________________________________<br />
4. Assume that the Fed decides that the nation’s money supply is growing a little too slow<br />
ly. What action would the Fed take to increase the money supply slightly?<br />
5. Assume that the action taken in question 4 does not make the money supply reach the<br />
Fed’s target for growth. What else can the Fed do to nudge the supply higher?<br />
S. Assume that the money supply has lagged far behind the Fed’s target for growth for<br />
several months. What might the Fed decide to do to increase the money supply?
•<br />
Section 5. MONETARYPOLICY<br />
Name<br />
Class Dale<br />
You have learned that the Fed regulates the nation’s money supply in order to stimulate<br />
or cool down the economy. However, the Fed’s actions can be offset or increased by<br />
events beyond its control.<br />
The first of the following exercises assumes that the Fed is trying to stimulate the<br />
economy. Write ‘yes” in the blank before each event that will help the Fed’s plan.<br />
Write “no” for each one that will not help the plan.<br />
The second exercise assumes that the Fed is trying to slow the economy down. Com<br />
plete this exercise in the same way as the first.<br />
1. The Fed has just lowered the discount rate to stimulate the economy. Will these<br />
events help its action?<br />
______<br />
a. A drop in the price of imported cars<br />
______ b. Announcement of a lowering of business taxes<br />
______ c. Increased demand for single-family homes<br />
______<br />
d. A drop in business investment<br />
______ e. A decrease in the nation’s net exports<br />
______ f. An increase in worker productivity<br />
2. The Fed has just sold Treasury bills on the open market to slow down the economy.<br />
Will these events help its action?<br />
______ a. An increase in the amount of savings<br />
______<br />
b. A poor harvest year among farmers<br />
c. Higher prices for imported goods<br />
_____ d. An increase in exports<br />
______<br />
e. The failure of a major bank<br />
______ f. The federal government’s decision to begin a new weapons program
Distribution of FamilyIncome by Income Group<br />
Distribution of Family Income by Income Grow<br />
Llndqr $5.<br />
*5.090to$9999<br />
$10000<br />
to$14,999<br />
$15,000 to $19,999<br />
$20,000 to $24,999<br />
$25 to$34,999<br />
$35,000to*49.999<br />
$50,000andover<br />
Number<br />
of FamilIes of Families<br />
3.539,000<br />
7.017.000<br />
8,296.000<br />
7,888,000<br />
7,932,000<br />
12325,000<br />
9,091,000<br />
5,430,000<br />
Iota 61,320.000<br />
Source: Bur au oftheCensus.<br />
5.8<br />
11.5<br />
13.6<br />
12.6<br />
13.0<br />
20.2<br />
14.9<br />
e.g<br />
100.0<br />
Wanaparency<br />
7<br />
-. Eanaflaa<br />
Thetle dows thedatbi on of kcms by<br />
l3es fan ki thel,ked Mes ls 1991.TheIe<br />
showsthe nunter of Iee ls s Wme<br />
•category.I also&KM5tie pescer*ige of<br />
,‘ ,<br />
cli1saduls ’ .:¼.<br />
1. What percerdage d<br />
00 ls 1991?<br />
veeiec&ved ls<br />
-‘ -c:<br />
2. How mwiy fan<br />
____<br />
es Iecehmdbhe i<br />
$15,000wal $34990ls 19.1?<br />
- -. -<br />
-• .<br />
•; I
FIGURE11.2TAXGRESSIVITY<br />
.4<br />
-3<br />
High<br />
Percent<br />
,of<br />
Income<br />
Paid<br />
In<br />
Taxes<br />
by<br />
Taxpayer<br />
Low<br />
Low Middle High<br />
Level of IncomeReceived<br />
by Taxpayer<br />
OVERHEAD101
e<br />
Section 5. SUPPLY-SIDEECONOMICS<br />
Name<br />
Class Date<br />
Recently, greater interest has been given to how suppliers (businesses) fuel the<br />
American economy. Study the following flow chart, and then answer the questions:<br />
S<br />
CIRCULARFLOWSIN THE AMERICANECONOMY<br />
Interest<br />
1. Describe the two physical flows and the two money flows in the diagram.<br />
2. How do consumers get the income they need in order to purchase the goods and<br />
services supplied by business?<br />
3. How do business enterprises get the money they need to pay for land, labor, and<br />
capital?<br />
dl<br />
4. Why does the diagram show the owners of the productive factors and the consumers<br />
in the same box?<br />
5. How does the flow chart reflect Say’s Law, that “supply creates its own demand”?
Name<br />
Section 1. WOMEN IN THE WORK FORCE<br />
Class Date<br />
In Chapter 19, you read about how growing numbers of women have entered the work<br />
force. The following diagram lists six factors that have contributed to this dramatic shift<br />
from the home to the work place. In the spaces provided below the diagram, explain<br />
how each of these factors has brought about greater participation of women in the work<br />
force.<br />
1.<br />
2.<br />
3.<br />
4.<br />
5.<br />
I<br />
5. ConvenienceFoods<br />
andFastFood<br />
Restaurants<br />
1. TheWomen’s<br />
Movement<br />
a<br />
IncreasingParticipation<br />
byWomenin<br />
theWorkForce<br />
4. Mechanization<br />
of the Home<br />
2. Inflation<br />
of the<br />
1970 ’s<br />
3. Declining<br />
Birth Rates
4<br />
.<br />
C<br />
U<br />
I<br />
Name<br />
Class Dale<br />
Section 4. MONETARYPOLICYANDA STABLEECONOMY<br />
As you have read, monetary policy calls for the Federal Reserve to manipulate the dis<br />
count rate, required reserve ratio, and open market operations to counter problems<br />
such as inflation or recession. Show your understanding of these monetary tools by in<br />
dicating what actions the Fed should take to counter these problems:<br />
I<br />
1. Actions<br />
a. ____<br />
b. ____<br />
C. ____<br />
1’<br />
2. Actions<br />
a. ____<br />
b. ____<br />
a. increasethediscountrate<br />
b. Raisethe<br />
reserveratio<br />
a. Lowerthediscountrate<br />
b. Reduce<br />
the reserve<br />
ratio<br />
c. Sellsecurities<br />
in theopenmarket<br />
c. Buysecurities<br />
in theopen-market<br />
C. ____<br />
3. Whydo economists like Milton Friedman feel that the actions of the Federal Reserve<br />
often do more harm than good?
Name<br />
Section 3. FISCALPOLICYAND STABILIZATION<br />
Class Date<br />
Imagine that you are the head of the President’s Council of Economic Advisers. The<br />
President has asked you to suggest ways to stimulate the economy, which is in a reces<br />
sion. The President also wishes to avoid inflation during the economic recovery. Your<br />
job is to explain to the President, who is not an economist, the concept of leakage in<br />
the circular flow of income. You must also describe the way in which fiscal policy can<br />
be used to stimulate the economy. Use the following topics to outline your report.<br />
A. Causes of recession<br />
1. Aggregate demand:________________<br />
2. Leakage and injections:<br />
B. Conditions during recession<br />
1. Economic activity:<br />
2. Employment:<br />
C. Recommendations to stimulate economy<br />
1. Taxes:_______________<br />
r<br />
2. Government spending:<br />
3. Unemployment:
I<br />
I<br />
I<br />
Figure19-1:EDUCATIONAL ATTAINMENT INTHEUNITEDSTATES<br />
Percent ofpersons Highschool—4 yearsormore<br />
Coflege—4<br />
.75<br />
25yearsoldorover _____<br />
yea’sormore____ 50<br />
25<br />
0<br />
I<br />
Years
i<br />
READING Free to Choose Education<br />
by Milton and Rose Friedman<br />
One publicgoodthat affects almost everyoneis publiceducation.Criticsof the<br />
current educationalsystem argue that increased competitionamong schools<br />
wouldbring improvements.One of these people is MiltonFriedman,a prominent<br />
economist. For over30 years,Friedmantaught at the Universityof Chicago.In<br />
1976 he won the NobelPrizein <strong>Economics</strong>. Friedmanadvocates less govern<br />
ment regulationof much of the economy.Inthis reading,adapted from Milton<br />
and Rose Friedmans book,Freeto Choose:A PersonalStatement, they explain<br />
whythey support a vouchersystem.As you read about the Friedmans’proposal,<br />
consider howyou woulduse an education voucher.<br />
ne wayto achievea major improvement,to bringlearningbackinto<br />
the classroom,especiallyfor the currentlymostdisadvantaged,is to<br />
give all parents greater control over their children’sschooling. . . . One<br />
simple and effectiveway to assure parents greater freedom to choose.<br />
whileat the same time retaining present sourcesof finance,is a voucher<br />
plan.<br />
Suppose . . . the government said to you: If you relieve us of the<br />
expenseof schoolingyour child, you will be given a voucher, a piece of<br />
paper redeemablefor a designatedsumof money.if. and onlyif. it isused<br />
to pay the costof schoolingyourchildat an approvedschool.”The sumof<br />
moneymightbe 52.000.or it mightbe a lessersum. . . . But whether the<br />
full amount or the lesser amount, it would remove at least a part of the<br />
financialpenalty that now limitsthe freedom of parents to choose. . . . T<br />
That wouldboth giveevery parent a greater opportunity to chooseand at<br />
$<br />
the same time require public schools to finance themselvesby charging<br />
tuition. . . . Thepublic schools would then have to compete both with<br />
one another and with private schools.<br />
This plan would relieve no one of the burden of taxation to pay for<br />
schooling. It would simplygive parents a wider choice as to the form in<br />
which their children get the schoolingthat the communityhas obligated<br />
itself to provide. . . . [Consider five of the possible criticisms of the<br />
voucher plan.]<br />
[Onej objection to the voucherplan is that it wouldraise the total cost<br />
to taxpayersof schooling—becauseof the cost of vouchers given for the<br />
roughly10percent of childrenwhonowattend parochialand other private<br />
schools. That is a ‘problem” only to those who disregard the present<br />
discrimination against parents who send their children to nonpublic<br />
schools. Universalvoucherswouldend the inequityof usingtax funds to<br />
school some children but not others.<br />
23ia<br />
—I I Ii I’II
I<br />
..f<br />
Under the current system, public school<br />
students such as theseattend whatever<br />
schoolservesthe districtin which they<br />
live.MiltonandRoseFriedmanbelievethe<br />
vouchersystemwould force schools to<br />
competewithoneanotherfor students.<br />
—<br />
[A second concern about vouchers is the fear that they would pro<br />
mote racialsegregation.]Discnminationunder a voucherplan can be pre<br />
vented. . . by redeemingvouchersonlyfrom schoolsthat do not discnmi<br />
nate. A moredifficultproblemhastroubledsomestudentsof vouchers.That<br />
is the possibilitythat voluntarychoicewith vouchersmightincreaseracial<br />
and classseparationin schoolsand thus exacerbate[increase]racialconflict<br />
and fosteran incTeasinglysegregatedand hierarchicalsociety.<br />
We believe that the voucher plan would have preciselythe opposite<br />
effect; it would moderate racial conflictand promote a societyin which<br />
blacksandwhitescooperateinjoint objectives,whilerespectingeachother’s<br />
separaterightsand interests.’. . . Integrationhasbeenmostsuccessfulwhen<br />
it has resultedfromchoice,not coercion.Nonpublicschools,parochialand<br />
other, have often been in the forefrontof the movetowardintegration.<br />
[A third possibleproblem with vouchersis] their likelyeffecton the<br />
socialand economicstructure. . . . [This]questionhas.. . perhapsdivided<br />
studentsof vouchersmore than any other. . . . Somehave arguedthat the<br />
greatvalueof the publicschoolhas been as a meltingpot. in whichrichand<br />
poor. nativeand foreign-born,blackandwhitehavelearnedto livetogether.<br />
That imagewasand islargelytrue forsmallcommunities.but almostentirely<br />
false for large cities. There, the public school has fostered residential<br />
stratification,by tyingthe kindand costof schoolingto residentiallocation.<br />
It is no accidentthat mostof the country’soutstandingpublicschoolsare in<br />
high-incomeenclaves[communities].<br />
[A fourth concernis over the creationof new schools.]Privateschools<br />
noware almostalleitherparochialschoolsor eliteacademies.Willthe effect<br />
of the voucherplan simply,be to subsidizethese, whileleavingthe bulk of<br />
[the studentsfrom poor families]in inferiorpublicschools?What reasonis<br />
there to supposethat alternativeswillreallyarise?
I<br />
Handout6-2<br />
WHEREWILLYOUCUTTHEBUDGET?<br />
Class ____________<br />
Introduction:<br />
0<br />
F. Researchanddevelopment fornewsourcesofen-<br />
Thefederalgovernmenthasa deficitwheneverIts<br />
spendingexceedsItsrevenues.Onewayforthegovemmenttodealwithdeficitsistoreducethembyraising<br />
taxesorbycuthngspendingbackclosertothelevelof<br />
existingrevenues. If,instead,thegovernment chooses<br />
todealwithdeficitsbyborrowing, thedeficitscancon<br />
tnbutetoinflation.Thereasonisthatgovernment’s borrowingactsto<br />
increasethemoneysupplyandthusto<br />
causethedemandfor goodsandservicesto exceed<br />
thesupply.<br />
lnflaboninitselfaddstodeficits—the government must<br />
paymoreeachyearforthegoods,services,andcredit<br />
itseeks.Furthermore, risingdeficitsencouragexpec<br />
tationsof continuingandpemapsof anincreaseininflation.<br />
ergy.<br />
G. Subsidiesto shoreupthelowpricesofagricultural<br />
productsthatarecausingsomefarmersto goout<br />
of business.<br />
H. Grantstostatesforhighwayconstructionandrepair.<br />
I. Programsto providemedicalcareforthepoor.<br />
nwction of a newmissiledefensesystem.<br />
Rankthe aboveitemsaccordingto yourpflortties.<br />
Whichprogramwouldyou cut first?Whichprogram<br />
wouldyoucutlast?(Designatetheprogramsbyletter.)<br />
Rank Program<br />
Cutfirst 1<br />
Directions:<br />
2<br />
AssumeyouareamemberofCongressandmustcut<br />
domesticspendingprogramstoreducethebudgetdef<br />
icit. Whatinthebudgetwouldyoucut?<br />
A. Foodstampsforlow-incomepeople.<br />
B. Programsto protectheenvironment.<br />
3<br />
4<br />
5<br />
6<br />
7<br />
e<br />
C. Assistanceformasstransitinurbanareas.<br />
D. Grantstostateandlocalgovernments forcrimepre<br />
ventionandcontrol.<br />
E. Programsprovidingjobsforthepoor.<br />
9<br />
Cutlast 10<br />
Whenyoucutaprogram.whatisthetrade-off?Who<br />
is hurt?Whois helped’Writeyouranswers.<br />
SOURCE: Thisexerciseisadaptedfrom FocusonDiscussionbyS.StowellSymrnes,Directorof<strong>School</strong>ServicesDivision, JointCoundiOn<br />
EconomicEducation,<br />
NewYork. 4<br />
FromAnatyzingInflationanditsConb’oI: A ResourceGuide,EPSSeries.1984.Publishedby theJointCounoilonEconomicEducation. Two<br />
ParkAvenue,NewYork.NewYork10016.<br />
26
ByKevin Lahart<br />
GRAMM-RUDMANilulling<br />
and the J.curve iere sup<br />
ponedto get things undercon<br />
trol and on the way to solution.<br />
But the U.S.Supreme Court dodared<br />
unconstitutional a key section<br />
of the budget-balancing law named<br />
after thosecongressionalgentlemen,<br />
andthe J-curveeffect— a graphicde<br />
piction of the lag betweenthe begin<br />
ning of a currency’sfall in value and<br />
the beginning ofa turnaroundin the<br />
trade balance — was taking longer<br />
thanmanyexpected.<br />
Asa result,the tradedeficitis like<br />
ly to hit p165 billion by year’send,<br />
still fourtimesgreaterthan in 1982.<br />
And thebudgetdeficit— eventhough<br />
Gramm-Rudman-Hollingscalls for<br />
$141billionin fiscal 1987— is likely<br />
to bumpup against$200 billion for<br />
yet anotheryear.<br />
Crucialto thesuccessofthebudgetcuttingbill<br />
wasa provisothat.made<br />
the cuteautomatic:if the legislative<br />
branchdidnotact,thentheexecutive<br />
would. But that,-said the Supreme<br />
Court, violatedseparationofpowers.<br />
Withoutteeth n thelaw,say many<br />
observers,deepbudgetcuttingis not<br />
likely and Gramm-Rud,nan-llollin<br />
s<br />
will comea cropper.lii re’ pomie Lu<br />
such criticism, Sen. Warren Rud<br />
man fR-N.H.) says that even with<br />
the weakeningof the enforcement<br />
provisions,the bill has already had<br />
great impact.Rudmansays that the<br />
$221 billion deficit in fiscal 1986,<br />
which ended Oct. 31, would have<br />
TWINI*FICA*.<br />
Deficit-CuttingLaw<br />
Loses 4, Teeth<br />
been evengrouterwithoutthe bill.<br />
Sen. Pete Doinenici (k-N.M.) who<br />
shepherdedthe bill through the<br />
Senate as chairman of the budget<br />
committee,says that the bill will be<br />
an even greater hit in fiscal 1987<br />
becauseexpeditureswill rise more<br />
slowlythan at any Limein the 1a8L<br />
six years. He said, moreover,that<br />
the real deficit in 1987will be less<br />
than the $160 billion estimate put<br />
Tmde<br />
GapYetUñbridged<br />
I I I I 1 I I I<br />
Levy, chief economist for Philadel<br />
phia’sFidelityBank,reflects“weaker<br />
than expectedeconomicgrowth and<br />
high spendingin someareaslike ag<br />
riculture. What we saw wasesnti p<br />
ueddeterioration. Thing. did not un<br />
prove and Gramm-Rudmanis juèt<br />
falling apart.”<br />
The trade deficit has beenlitLle<br />
affected by the declinein the vafqç<br />
of the dollar,whichbeganin Febru<br />
817, 1985.<br />
That is partly due,sayeconomi8tp.<br />
to the natural lag time betweenacur<br />
rency’.fall andthe priceeffectonun<br />
portsand exports.But thereareoth.,<br />
reasonsas well, they say, that ray<br />
stretchthelag—oilimports,outeeurç<br />
lag and movement abroadby some<br />
American companies,the de& di fi.<br />
culti.. of many developingnations,<br />
th. value of the currenciesof newly<br />
industrialized countries that s<br />
•zporters to the UnitedStates.<br />
“The dollar is down only 11,. ppi’<br />
cent against other currencies,”s4<br />
Irwin Keliner, chief 4t economis (9r<br />
ManufacturersHanoverTrust ço.,<br />
since major trading partnerstie’ he<br />
valueof their currenciesto thedojl dt.<br />
forth by the Officeof Management In addition,hesaidwhatweremajor<br />
and Budget.<br />
U.S.export marketsinthedeveloping<br />
Many economistsscoffat such no worldhaveineffectabutdownascoun<br />
tions,sayingthat the 1986deficitwas tries with largeezteiital debtsmoved<br />
nosign ofau sa. Andtheconsensus to severelyrestrict imports.<br />
amongprivate sectoreconomistsputs “Finally, and moatimportant,” d<br />
the 1987budgetdeficit between$185 Kallner, “isour budgetdeficitwMdb<br />
billion and $200billion— far greater keep.interest ratesbigh ”sllbetingsl’.<br />
than the $141 billion called for in erything from U.S.firma’inve,tzsnt<br />
Gramin-Rudman.<br />
deciaionatodevelopingcouatr<br />
iss ’* jl<br />
The 1986 number, said Mickey itytop.yth.irdebta.<br />
•1.
BUSINESS<br />
/<br />
A LessoninEconomicLife<br />
Is Tbrning theKeynesianTide<br />
cyclicdownswings.Hisbookassumesthat<br />
government,in its role as a stabilizing<br />
force,wouldalwaysactinthepublicinter<br />
est. Forexample,thisexcerptis fromthe<br />
1955edition:The FederalReserveBoard<br />
“is directlyresponsibleto Congress;and<br />
wheneverany conflictarisesbetweenits<br />
makinga profitand the publicinterest,it<br />
actsaccordingtothepublicinterestwithout<br />
question’<br />
ThomasDiLorenzo,a visitingprofessor<br />
at WashingtonUniversityin St. Louis,as<br />
sertsthatSamuelson’sbookandotherslike<br />
it “justassumedthatannouncin goodin<br />
tentionswasenoughtobeoptimisticabout<br />
theeffectsof thosepolicies:’<br />
Butjustasgovernmentwaspresentedas<br />
a good guy.so the free marketwas por<br />
tiayedas undisciplined.Samuelson’stext<br />
was in part an interpretationof Keyne<br />
1936work,“TheGeneralTheoryof Er<br />
ployment.Interestand Money’ in which<br />
supportfor governmentinterventionwas<br />
joinedtoa cool,evenantagonistic,viewof<br />
theworkingsof markets.<br />
DiLorenzoquotesa passagefrom the<br />
1955edition:Theprivateeconomyis“like<br />
a machinewithoutan effectivesteering<br />
wheel. . . . [OurJcapitalistsystemmay<br />
depart from what is considereda social<br />
optimumin threeways:throughimproper<br />
distributionof income,throughmonopoly<br />
Conventional wisdomon economic on, could say at one point during his and throughliuctuationsin employment.<br />
policywasprobablybornin 1948. presidcncy, “Wearcall Keynesians ” iiow It isthepresentwriter’sbelief. . that<br />
That year Paul Samuelsonfirst Buttoday,theclassical Keynesianview alltheseevilscanbeamelioratedbyappro<br />
publishedhis textbook “<strong>Economics</strong>,” of governmentinterventionisundergoinga priatepolicies:’<br />
whose3 millioncopiesover 12 editions metamorphosis, andsomeofthegospelhas in examiningmarkets,Samuelsonand<br />
havebeenabibleforgenerationsofuniver beenmodified.Moreover,anarrayofquite hismanyimitatorspresenteda modelof a<br />
sit)’students— and,ihus,theseminalwork differentextbookshasenteredthe market marketwithperfectcompetition.But stu<br />
for most of those who go on to be to challengethe dominationof Samuel- dents, lookingat the real-worldmarkets<br />
economistsinthe UnitedStates. son’s.Whatfutureuniversitystudentslearn aroundthem, sawsomethingsignificantly<br />
“I’m sure that no other book in the abouthowaneconomyworksmaybequite different from perfect competition.Be<br />
history of economics,including Adam differentas well.<br />
causerealitydidnotliveuptotheantiseptic<br />
Smith’s‘Wealthof Nations: has had as Perhapsmost significant,economists standardsof the model, studentsreached<br />
muchimpactonasmanypeople,”saysPaul over the past decade have increasingly the conclusionthat the marketeconomy<br />
Heyne,economicsprofessorat theUniver modifiedtheir view of macroeconomics. was mythicaland real-worldcompetition<br />
sityof Washingtonanda textbookauthor. the big pictureof the entireeconomy,to irrelevant.They saw the “flaws”in real<br />
Samuelsonservedas the St. Paul for incorporateinsightsfrommicroeconomics, marketsas marketfailuresor instancesof<br />
JohnMaynardKeynes,whoserevolution the studyof thebehaviorof individualsin monopolisticmarketpower<br />
arytheoriesprovidedan intellectualfoun markets.The changeis significantin that<br />
dationforthoseeconomistswhoproposed it indicatesa shift in philosophyamong<br />
governmentinterventionin the economy. manyeconomists.Macroeconomics isina<br />
These ideasfirstgainedcurrencyin the stateof confusion, its analysesseemingly<br />
UnitedStatesduringtheGreatDepression. less and ss appropriatefor large-scale<br />
HistriumphoverAdamSmith’sideathat policyintervention.<br />
marketsare a self-regulatingformof hu Samuelsondisseminatedthe view that<br />
manactivitywasso dramaticthat evena governmentpolicycouldstabilizetheecon<br />
conservativeRepublican.RichardM. Nix- omy and miti2atethe air<br />
— SUMMARY: Afterfour decades,thepervasiveinfluenceofSamuetson’s<br />
Econom1cs,”a Keynesiantexttothecore,maybeencounteringa run<br />
forItsmoneysTheclassicalKeynesianviewofgovernment Intervention<br />
hashad its day inthepolicyspotlight, andItsunhappyeconomic<br />
resultshavepersuaded manyeconomiststo rewrite theirphIlosophies.<br />
Thenewertextbooks marl a returnto basicmicrooconomic principles.<br />
Since1948,the 12editionsof Samuelson’stexthaveaffectedcountlessstudents.<br />
justthesort<br />
of thingthatgovernmentshouldstepin t<br />
CoiTect.<br />
“ThewholeSamuelsonapproachis in<br />
largepartresponsibleforthe basiclackof<br />
understandingthat so many collegeStu<br />
dentsand the populationin generalhave.<br />
Theylearnedeconomics as a mechanistic<br />
systemof assumptionswhichwereunreal<br />
ç i’ a._ •
—<br />
I.<br />
S<br />
S<br />
\<br />
ancient Universityor a European capital to our local schoolsand their<br />
surroundings. to our local government and its offices.Above all, let us<br />
provide a local center of refreshment and entertainment with an ample<br />
theatre, a concert hail, a dance hail, a gallery, a British restaurant.<br />
canteens. cafes, and so forth.<br />
Assuredly we can afford this and much more. Anything we can<br />
actuallydo we can afford. Once done, it isthere. Nothingcan take it from<br />
us. We are immeasurablyricher than our predecessors. Is it not evident<br />
that some mistaken reasoninggoverns our action as a country if we are<br />
forced to be so much poorer than they in the richesof life?<br />
Yetthese must be only the trimmingson the more solid, urgent, and<br />
necessary outgoings on housing the people, on reconstructingindustry<br />
and transport, and on replanningthe environment of our daily life. Not<br />
only shallwe come to possessthese excellentthings. With a bigprogram<br />
carried out at a proper pace we can hope to keep employmentgood for<br />
manyyearsto come. Weshall, inveryfact, havebuiltour newcitiesout of<br />
the labor which we were mistakenly keeping unused and unhappy in<br />
enforced idleness.<br />
From How MuchDoesFinanceMatter?,by JohnMaynardKeynes.<br />
UNDERSTANDING THE READING<br />
1. Explainwhat Keynesmeant in hisquestion: But surely,SirJohn. you<br />
don’t build houses with money?”<br />
2. Accordingto Keynes.what are the costsof not building?<br />
3. How did Keynes think that a large construction program in Great<br />
Britain would help society?
Bythe1950sandI960stheseideashad<br />
takenfirmtoot.Optimismranhighamong<br />
policymakers,andit wasbelievedthat<br />
Keynesianeconomicsheldthe keyto the<br />
businesscycle. Governmentcould finetunetheeconomyandpreventrecessions.<br />
uuShatsoldKeynesianism,”saysSteve<br />
Pejovich,aneconomicsprofessorat Texas<br />
A&MUniversity “wasa basicbeliefthat<br />
peoplecouldengineertheirdestinies. Peo<br />
ple refused to believethatan impersonaJ<br />
forcelikethemarketcoulddoa betterjob<br />
thanwisepeoplewhoworkedtogether.<br />
<strong>Social</strong>engineering meantcontrolling the<br />
economy,andthewaytocontrol it,people<br />
thought, wasbywayof controllingde<br />
mand,andthatwasreallyanextension of combinationof lowgrowthandinflation, established andfundamental toeconomics,<br />
theKeynesianargument. I don’thinkit’s wascreated.President Nixonhadevenin thenewdisciples madeoverblownclaims.<br />
correctocallitKeynesianism. It’sjusthat stitutedwageandpricecontrols tocombat Isthereawaytofindasynthesis ofall<br />
Keynessimplytriggeredthiswholemove inflation.Regulations haddistortedmar theseideas?“TheKeynesianapproach of<br />
ment:’<br />
ketsandsheltered industries. Government thel930shasbeenevolvingandchanging,”<br />
Butbythemid- 1970s, theresultsof budgetdeficitshadbecomea permanentsaysSamuelson.<br />
IntheIrtextbookmodels<br />
whathadbecome agreat laboratoryexperi andgrowingfixtureoftheeconomy, tend of theeconomy, manyKeynesians have<br />
mentineconomics werein.Notonlywas ingtohamper privateinvestment. included supply-side effects. AlanBlinder,<br />
thebusiness cycleuntamed, butinflation Criticsof Keynesianism hadbeenpre professor ofeconomics atPrincetonUni<br />
wasraginganda newevil,stagflation, a dictingthisresultfordecades. Thetheory versity, saysthismodel“hasKeynesian<br />
“wasputtothetestintheI970sanditfailed effectsintheshortranbutmoreclassical<br />
thetestmiserably:’ saysHeyne.“I think effectsinthelongrun,withtheprovision<br />
we’vediscovered thateconomists simply thatinthelongrun,thesupplyisfixedby<br />
don’thaveenoughknowledge to advise microeconomic considerations andwon’t<br />
government on whatto do, andconse respondmuchandprobablynotatall to<br />
quentlytheattempt bygovernment tofol stimulating theeconomy byfiscalandmon<br />
low‘Keynesian prescriptions’ isprobablyetarypolicy:’<br />
morelikelytodestabilize thantostabilize:’ Thisisnotadisavowal ofKeynesianism<br />
Macroeconomists havebeen“mugged itself,saysBlinder,butof“theoldnaive<br />
byreality:’ saysRichardStroup, aprofessorKeynesianism.<br />
All of usin thisbusiness<br />
ofeconomics atMontanaStateUniversityhavehadcauseto<br />
becomemoremodest<br />
anda textbook coauthor. “WhatI thinkof about theplausible claimsofwhatcouldbe<br />
astheprogressivedreamers of the 1960s donebystabilization policy.Youwillfind<br />
havereallybeenreinedinbytheevidence.” moremodesty andmorestressontheun<br />
Economists returnedto thedrawing certainties andthethingswe’dliketoknow,<br />
board.Whileseveralnewtheorieshave butdon’t,andtherisksinvolved:’<br />
emerged, nonecanlayclaimtothesalva<br />
tionKeynesianism oncepromised. Mone Peter0. Steiner,<br />
tarism,whoseforemost proponent isNobel<br />
PrizewinnerMiltonFriedman, linksmon<br />
eygrowthtoinflation. Someofitsprecepts<br />
havebeenintegratedintomainstreamthe<br />
oryto an extent,butit is underattack<br />
because, intheviewofmanyeconomists,<br />
predictions aboutherelationship between<br />
moneygrowth,inflationand economic<br />
growthavenotheld.<br />
The supply-siders havesucceeded in<br />
I convincing manypeopleofthevalueoflow<br />
incometaxesasa spurto growth.But<br />
supply-side faithintheLaffercurve,which<br />
positsa federalbudget balancedsolelyby<br />
a morevibranteconomypoweredbylow<br />
taxes, “hasb&nthesourceofmuchjustifi<br />
ableridiculeandcontempt,” saysHeyne.<br />
Althoughsupply-side principles axelong-<br />
coauthor ofapop<br />
Monetarism, link’mgmoneygrowthtoinflation,has not proveda likelyredeemer.<br />
ulartext,says,“Keynesian eco<br />
nomics isstillverymuchthere,in<br />
thatthingsthatstimulatetheeconomy,<br />
whether they’reintentional ornor,suchas<br />
largegovernment deficits,havethekinds<br />
ofeffectsthatKeynesianeconomics fore<br />
cast:’<br />
This nonetheless reveals a profound<br />
shift.Confidence inmacroeconomics “has<br />
beenvery,verybadlyshaken,” saysWil<br />
liamAllen,authorwithArmenAlchianof<br />
a pioneeringmarket-oriented textbook in<br />
1964.“Inthefirstgeneration afterWorld<br />
WarII, macroeconomics wastheglam<br />
orousfield.Weweregoingto solvethe<br />
problems of unemployment andinflation<br />
andlivehappilyeverafter.Nowpeopleare<br />
goingbacktotheneoclassical emphasis on<br />
INSIGHT/JUNE 8,,1987 (• -..<br />
:<br />
.
the workingsof the pricesystem.h’s not<br />
so muchbecauseconomistshavegotten<br />
religionbut becausemacroeconomicsis<br />
largelyindisarray?’<br />
Admittingto somehyperbole,he adds,<br />
“I’d say most of the outstandingpeople<br />
workingin macroeconomicsacknowledge<br />
— at leastin conversation,not alwaysin<br />
— —<br />
thattheyverylargelydon’tknow<br />
whattheyaredoing?’<br />
Manyagme.‘Ibere is no reallyclear,<br />
single,happychoice like Keynesonce<br />
was:’saysJohnGreenman,senioreconom<br />
icseditorforHarper&RowPublishersInc.<br />
“Samuelsonhad it so beautifullycut-and.<br />
driedduringthe Keynesianera, but now<br />
he’sflounderingthroughquicksandjust as<br />
badlyas everyoneelseis. Thereis no new<br />
Keynesemergingvt, nosinglefigurewho<br />
candofortheworldeconomywhatKeynes<br />
didm 1936,soevezyoneissadlygroping<br />
fora newway’<br />
As a result,economistshavebegunto<br />
returntofundamentals,andthatmeansmi<br />
croecononucs.Itspreceptsaremuchbetter<br />
understoodand established;in fact, price<br />
theory, the cornerstone of microeco<br />
“omics.is thefoundationof economics.<br />
“It’sa movementowarda clearerand<br />
bettereconomics,”says Heyne,“an eco<br />
nomicsfreerofcertainpoliticalpreconcep<br />
tions that determinethe result of the<br />
analysis.There has been a verydefinite<br />
attenq*toreturntobasics,andthatmeans<br />
supplyanddemand.ThenI thinkeconom<br />
ESbecomesnxxesolidlybased,moreusc-<br />
“Intellectually, analytically, thesmallgovernment,<br />
privateproperty, price-directed economytypeshave<br />
won.Intellectually andprofessionallywe’vewon.”<br />
fuland, I wouldadd,morehumble:’<br />
Thismeansamuchmoremarket-orient<br />
ed economicsthat focuseson the price<br />
system.Italsomeansatheorythatpredicts<br />
thatgovernment intervention tendsto de<br />
stabilizeratherthanstabilize,and,drawing<br />
on publicchoicetheory,thatgovernment<br />
policies often reflect political interests<br />
ratherthansomepublicmterest.<br />
Tosome,thiscarriesheavyideological<br />
overtones.<br />
“1 really believe:’says Heyne, “that<br />
goodeconomicspromotesclear property<br />
rightsand freeexchange.Whenyou use<br />
economictheory — careful,critical,re<br />
sponsibleuseof supplyanddemandanal<br />
ysis — •viewthatsays,undertherightset of cir<br />
cumstances, intervention candogood,and<br />
underthe wrongset of circumstances, it<br />
cando ill. Thenit’sa matterof degreeas<br />
to howlikelyyou think (theformerlac<br />
tuailyarise.”<br />
Blinderbasicallyagrees withHeyne.<br />
Thedifference,hesays,is that“whileex<br />
plainingtostudentswhywethinkthatway,<br />
we(Keynesiansjalsospendalotoftimeon<br />
qualifications,pointingout whenmarkets<br />
don’tdowell,placeswheremarketsmight<br />
fail?’Hepointstounequalincomedistnbu<br />
tionandmacroeconomic instability.“Free<br />
marketeconomiesinmyviewandtheview<br />
of manyhavenothada wonderfulrecord.<br />
to analyzewhatactuallyhappens, They’reproneto inflationsandrecessions<br />
Ithinkthatyoubecomeincreasinglysuspi anda varietyof things?’<br />
cious of traditionalgovernment-imposed Allen,however,believesthat“intellec<br />
solutionstoproblemsandmoreimpressed tually,analytically, thesmallgovernment,<br />
privateproperty,price-directedeconomy<br />
typeshavewon.Wedon’thaveto fightin<br />
theprofessional journalsagainstheMarx<br />
ists, certainly,and the socialistsand so<br />
forth. Intellectuallyand professional]:<br />
we’vewon”<br />
AddsPejovich.“Idon’tthinkanybody<br />
whounderstandseconomicsreallyholdsto<br />
freemarketconceptssimplybecauseof an<br />
ideologicalpreferenceforthem.Wehold<br />
to free marketsbecausethereis enough<br />
evidenceto showthattheyproduceresults<br />
thataresuperiortoothers?’<br />
Andit duesseemthat theseviewsare<br />
gaininghold in the tcxtbooks. While<br />
Keynesiantextsstillholdthelargestshare<br />
of themarket, theviewstheyespousehave<br />
beenprofoundlymodified,andthetheories<br />
of publi choice(adisciplineapplyingeco<br />
nomicprinciples topoliticaldecisionmak<br />
ing),theroleof privatepropertyandthe<br />
powerof marketsolutionsthatreflectindi<br />
vidualchoicesratherthan collectivede<br />
cisionshavemadea markontheewlution<br />
of economictheory.<br />
Aseconomicsreturnstobasicprinciples<br />
withthecapacityof spontaneous ordersto of microeconomics,ii teaches students<br />
workout solutionsontheirown?’ moreaboutincentives,aboutscarcityand<br />
DavidColander, an economicsprofes about opportunitycosts and trade-offs.<br />
soratMiddleburyCollegeinWrrnontand “That’s not ideology ” says Ronald A.<br />
a professed‘Keynesian,agreesthat“most Krieger,formerchairmanof theeconomics<br />
economistsare harsherthan most other departmentat GoucherCollegein Mary<br />
people),becausethey’veseenthenumber land.“k’s a wayof lookingat the world,<br />
ofexampleswherethemarkethasworked. an understandingof how marketsituatons<br />
The questionis. what if the government occurin everydaylifeand howtheseprin<br />
staysoutoftheeconomy?Arewebetteroff ciplesapplyto virtuallyall publicandpn<br />
or worse ofP That’s an issue that the vale decisions?’And manyobserversbe<br />
modelscan’ reallyhandle?’<br />
lievethat eventuallytheseideas,through<br />
Keynesiansno longerviewgovernment textbooks,may becomethe new wisdom<br />
interventionasdevoidof negativesideef furthecomingclassesof universitygradu<br />
focts. 1’bcreis mi reasonto be absolutist atesandeconomistsaswell.<br />
aboutthis:’saysWindcr.“Youcanholda<br />
— r
a<br />
.TF Ti U11<br />
Nation<br />
TheQuarterback<br />
OfSupplySide<br />
Jack Kemp ispropelled by ideas<br />
Promising to expand the Reagan revolution.<br />
New York Congressman Jack Kemp plunges 4n.<br />
:husi’as:icallyinto the presidential race. This “is<br />
the fourth in a series of profiles of the major<br />
1988contenders.<br />
Thecandidatestrode genially from tableto table. hands out<br />
stretched. makingfingertipcontact with smiling ladies at a lun<br />
cheon in Manchester.N.H. An elderlywomangrabbed him by<br />
thesleeveand yanked him to herside.“Therearetoo manyfor.<br />
eigners buyingupour land.” shecomplained.He bentdownnext<br />
to her chair.“Aw. come on.” he chided. “dont look at it as a<br />
zero-sum game. We want peopleto invest in America.” She lis<br />
tenedsullenlyas he triedto explain his visionof an unfettered<br />
freemarket.“Well,youthink aboutit.”she interrupted,shaking<br />
herfinger.He maskedhis exasperationwithan affectionatepat<br />
on the back’’l will.” he promised.“butyouthinkaboutit too.’<br />
Jack Kemp. 51. the New York Congressmanand former<br />
pro-footballquarterback(for the BuffaloBillsi.once thoughthe<br />
wouldend up as a coach or teacher.Even now that he is cam<br />
paigningforPresidenthe cannotsuppress the urgeto enlighten.<br />
to pounceon a negativeoutlookandofferan optimisticeconom<br />
ic visionin itsstead.His ferventembraceof thesupply-sidefaith<br />
and its feel-goodgospel of growthis more than just.a political<br />
• platform. ft is a personaicreedthat<br />
• has fueledhiscareer andhelped him<br />
developa blendof conservatismand<br />
• blue-coUarpopulism that he sees as<br />
the natural extension of Ronald<br />
Reagan’s legacy.<br />
• Thepastyear has been troubling<br />
• for Kemp’scampaign. His hope of<br />
turning the Republicanrace into a<br />
Kemp-Bush contest failed: though<br />
Iranscam deliatád George Bush’s<br />
lead. Robert Dote emerged as the<br />
main alternauve to the Vice Pt’esi<br />
dent. As Kemp makes his formal<br />
announcementtt 1is week, there is<br />
whispering that his candidacycan’t<br />
I get off the ground.<br />
Partof Kemp’sproblemthusfar<br />
has been that he seems more cant<br />
(ortablepromotingideasthanselling<br />
himseltWhenproselyuang about his<br />
economictheories—thevirtuesof tax<br />
cuts. the need for currencyreform<br />
and a dollar “as good as go(d”—ba<br />
displaysthe earnest exuberanceala<br />
juniorprofessoraddressinga pep rat<br />
ly. Beneath the hearty veneer and<br />
lbothall-starluster.Kemp harborsa<br />
cw ous personal reticence. When<br />
askedwhat his appeal is to voters,he<br />
answers.“Ithinkmy ideasarepopu<br />
lar.and I thinkI can articulatethem<br />
as wellas anyone.”<br />
TheebullientKemp,a conserva<br />
liME. APRIL13.1987<br />
tivemirrorimageof Hubert Humphrey,lovesto talk Whenhe is<br />
minutesintoa speech,hisheadbobsbackand forth,as ifstraining<br />
againsta too-tightcollar and uepin.He plants his feet far apart<br />
and unfurlshis arms. flexinghis fingersto pantomimeanexpres<br />
sion Like quote. unquote.”He speaks so quickly,using so many<br />
factsandhistoricalallusions.thatheoftenfailstoengagehisaudi<br />
ence.His aideshaveven him a digitalstopwatchto remindhim<br />
to keep it short.<br />
To solidifyhis conservativebase,Kemp has been intensify<br />
ing his oppositionto abortion, agitating forearly deployment of<br />
Star Warsand bashingSecretaryofStateGeorgeShultzforbeing<br />
too moderate. But Kempdoes not fully resonate with the New<br />
Right moralistsand movementconservativeson theparty’sright<br />
wing. The libertarian streak in his philosophymakes him more<br />
comfortable talking abouttoleranceand individual rights than<br />
about imposingsocialandreligiousvalues:his senseof optimism<br />
makeshimshyawayfromtappingtheresentments that can fuel<br />
an ideologicalcrusade.<br />
His wife Joanne, 50.a devoutChristian. calls his politicsof<br />
inclusionthe “goodshepherd”model.KempLikesthe metaphor.<br />
Republicans,he believes,mustreachout to minorities, women.<br />
blue-collarworkersand even organized labor.He has been a<br />
longtimesupporterof civil rights and feelsit was a historic mis<br />
takeforRepublicansnotto beat theforefrontof that movement.<br />
Kemp’sintellect seems to reflect a doggedfascinationwith<br />
ideasrather thana natural brilliance.He talks aboutideas the<br />
wayimmigrants talk aboutAmerica: it is the passionate loveof<br />
the convert.Footballconsumedhis lifethroughouthischildhood<br />
in Los Angelesand his years majoringin physicaleducation at<br />
OccidentalCollege in Southern California.Not until he was<br />
newlymarriedand playingprofessionallydidhis focusbroaden.<br />
He workedforGovernorReaganin 1967.and read BarryGoldwaters<br />
The Conscienceof a Conservativeand Ayn Rand’sliber<br />
tariart-positivistnovels,suchas The Fountainhead. In the mid<br />
‘60s he discoveredFriedrich von Hayek’s The Constitutionof<br />
Liberty.a paean to free-marketeconomics.and “fromthenon it<br />
was Katie-bar-the-door.”he recalls.“I readeverythingI could<br />
get my handson about economicsand politicalphilosophy.”<br />
WhenKemp arrived in Washingtonin 1971.a boyish-look<br />
ing Congressman representing the<br />
Buffaloarea. he embracedthe no<br />
tionof growththroughtax cutswith<br />
a firebrand’sunnuancedzeal.Obvi<br />
ouslyambitious.he seemed shallow.<br />
and he compensatedby bolstering<br />
hisrhetoricwith sweepinghistorical<br />
references and obscure names.<br />
“Hes more secure now,” says his<br />
earliest supply-sideguru.JudeWan<br />
ruski.“He doesnt tbel the need to<br />
drop Von Hayek’s name in every<br />
speech.” Even now Kemp cannot<br />
alwaysresist. He recently citedJean<br />
FrançoisReveland LordAcrontoa<br />
group of senior citizens in Fort<br />
Dodge. Iowa. He remainsa vora<br />
cióus reader.On planerides. he de<br />
vows biographiesand historybooks<br />
the same way he reads newspa<br />
pers—scanning and mentally clip<br />
pingideasand factsthat supporthis<br />
worldview.<br />
He does not relishtheunderbelly<br />
of politics. the gossip and tactical<br />
• stalking.Aftera politicalevent,liere<br />
treats to hisairplaneseat.ignoringhis<br />
aides’shoptalk.occasionallylooking<br />
upfromhisreadingtosay,ofa factor<br />
quotation.“Wow,lookatthat!”Muses<br />
his friend Tom Keen, Governor of<br />
NewJersey:“He’snormuchdifferent<br />
rantoGoldwaterid ‘z.ro-sianganes”<br />
in privatethan in public. When he<br />
calls, be’s always excited, trying
d<br />
I<br />
-<br />
out new ideasor telling me aboutsome new book or article.” sionallowshim towatchmostof the gamesof his eldestsonJeff.<br />
Off the podium. Kemp reverts to a Southern Californiaver a backupquarterbackforthe San Francisco49ers. He hates the<br />
nacuiar.Thingshelikes.fromhis familyhousen suburban Mary campaign travel, hates being separated fromhis family.<br />
landto theflowenngofcapitalismin theThirdWorld,are “really p Buthe enjoysone elementof the race.“Thefunof thecam<br />
neat.”He is proudof hiseruditton.usingFrenchphra 5es liketan paign.”he insistz.“is to actuallysayto someone.took. I reallybe<br />
vital,buthe sometimestossesout strange . neolog2s like “brag /ievewe couldrestorea 3%primerate.’”He gasps.as if to till in<br />
gadocious.”His tastes are unabashedlymiddlebrow.He saw the thelistenersincredulousresponse.“Now.someoneisgoingtosay.<br />
musicalLesMisirablesthree tines and with charactenstic gusto lack Kemp.you’recrazy.’But I reallybelievewe can have ow<br />
has becomea one-manad forthe show,tellingpeoplethat it’sthe long-terminterest ratesand7% mortgageraces.andreduceunern<br />
best musicalsince Wanof/a Mancha.’<br />
•<br />
ploymentin our cities by half.” He pausesand leansbacicin nis<br />
At home Kemp relaxesin his book-lined den with football chair. envelopedin his own earnestness.“Thats why I am in it.<br />
trophiesand framedfamilyphotographscrowdingthe mantle.A That’s all I’min it for.” _<br />
giant blacksatellitedish connected to his 20-inchRCA televi<br />
26
I<br />
p<br />
t<br />
I.<br />
iThe Balanced-Budget Amendment<br />
.<br />
.‘.‘ - .“:<br />
Duringtheir campaignsfor the Presidency.<br />
both Jimmy Caner and Ronald Reagan<br />
promised to balance the federal budget.<br />
However, federal expenditures have con<br />
tinuedto exceedincome.Between1969and<br />
1979.personal incomein the United States<br />
rose 158percent. total federal government<br />
expendituresrose 263 percent. Federal tax<br />
receiptsrose significantlylessthan expendi<br />
tures. As a result. deficits have occurred<br />
duringevery year since 1969.<br />
An amendment to the Constitution<br />
proposed in Congress in 1982 would re<br />
quireCongressto balancethe budget every<br />
year. The provisions of the amendment<br />
would allow for two exceptions. Congress<br />
could waive.the balanced budget require<br />
ment b’ a simple majority in an year<br />
during which the nation was fighting a<br />
declared war. In years of peace. Congress<br />
could pass a deficitbudget only if a threefifths<br />
majority of both houses agreed. In<br />
addition. Congresscould not raise taxes as<br />
a proportion of national income unlessthe<br />
membersspecificallyvoted to allowsuchan<br />
increase.A deficitcouldoccurlegally,how<br />
ever, if tax collections fell below the<br />
amount predicted by Congress.<br />
The proposed balanced-budgetamend<br />
ment aroused a great deal of controversyin<br />
the nation. Rtbert List, formergovernorof<br />
Nevada. supported the amendment. Wil<br />
liam O’Neill. who became governor of<br />
Connecticut in 1981. disagreed with List.<br />
Compare the followingstatements of List<br />
and O’Neill. Decide whether or not you<br />
would support an amendment to the Con:<br />
stitution requiring a balanced budget.<br />
I<br />
Robert List believes the economy of<br />
the United States hasgotten out of control.<br />
He sees the doubling of the national debt<br />
between 1972and 1982and the endlesstide<br />
of deficitsas the reasons for the unwieldy<br />
economy.Listdoes not think that Congress<br />
can balance the budget on its own, since<br />
Congress lacks the will to stand up to<br />
specialinterest groups. These groups pres<br />
sure the Congressfor appropriationsto the<br />
concernsthey promote.<br />
List supports the requirement that<br />
three-fifths of the Congress must vote to<br />
authorize deficit spending in peacetime<br />
instead of the simple majority vote now<br />
needed. The proposed amendment would<br />
make Congress and individual lawmakers<br />
accountable for any deficit spending. By<br />
placinga heavierburden dn lawmakerswho<br />
approve deficits, the amendment would<br />
slow governmentspending.<br />
List believes that people are demand<br />
ing fiscalresponsibility.He cites one opin<br />
ion poll showingthat an overwhelming90<br />
percent of the public believe the deficit<br />
poses a serious problem for the nation.<br />
Another opinion poll indicatesthat 79per<br />
cent of the American people favor a<br />
balanced-budgetamendment. The amend<br />
ment making it harder to go into debt has<br />
much popular support. List is wary that<br />
Congress might still find ways to continue<br />
deficit spending. He stresses the need to<br />
watch Congressvery closely.<br />
To balance the budget. Congress must<br />
either raise taxesor cut spending.List feels<br />
that what Congress would do is open to<br />
speculation. He is confident,however, that<br />
26)<br />
—— * wt IL<br />
L
4<br />
Ii<br />
Congresswould not start slashingin areas<br />
where people supported government<br />
spending. List believes that if Congress<br />
passes the amendment, the states will<br />
quicklyratify it.<br />
Nevertheless, he is also aware that, in<br />
somestates, bureaucratsand publicofficials<br />
fear a loss of federal money. Therefore.<br />
theyoppose the amendment for selfishrea<br />
sons. Listcriticizesthe congressionaloppo<br />
nentsof the proposedamendmentwhotake<br />
credit for all the federal expenditures in<br />
What is a simple definition of deficit financing?<br />
their district or state while blaming the<br />
federal deficitson all the other membersot<br />
Congress. List claims. lhat just is not<br />
goingto work anymore.”<br />
William O’Neill opposes the amend.<br />
ment for a balanced budget. Lockingthe<br />
amendment into the Constitution would<br />
restrict the flexibilityin spendingnecessary<br />
to hold the country together. especiallyin<br />
difficulteconomictimes.<br />
According to O’Neill. the problems<br />
state and federal governmentfaceare corn-<br />
I
pletelydifferent. Manyof the expenditures<br />
that contributeto the deficitinvolvefeder<br />
al. not local, problems. Highwayand rail<br />
systems.health and welfareprograms. and<br />
employment policy can be solved only at<br />
the federallevel. Holdingthe lineon feder<br />
al expenditureswould amount to Congress<br />
walkingawayfrom itsresponsibilities.Such<br />
a stance would weaken, rather than<br />
strengthen, the country.<br />
O’Neill also believes that the amend<br />
ment would hurt relations between the<br />
federal governmentand the states. To bal<br />
ance the budget. Congress would have to<br />
cut the dollars going to the states even<br />
more drastically then has already been<br />
done. The states would then have to as<br />
sume the burden of funding programs for<br />
whichthe federal governmenthad paid.<br />
O’Neill thinks that social programs<br />
should remain among the obligations of<br />
government at all levels. The states might<br />
better handle some items in the federal<br />
budget. but many responsibilitiesmust be<br />
shared between the two levels of govern<br />
ment.<br />
Finally. O’Neill opposes the amend<br />
mnt becausehe thinks it wouldresult in a<br />
basic change in the democratic process.<br />
The amendment would require three-fifths<br />
of the members of both housesto approve<br />
any deficit spending. Two-fifths of the<br />
members—a minority—could. therefore.<br />
blocksome proposed spending.<br />
O’Neillforesees the election of fiscally<br />
responsiblepeople to Congressas a wayof<br />
solving the problem. He also looks at the<br />
possiblerults of immediateaction to bal<br />
ance the budget. If Congressattempted to<br />
balancethe budget now, the cuts in spend<br />
ing would result in additonal millions of<br />
unemployedpeople. O’Neill would rather<br />
see people workingand payingtaxes, even<br />
if theyare holdingpublic-servicejobs, than<br />
standing in breadlinesor livingon welfare.<br />
t<br />
‘11<br />
O’Neillrealizesthat mostpeoplewould<br />
support balancing the federal budget.<br />
However, if they were asked about what<br />
they thought of cuts in their socialsecurity<br />
or in the grants for their children’seduca<br />
tion, they would respond very differently.<br />
ANALYZINGTHECASE STUDY<br />
STEPi Gather Evidence<br />
I. Explain why the proposed amendment<br />
would allow Congress to deficit spend<br />
during wartime?<br />
2. In your opinion, would the balancedbudget<br />
amendment decrease govern<br />
ment spending?Why or why not?<br />
3. Accordingto O’Neill.what does current<br />
law say about the federal expenditures<br />
and the budget?<br />
STEP 2 Evaluate Costs and Benefits<br />
1. How does the balanced-budget amend<br />
ment affect government expenditures?<br />
Are there any costs or benefits to the<br />
government?Explain your answer.<br />
2. How does government spending affect<br />
taxpayers? Will taxpayers benefit from<br />
the proposed amendment? If so. how?<br />
3. How does the balanced-budgetamend<br />
ment affect various groups of citizens?<br />
Are there any costs or benefits for the<br />
elderly?Collegestudents?The wealthy?<br />
STEP 3 Make a decision<br />
1. Write a paragraph explaining why you<br />
support or oppose the amendment to<br />
balance the budget.<br />
Enrichment Activity<br />
Divide the class into two groups. Ask one<br />
group to prepare a defenseof the balancedbudget<br />
amendment. Ask the other group to<br />
prepare arguments against the proposed<br />
amendment. Allowclasstime for debate.
•<br />
ControllingBusiness<br />
Fluctuations:Government<br />
FiscalPolicies<br />
ExcerptreprintedfromGreetMythsof<strong>Economics</strong> byDon<br />
PaarlbergwithpermissionofThe Vew,lmericanLibrary.<br />
j 1968by Don Paarlberg.<br />
John Maynard Keynes was one of the leading<br />
economistsof the twentiethcentury. Believingthat<br />
governmentfiscalpolicies(taxesand spending)can<br />
controlinflation and recession, his thinking heav<br />
ilyinfluencedeveryadministrationsince Franklin<br />
Roosevelt’sin the 1930s. Here his “new” eco<br />
nomictheories are explained.<br />
In pre-Keynesianeconomicsit was generallyas<br />
swned that the economywouldbe at full employ<br />
ment. What this meant, usually, was “substantial<br />
full employment,”not that every employableman<br />
wouldhave a job. In a practical sense, the nation<br />
couldbe at substantial fullemploymentwith4 per<br />
cent of the labor force unemployed.... “Full em<br />
ployment or “substantial full employment”refers<br />
not only to labor but to employmentof resources<br />
generally, including industrial plants. Pre<br />
Keynesiansbelieved there might be some tempo<br />
rary departures from full employment,but these<br />
wererelatedto adjustments that were underway;if<br />
wedepartedfromfullemployment,wewouldrather<br />
soonreturn to it for this was the equilibriumpoint<br />
towardwhicheconomicforceswerecontinuallydriv<br />
ing.<br />
• Economicanalysesgenerallymadethese assump<br />
tions.<br />
Thencamethe Great Depression,withone-fourth<br />
ofthelaborforceunemployedand industrialproduc<br />
tion cut almost in half, a dreadful situation that<br />
draggedalongyear after year. Thefull-employment<br />
assumptionofpre-Keynesianeconomicswasshaken<br />
to its foundations.Economistswere withoutexpla<br />
nation for chis catastrophe, and without<br />
remedies.<br />
Into this impasse came the new economics.The<br />
essential positionwas that there couldbe equilib<br />
riumwhenresourceswere lessthan fullyemployed,<br />
that under certain conditions the economycould<br />
stagnate, continuingindefinitelywith a large share<br />
ofits laborforce unemployedand with many of its<br />
factoriesshut down.<br />
The new theory is best explainedby examining<br />
the fundamentalideas in the Keynesiansystem:<br />
(1)A major driving force for the economyis the<br />
leveloftotal spending. Total spendingis thmeaa<br />
ure of aggregate demand [the total amount that<br />
( consumersare willingand able to spend for goods<br />
and services].Withinlimits, the higherthe levelof<br />
spending, the greater will be the total amount of<br />
goodsand services produced....<br />
(2)Spendinghas three components:spendingfor<br />
consumption,spending for investment, and spend<br />
ingonthe part ofgovernment.Thelevelofconsump<br />
tion depends in large part on psychologicalat<br />
titudes, whichresult in a particular [desire)to con<br />
sume. The level of investment depends on profits.<br />
expectations,and the rate of interest. The level of<br />
governmentspendingis a matter of publicpolicy.<br />
(3)Savingsare a key to the system. Incomemay<br />
be spent or it may be saved. The purposeofsaving,<br />
fundamentallyand ultimately, is investment. But<br />
savingisdoneby oneset ofpeople,promptedbyone<br />
set of motives, and investment is undertaken by<br />
anothergroup,forrelated but notidenticalmotives.<br />
The two may not agree. If (total] savings exceed<br />
(total]investment, the level of spendingdecreases<br />
and the economyslowsdown. If (total]investment<br />
exceeds savings, spending rises and the gross na<br />
tional product increases.<br />
(4)Peoplediffer in their saving habits. The poor<br />
spend virtually all they receive, sometimesmore,<br />
and (put]nofundsintosavings.The wealthypeople<br />
save a considerableshare of their incomesand may<br />
withdrawexcessivesumsfromthe incomestream.<br />
(5)As a result ofthe forcesdescribedabove,with<br />
a low(desire]to consumeand a weak[incentive]to<br />
invest, equilibrium can occur with resources less<br />
than fully employed.... In such a situation, gov<br />
ernment canbring about fullemploymentby either<br />
spendingmore or cutting taxes.<br />
(6)I.fthe economyis fullyemployedandspending<br />
continuesto increase, this [spending]will(cause]a<br />
price rise. (In this situation, the government can<br />
reduce inflationby spendingless or raisingtaxes.]<br />
The logicalconsequenceof this analysisis that if<br />
the economyis less than fully employed,govern<br />
ment spending should be greater than taxes; the<br />
governmentshould then operate in the red. If the<br />
economyhas been overstimulatedsothat it is at full<br />
employmentand spendingis excessive,inflationre.<br />
suits.Thenthe appropriateactionisto mopup some<br />
of the excessincome,either by increasingtaxes or<br />
by reducingthe level of governmentspending.<br />
The new economicslookson ta,dng and spending<br />
not simplyas a wayof meetingthe costsofgovern<br />
ment, not indeedjust as a way oftaking the peaks<br />
and boughs out of the businesscycle,nor just as a<br />
way ofstabilizingthe valueof the dollar.It is all of<br />
these things plus a way of achievinga highlevel of<br />
economicactivity,fullemployment,anda rapidrate<br />
of economicgrowth. Clearly, the new economics<br />
enlargesthe roleofgovernmentineconomicaffairs.
CopingwithStagflation:(6)<br />
TheFordPlan<br />
1/27/75<br />
Againstthe advice of some of his conservativead<br />
visers,Ford proposed a large dose of Keynesian<br />
fiscal policies.<br />
With that bleakbottom-lineassessment,Gerald<br />
Fordfinallymovedlast weektoreversethequicken<br />
ingslideofthe U.S. economy,and ofhis ownstand<br />
ingamongthegovernedaswell.Firstinatelevised<br />
firesidechat,thenin anuncommonlysomberState<br />
of the UnionMessage,he proposed a three-front<br />
‘nationalrecoveryprogram” — a brash... blendof<br />
taxcutsto slowthe recession,taxincreasesto ease<br />
the energy crisis and budgeteconomiesto coolthe<br />
continuinginflation.But his packageplayedto...<br />
lightapplausein the Capitolandacrossthe nation.<br />
NoteventhePresidentprofessedto besurethathis<br />
granddesignwouldwork;the economicterrain was<br />
toounfamiliar,and his ownexperienceat economic<br />
activismtoolimited.<br />
Thehighlightsoftheprogram:<br />
I RECESSIONsucceeded inflation as Ford’s<br />
economicenemyNo. 1, and the centerpiece of his<br />
programwas his pump-primingrebateon 1974in<br />
cometaxes — a two-stepref .ind of12percent,with<br />
a $1,000 ceiling. “What we need most urgently<br />
today,”he said, 1j more spendingmoneyin your<br />
pocketsratherthanintheTreasuryinWashington.”<br />
Inthe hopeofstimulatingmorejobs,headdedona<br />
proposedboostfrom7 to 12per cent in the amount<br />
businessesandfarmerscandeductforinvestmentin<br />
new plant and equipment.And he [attachedI an<br />
array offurthertax-reliefmeasuresdesignedto off<br />
set the $30billionhisenergylevieswilldrainoutof<br />
the economy. Ilese included$16.5billionin indi<br />
vidualincome-taxcutsfor1975andlateryears;a 13<br />
per vent, $6 billioncut in corporate taxes and $2<br />
billionin it straig negative-income-taxpaymentsof<br />
$80peradulttotheverypoor.<br />
I INFLATIONdroppedto No. 3 onFord’senemies<br />
liat—asharpand difficultchangeforamanwhoonly<br />
threemonthsagohadproposedbudget-cuttinganda<br />
5per centincome-taxsurchargeasthebestmedicine<br />
for what ailedthe economy.His [aides]conceded<br />
thatthe governmentwillrun inthered byanaggre<br />
gate$80billionthis fiscalyearandnext,andthat the<br />
total couldrun close to $100billionif Congress<br />
spendsmoreortaxeslessthanhehasproposed.But<br />
therewaslittlejntheendhecoulddoaboutit beyond<br />
a long, stern State of the Unionhomilyon thrift<br />
(“Wehavebeenself-indulgent.., and nowthe bill<br />
has come due”)and a series of... frugalities —<br />
amongthem a 5 per cent ceilingon 1975cost-oflivingincreasesforsocialsecurityand<br />
government<br />
salaries.<br />
As unveiledlast week,the Fordprogramrepre<br />
sents a series of hard and controversialchoices<br />
among tdifficult]options.Its successrests on the<br />
rather intricatetrade-offs betweenits inflationary<br />
and depressantelements— andit wouldsendbill<br />
ionsofdollarssloshingthroughtheeconomyinways<br />
thatnoonecanpredict withmuchconfidence.Thus.<br />
businessmen,politicians, economists and hardpressed<br />
citizenswill be trying to makeup their<br />
mindsaboutthe programforweeksto come.Still,<br />
sometentative judgmentsand conclusionseemed<br />
meritedlastweek.<br />
Ford’sproposalto pumpupthe economywithan<br />
income-taxrebateandataxcutwillprobablybolster<br />
consumerpsychology,butit isn’tlikelyto halt the<br />
deepeningrecessionorspeedthe recovery.Before<br />
Fordspoke,the consensuspredictionwasthat the<br />
slumpwouldendsometimeafterthe middleof the<br />
year and thata slowclimboutof the depthswould<br />
begin.Thatremainsthe bestbet. Thetaxcutcould<br />
makefora somewhatstrongerupturn.Butit could<br />
also helpset the stage for a renewedinflationary<br />
surge.<br />
Theprogramalsohas a fullquotaof inequities —<br />
andallegedinequities.Forexample,the tax rebate<br />
wouldreturn$104toa$10,000-a-yearfamilyoffour,<br />
but it wouldgive back$1,000to a similar family<br />
earning$50,000.The$3-a-barrel tax onimportedoil<br />
woulddeala particularlyhardblowto New Eng<br />
land, whichdependsheavily on foreignsupplies.<br />
Massachusetts GovernorMichael Dukakis esti<br />
matedthat the levy wouldcost consumersand in<br />
dustryinhisstate$620millionmoreayear.Airlines<br />
werealsoaghastat whatthey saw in theirfUture.<br />
The$3importtax, saidTransWorldAirlineschair<br />
man Charles llinghast, would[require] a 21 per<br />
centfare hike.<br />
The oppositionto Ford’sprogram is certainto<br />
mount.Tocounterit, thePresidentis embarkingon<br />
a personalcrusade,startingthis weekwitha press<br />
conferenceand a majorspeechin Washington.He<br />
obviouslyhasalotofsellingtodo.<br />
2ii.
DoesKeynesianTheory(5)<br />
WorkIn Practice?<br />
£z cerp: repriniedfrom TheWe1fai e StateUSAby Mel<br />
villeI. turnerwithpermissionofHoug uon MLffiinCom<br />
pany.Boston.© 1970byMelvilleJ. Ulmer.<br />
The standard tools of the New <strong>Economics</strong>are<br />
hobbledby... their inflexibility.Weare supposing,<br />
contraryto fact, thatthereis someidealgoal,A,...<br />
fl 11 employment without inflation,that can be<br />
achieved simplyby... proper... fiscalpolicy.In<br />
theory, if the nationalincomeheadedabove A,<br />
(governmentspending]couldbe cut and/or taxes<br />
increasedso that the nationalincomewouldmove<br />
down from its inflationaryheight. If the national<br />
incometended to fall belowA, [spending]couldbe<br />
steppedupand/or taxes reduced,therebyavoiding<br />
unemployment..<br />
Therecent record of fiscalpolicyin the United<br />
States is far fromencouraging,despitethefactthat<br />
duringthe Kennedy,Johnson,and Nixonadininis<br />
trations circumstanceswere [very]favorableto its<br />
success.<br />
Thus, whenPresidentKennedytookofficeat the<br />
startof1961,withtheeconomyinrecessionandfully<br />
7percentofthelaborforceunemployed,thesetting<br />
was. . * receptiveto Keynesian(solutions].Thena<br />
tion as a whole, in line with campaignpromises,<br />
awaited action that wouldsend businessactivity<br />
“movingahead.”NorwasProfessorWalterW.Hel<br />
ler,the newlyappointedchairmanofthe Councilof<br />
EconomicAdvisers,caughtnapping.Barelybefore<br />
he had learned the first nameof his secretary, he<br />
recommendedasubstantialcutintaxes. Thestrictly<br />
politicalresistance to a reduction in taxes is not<br />
normallyconsideredto be very high.<br />
Yet, accordingto Heller’sowntestimony,it was<br />
not untila yearafterthe recommendationhad been<br />
madethat PresidentKennedywasconvincedthat a<br />
red icdon intaxes... wasjustified.Furthermore,it<br />
wasnotuntil963 thatthe Presidenthad sufficient<br />
confidenceinthemoveto recommendittoCongress.<br />
Forits part, the Congresswasalso(slow].Notuntil<br />
1964,a little after the youngPresident’sassassina<br />
tion, was a tax reduction finallyenacted. Sincethe<br />
effect of suchmeasuresis never instantaneous, it<br />
was not until 1965 thit the tax cut signi cantly<br />
influencedthe paceofbusinessactivity.Meanwhile,<br />
excessive unemployment,bringingpersonal“de<br />
pressions” to some 5 millionworkersand their<br />
families,had persisted forfullyfouryears.<br />
Evenworse,becauseof this lengthydelay,it is<br />
possiblethat whenthe tax cut finallycame, it ar<br />
rivedatthewrongtime.Certainly,as theyear1965<br />
drewto a close, priceswere surging forward,the<br />
Vietnamwar wasescalating,andinflationinsteadof<br />
unemployment seemedto be the primaryproblem,<br />
at least as viewedfromWashington.... Professor<br />
Heller,bynowbackat theUniversityofMinnesota,<br />
calledpromptlyin newspaperinterviewsfor a tax<br />
increase. The Councilof EconomicAdvisers soon<br />
echoedthe call.Aftersomedelay,PresidentJohn<br />
son(agreed].Butonthis occasionthe resistanceof<br />
Congresswas stubborn.Through1966,1967,and<br />
1968,(free of] anytax increase, prices rose by 10<br />
percent Inmid-1968,aboutthreeyearslate, a tax<br />
(increase] was finallyenacted, the flailimpact of<br />
whichwasnotexpecteduntil1969.Butbyearly1969<br />
the momentumofinflationwas so greatthatPresi<br />
dent Nixonwas (forced]to seek additionalmessurea,<br />
suchas budget-cutting... to stopit.<br />
Thereactionof ProfessorHellerand mostother<br />
New Economiststo these fatal delaysis that the<br />
faultlies with a (clumsy]legislativeprocess.Pre<br />
sumably,in their view, Congressmenand some<br />
timesPresidents are eitherornery ordense;at any<br />
rate theydonotpromptlysee the light,as revealed<br />
by the New Economists,and act uponit.<br />
Togivethemtheirdue,politiciansseemto sense<br />
instinctivelythat tax rates are too importantan<br />
economic(fact)tobejiggledfrequentlyand(lightly].<br />
Businessplansits investmentsonprospectiveyields<br />
figuredafter taxes. Householdsof necessityshape<br />
theirspending,andassumemortgagepaymentsand<br />
other commitments,on the basisof their expected<br />
incomes after taxes. Stability in their accounts<br />
wouldbe next to impossiblewithfrequentand un<br />
foreseeablechangesintherulesofthegame.Moving<br />
taxesupanddown,as ProfessorHelieronceputit,<br />
withthe“push-buttonsensitivity”ofanofficebuild<br />
ingelevator,wouldtransformtheorderlyconductof<br />
businessandhouseholdaffairsintoa hopelessgam<br />
ble.<br />
Norwouldit bean improvemento placereliance<br />
on altering government(spending]rather than<br />
taxes. Theprograms onwhichthe federalgovern<br />
mentspendsalmost($3003billioneachyearrequire<br />
not only legislation, which is always timeconsuming,but<br />
also... planning,and organization.<br />
By theirnature they cannotbe shiftedquickly,nor<br />
shouldthey, any morethan taxes.<br />
‘I
7<br />
Healthand<br />
Police $21.3<br />
•Figure17-4:SPENDING BYSTATEANDLOCALGOVERNMENTS INA<br />
RECENT YEAR(inbillionsofdollars)<br />
wes: 1I 4Asbi ffieU.S , BureauoftheC<br />
$175.5<br />
btalSpe dhig $111.2
I<br />
Health<br />
IncomeSecurfly—<br />
$3880<br />
Oth<br />
$502<br />
Figure17-3:SPENDINGBYThEFEDERALGOVERNMENT IN<br />
A RECENTYEAR(in billionsof dollars)<br />
- -<br />
ion, E6uc ianmg,<br />
andEnpk me<br />
$284 : Stkai Ab5VaU Li!. nai U<br />
a<br />
• -.<br />
Wi
•<br />
TaxCuts:<br />
HowMuchIs Enough?<br />
8/10/75<br />
in addition to political problems, implementing<br />
Keynesianpoliciesisfurther complicatedbydiffer.<br />
lug economicforecasts and analysts.<br />
President Ford decided to give the flagging<br />
economya shot of adrenalin by proposingincometaxcutsinhisnewprogram.Buttheprevalentview<br />
ofcongressmenand economistswas thathisneedle<br />
wastooshortandtoolate. Someconservativescom<br />
plainedthatwithoutimposingcomparablespending<br />
cuts Fordwas simplygiving inflationa — new if<br />
somewhatdelayed — leaseonlife.<br />
Theidea ofa tax cut wonoverwhelmingapproval<br />
fromconsumers,businessmenand economists.But<br />
manysaidthat it was toosmall.Therewerenumer<br />
ous suggestions that the individual reductions<br />
shouldamountto $25billiononapermanentbasis —<br />
amountthat wouldbe rebatedto the<br />
(9)<br />
moreaffluent<br />
groupswouldn’tbe large<br />
andwithoutanyoffsettingenergytaxes.<br />
Someeconomistsquestionedhowmuchofthe re<br />
batewouldbe spent. The historyof suchone-shot<br />
windfallsshowsthat onlya smallamountis actually<br />
spent,as economistLeifOlsenof New York s First<br />
NationalCityBankandothersobserved.Thebulkof<br />
themoneygoesfordebtrepayment orintosavings.<br />
Last week,it appearedthata rebateon1914taxes<br />
woul4receivethe same treatment.TheNewsweek<br />
po 11 showedonly a sthallpercentageof consumers<br />
planningtoèpendtheirrebate.<br />
Thereweresimilarreservations abouthowsue<br />
eessful,a one-yearincreasein the investment-tax<br />
credit would be in stimulatingnew plant-andequipmentspendingby<br />
business. The incentive<br />
mightencouragecorporationstogoaheadwitha few<br />
programs that previously were marginal. But<br />
industry’sbigproblemrightnowis tofindsufficient<br />
orders to keepits currentfacilitiesoperating,notto<br />
buildmorecapacity.<br />
There nevS was a tax thatwas completelyequi<br />
table,andit wasn’tdifficultto faultFord’sproposed<br />
changesonthe grounds of fairness.It wasunargu<br />
ablethat familiesthatuse everyavailabledollarjust<br />
to scrape bywouldget pitifullysmallrebateswhile<br />
upper-income groups would receive $1,000.<br />
Nevertheless, upper-incomegroups are Ifeavily<br />
taxedtobeginwithandfeelthattheydeservesome<br />
thingin thewayofarebate.Inaddition,theover-all<br />
— $5.3billionforfamilies<br />
making above$20,000and $800millionfor those<br />
earning above$50,000.Fromthe viewpointof the<br />
total economy,higher-incomefamiliesare more<br />
likelytosaveagoodportionoftheir refunds,andthe<br />
economyisindesperateneedofmoresavings.<br />
While[supporters]arguedaboutthesizeandform<br />
ofatax cut, someexperts wereshockedat the sug<br />
gestionthattaxes becutatall.<br />
Critics worried most about the huge Federal<br />
deficitthatwouldresultfroma tax cut. Fordsaid<br />
lastweekthatenactmentofhisprogramwouldmean<br />
a$30billiondeficitduringthecurrentfiscalyearand<br />
asmuchas $47billioninred inkinfiscal1976.Large<br />
astheywere,hisfigureswereprobablyflow].<br />
Conservative suchas Treasury Secretary Wil<br />
11amSimonand chairmanAlanGreenspanof the<br />
CouncilofEconomicAdvisersarguedprivatelythat<br />
a deficitofthat size wouldhavea ruinouseffecton<br />
the nation’smoneymarkets.As they saw it, gov<br />
ernmentborrowingto coverthe deficitwouldsoak<br />
up availablecredit, pushup interestrates and in<br />
creaseinflationarypressures. Businesswouldfindit.<br />
evenmoredifficulttoborrow— and this couldlead<br />
tomorebankruptcies.<br />
Even a deficitof the size Ford predictswould<br />
present the FederalReserveBoardwitha brutal<br />
choice.It couldcreateenoughmoneyto financethe<br />
spending,andthuscontributeto a newinflationary<br />
push. Or it couldkeepmoneyrelativelytight,push<br />
ing up interest rates and endingany chanceof a<br />
recoveryinhousing.Confrontedwiththat (difficult]<br />
choice,chairmanArthur Burnsand his boardop<br />
posedFord’stax cuts.<br />
Butliberaleconomists,and evensomeconserva<br />
tives, contendedthat an eye-poppingdeficitof$60<br />
billionneednotrekindleinflationand wreckmoney<br />
markets.Theymaintainedthat even as cautiousa<br />
President as Dwight Eisenhower allowed the<br />
budgetto slip$12.9billionintothered in fiscal1959<br />
to spura recoveryfromthe 1957-58recession.A<br />
deficitof that size wouldamountto somethinglike<br />
$40billionin1975dollars.<br />
HerbertStein, who was CEA chairman under<br />
formerPresidentNixon,rejected thepredictionsof<br />
a moneysqueezeas “the New Yorkbondcrowd’s<br />
arguments.” As Stein told Newsweek!s Rich<br />
Thomas:“When we have had big deficitsbefore,<br />
interest rates have comedown, inflationhas not<br />
beenrekindled, housinghas recoveredand indus<br />
trialproductionhaslaterrecovered,too.”<br />
29’1
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER13<br />
Name Class Date ___________<br />
13.1THE FORMSAND FUNCTIONSOF MONEY<br />
WHATIS MONEY?WHATDOESIT DO?<br />
A. The forms of moneyhave changedover the years. Giveexamplesof each form of money, and describe its<br />
advantagesand disadvantages.<br />
.<br />
Commodity<br />
money<br />
.<br />
Precious<br />
metals<br />
Paper<br />
receipts<br />
.<br />
Transaction<br />
accounts<br />
Examples Advantages Disadvantages<br />
la lb. ic.<br />
2a. 2b. 2c.<br />
3a. 3b. 3c.<br />
4a. 4b. 4c.<br />
B. The four functionsof money are listed below. Decide which function is most important in each example<br />
that follows.Write the name of the function on the answer blank.<br />
medium of exchange standard of value<br />
store of value standard of deferred payment<br />
1. Susan Smith borrowsmoney to buy a new car and agrees to pay the loan in 36 months. ______________<br />
2. GeorgeRossicollectshis weeklypaycheck.<br />
3. Your schoolbuys more economicstextbooks. _______________________________________________<br />
4. A T-shirt costs $10, about the sameamount Jennie earns for two hours of work. ____________________<br />
5 Mr. and Mrs.<br />
Kim save money for their retirement. ____________________________________________<br />
6. John Nesmit takes out a 20-yearmortgageon his new home.<br />
7. Joanna Bensonuses the money from her salaryto pay for food, rent, and other necessities.<br />
8. SusieStorm estimatesthat she will have to work four more months to earn enough money to buy a new<br />
winter coat.<br />
9. Max borrows $2 from a friend and agreesto pay it back the next day.<br />
10. The local stereo shop is sellingblank cassettetapes for $5.95. You consider this too high and decide to<br />
shop around.<br />
.
4<br />
.<br />
TYPESOF MONEY<br />
FRE ENTERPRISE<br />
WORKSHEET<br />
Name<br />
Class Date<br />
As civilization grew more complex, people began to specialize in different crafts and<br />
jobs. Barter became increasingly inconvenient as a way of getting and selling goods.<br />
People found that they could not always get what they needed, because the seller did<br />
not always have it or want what they had to offer. Therefore, money was developed as a<br />
medium of exchange. Since then, it has gone through several stages:<br />
Commodity money: an item that has value as a good as well as a monetary unit<br />
Representative money: money that does not in itself have value for nonmoney uses, but can be<br />
exchanged for something of value, such as gold or silver<br />
Fiat money: money that has value simply because a government says it does<br />
In each of the following cases, tell which kind of money is being described, and<br />
explain how you can tell.<br />
1. Until 1957, the United States government issued silver certificates, mostly in $1<br />
.denoininations. These certificates were redeemable for silver until 1968. ___________<br />
2. Native American tribes often used seashells as a medium of exchange.<br />
3. During the Civil War, the United States government issued millions of dollars of<br />
“greenbacks,” paper money that it used to pay for the war effort.__________________<br />
4. The Federal Reserve System issues Federal Reserve notes, which are legal tender<br />
and can be used to pay all debts. ______________________________________________<br />
5. GoJd certificates were once issued by the United States government. They could be<br />
exchanged for the amount of gold equal to the value of the certificates.
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER13<br />
Name__________________________________________<br />
Class Date___________<br />
13.2THEAMERICANMONEYSUPPLYAND ITS CREATION<br />
WORKINGWITHT.ACCOUNTS<br />
A. Define the followingterms as they would be used on a bank’s balancesheet.<br />
I. assets:<br />
2. liabilities:<br />
3. net worth:<br />
B. Determine the bank’s net worth in each of the followingsituations. Work with this equation:<br />
Net Worth = Assets — Liabilities.The first one has been done for you as an example.<br />
1. If a bank’sassetsare $1,000and its liabilitiesare $900, its net worth is $ 100<br />
2. If a bank’sassetsare $2,500and its liabilitiesare $400, its net worth is _________________________<br />
3. If a bank’sassets are $480and its liabilitiesare half that amount, its net worth<br />
is _______________________________<br />
4. A bank’s net worth is _________________________ if its assetsare $3,100and its liabilitiesare $850.<br />
5. A bank’snet worth is _______________________ if its assetsare $6,605 and its liabilitiesare $1,205.<br />
C. Examinethe T-account below, and answer the questions that follow.<br />
Bank Customer<br />
Assets Liabilities Assets Liabilities<br />
$300Currency $150Transaction $150Checking -0-<br />
Account Account<br />
at Bank<br />
I<br />
Net Worth = $150 Net Worth = $150<br />
I. How much ca h is the bank holding?<br />
2. How much money is in the customer’schecking account?<br />
3. Is the customer’scheckingaccount an asset or liabilityfor the bank? _______________________<br />
4. What is the bank’s n worth? _____________________<br />
5. What is the customer’snet worth?<br />
6. a. Was the money supply affectedby the customer’sdeposit? b. What<br />
would have happened to the money supp if the customer had borrowed $150from the bank rather than<br />
making a deposit?
0<br />
I<br />
Figure15-2:GROWTH IN<br />
THEMONEYSUPPLY, 1977-1986<br />
Billions<br />
ofDollars<br />
f3OO<br />
5OO- -<br />
101<br />
1 I I I I<br />
1977 1978 1919 1980 1981 1982 1983 1984 1985 1986<br />
L<br />
Source: Federal ReserveBulletin,BoardofGovernors oftheFederal Reserve System<br />
4
ENRICHMENTWORKSHEET ________________<br />
CHAPTER13<br />
Name Class Date___________<br />
MONEYAND BANKING<br />
WHEREIS OURMONEY?<br />
The role of computers in banking is growingdaily. Read the followingexcerpt<br />
from Ralph T. Burns and Gerald W. Stone’sbook, <strong>Economics</strong>,and the article from<br />
The New YOThTimes. Then answer the questions that follow.<br />
Is There AnyReal Money in Banks?<br />
If “real”moneyis interpretedas bills andcoins, the answerto the above<br />
questionis “notmuch.”Banks keep enoughcurrencyon handto meet their<br />
customers’demandsfor cash,andthatis aboutit.<br />
Sincethe averagebank hasdepositsof over$10 million,wheredo they store<br />
our money?. . . In a (our] banking system,banksonly holdabout15—30percent<br />
of deposits as reserves. However, a $10 millionbank will not keep $1.5 to $3<br />
million on hand—keepingtrackof the inventory might be a problem, and there is<br />
no sensein temptingthieves.Consequently,bankskeepmostof theirreserveson<br />
depositwith FederalReserveBranchor <strong>District</strong>banks.<br />
EventheseFED banksdo not holdyourbank’sdepositsin the formof cash.<br />
To do so wouldmeanthatliterallytonsof the greenstuffwouldneedto be<br />
warehoused.You have probably figured out thatyourbank accountis simplya<br />
few electronicimpulsesstored in the bank’s computer. The FED does the same<br />
• thing with the reservesthat banks keep on deposit at Branch or <strong>District</strong> banks—it<br />
is all in the computer.<br />
Summarizing,at least two-thirds of our trillion-dollarmoney supply. . . does<br />
not exist outsideof computers.Massivepowerfailurecertainlywouldfoul up our<br />
financialsystem,wouldn’tit?<br />
Source:Eco ,wn*ws, GoodyearPublishingCo., 1981.<br />
BOGOTA, November 30—<br />
The ColombianGovernmentis embroiledin an angry dispute with Chase<br />
Manhattan Bank overthe mysteriousdisappearanceof $13.5 millionfrom<br />
Colombia’saccountwith the bank’s London branch.<br />
Accordingto testimony and documents produced at a series of Congressional<br />
hearings here, the money disappearedafter an exchangeof fake telexesthat<br />
authorizeda transferof funds involvingChase, Morgan Guaranty Trust and the<br />
Hapoalim Bank of Tel Aviv.<br />
So far, the Governmentsaid, it does not know who sent the telexesand who<br />
got the money.<br />
Sourct:TheNew YorkTimes,November30, 1983.<br />
I<br />
1. Accordingto the excerpt from <strong>Economics</strong>, what percentageof our money is kept on reserve in banks?<br />
2. What does most of our money supply consist of?<br />
3. How did the Colombiangovernment wind up missing $13.5 million? ______________________________<br />
4. What would happen if tomorrow everyonein the country whohad a transaction (checking)account went to<br />
the bank and demanded payment in cash?
Name<br />
1. In which Federal Reserve<strong>District</strong> do you live?<br />
2. What is your Federal ReserveBank city? —<br />
SKILLSWORKSHEET<br />
CHAPTER13<br />
‘Lookat the map below. It showsthe 12 Federal Reserve<strong>District</strong>s,their<br />
boundaries, and the Federal ReserveBank cities. After studying the map, answer<br />
questions 1—3.<br />
3. Why do you supposesome districts are physicallymuch larger than others?<br />
LEGEND<br />
Boundariesof Federal<br />
Reserve<strong>District</strong>s<br />
— Boundariesof Federal<br />
ReserveBranch<br />
Territories<br />
o Boardof Governorsof the<br />
FederalReserveSystem<br />
• FederalReserveBank<br />
Cities<br />
• FederalReserveBranch<br />
Cities<br />
4. Now study column A. It shows how a typical check clearsthrough the banking system. CompleteColumn B.<br />
I<br />
I .<br />
I I<br />
I<br />
L<br />
MAlY $00040<br />
rn’TLANo T<br />
PAYTOThE<br />
ORDEROF<br />
bI&MOHT NATIORALMNI<br />
‘,<br />
,.c. 4L1O)2<br />
st ]<br />
101<br />
—‘—— —S—s..———— OOu.ARS<br />
?‘P)i<br />
1National California Bank—CheckingAccount<br />
San Diego GeorgeWilson + $100<br />
Federal ReserveBank<br />
San Francisco<br />
4;<br />
Federal ReserveBank<br />
Boston<br />
Vermont National Bank —CheckingAcc int<br />
Rutland Mary Stone—$100<br />
______________ Class _____________ Date___________<br />
MONEYAND BANKING<br />
UNDERSTAHDJNGTHE FEDERALRESERVESYSTEM<br />
Note:AlaskaandHawaii<br />
arein the 12th district.<br />
4;<br />
4;<br />
4;<br />
Column A<br />
—ReserveAccount<br />
CaliforniaNational<br />
Bank +$100<br />
—ReserveAccount<br />
Vermont National<br />
Bank -$100<br />
I I<br />
II<br />
Column B<br />
I<br />
EJ I<br />
I Z)P*R LAP.E ,7R.ka ,IeE<br />
652<br />
I PAYTOINE<br />
I ORDEROF<br />
I O$AI.WI TUA$NATI<br />
‘i I<br />
t% .<br />
sIii<br />
DOU.ARS<br />
IllinoisNational Bank—a.<br />
Chicago<br />
4;<br />
b. ____________—Reserve Account<br />
C.<br />
d.<br />
___________<br />
4;<br />
4;<br />
IllinoisNational<br />
Bank +$250
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER13<br />
Name__________________________________________<br />
Class_____________<br />
13.3THE FEDERALRESERVESYSTEM<br />
THE ROLEOF THE FED IN MONETARYPOLICY<br />
A. Completeeach statement by fillingin the blank or circling the correct word.<br />
1. The Federal ReserveSystemhas three waysof controllingthe money supply. They are:<br />
a.<br />
b.<br />
C.<br />
Date___________<br />
2. Member banks can borrow from the Fed. The rate of interest these banks pay on such loans is called<br />
3. The amount of moneythat a bank can lend out is influencedby the amount of the<br />
I<br />
4. If the Fed lowersthe discount rate, member banks will borrow more/lessfrom the Fed. This will<br />
increase/decrease<br />
the amount of money that a bank can lend its customers.<br />
5. When the Fed buys governmentbonds through its open market operations, it must pay the banks and the<br />
other financialinstitutions that are holding the bonds. Therefore, when the Fed buys governmentbonds,<br />
it increases/decreases the amount of money availablefor loans.<br />
6. II the reserverequirementis 10 percent, then for every $10 a bank has in reserveit can lend ___________<br />
7. How would the Fed use its tools of monetary policyif the Consumer Price Index was increasingat a rate<br />
of 9 percent a year?<br />
a. Open market operations—TheFed would buy/sell.<br />
b. Reserverequirements—TheFed would raise/lowerthem.<br />
c. Discount rate—The Fed would raise/lowerit.<br />
B. Write T l)eforeeach truestatement and F before eachfalse statement.<br />
______ 1. Each commercialbank sets its own reserveratio.<br />
______ 2. The Fed has the power to order the Treasury and the Bureau of Printing and Engravingto print<br />
more money.<br />
______<br />
3. Congressand the President tell the Fed what monetary policy to follow.<br />
______ 4. The amount of currency that the Fed has printed determines the money supply.<br />
______ 5. The Federal ReserveSystemis owned by the U.S. government.<br />
_______ 6. The authorityto regulate the supply of money has been delegatedto the Federal Reserve System<br />
by Congress.<br />
______ 7. The President of the United Statesappoints the Chairman of the Federal ReserveBoard.<br />
______ 8. Members of the Federal Reserve’sBoard of Governorscan be fired by a United States President<br />
•. ‘—<br />
.
FRE ENTERPRISE<br />
WORKSHEET<br />
TOOLSOF THE.FEDERALRESERVE<br />
a. Changing reserve requirements:<br />
b. Changing the discount rate:<br />
c. Open-market operations:<br />
Name<br />
Class Date<br />
1. The Federal Reserve Board uses three major tools to control the nation’s money<br />
supply and keep the economy running smoothly. These tools are reserve<br />
requirements, discount rate, and open-market operations. Describe how each of<br />
these tools can be used to increase the money supply.<br />
2. Imagine you are a member of the Federal Reserve Board and your staff has just<br />
given you this report on the money supply and the economy:<br />
‘ “The Consumer Price Index continues to rise and the money supply has increased beyond our<br />
target levels. Public opinion polls show that consumers fear a return of high inflation.”<br />
Outline the policy you would follow by underlining the appropriate words in<br />
parentheses in the following sentence.<br />
a. The Fed should now follow a (tighter, looser) monetary policy with the desired<br />
effect of (increasing, decreasing) the money supply.<br />
b. Possible actions to implement this policy are (raising, lowering) reserve<br />
requirements; (raising, lowering) the discount rate; or (selling, buying) U.S.<br />
Treasury securities on the open market.<br />
3. Now imagine that a year has passed since you made your recommendations to the<br />
Board. Your staff gives you this report:<br />
“business activity continues to sag, unemployment is rising, and the economy appears to be<br />
weakening. The money supply is growing at a much slower rate.”<br />
Outline the policy you would follow by underlining the appropriate words in<br />
parentheses in the following sentences.<br />
a. The Fed should now follow a (tighter, looser) monetary policy with the desired<br />
effect of (increasing, decreasing) the money supply.<br />
b. Possible actions to implement this policy are (raising, lowering) reserve<br />
requirements; (raising, lowering) the discount rate; or (selling, buying) U.S.<br />
Treasury securities on the open market.
4<br />
‘<br />
CHAPTEREVIEW<br />
WORKSHEET<br />
Name<br />
Class Date<br />
Chapter16 HOWTHE FEDERALRESERVESYSTEMOPERATES<br />
Money,to remainvaluable,mustremainscarce.Theinstitutiongiventhe responsibilityof<br />
controllingjust howscarcemoneywill be is the FederalReserveSystem.By varyingits<br />
policies,theFedcarshavea majorimpactonthenation’seconomy.<br />
Brieflydefineanddescribetheadvantagesanddisadvantagesof thetwotypesof money<br />
policiesof theFed.<br />
1. Tightmoneypolicy<br />
2. Loosemoneypolicy<br />
TheFedhasa numberoftoolsforchangingtherateofgrowthofthemoneysupply.Indicate<br />
whateffecteachof the actionsbelowhason thisgrowthrate.Besideeachonemark/ for<br />
Increaseor D for Decrease.<br />
3. raisingreserverequirements 6. buyingTreasurysecurities<br />
4. sellingTreasurysecurities 7. ____ raisingthediscountrate<br />
5. loweringthediscountrate 8. ____ reducingreserverequirements<br />
PutanX besideeachitembelowthatis a functionof theFederalReserveSystem.<br />
9. ____ setspricesfor farmcommodities 15. ____ mintscoins<br />
10. givesfinancialadviceto the<br />
federalgovernment<br />
11. regulatesnationally-chartered<br />
(<br />
12. ____<br />
memberbanks<br />
insuresdepositsupto $100,000<br />
13. ____ setsreserverequirements<br />
holdsdepositsfor thefederal<br />
14. ____<br />
government<br />
Describetwo waysin whichthe actionsof theFedcanhavea<br />
directeffectonyourlife.<br />
21.<br />
22.<br />
16. ____<br />
17. —-<br />
clearschecks<br />
lendsmoneyto theTreasury<br />
18. printspapermoney<br />
19. — regulatesall aspectsof credit<br />
unions<br />
20. regulatesthemoneysupply
Figure161:ORGANIZATION OFTHEFEDERAL RESERVE SYSTEM<br />
Members<br />
Banks<br />
5,600members
FIGURE13.8 FEDERAL RESERVE SYSTEM: RESERVE<br />
Reserbe Rank<br />
OVERHEAD12 ]<br />
FIGURE13.9 FEDERAL RESERVE SYSTEM: DISCOUNT RATE<br />
r<br />
.‘ ‘ ReserieBank Rate:SI ui<br />
RasUktheUone y<br />
I 1.enderof<br />
FIGURE13.10FEDERAL RESERVE SYSTEM: OPENMARKET<br />
OPERATIONS<br />
..-.-.-.<br />
Reserbe<br />
System<br />
0OO \I_$1OO<br />
I<br />
Bond<br />
sioo,rxxj<br />
Checkfor<br />
DecreaseInMoneySupply(Fe r Lo<br />
Buy Gowmmont Bonds . - .. :. .-<br />
Bond<br />
$100,000<br />
ECONOMICSFflJ :r r uI<br />
uft<br />
FedLo i<br />
scou Rate:<br />
SnaIs Eq,mvsbt.<br />
aryMnetwy<br />
-
Sani<br />
TheFederReserve System<br />
* Ioad Go em i<br />
o redergsw B.* tes<br />
• rera ,w atd Cmes<br />
• On 8o fles<br />
Suca o<br />
TIO,S V ed U AeaenS’ em
C<br />
FIGURE15.3 GROWTHOFREALPERCAPItAGNP,1870-1986(IN1982DOLLARS)<br />
I<br />
I<br />
OVERHEAD 14 ]<br />
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 198086<br />
Ld 19 (d S1os<br />
Cawiw &d,.QJTh RtUie President<br />
ECONOMICSFORDECISIONMAKING chapter 15,pages 243—246
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER14<br />
Name __________________________________________ Class_____________ Date___________<br />
14.1ECONOMICPERFORMANCEIN THE UNITEDSTATES<br />
WHATMAKESA COUNTRYPRODUCTIVE?<br />
Productivityis still higher in the United States than it is in other countries.<br />
Yet the rate of growth in U.S. productivity has declinedsince the mid-1960’s.<br />
Productivityrefers to the amount of goodsand servicesproduced per hour by all<br />
persons in the economy.The graph belowshowsthe relationshipof investment to<br />
productivity. Investment determines how much machineryand equipment each<br />
worker has.<br />
Study the graph and answer the questions that follow.<br />
INVESTMENT AND THE GROWTH OF PRODUCTIVITY, 1960-1976<br />
:_ 8<br />
9 — Japan<br />
Netherlands<br />
- Belgium.\<br />
6 - •G nany<br />
2 -<br />
•Canada<br />
United Kingdom<br />
United States<br />
10 15 20 25 30 35<br />
Investment (as a percent of GNP)<br />
1. What relationshipdoes the graph show? ______________________________________________<br />
2. a. What percentageof our GNP did the United States invest from 1960to 1976? ________________<br />
b. During these same years, what was the percentageincreasein U.S. productivity?<br />
3. a. What percentageof its GNP did Japan invest from 1960to 1976? __________________________<br />
b. During these years, what was the percentageincreasein Japan’sproductivity?<br />
4. What conclusions,if any, can you draw from this information?<br />
5. Does informationgiven for other countries support your conclusions?<br />
6. Usinginformationfrom your textbook, give some reasonsthat might have discouragedU.S. businesses<br />
from investingin new equipment and machinery.
INDEPENDENTPRACTICEWORKSHEET____________<br />
CHAPTER14<br />
Name Class____________<br />
_________________________________________<br />
14.2MEASURINGBUSINESSCYCLES<br />
WHOGAINS?WHOLOSES?<br />
Date__________<br />
In 1980,the rate of inflationwas 12.4 percent. Somepeople suffered from the<br />
inflation, some benefited, a few were not affected. Decide what effectinflationhad<br />
on each of the followingindividuals, and write betteroff, worseoff, or same.Then<br />
give reasonsfor your decisions.<br />
1. A Vietnamveteran who receivedan $800-a-monthdisabilitypayment from the U.S. government<br />
2. A member of a union that negotiateda salarycontract that indexed wageincreasesto the rate of inflation<br />
3. A homeownerwho made paymentson a 20-yearmortgagethat had an interest charge of 8 percent<br />
4. A U.S. televisionmanufacturer who wanted to sell televisionsets to people in other countries<br />
5. An investor who received 15-percentdividends on stocks<br />
6. A banker who in 1978had lent money to borrowersat a rate of 7.5-percentinterest<br />
7. An automobilemanufacturer who wanted to borrow money from banks to buy robots in order to increase<br />
the assemblyline’sproductivity<br />
8. An unemployedsteel worker who receiveda monthly unemploymentcheck of $500
ENRICHMENTWORKSHEET<br />
CHAPTER12<br />
Name________________________________________ Ctass____________ Date__________<br />
MEASURINGTHEECONOMY<br />
NATIONALECONOMICACTIVITY:EXPENDITURESANDINCOME<br />
GNP is the totaldollarvalueof all goodsand servicesproduced each year in the<br />
economy.Put anotherway,GNP equals the totalexpenditures by consumers<br />
(C = consumption),business(I = investment),and government(G = government)<br />
in the economyforgoodsand services.Thus GNP = C + I + G. GNP alsoequals<br />
the totalincomeof households.<br />
Expendituresand incomeare equal but oppositefactors.Whenone person<br />
spendsto buy goodsor services,anotherreceivessomething. However,not all<br />
incomeis spentas consumption.Somegoes into taxes(T) or savings(S).<br />
A healthyeconomyneedsa smoothflowfromincometo expenditures.<br />
Otherwise, the economymayslowdown. The modelbelowillustratesthis flow.<br />
Studythe model.Then answerthe questionsthatfollow.<br />
EXPENDITURES<br />
Consumption(C)<br />
Savings(S) Business—uses<br />
individual<br />
Investment(I)<br />
Taxes(T)<br />
savingsfor<br />
investment.<br />
Government—<br />
Gomment<br />
Expenditures(G)<br />
Households—contribute to GNP<br />
throughconsumption(C),<br />
savings(S),andtaxes(T).<br />
USeS taxe to<br />
irov e s and<br />
Businessand Government—<br />
makepaymentsto the various<br />
factorsof production.<br />
Labor(wages),Land Resources(rent)Capital(interest),Entrepreneurship(profits)<br />
INCOME<br />
Ia. Accordingto the model, what three kinds of expenditures do households make? _________________<br />
lb. Give an example of each of these expenditures.<br />
2a. Whatspendingby households is used by business to generate new business? __________________<br />
2b. Givean exampleof this in the economy.<br />
3. What might happen if householdsincreasedconsumptionandreducedsavings?<br />
4. What might happen to householdexpenditures if peoplehaveto payhighertaxes?<br />
5. In yourown words,explainhow changesin spendingpatternsmightaffect the healthof the economy.
Figure14-1:GNPANDITSCOMPONENTS INA RECENT YEAR<br />
Billions profits,<br />
ofDollars<br />
5,000<br />
4,000<br />
3,000<br />
2,000<br />
1,000<br />
0<br />
Minus:<br />
corporate<br />
rncome taxes,<br />
reinvested<br />
employer<br />
<strong>Social</strong>Security<br />
contributions<br />
P$us:<br />
transfer<br />
National National Income Income Income<br />
Product Product<br />
Source:<br />
Bureau<br />
ofEconomic<br />
Analysis
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER14<br />
Name__________________________________________ Class_____________ Date___________<br />
The tables for year I and year 5 describestwo possibleconditions in the United<br />
States economyat two different times. Study each. Then describe the general<br />
conditionsin the economyand the actionsthe governmentand the Federal<br />
ReserveBoard might take from the point of viewof an interventionistand a<br />
non-interventionist.<br />
1. Describe the economicconditionsfor year 1. 4. Describe the economicconditions for year 5.<br />
2. What would an interventionistsuggest?<br />
a. Governmentpolicy:<br />
5. What would an interventionistsuggest?<br />
a. Governmentpolicy:<br />
b. Federal Reservepolicy: b. Federal Reservepolicy:<br />
3. What would a non-interventionist suggest?<br />
a. Governmentpolicy:<br />
14.4ALTERNATIVESFOROVERCOMINGINSTABILITY<br />
TO INTERVENEOR NOT TO INTERVENE?<br />
Year1<br />
Real GNP Down 1%from<br />
Unemploymentrate<br />
previousyear<br />
8%<br />
Retail sales<br />
Down 3%<br />
New housing starts Down 4%<br />
Changein money supply.<br />
ConsumerPrice Index<br />
Down 1.25%<br />
Up .2%<br />
Averagework week 36 hours<br />
Personalincome<br />
Down $1 billion<br />
New plant and equipment<br />
a month<br />
expenditures<br />
Down $5 billion<br />
YearS<br />
Real GNP Up 4% from<br />
previousyear<br />
Unemploymentrate 4%<br />
Retail sales Up 7%<br />
New housing starts Up 12%<br />
Changein money supply Up 3%<br />
ConsumerPrice Index Up 10%<br />
Averagework week 40 hours<br />
Personalincome Up $1.5 billion<br />
a month<br />
New plant and equipment<br />
expenditures Up $4 billion<br />
6. What would a non-interventionist suggest?<br />
a. Governmentpolicy:<br />
b. Federal Reservepolicy: b. Federal Reservepolicy:
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER15<br />
Name__________________________________________ Class_____________ Date___________<br />
15.1THE MARKETAND ECONOMICGROWTH<br />
WHATMAKESTHE ECONOMYGROW?<br />
A. Entrepreneursfind that by investingin capital goods, they can reduce costs and becomemore efficient.<br />
Decide whether each item belowis a capital good, a consumer good, or could be either. Write capital,<br />
consumer, or either.Then explainwhy.<br />
1. Bread<br />
2. Assembly-linerobot<br />
3. Hammer<br />
4. Dump truck<br />
5. Computer<br />
6. <strong>Blue</strong> jeans<br />
7. Cassettetape<br />
8. High-speedprinting machine __________________________________________________________<br />
B. Decideif each of the followingconditionsimprovesor harms the availabilityand quality of human capital.<br />
Write I (improve)or H (harm)on the line beside each number.<br />
______ 1. Every person can get an education up to his or her levelof ability.<br />
______ 2. People must enter the occupationstheir parents have.<br />
_______ 3. People from the upper classesget the first chance at jobs.<br />
______ 4. Family men are givenfirst chance for the best jobs.<br />
______ 5. All babiesare guaranteedgood health care and nutrition.<br />
_______ 6. All jobs are open to the best applicants regardlessof race.<br />
______ 7. Politicalparties appoint their most loyal members for availablejobs.<br />
_______ 8. Employersselecttheir new employeesfrom friends and familiesof people they know.<br />
______ 9. All students are assured of learning to read, write, and solveproblems.<br />
10. Businessespay for coursesemployeestake to improve business-relatedskills.<br />
-
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER15<br />
The issueslisted beloware some concernsthat are often cited by people who want<br />
to limit economicgrowth. Read the list. Then followthe directions.<br />
nuclear accidents<br />
destruction of wilderness<br />
contaminationof water supply<br />
explosionsat chemicalplants<br />
loss of farmland due to urbanization<br />
erosion and overuseof farm soils<br />
contaminationfrom pesticides<br />
depletion of the ozonelayer<br />
damageto hearing from excessivenoise<br />
accumulationof carbon dioxidein atmosphere<br />
cluttering spacewith debris<br />
crowdingin urban areas<br />
problems of disposingof radioactivewastes<br />
problemsof disposingof solid wastes<br />
toxic pollutants in air<br />
damagefrom use of chemicalfertilizers<br />
destruction of tropical rain forests<br />
damageto ocean environment<br />
depletionof fish in waterways<br />
depletion of supplies of mineralsand other<br />
natural resources<br />
scarcityof water<br />
chemicalsin the food chain<br />
From this list, choosefiveissues that you consider to be important. List them below. Then describe the<br />
problem. If you can think of a solution for each problem, describe it.<br />
1.<br />
2.<br />
3.<br />
4.<br />
5.<br />
Name Class Date ___________<br />
Problem:<br />
Possiblesolution:<br />
Problem:<br />
Possiblesolution:<br />
Problem:<br />
Possiblesolution:<br />
Problem:<br />
Possiblesolution:<br />
Problem:<br />
Possiblesolution:<br />
15.2THE CASEAGAINSTECONOMICGROWTH<br />
WHYLIMITGROWTH?
INDEPENDENTPRACTICEWORKSHEET ___________<br />
CHAPTER 15<br />
Name__________________________________________ Class_____________ Date___________<br />
15.3THE CASEFORECONOMICGROWTH<br />
RECOGNIZINGTHE OPPORTUNITYCOSTS<br />
Those who favor economicgrowth note that many problems can be solvedif we<br />
are willingto accept the opportunity costs. The question remains: Who should pay<br />
the costs—theprivate enterprise causing the problem or the public? For each<br />
solution below, explain the opportunity costs if paid by the private enterprise and<br />
those if paid by the public.<br />
1. Industrial wastescan be cleanedbefore they are emitted by a factory.<br />
a. Private opportunity costs: ______________________________________________________________<br />
b. Public opportunity costs: __________________________________________________________<br />
2. Chemicalwastes can be stored in safeplacesin leakproofcontainers.<br />
a. Private opportunity costs: _________________________________________________________________<br />
b. Public opportunity costs: ____________________________________________________________<br />
3. Nuclear wastesfrom medicaluses and fuel uses can be stored deep in the earth in safe containers.<br />
a. Private opportunity costs:<br />
b. Public opportunity costs: ____________________________________________________________<br />
4. Future energy sourcesmay not have to use up irreplaceableresources.<br />
a. Private opportunity costs: ______________________________________________________________<br />
b. Public opportunity costs: _________________________________________________________<br />
5. Is there a way that both private enterprises and the public can avoid paying opportunity costs for economic<br />
growth? Why?
INDEPENDENTPRACTICEWORKSHEET ____________<br />
CHAPTER16<br />
Name Class_____________<br />
__________________________________________<br />
16.1THE THEORYOF ECONOMICADVANTAGE<br />
ABSOLUTEANDCOMPARATIVEADVANTAGE<br />
Date___________<br />
A. Chart A showsa hypotheticalsituation in which two nations have not yet specializedin the products for<br />
which they have the comparativeadvantage.Use the data in the chart to answer the questions. Write A or<br />
B to specifythe nation. ________________________________________________________<br />
CHARTA<br />
Nation<br />
1. Which nation has an absolute advantagein producing bicycles?<br />
10-SpeedBicycles 1000+ ComputerChips<br />
Numberof NumberProduced Numberof NumberProduced<br />
Workers perDay Workers perDay<br />
A 10 10 7 1000<br />
B 6 10 6 1000<br />
2. Which nation has an absolute advantagein producing computer chips?<br />
16 20 13 2000<br />
3. Which nation has the comparativeadvantagein manufacturing 10-speedbicyclesinstead of computer chips?<br />
4. Which nation has the comparativeadvantagein manufacturingcomputer chips instead of 10-speedbicycles?<br />
5. To trade to their mutual advantage,nation A should produce and nation<br />
B should produce<br />
B. Chart B assumesthat workers and resourcesin both nations can be moved readilyfrom bicycle<br />
manufacturingto computer-chipmanufacturing.This is what the two nations would then produce.<br />
Nation<br />
Numberof<br />
Workers<br />
6. Fill in the total of each column on the appropriate line in the chart.<br />
CHARTB<br />
JO-SpeedBicycles 1000+ComputerChips<br />
NumberProduced Numberof<br />
per Day Workers<br />
NumberProduced<br />
per Day<br />
A 0 0 17 2429<br />
B 12 20 0 0<br />
Total a. — b. — c. — d. —<br />
7. a. In chart A, how many workers were needed to produce 20 bicycles?<br />
b. In chart B, how many workers were needed to produce 20 bicycles?<br />
8. Without increasingthe total number of workers, the two nations produce the same number of bicycles,but<br />
______ more computer chips are produced.
Figure142:FOURAREAS<br />
GNPINA RECENT YEAR OFECONQMLC ACTIVITY ASPERCE TA E OF<br />
Government Goods<br />
andServices<br />
Net<br />
Business Goods<br />
andServices<br />
Source:<br />
Survey<br />
ofCwrent<br />
&,si,ess,BureauEconomic<br />
Miysis<br />
Consumer Goods<br />
aid Sen s
Source:Commerce Department and TheNew York Tiare,,November<br />
20—21.1986.<br />
ENRICHMENTWORKSHEET<br />
CHAPTER14<br />
Name__________________________________________ C{ass _____________ Date___________<br />
MONEYSUPPLY:M-l<br />
Currency, checks and checklike<br />
deposits. ‘Weekisaverages<br />
in billions of dollars,<br />
seasonally dusted. $715<br />
Annual Rates<br />
of Change<br />
710<br />
3m,,. +15.8<br />
6 mos. + ’oI7.2<br />
705<br />
I yr. +<br />
700<br />
1986<br />
ECONOMICINSTABILITY<br />
THE LEADINGINDICATORSANDTHE ECONOMY<br />
Periods of “boom” and “bust,” called the businesscycle, have been characteristic<br />
of every industrial economy,including that of the United States. Economists,<br />
therefore, are continuallylookingfor signs of economicconditionsand trying to<br />
forecastwhat will happen in the future. The main signs of economicconditionsare<br />
calledleadingindicators. These leadingindicators tend to increaseor decrease<br />
before the economychanges. Economistsexaminemany leadingindicators. The<br />
charts below show just three leadingindicators. They are new housing<br />
construction, including housing started and new permits to build issued, the<br />
money supply (M-1) and real economicgrowth (RealGNP). Study the charts and<br />
answer the questions that follow.<br />
1. In general, did the 1986money supply (M-1)increasefrom August to November?<br />
2. Were housing constructionstarts for 1986higher than for 1984?<br />
3. When did housing construction(starts) peak between 1984and 1986?<br />
4. What was the Real GNP in 1982dollars in 1986?<br />
HOUSING CONSTRUCTION<br />
New private housing started and<br />
permits authorized during the month,<br />
its millions at seasonally adjusted<br />
annual rates<br />
— 2.2<br />
—2.0<br />
1.8<br />
1.6<br />
Permits<br />
— 1.4<br />
[ Oct. Data<br />
In millions<br />
Starts 1.65 — 1.2<br />
Permits 1.56<br />
I I<br />
1984 1985 1986<br />
REALECONOMICGROWTH<br />
Gross national product,<br />
in trillions of 1982dollars,<br />
seasonally adjusted<br />
by quarters<br />
Annual Rates<br />
of Change<br />
1stqtt...... + SS°7c<br />
2d qrr<br />
Sdqtr .4 2.9 ’r<br />
liii liii I<br />
82 1983 1984 1985 ‘86<br />
5. Based on the informationin the charts, forecastwhat will happen in the economyin the months ahead.<br />
3 70<br />
3.60<br />
3.50<br />
3.40<br />
3.30<br />
3,20<br />
3.10
, FRE ENTERPRISE<br />
WORKSHEET<br />
ECONOMICINDICATORS<br />
Name<br />
Class Date<br />
Economic indicators help business to determine which way the economy is headed.<br />
They also allow businesses to plan their future needs and actions with some degree of<br />
accuracy. As you read in Chapter 14, there are three types of indicators:<br />
Leading indicators are those whose movement predicts the movement of the<br />
economy as a whole.<br />
Coincident indicators are those which move at about the same time as the rest of the<br />
economy.<br />
Lagging indicators signal the strength of an upward or downward swing in the<br />
economy after the movement has begun.<br />
In the following chart, check whether each headline is good news or bad news for<br />
the economy. Then tell what type of indicator each headline refers to.<br />
Good Bad<br />
Headline News News Type of Indicator<br />
1. Housing Starts Lowest in Months<br />
2. Fed Lowers Discount Rate: Interest<br />
Rates Tumble<br />
3. Retail Sales Up 3% Over Last Month<br />
4. Business Debt Down From Last Year<br />
5. Unemployed Have Average Two-Month<br />
Wait Before Finding New Job: Down<br />
From Four-Month Wait Last Year<br />
6. Producer Price Index Rises 0.5%<br />
7. Businesses Buying More Electronic<br />
Office Equipment, Hiring More<br />
Clerical Staff<br />
8. Industry Jobs Go Unfilled as Area<br />
Unemployment Rate Sinks to 3%<br />
9. Consumer Debt Higher Than at Any<br />
Time in History<br />
10. Telephone Company Reports 30-Day<br />
Backlog in Installing Business Systems
A,<br />
CHAPTER REVIEW.<br />
‘ WORKSHEET<br />
Name<br />
Class Date<br />
Chapter14MEASURINGTHEECONOMY’SPERFORMANCE<br />
Theupsanddownsin the businesscycleaffecteveryone’slife—businesspeople, govern<br />
mentofficials,workers,andconsumers.Understandinghowto measurethesechangesand<br />
whatsomeof theircausesmightbecanhelpyoumakeinformedpredictionsanddecisions<br />
aboutyourfuture.<br />
Grossnationalproduct(GNP)andits componentsarethebroadestmeasureof anecon<br />
omy’sperformance.Thefollowingstatisticsaretakenfromdifferentareasof the national<br />
incomefora recentyear.Thefiguresarein billionsof dollars.Usingthesefigures,calculate<br />
the majormeasuresof theeconomy’sperformance.Usethespaceto the rightto compute<br />
youranswers.<br />
Economicactivityinvolving<br />
consumergoodsandservices<br />
Corporateincometaxes,<br />
reinvestedprofits,<br />
employer<strong>Social</strong>Security<br />
contributions<br />
Personal taxes<br />
Transferpaymentsto<br />
individuals<br />
$1,673<br />
$ 254<br />
$ 338<br />
$ 294<br />
Economicactivityinvolving<br />
businessgoods<br />
Netexports<br />
Depreciationon producergoods<br />
Indirectbusinesstaxes<br />
Economicactivityinvolving<br />
governmentgoods<br />
$395<br />
$ 23<br />
$287<br />
$219<br />
$535<br />
1. grossnationalproduct<br />
2. netnationalproduct<br />
3. nationalincome<br />
4. personalincome<br />
5. disposablepersonalincome<br />
$2,626<br />
$2,339<br />
($1,673+ 395+ 23 + 535)<br />
($2,626<br />
Eachof the followingstatementsrelatesto someindicatorof economicconditionsin the<br />
nation.Totheleftof eachstatement,labelit leading,coincident,or lagging.<br />
— $2,120<br />
287)<br />
($2,339 — $2,160<br />
219)<br />
($2,120 — $1,822<br />
254+ 294)<br />
($2,160 — 338)<br />
6. _____________________ Morenewbusinesseshaveopenedthisyearthaninthelast<br />
threeyearscombined.<br />
7. ____________________ Retailsaleshavebeendroppingforsevenmonthsandecon<br />
omistspredictfurtherdeclines.<br />
8. _____________________ Thesteelindustryreportsproductionat 3 percentlessthan<br />
lastmonth.<br />
9. ____________________ On averageit takes an unemployedworkerthreeweeks<br />
longerto find,a job thisyearthanit didlastyear.<br />
10. ___________________ Newhousingstartsareup andthe numberof buildingper<br />
mitsissuedthismonthis .4 percenthigherthanlastmonth.<br />
11. Theprimeratehasdeclined.5percentinthelasttwoweeks.
RealGNP—GNPcorrectedfor inflation—for theyears1907-1922is listedbelowin billions<br />
of dollars.Constructa linegraphfromthisinformationin thespacebelow.<br />
C<br />
1907:$109 1911:$123 1915:$124 1919:$146<br />
1908:$100 1912:$130 1916:$134 1920:$140<br />
1909:$117 1913:$132 1917:$135 1921:$128<br />
1910:$120 1914:$126 1918:$152 1922:$148<br />
$155<br />
$150<br />
$145<br />
$140<br />
$135<br />
$130<br />
$125<br />
Q. $120<br />
$115<br />
$110<br />
$105<br />
$100<br />
RealGNP,1907-1922<br />
I t I I I I I I<br />
.307 1908 1909 1910 1911 1912 1913 19141915 1916 19171918 1919 1920 19211922<br />
Years<br />
12. Labelonthegraphthephasesof thebusinesscycle.<br />
13. Basedon whatyouknowaboutUnitedStatesandworldhistory,whathistoricevent<br />
causedtheincreasein realGNPbetween1915and1918? _____________________<br />
14. Whichfactoror factorswouldhavebeenoperatingto influencethisphaseof thebusi<br />
nesscycle?Explainin a briefparagraph.
Figure6-1: NEW.HOUSINGSTARTS, 1965-1987<br />
Millionsof.<br />
Housing Starts<br />
:: V<br />
1.0<br />
A<br />
V<br />
a’<br />
UI J: I I I<br />
1965 1970 1975 1980 1985<br />
Years<br />
Source: Statistical Abstract oftheU.S., BureauoftheCensus<br />
1987dataisestimated.<br />
1990
FIGURE12,1MACROECONOMIC CIRCULAR FLOWDIAGRAM<br />
‘ages,<br />
Goods<br />
OVERHEAD11
_________________<br />
SKILLS WORKSHEET<br />
CHAPTER12<br />
Name __________________________________________ Class_____________ Date ___________<br />
MEASURINGTHE ECONOMY<br />
USINGTHE CONSUMERPRICEINDEX<br />
In 1986,led by oil price declines,the ConsumerPrice Index declined somewhat,<br />
from 328.4 in January to 325.3 in April. That declinerepresented a decreaseof<br />
about 1 percent in the general levelof consumer prices. Use these statisticsto<br />
answer the questions below.<br />
1. What effectwould the declinehave had on a person whoseincomewas tied to the ConsumerPrice Index?<br />
2. Would it have been easyor hard for someonewho investedin oil in January to sell it at a profit in April?<br />
Explain your answer.<br />
3. In the past, a drop in the general levelof consumerprices has accompaniedan economicslowdown.Based<br />
on your knowledgeof economics,why do you think that is true?<br />
4. Each of the followingsituationsdescribesa person who has an investment in the economy.Put a (+) before<br />
each person who would probably gain from a drop in generalprice levelsand a (—)before each person who<br />
would probably lose.<br />
a. _______ The owner of a bond that pays a fixedinterest rate<br />
b. ______ A speculatorbuying real estate with borrowed money<br />
c. ______ A farmer heavilyin debt for new equipment<br />
d. ______ A retired person on a fixedincome<br />
e. ______ A home owner with a large mortgage<br />
5. List three groups of people who would probably benefitfrom a drop in prices.<br />
6. List three groups of people who would probably be hurt by a drop in prices.<br />
7. In the past 20 years, prices in general have increasedthree times over (300%).If the United States were to<br />
enter a period of price stability, how might that affectpeople’sbehavior?
__________________<br />
SKILLS WORKSHEET<br />
CHAPTER15<br />
__________________<br />
Name __________________________________________ Class_____________ Date___________<br />
UNITS OF LABOR<br />
(millionsof workers)<br />
o 1<br />
ECONOMICGROWTH<br />
ANALYZINGECONOMICGROWTH<br />
Suppose that we had an economy in which the quantities of all the factors of<br />
production were held constant, except labor. Labor increased in multiples of one<br />
million, and this affected total production. This situation is shown in the table<br />
below.<br />
TOTAL PRODUCTION<br />
o<br />
40<br />
2 100 a.<br />
3 162 b.<br />
4 200 C.<br />
5 225 d.<br />
6 240 a.<br />
7 245 f.<br />
8 240 a.<br />
AVERAGEPRODUCT<br />
OF LABOR<br />
1. Complete the last column of the table by dividing total production by the number of units of labor<br />
employed.<br />
2. Using the information in the table, complete the following statements.<br />
a. There are increasing returns of production from the addition of the first unit of labor to the<br />
__________________________ unit of labor.<br />
b. There are decreasing returns to production from the ________________________ unit of labor to the<br />
______________________<br />
unit of labor.<br />
c. The ideal size of the labor force for the economy is ________________________ units of labor because<br />
3. Name and define the economic principle that is demonstrated by this example.<br />
4. Now suppose that the population included five million workers. What would have to happen in order for<br />
there to be economic growth?<br />
0<br />
40<br />
•
Rgure14-4:A MODELOFTHEBUSINESS CYCLE<br />
point)
ENRICHMENTWORKSHEET<br />
CHAPTER15<br />
Name________________________________________ Class____________ Date__________<br />
ECONOMICGROWTH<br />
ECONOMICGROWTHANDDAMAGETOTHEENVIRONMENT<br />
Both those in favor of and those opposed to economicgrowth recognizethe<br />
dangers to the environmentthat can be caused by uncontrolledgrowth. Read the<br />
article belowby Paul Lewis and answerthe questions that follow.<br />
A huge dischargeof toxic chemicalsinto the Rhine is confronting Europe with<br />
one of its worst ecologicaldisastersin recent years.<br />
Tonight, French televisionreported that more than 1,000tons of chemicals,<br />
including eight tons of mercury, spilled into the river 10 days ago after a fire at a<br />
chemicalstoragewarehousein Basel, Switzerland.<br />
Spokesmenin France, West Germany, the Netherlands and Switzerland—the<br />
four countries through which the Rhine flows—saidtoday that it was in danger of<br />
becominga “dead” river as the chemicalskill off the fish and destroy the<br />
ecologicalsystemof the vital waterway.<br />
The four countries have shut down all plants processingRhine water for<br />
drinking. They have also banned fishingin the river and closed sluicesand locks<br />
to stop polluted water seepinginto estuaries, streams and underground water<br />
courses.<br />
In West Germany, 24,000 villagersalong the Rhine are being supplied with<br />
drinking water from fire trucks.<br />
The four governmentshave taken defensiveaction in the last two or three<br />
days as they have graduallyrealizedthe gravity of the crisis.<br />
Accordingto the environmentalprotection officein Basel,water used to douse<br />
a fire at the riversidestoragebuilding of the Sandozchemicalcompanycarried 10<br />
to 30 tons of toxic substancesinto the river. At least 34 different chemicalswere<br />
washed into the Rhine, some of which may have fused into new compoundsas a<br />
result of the high temperatures created by the blaze.<br />
The chemicalsincluded dyes, insecticidesand mercury, a highly toxic<br />
substance. A seconddischargeof mercury-taintedwater took place from the same<br />
plant last Friday.<br />
Dead fish are being removedin large quantities from the Rhine in<br />
Switzerland,France and West Germany. But scientistsfear the fauna and<br />
microscopicorganismsthat serve as the basis of the huge river’secosystemare<br />
being destroyed as well. . .<br />
Source:TheNew York Times,November 10, 1986.<br />
1. How does a chemicalspill represent economicgrowth threatening the environment? _________________<br />
2. What problems have been caused by the chemicalspill in the Rhine River? _______________________<br />
3. What could be done to protect the environmentfrom such catastrophes?<br />
4. In light of the article you just read, do you think we can have economicgrowth and a clean environment?<br />
On a separate sheet of paper, explainyour answerin a short essay.
1<br />
‘1 g<br />
1<br />
I<br />
DATABANK<br />
•UPDATE.Selects 9 Signs of<br />
Our Economic Times<br />
•g:.<br />
•‘“Sl.t3<br />
..<br />
.<br />
.SLOS.-•<br />
5.98.•.<br />
1979 1.4$<br />
1o 1.41<br />
IYBI 1.37<br />
19<br />
.<br />
$34<br />
SOCIAL<br />
SECURITY<br />
BURDEN FALLS<br />
ON FEWER<br />
WORKERS<br />
Workersper b.neficiary<br />
utun paying into th.<br />
pscw ry .yst.m. psi .ab r.qpt.nt qt<br />
Sn1J (r. zsss. muw djaa L.d. seC .<br />
—<br />
I THE<br />
I<br />
•1<br />
ONE DOLLAR UI THE<br />
Where II Will Corn. Trorn —<br />
1984 U.S. BUDGET<br />
Where II Will Go<br />
NU) ER OF WOMEN WORKERS<br />
IS GROWINGAT A FASn R RATE THAN<br />
THE TOTAL LABOR FORCE<br />
-<br />
jf<br />
Perc. t ncrecse from 1960<br />
1.<br />
——
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II1 lIIL I -<br />
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Suui... Ii 5 OIi... ol Muuugwnum unJ tud i _______<br />
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tpI 1fl hi Mf:<br />
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Suwc.. U S Olbv. o Muu,ugipn.uni u,,J Sud .1<br />
flHUUr1’ s’<br />
.<br />
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9.2 D. Ph<br />
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j,.<br />
a<br />
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- ILFI<br />
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o0
5. CONSUMER PRICE INDEX (CPfl<br />
measurespricechangesof 380goods and services used<br />
by a typical city family. cdjusted by region. Siguili<br />
canoe: The CPI—sometimescalled the ‘cost-of.living<br />
index”—isthe main way we measure inflation. Some<br />
wages and about one thirdof.óBfederal spending (in<br />
cludingold-agebenefits)inease with a riseoftheCPL<br />
Source; U.S.Deptof<br />
(nua1 per tae chanpe)<br />
6. RETAIL SALES measures the total amount<br />
that consumersspend. Significance: Someexperts call<br />
this measurethe “consumerconfidence index.” If peo .<br />
pie iee] theeconomyis in good shape, they spend.<br />
7. PERSONAL INCOME measures howmuch<br />
individual Americans earn in wages. and how much<br />
tAey arepaid in interest, stock dividends, arid sociul<br />
securityaridotherbenefits. Significance: Personal hi.<br />
come determineshow much consumers can buy.The<br />
graphchaxtschanges in per capita income.<br />
Sou.s. Deptof Comm.it.<br />
(thilions cotutant82doIt ’s)<br />
- -<br />
B UNEMPLOYMENT measures the nt per<br />
age of workers who want jobs but caxit find them.<br />
.Signlficnnre: Unemploymentusually is a lagging—<br />
rather than a lading—indicator. That is. it goes up<br />
only after the economyslows,and it drops sometime<br />
after business activny picksup:<br />
9 HOUSLi STARTS—the totalnumber of<br />
new houses on whichconstruction has begun—is a<br />
measure ofthehousing industry’s health. Significance:<br />
Housingstartsare a boost not onlytoconstruction work<br />
ers, but alsoto factory workerswho produce supplies.<br />
10. STOCK MARKET PRICES—the value<br />
f shoresinprivatecompanies—shift continually. There<br />
are a number ofways to measure themarket’supsarid<br />
downs. Significance: Stock marketindicators usually<br />
rise or fall steeply monthsbefore the economydoes.<br />
32.’
READING Estimating GNP<br />
by EdwardMeadows (1944- )<br />
Whenyoucompleteyour economics course, youprobablywillgeta singlegrade<br />
evaluatingyourperformance.A full evaluationof yourperformance wouldgrade<br />
howwellyoudid on testsandquizzes,howhardyouworked,yourcontributions<br />
in class,andhowmuchyoulearned.Yet,onlya singlelettershowson yourre<br />
portcard.Thegrowthof the economyis alsoa complexactivitythatis often<br />
reportedbymeansof onefigure.Consequently, an inaccurateGNP,likeen mac<br />
curategrade,mayshapepeople’sopinionsunfairly.In an articlein Fortune<br />
magazine,EdwardMeadowspotntsout thedifficultiesof measuringGNP.Asyou<br />
read,askyourselfhowdifferentyourperceptionof the strengthof theeconomy<br />
wouldbeif youignoredthesedifficulties.<br />
our timesa year.thefederalgovernmentmakesa heroicattemptto<br />
sumup in a singlenumberall the multifacetedmovementsof the<br />
Americaneconomy.What resultsis grossnationalproduct.the statistic<br />
relied on as the major indexof nationalprospenty.GNP can’t really<br />
measureprosperity,of course.for it ignoresmanyof thethingsthatmake<br />
life worthwhile,suchassunsetsandhomecooking.andcountsall manner<br />
of unpleasant things.like thecostsof hurricanesandwars.And sincethe<br />
numberisjerry-built from incompletedata,it is riddledwith error. GNP<br />
is eternallybeingrevised.<br />
Revisionsare an inescapablefact of life,at the CommerceDepart..<br />
ment’s Bureauof EconomicAnalysis.where the statisticsfor gross<br />
nationalproductare produced.The bewilderingtruth is that no GNP<br />
figure is ever final. There are six routine revisionsof each original<br />
estimate,andmajorrevisionsof the wholeserieseveryfewyears.<br />
The main reasonfor all this tinkeringis the immensityof the job.<br />
4<br />
i<br />
T_ JT
Lesson14<br />
conomic Ups and Downs<br />
TIME RE9UIRED One class period<br />
CONCEFTS Gross National Product<br />
Unemployment rate<br />
Inflation<br />
Deflation<br />
Tables<br />
Charts and graphs<br />
Percentage changes<br />
INSTRUCTIONALOBJECTIVES Students will<br />
C Plot economic data on a graph;<br />
Analyze economic data for the trends they re<br />
veal:<br />
C Classify a series of years as periods of recession<br />
or expansion:<br />
( Define key indicators of economic performance<br />
(real Gross National Product. Consumer Price In<br />
dex. unemployment rate).<br />
RATIONALE News reports about the economy of<br />
ten refer to data concerning economic growth.<br />
recession. inflation, and unemployment. These are<br />
among the key indicators of economic performance<br />
that well-informed citizens should be familiar with.<br />
The ability to understand the meaning of such in<br />
formation is a necessary first step in judging the<br />
appropriateness of current economic policies.<br />
.L tTERIALS<br />
: A copy of Handouts 14-1. 14-2. and 14-3 for<br />
each student.<br />
A transparency of Handout 14-4.<br />
3 An overhead projector.<br />
< The latest Economic Report of the President<br />
or other source(s) of economic data with which to<br />
update handouts.<br />
?ROEDJRL<br />
Before the class meets. bring the data on<br />
i-iaridout 14-1 up to date. (Youcan use the handout<br />
until the year 2001: there is ample room to extend<br />
t further as well.) The best source of recent data<br />
is the appendix in the Economic Report of the Pres<br />
ident, which is published every February: use the<br />
latest edition. (Noit: Data on the real Gross Na<br />
tional Product should be taken from one source. If<br />
possible. unless you can insert the revisions for the<br />
past three years that are made every July.)<br />
2 Give a copy of Handout 14-1 to each student.<br />
Briefly explain the meaning of each Indicator. (Les<br />
son 15 deals with these indicators In more detail.)<br />
3 Give a copy of Handouts 14-2 and 14-3 to<br />
each student. Explain that by graphing economic<br />
data, the class will be able to see important rela<br />
tionships among them.<br />
4 Have the students graph the data as directed<br />
in items 1—3of Handout 14-2. Because the rest of<br />
the lesson depends on accurate graphs. check the<br />
students work. You may want to project one of the<br />
graphs drawn in class against Handout 14-4 so<br />
that students can check their work.<br />
5 When students have finished the graphs. the<br />
should answer the questions in Item 4 of the hand<br />
out.<br />
6 Project a transparency of Handout 14-4. and<br />
go over the answers to the questions in Handout<br />
14-2. To nail down the main points, ask these ques<br />
tions:<br />
• What ai-ebusiness cycles? (Business cycles<br />
are sequences of rises and falls in cweraflecc<br />
nornic activity. parucuiariv as re :stered in<br />
stausucs on Gross National Product. the in<br />
dex of ndus ria production. erripiovmen .<br />
unernpiovrnem. aria iric -om .<br />
r.-picaliv consis of four phases: a period of<br />
expansion or rise in tota economic activity:<br />
a peak or topping-out period: a contraction<br />
period, during which total economic act ivirv<br />
declines: and a trough or bottoming-out pe<br />
riod. The expansion then resumeE. and the<br />
whole cycle of phases is repeated. These<br />
phases can be seen in the craph of rea.<br />
GNP. for example: ]97O— —expansion:<br />
1973—peak.<br />
trough.<br />
l97 —.75—coritracuor.. l97 —<br />
6 What happens to prices and unemploy<br />
ment during contraction or recession? (Prices<br />
tend to decline or their rise slows. although<br />
the effect is sometimes delayed. Unemploy<br />
ment rises.i<br />
33.’
Handout14-1<br />
tame Class ______________<br />
MeasuringthePerformanceof the U.S.Economy<br />
ConsumerPriceIndex<br />
Unemployment<br />
Rate 3<br />
All CivIlianWorkers RealGNP<br />
Year (yr.-to-yr.percentchange) (percent) (billionsof 1972dollars)<br />
1970 5.9% 4.9% $1,085.6<br />
1971 4.3 5.9 1,122.4<br />
1972 3.3 5.6 1.185.9<br />
1973 6.2 4.9 1.254.3<br />
1974 11.0 5.6 1.246.3<br />
1975 9.1 8.5 1,231.6<br />
1976 - 5.8 7.7 1,298.2<br />
1977 6.5 7.1 1,369.7<br />
1978 7.7 6.1 1,438.6<br />
1979 11.3 5.8 1,479.4<br />
1980 13.5 7.1 1,475.0<br />
1981 10.4 7.6 1,512.2<br />
1982 6.1 9.7 1.480.0<br />
1983 3.2 9.6 1,534.7<br />
984 4.3 7.5 1,639.9<br />
1985 __________<br />
1986 ________<br />
1987 _________<br />
1988 _________<br />
1989 _________<br />
1990<br />
1991<br />
1992<br />
1993<br />
1994<br />
1995<br />
1996<br />
1997<br />
1998<br />
1999<br />
2000<br />
2001<br />
SOURCE:CPI andcivilianunemployment.1970—83,and real GNP.1970—80:EconomicReportof the President.February1984(Washirigtor’.<br />
D.C.:U.S.GovernmentPnntingOffice,1984),pp.283,259,arid222.CPIandcivilianunemployment,1984,andrealGNP,1981—84: Economic<br />
Indicators,February1985.<br />
FromMasterCurriculumGuidein<strong>Economics</strong>.TeachingStrategiesforHighSchoo!Econom,csCourses1985JointCouncilonEconomicEaucation.<br />
2 ParkAvenue.NewYork,NY 10016.<br />
33..,
Handout14-2<br />
GRAPHINGTHEU.S.ECONOMY<br />
Name — Class _____________<br />
Instructions:Studytheeconomicdatain Handout14-1.Usethedatadescribed<br />
in items1—3belowto drawgraphsintheappropriateportionof Handout14.<br />
3. Theninterpretheresultin graphsbyansweringthequestionsin item4,<br />
below.<br />
1 PlotRealGrossNationalProducton the top graph.RealGrossNational<br />
Productmeasurestheoutputoffinalgoodsandservicesintheeconomyinconstant<br />
dollars(i.e.,withanyeffectsof inflationor deflationeliminated). In general,increasesinRealGrossNationalProductarelookedonasfavorabledevelopments,<br />
decreasesasunfavorable.<br />
2 PlottheannualpercentchangeintheConsumerPriceIndexonthemiddle<br />
graph.TheConsumerPriceIndexis themostwidelyknownmeasureof changes<br />
intheaveragepricelevel.Asustainedriseintheleveliscalledinflation;asustained<br />
declineis calleddeflation.Bothinflationanddeflationareundesirable.<br />
3 Plotthe civilianunemployment rateon thebottomgraph.Thecivilianun<br />
employment rateindicatesthepercentofthecivilianlaborforcethatisoutofwork.<br />
In general,lowunemployment ratesare lookedon as desirable:highratesas<br />
undesirable.<br />
4 Basedonthegraphsyouhaveplotted,answerthesequestions:<br />
a A recessionissometimesdefinedasaperiodwhenRealGrossNational<br />
Productdropsfor six monthsor more.Duringwhichyearsdid we have<br />
recessions?<br />
b Whathappenedto theunemployment rateduringtheserecessions?<br />
c Whathappenedto the ConsumerPriceIndexduringand afterthese<br />
recessions?<br />
d TheRealGrossNationalProductincreasesduringa periodofeconomic<br />
expansion.Duringwhichyearsdidtheeconomyexpand?<br />
• Whichwasthe longestperiodof economicexpansion?Whichwasthe<br />
shortestperiodof economicexpansion?<br />
I Whathappensto the unemployment rateduringperiodsof economic<br />
expansion?<br />
g WhathappenstotheConsumerPriceIndexduringeconomicexpansion?<br />
h Whendidthehighestrateof inflationoccur?<br />
I Whendidthelowestratesof inflationoccur?<br />
FromMasterCurncuiumGuiaein<strong>Economics</strong>:TeacrnngStrategiesforHigh<strong>School</strong><strong>Economics</strong>Courses. 1985.,JointCouncilonEconomicEoucatiori.<br />
2 ParkAvenue,NewYork.NY 10016.<br />
4_I P.<br />
3 ‘t<br />
I
GROSSNATIONALPRODUCT<br />
Activity Ill — Creatinga PriceIndexand CalculatingG.N.P.<br />
Inthisexercise,wewillcomputepriceindex,currentG.N.P.andrealG.N.P.fromtheyear,quantityand<br />
priceofvariousgoods.Priceindexisdeterminedbydividingallpricesofthecurrentyearbythoseofthe<br />
baseyear,thenmultiplyingby100. (PriceIndex= price/baseyearx 100)TocalculatecurrentG.N.P.,<br />
multiplyquantitytimesprice.(0 xP)TofindrealG.N.P.,dividequantityforeachyearbythepriceindexfor<br />
thatyear,thenmultiplyby100. (RealG.N.P.= Quantity/Price Indexx 100).Thefirstfiguresaregivenas<br />
an example,usingYear1 asa base.<br />
Pleaseanswerthefollowingquestions:<br />
1. Usingyearthreeasa baseyear,calculatea priceindexin percentageterms.<br />
2. CalculatecurrentG.N.P.for all yearsinthechart.<br />
3. CalculaterealG.N.P.for all yearsin thechart.<br />
4. ComparecurrentandrealG.N.P.Whatconclusionscanyoudraw?<br />
Activity IV — G.N.P. — Critical ThinkingSkills<br />
MeasuringG.N.P.can be complicated,but it is basedon somesimplerules. In orderto better<br />
understandthe numbersinvolvedin thecalculationof G.N.P.,choosethreegoodsandthreeservices<br />
industriestoincludeinthechartbelow.Appproximate thenumberofunitsproducedyearlyforeach. (You<br />
maywishto useanalmanac.)Thenfollowthechartandestimatea price.Theentirechartwillapproxi<br />
matethosegoods’andservices’contributions tothewealthrecordedintheG.N.P.Refrigeratorsaregiven<br />
as an example.<br />
Product Quantity x Price = DollarValue<br />
Goods:Refrigerators 3 million $400 1.2billion<br />
Services:Haircuts<br />
Pleaseanswerthefollowingquestions:<br />
1. Doesa risein servicessuchashaircutsreflecta changein ouroverallwealth?<br />
2. Doesa risein servicessuchas haircutsreflecta changein the G.N.P.?<br />
3. Doesthe factthat morepeoplebuyrefrigeratorsreflecta changein overallwealth?In the<br />
G.N.P.?<br />
4. HowdoesG.N.P.differfromwealth?
TIMEEDUCATIONPROGRAM<br />
ISTUWXTACTIVFIYSHEET )<br />
Instructions<br />
ANATOMYOFTHEU.S.ECONOMY<br />
Thelistbelowshowsthe pricesof somebasiccommoditiesin1970.<br />
1. Usingthe averagehourlywage,whichin 1970was $3.05,<br />
find out howmanyhoursof workwereneededto buy each<br />
product.<br />
2. Find out the averagepriceof eachof theseproducts<br />
today,and workout howmanyhours are requiredto buy<br />
eachone now. Use$6.16as the averagehourlywage.<br />
Product<br />
(a) Hamburger<br />
(lb.)<br />
(b) MovieTicket<br />
(c) <strong>Blue</strong>Jeans<br />
(d) Loafof Bread<br />
(e) Gallonof Gas<br />
(unleaded)<br />
(f) Basic<br />
Chevrolet<br />
(g) QuartofMilk<br />
1969/70Price<br />
$ 0.70<br />
1.80<br />
9.25<br />
0.25<br />
0.52<br />
3,200.00<br />
0.33<br />
Hoursto Buy<br />
In 1970<br />
/ LtMl,, .RTffS<br />
b<br />
1980-1981<br />
Price<br />
‘ 1.30<br />
Note: Pricesshown arean approximation. Prices of many goods vary<br />
considerably,dependingonarea.<br />
0<br />
o. c<br />
Hoursto Buy<br />
In 1980-1981<br />
/1 jg )ifr s<br />
!
WHEREFOREIGNAID $$ GO<br />
$20.3billion<br />
1May not equal 100percent due to rounding.<br />
bTotals are in real dollars, 1989= 100.<br />
Request.<br />
1981 1989c<br />
1985<br />
Sources: Agency for International Development,<br />
CongressionalPresentation,Main Volume,variousyears;<br />
Department of State, unpublished printouts.<br />
Reproduced courtesy of<br />
Overseas Development Council,<br />
from Policy Focus 1988, No. 2<br />
Explanation of foreign assistancecategories.<br />
MiddleEast:Total of all forms of assistancein the region, primarilyIsrael<br />
and Egypt; it includes military assistanceand Economic Support Fund<br />
assistance.<br />
BilateralDevelopment Assistance:Assistanceto supportdevelopmentprojects.<br />
in areassuchaseducation, agnculture,healthandtransportation,to individual<br />
foreign countries.<br />
PL-480:Popularly knownas Food for Peace,this is primarilycomprisedof<br />
shipments of commoditiesto developingcountries.<br />
MultilateralAid:U.S. contributionsto internationalfinancialand aid insti<br />
tutions such as the World Bank, the lnteramericanDevelopmentBank and<br />
the International Monetary Fund.<br />
ESF: (EconomicSupport Fund)Often referredto as securityassistance,this<br />
is financialsupport provideddirectlyto foreigngovernmentsto meetpoliti<br />
cal or strategicneeds.<br />
Military Aid: Includescreditsand grantsfor foreigngovernmentsto buyU.S.<br />
armsand providesmilit;aryeducationand trainingprogramsto foreignarmed<br />
forces.<br />
NATO:(North Atlantic Treaty Organization)ComprisesESP and military<br />
aid to Portugal, Spain, Greeceand Turkey, someof whichis relatedto U.S.<br />
bases in these countries.<br />
r<br />
L<br />
I.
13:ActivityMaster2<br />
JiowDoestheFederalRes iye Operate?<br />
The Panicof 1907,thedepressionwhichfollowed,andthereportoftheNationalMonetaryCommission<br />
:ledto theestablishmentof theFederalReserveSystemin 1914.The“Fed” is acentral-bankingsystem<br />
senda bankfor otherbanks.It alsosometimes(thoughrarely)dealswith individuals.Mostof thepur<br />
posesof thesystemarelistedintheright-handcolumnbelow.<br />
ach of thetwelveFederalReserveBanksisgovernedbya nine-memberBoardof Directors.Thesys<br />
tem asa wholeis directedby a seven-memberBoardof Governors(appointedby the Presidentwith<br />
consentof Congressforfourteen-year terms)whichsitsin Washington,D.C.<br />
Belowarelistsof the,proceduresandpurposesof theFederalReserveSystem.Matchtheprocedureon<br />
theleftwiththeappropriatepurposeor purposesontheright(youmayuseitemsin theright-handcol<br />
umnmorethanonce).<br />
‘<br />
J_<br />
._.<br />
I<br />
Procedure Purpose<br />
1. The Federaleserve iSSues:Federal‘Reserve ‘a. To enablethe nation’smoneysupnotes<br />
backedy Old cefflficates, government ply to expand and contract as<br />
securities,and.otherassets.Thequantityexpands economicconditionsrequire.<br />
andcontractswitt .ttie , public’sneed.<br />
2.TheFeder al ResetveBankreceivesa checkfor ‘b. To decentralizethe nation’smoney<br />
$100,-’drawnagainst1st: ’National Bank,from 3rd supply,which had tendedto con<br />
National.TJ ie .ed” ‘1 irrcreases ‘3rd’Nationat<br />
s - .centratein NewYorkCity.<br />
serveassetsbyS1O , teduces :1stNational’s-assetsby$100,and:returnsthe<br />
“cleared” checkto<br />
1stNational.<br />
3.TheFederal:Reser<br />
e TActcalledfor a Boardof - c. To provide a system of national<br />
Governorsto beestablished. managementandsupervision.<br />
4. OistrictBanks”Boards-of Directorsaremadeup d:To insurethatthe systemfunctions<br />
of bankers,businessmen,and membersof the sntheinterestof thegeneralpublic.<br />
generalpublic.<br />
;5•To curb ,the inflaUon,: ’ Fedsellsgovernmentse- e.’ To preventbanksfromcreatingtoo<br />
curities ‘in the ‘qpen market” to commercial muchcredit.<br />
banks, deductingpayment from the banics’r<br />
‘serveaets. then: ’TThebanks have’lessmon y. to<br />
loan.<br />
sen,es 6:EaofFe edl erai<br />
U icsm ff:To providefor collectionandtrafls<br />
.jts ownDistrteI.1Tt twMveDstticts a cdt$tri- 4erof fundsbetweenbanks.<br />
buted geo yq)biiaJ accos the. count ’y.<br />
7.Theii ier l FReser e Boertlastab1i hes: ratios<br />
between resec s held byand loans made by<br />
member uks.<br />
JoIjit dCos oaEconomicEducalion1977<br />
I
FAL<br />
E,dY kev’<br />
bk)<br />
Tk FW RAL RES<br />
V y;er OF THE UNITED STATES<br />
WA H,NGrON, P.C.<br />
n ‘tiridependent<br />
at.e4 encyL’cre by<br />
ov gr ss k Iq 3 --<br />
MEM6 Rs<br />
ve 5por sbfe ority<br />
BoAR OF ovEPJ.JoRS fo Cor gvess.<br />
e4 ppok1 bytke<br />
PRE IEpJT of +keU.5.(covifirpne4<br />
bj 5e .+e) -for 14qe.ar+c -15.<br />
4otwo rovy me 1. d+ric<br />
FEPERALP P-•<br />
COMM<br />
7 Boardof Gove rior @bove)<br />
+ S Pre deii+ of Re 0 vv I<br />
ks (left)<br />
_______<br />
1øL ToT 12.Me,mE’e.rs
InstructionalActivity 2<br />
WHAT’S A FAIR TAX?<br />
Recommended Use: Before beginning this developmental exercise, students<br />
should be familiar with the important U.S. taxes and the<br />
bases of taxation.<br />
Time Required: Two 45-minute periods.<br />
Materials Required: Student Handout 1. The section on political acceptability<br />
in the Overview should be useful as teacher background.<br />
Rationale: Equity is an important criterion of a good tax, and the<br />
fairness of a tax may dominate public discussion of that<br />
tax. Of course, there is often considerable disagreement<br />
about what constitutes fairness. In order to debate this<br />
issue rationally and intelligently, it is necessary to com<br />
prehend the definitions of regressive, progressive, and<br />
proportional taxation.<br />
Concepts: Progressive, regressive, and proportional taxation; effec<br />
tive tax rate.<br />
Instructional Given a problem sheet on tax equity, students should be<br />
Objectives:<br />
able to:<br />
1. Define regressive, proportional, and progressive<br />
taxation;<br />
2. Distinguish among taxes that are regressive, pro<br />
gressive, and proportional;<br />
3. Defend a position that one of these three distribu<br />
tional patterns is fairest;<br />
4. Distinguish between an effective tax rate and a nomi<br />
nal tax rate.<br />
Teaching Strategy/Pupil Activity<br />
Since students will be working on the problem sheet, this section concentrates<br />
on the information needed to prepare them for the task and on the parts of the<br />
sheet where they will have the most difficulty.<br />
Before handing out the problem sheet (Handout 1), discuss the definitions of<br />
progressive, proportional, and regressive tax rates. Students will have a difficult<br />
time understanding these definitions. They will confuse the income tax base<br />
with other tax bases, such as consumption and wealth. For example, they will<br />
conclude that the sales tax is a proportional tax since the tax rate is the same for<br />
everyone. They will not distinguish between a consumption base and an<br />
income base.<br />
Also, spend some time calculating effective tax rates or tax liability as a<br />
percentage of income. Students may have difficulty on the computational<br />
problems.<br />
These are the answers to the questions on the problem sheet and some<br />
discussion points that can be associated with each answer:<br />
34
StudentHandout1<br />
PROBLEMSHEET—WHAT’SA FAIRTAX?<br />
Almosteveryoneis concernedabouthowmuchwe payin taxes.Thebest<br />
wayto determinehowmuchtaxyoupayisto stateyourtaxasaneffectivetax<br />
rate.Aneffectivetax rateis the percentageof yourincomeyoupayin taxes.<br />
Thisdiffersfromanominaltaxrateor legaltaxrate.Fotexample,asalestax<br />
ratemaybe5%(thenominalrate),butthisdoesnotmeanthatall peoplepay<br />
out 5%of their incomein salestaxes.Outlaysfor rent,insurance,medical<br />
bills,amongotherthings,arenot subjectto salestaxes.Neither,of course,<br />
aresavings.<br />
Let’slookattheeffectivetax rateof JoanneWalters.If shemade$10,000a<br />
yearandpaid$2,000in taxes,hereffectivetax ratewouldbe20%.Youcan<br />
figurethis bydividing$2,000by$10,000:<br />
$ 2,000 = 20%<br />
$10,000<br />
Taxesmayhavethreekindsof effectivetax rates.If atax isprogressive,the<br />
effectivetax rate increasesas a person’sincomegoesup. Forexample,a<br />
personwhomakes$10,000ayearmayhaveaneffectivetax rateof 10%while<br />
a personwho makes$15,000a yearmayhaveaneffectiverateof 18%.<br />
If a tax isproportional,the effectivetax ratestaysthe sameregardlessof<br />
income.In this case,a personmaking$10,000a yearanda personmaking<br />
$15,000ayearbothwouldbetaxedat aneffectiverateof 10%.Ofcourse,the<br />
personmaking$15,000a yearwouløpaymoretotal dollarsin taxes.<br />
If a tax is regressive,the effectivetax ratedecreasesas incomegoesup.<br />
Forexample,a personmaking$10,000a yearmightpayaneffectivetax rate<br />
of 10%whilea personwho makes$15,000a yearmightpayaneffectivetax<br />
rateof 8%.<br />
Nowanswerthesequestionsto seeif youunderstandprogressive,propor<br />
tional,andregressivetax rates.<br />
1. A tax where each person pays 3% regardless of income is a<br />
_____________ tax.<br />
2. Ataxleviedat 1%onthefirst$1,000of income,2%onthenext$1,000,3%<br />
on the next$1,000,andsoon is a ____________ tax.<br />
3. Atax leviedat 15%on thefirst $1,000of income,12%on thenext$1,000,<br />
1001eon the next$1,000,andso on is a ____________ tax.<br />
4. 11it istruethata personwithanincomeof $4,000ayeartypicallybuyssix<br />
packsof cigarettesper weekanda personwith an incomeof $8,000a<br />
yeartypicallybuysninepacksof cigarettesperweek,this suggeststhat<br />
an excisetax of 10 cents per pack would be a ____________ tax.<br />
Explain.<br />
5. RickMoraleshasanincomeof $6,000andspendsit allontaxablegoods.<br />
ChetBurtonhasanincomeof $12,000butspendsonly$9,000ontaxable<br />
goods.Assuminga 5%salestax, Mr. Moraleswill pay $_____ in sales<br />
taxeswhich s _____% of histotalincome.Ontheotherhand,Mr.Burton<br />
will pay $_____ in salestaxeswhich is _____% of his total income.<br />
Therefore,wecanconcludethat the salestax is _________<br />
36
• Many changes have occurred in the <strong>Social</strong> Security System since its establishment during the administration of<br />
President Franklin D. Roosevelt. The time line below indicates some of these changes.<br />
<strong>Social</strong>SecurityTimeLine<br />
August14,1935<br />
Created t<br />
I j!<br />
& rvivorsOldAge<br />
Be.afitsAdded<br />
1940<br />
StartPayingBenefits<br />
Add Federa EmployeesRetirement<br />
1950<br />
Expandedcoverage<br />
tomotewomen<br />
1954<br />
Add FarmWorkersand<br />
Domestic Help<br />
KEY:<br />
Number of persons<br />
paying into system<br />
for each person<br />
receiving benefits<br />
1972<br />
AutomaticCostof<br />
Livingraises<br />
I 1956 1965 1973<br />
Disability Benefits Medicare Medicarefor Chronic Kidney Patients<br />
I<br />
14<br />
at Age 50<br />
Womenat Age 62<br />
5 3.5 3<br />
— 3 — ,* . piu<br />
i6U 1970 -<br />
a Disc .s one way in which a specific development in each of threeof the areas hsted bi lo kis h. d an ini 1,: ct<br />
any of the data shown in the time line. [a)<br />
Areas<br />
• Science<br />
• Composition of the population<br />
• Changes in social attitudes<br />
• The nations economy<br />
b Write a generalization about a problem facing the <strong>Social</strong> Security System. Explain how data in the time Line<br />
support your generalization. [3]<br />
c State a specific course of action that has been or might be taken to deal with the problem given in answer to b.<br />
[3]<br />
S<br />
O:
DEPRESSION & NEW DEAL<br />
1 Louisiana’s “Kingfish,” his “share the<br />
wealth” program challengedNew Deal<br />
3 They were made to farmers, homeowners,<br />
& exporters by New Deal measures<br />
7 The Patman Bonus_..... was vetoed by PDR<br />
9 His plan called for giving $200 a month<br />
to every U.S. citizenover age 60<br />
10 Defeatedby FDR in 1932 election<br />
11<br />
12<br />
Measure designedto revive industryby<br />
fair competitioncodes system (abbr.)<br />
Medium used effectivelyby FDR<br />
14 Maximumweekly hours and minimum hourly<br />
wage (in cents)establishedby FDR<br />
16 FDR was accusedof trying to “pack” it!<br />
17 New industriallabor organization<br />
headed by John L. Lewis (abbr.)<br />
18 You and I!<br />
19 The Fair Labor StandardsAct<br />
establisheda minimum _____<br />
21<br />
22<br />
25<br />
26<br />
27<br />
29<br />
30<br />
The Civilian_____ Corps providedwork<br />
Agency created for dam and power<br />
project in TennesseeValley (abbr.)<br />
Symbol of compliancewith FDR’s codes<br />
of fair competition (2 words)<br />
73rd Congress ... the “Hundred ____<br />
Roosevelt’sSecretaryof State<br />
FDR’s close friend 6 specialassistant<br />
“The only thing we have to fear”!<br />
31 Headed Senatemunitionsinvestigation<br />
BRAIN TRUST<br />
BLUE EAGLE<br />
TENNESSEE<br />
CONSERVATION<br />
1 Governorof Kansas,he carriedonly 2<br />
states in presidentialelection,1936<br />
2 The 21st Amendmentended the era of<br />
“bathtub_____ 3 Huey Long’s state (abbr.)<br />
4 Attending_____ events such as boxing &<br />
baseballwas a popular 30’s diversion<br />
5 FDR tried to put the American economy<br />
on the _____<br />
to recovery<br />
6<br />
7<br />
FDR’s Vice—President,1933—1941<br />
FDR’s advisorsoutside Cabinet (2 words)<br />
8<br />
10<br />
A Congressman,he ran for Presidentin<br />
1936 on Union party ticket<br />
HOLC, FaA, and USHAwere all concerned<br />
with this problem<br />
11 FDR had been its Governor (abbr.)<br />
13 1st major agency to assist American<br />
farmers,createdin 1933 (abbr.)<br />
15<br />
16<br />
18<br />
20<br />
A vast dam and electricpower project<br />
was started in this valley<br />
FDR custom ... “fireside ____<br />
Secretaryof Agriculture,1933—1941<br />
The New Deal essentiallyabandoned<br />
the _____<br />
standard<br />
23 Relief, Recovery, and ____<br />
24 One of FDR’s 1st ieasures was to sus<br />
pend, temporarily,their operations<br />
26 Roosevelt’sparty (abbr.)<br />
28 It marked the end of the New Deal!
1. What does the graph on the transparency<br />
measure?<br />
Does this graph tell you anything about farm<br />
employment?<br />
What years are coveredby the horizontalaxis?<br />
What percentagesare coveredby the vertical<br />
WORKSHEETS<br />
MANUFACTURING EMPLOYMENT<br />
AS A PERCENTAGE OF<br />
TOTAL NONAGRICULTURAL EMPLOYMENT<br />
axis? 15 I I I I I I<br />
1947‘52’57’62’67‘72’77’82’87<br />
2. Were there years when the percentageof<br />
manufacturingworkers increased?<br />
_____________ How can you tell that the<br />
slopingline on the graph actuallymeasuresyears<br />
notshownon the horizontalaxis? _____________<br />
3. Approximatelywhat was the percentageof manufacturingjobs in 1947? ______________<br />
1962? _______________ 1982? Approximatelywhat was the percentageof nonagricultural,<br />
noninanufacturingjobs in 1952? ______________ 1967? ______________ 1977? ______________<br />
4. What kind of visualimpressiondoes this graph make in terms of the future.of manufacturing<br />
employment?<br />
5. Using a ruler, carefullyplot the informationfrom<br />
the graph at the top of the page onto this graph at<br />
the right. (You will only need to plot the<br />
informationfor the years 1947, 1952, 1957, 1962,<br />
1967, 1972, 1977, 1982,and 1985.)What kind of<br />
visualimpressiondoes this graphmake in terms of<br />
the future of manufacturingemployment?<br />
MANUFACTURINGEMPLOYMENT<br />
I<br />
40<br />
35<br />
:fl<br />
20<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0 •<br />
1947’52‘57‘62‘67‘72‘77‘82‘87
TIMEEDUCATIONPROGRAM<br />
ESTUI)}NFACTJIT!YSHEET )<br />
INFLATION.RECESSION-DEPRESSION<br />
Decision Making During Inflation<br />
DIRECTIONS:Read the economicproblem outlined belowand study the summaryof financialinformation presentedin<br />
the Data Bank. If you have a computer, followthe stepslistedin the Flow Chart, to help solvethe problem. If you do not<br />
have accessto a computer, you can figurethe problem out by hand.<br />
SITUATION:Imaginethat you haveearned$250at a summerjob and are delightedto havethe moneybecauseit meansthat<br />
you can buy the stereoset that you’vewanted for the past two years. The verynext day you go to the musicstore to get the<br />
modelyoulikebest. Unfortunately, inflation has raiseditscost sincethe lastyou sawit in the store. Youare disappointedto<br />
discoverthat you don’t have enough money. The stereo set costs$300.<br />
At first you decideto wait until you can earn the additional moneyneededto buy the stereoyou want. Then you read in<br />
TIME that economistspredictan averagerate of inflation overthe yearof 12%. Perhaps waitingand savingwouldnot bea<br />
wisecourseof action. Instead, you ask your father if you can borrowjust enoughmoneyto coverthe differencebetweenthe<br />
cost of the stereoand the amount of moneyyou’veearned. Your father is willingto loan you the moneyprovided you pay<br />
him 12%interest, whichis what he would losein income by transferring cash from his money market fund to you.<br />
PROBLEM:Assumingthat inflation willindeedaverage12% overthe year, and assumingthat as an alternativeyou could<br />
borrow money from your father at 12% interest:<br />
1. How much would the stereo cost in another year?<br />
2. How much moneywould you have to repay your father for a 12% loan?<br />
3. Wouldyoubewiserto wait, save,and getthe stereoina year, or to spendand borrownow?Explainyourchoiceinspecific<br />
financialterms.<br />
DATABANK<br />
Amount of your gift<br />
Costof stereo<br />
$ 250.00<br />
$ 300.00<br />
Rateof inflation 12%<br />
Moneyneededforloan $ 50.00<br />
Rateof intereston loan I2%
INFLATION - RECESSION-DEPRESSION<br />
DecisionMakingDuring Inflation<br />
REMINDER:FlowChartSymbols<br />
(“ TeHs what<br />
I inputmust<br />
besupplied<br />
Describesan 1<br />
operationto be<br />
donebythe<br />
computer<br />
Tellswhat<br />
outputIsto be<br />
displayedby<br />
computer
TIMEEDUCATIONPROGRAM<br />
(STU)E\T ACTIVElYSHEETJ<br />
INFLATION.RECESSION-DEPRESSION<br />
How Money Is Created<br />
DIRECTiONS:Read the economicproblem outlined belowand study the summaryof financialinformation presentedin<br />
the Data Bank. If you have a computer, followthe stepslistedin the Flow Chart, to help solvethe problem. If you do not<br />
haveaccessto a computer, you can figurethe problem out by hand.<br />
SITUATION:Imaginethat you have deposited$1,000in your checkingaccount at the local bank. What happens to this<br />
money?Your deposit createsnewmoney.<br />
Accordingto law, your local bank is required to keep only 10% of its deposits on reserve, includingyour $1,000. Of<br />
course,the bank could keepa greater cash-reservebalanceon hand, but it is more profitable to earn as much interest from<br />
loansand investmentsas possible.That’showbanks earn income.Thus, whenMr. Johnson comesto the bank for a loan, he<br />
isableto borrow$900because10%of your depositmust stillremainon reservein the bank. Meanwhile,Mr. Johnson takes<br />
the $900he borrowedandbuysa newcolortelevisionset. Mr. Green, ownerof the appliancestore, takes Mr. Johnson’s$900<br />
and depositsit in his checkingaccount.<br />
Keeping1001on hand from Mr. Green’sdepositof $900,Mr. Green’sbank lendsthe remainingsumto Ms. Stevens.Ms.<br />
Stevensuses the money she borrows for a home improvement loan and pays the carpenter for paneling her den. The<br />
carpenter, Mr. Woodman, goesto the bank and deposits his earnings.<br />
Usingall but the 10% required for reserve,Mr. Woodman’sbank....<br />
PROBLEM:Assumingthat this processof deposits and loans happens a total of 10times, and assumingthat the reserve<br />
requirementof 10% remainsthe same for everybank transaction:<br />
1. How muchmoney wasloaned to the tenth customer in this chain of multiple expansionof the money supply?<br />
2. How muchtotal moneyin new deposits wascreated after 10bank transactions?<br />
3. How much total moneyin new loans was created from the $1,000after 10transactions?<br />
4. What wasthe total amount that all 10banks kept on reserve?<br />
DATABANK<br />
Your Local Bank<br />
Originaldeposit $1,000.00<br />
Loan to Mr. Johnson 900.00<br />
Reserves 100.00<br />
Green’s Bank<br />
Green’sdeposit<br />
$ 900.00<br />
Loan to Ms.Stevens 90% x Green’sdeposit<br />
Reserves 10% x Green’sdeposit<br />
Reservesrequirements<br />
at allparticipatingbanks 10010
INFLATION-RECESSION-DEPRESSION<br />
How MoneyIs Created<br />
REMINDER:FlowChartSymbols<br />
(TelJs 7] wha<br />
I inputmust<br />
besupplied<br />
Describesan<br />
operationto be<br />
donebythe<br />
computer<br />
Tellswhat<br />
outputis to be<br />
displayedby<br />
computer<br />
)
1<br />
1919<br />
1920<br />
1q21<br />
1922<br />
1923<br />
124<br />
1i25<br />
I92<br />
1)<br />
19 6<br />
17Z<br />
)q3%<br />
143g<br />
)32<br />
1?3 ’<br />
l34<br />
k9 5<br />
16<br />
L937<br />
19 8<br />
CQNSUM\ERPI 1CL Jdi ‘n.<br />
32<br />
60<br />
54<br />
50<br />
51<br />
51<br />
53<br />
5<br />
.2 .<br />
.1 .<br />
51<br />
So<br />
46<br />
42.<br />
31<br />
40<br />
41<br />
42<br />
4<br />
42<br />
.<br />
,j1942<br />
.<br />
H<br />
‘1940.<br />
,194 1<br />
1S 3<br />
144<br />
194<br />
194G<br />
1947<br />
.48<br />
.(/‘I<br />
co<br />
19S 1<br />
52 -<br />
1953<br />
14<br />
19 •<br />
1957<br />
13<br />
—<br />
£o *rc : U. S. iç ’. I.<br />
t f.i sre. . l. t i. z... .<br />
Cvn4um! PAice zIrt1 for I I)r .s .t t’(C: C1<br />
-<br />
4’?<br />
•<br />
•<br />
42<br />
42<br />
44<br />
‘9<br />
52<br />
53<br />
54<br />
5<br />
&:i<br />
72..<br />
71<br />
7z.<br />
7 O<br />
O<br />
u<br />
[l<br />
4<br />
.1959<br />
19<br />
O’ 1961<br />
196<br />
1963<br />
4I9<br />
1b<br />
19<br />
16$<br />
)ô<br />
197i<br />
p971<br />
1’173<br />
1’174<br />
Ij?S<br />
l9I<br />
1977<br />
I.78<br />
prr )I’, •S$c rkev ic thi<br />
‘87<br />
89<br />
9<br />
‘J .<br />
2<br />
3’<br />
5<br />
‘,7<br />
ico<br />
04<br />
1)0<br />
, 1I<br />
121<br />
125<br />
)33<br />
14B<br />
161<br />
17k<br />
18<br />
J9<br />
27<br />
0 -<br />
V<br />
..,<br />
c,I sIs<br />
CMm’L)J<br />
b.
Mrn<br />
C<br />
C<br />
a)<br />
C.)<br />
a)<br />
14<br />
12<br />
10<br />
4<br />
2<br />
0<br />
14<br />
12<br />
10<br />
4<br />
2<br />
0<br />
Handout14-3<br />
GRAPHINGECONOMICDATA<br />
UNEMPLOYMENTRATE,ALL CIVILIANWORKERS<br />
Class ______________<br />
— — — — — — —<br />
‘70 ‘72 ‘74 ‘76 ‘78 ‘80 ‘82 ‘84 ‘86 ‘88 ‘90 ‘92 ‘94<br />
YEAR-TO-YEARCHANGEIN CONSUMERPRICEINDEX<br />
‘70 ‘72 74 ‘76 ‘78 ‘80 ‘82 ‘84 ‘86 ‘88 ‘90 ‘92 ‘94<br />
Cont,nued<br />
FromMasterCurriculumGuioein<strong>Economics</strong>.TeachingStrategiesforHigh<strong>School</strong><strong>Economics</strong>Courses1985.JointCouncionEconomicEoucator<br />
2 ParkAvenue.NewYork,NY 10016.<br />
34’
Handout14-3(concluded)<br />
‘<br />
0,<br />
2100<br />
2050<br />
2000<br />
1950<br />
1900<br />
1850<br />
1800<br />
1750<br />
1700<br />
1650<br />
1600<br />
o 1550<br />
1500<br />
1450<br />
1400<br />
1350<br />
1300<br />
1250<br />
1200<br />
1150<br />
1100<br />
1050<br />
REALGROSSNATIONALPRODUCT<br />
— — — — — — — — — — — — — — — — — — — — — — — — —<br />
— — — —<br />
70 72 74 76 ‘78 ‘80 ‘82 ‘84 86 ‘88 90 ‘92 ‘94<br />
r1
Name<br />
0<br />
14<br />
12<br />
10<br />
4<br />
2<br />
0<br />
14<br />
12<br />
10<br />
0<br />
Handout14-4<br />
GRAPHINGECONOMICDATA<br />
UNEMPLOYMENT<br />
RATE,ALL CIVILIANWORKERS<br />
YEAR.TO-YEARCHANGEINCONSUMERPRICEINDEX<br />
Class ______________<br />
70 ‘72 74 76 78 ‘80 ‘82 ‘84 ‘86 ‘88 ‘90 ‘92 ‘94<br />
70 ‘72 ‘74 ‘76 ‘78 ‘80 ‘82 ‘84 b86 ‘88 ‘90 ‘92 ‘94<br />
FromMasterCurriculumGuidein<strong>Economics</strong>: TeachingStrategies forHighScriool<strong>Economics</strong>Courses.1985.JointCouncilonEconomicEducation.<br />
2 ParkAvenue.NewYork.NY10016.<br />
34..’e
Handout<br />
14-4(concluded)<br />
2100<br />
2050<br />
2000<br />
1950<br />
1900<br />
1850<br />
1800<br />
1750<br />
1700<br />
1650<br />
1600<br />
1550<br />
1500<br />
1450<br />
1400<br />
1350<br />
1300<br />
1250<br />
1200<br />
1150<br />
1100<br />
0<br />
NATIONALPRODUCT<br />
70 72 74 76 78 80 82 84 16 ‘88 ‘90 ‘92 ‘94<br />
‘) I<br />
4f ‘t
atlst<br />
OVERHEAD81<br />
FIGURE9.1MANUFACTURING EMPLOYMENT ASAPER<br />
CENTAGE OFTOTALNONAGRICULTURAL EMPLOYMENT<br />
r<br />
2<br />
40-<br />
35<br />
30<br />
25<br />
20<br />
15 —<br />
1947<br />
I I I _1_ .1 I I<br />
‘52 ‘57 ‘62 ‘67 ‘72 ‘77 ‘82 ‘87<br />
Source:NonagrIcIit faI payroemployment estab11shm<br />
ECONOMICS FORDECISIONMAKING<br />
____
GROSSNATIONALPRODUCT<br />
WhentheGreatDepressionlaggedonintotheearly1930s,economistsbeganto questionthevery<br />
foundationsof theAmericaneconomy.Withthisquestioningcamea needto examinetheeconomyina<br />
scientificmanner.Untilthispoint,theUnitedStateshadnotdevelopeda systemto measurethenation’s<br />
resourcesoritssourcesofincome.Duringtheheightofthedepression, ayoungeconomistnamedSimon<br />
Kuznetswas calledto join the NationalBureauof EconomicResearchand Development.Kuznets<br />
developedthefirstsystemof nationalaccounting.ThesystemwaslaterrefinedintotheGrossNational<br />
Product(G.N.P.)AccountingSystem.<br />
DuringWorldWarIl, informationaboutG.N.P.wasveryusefulin determiningwartimeproduction<br />
goals. EfficiencylevelswerecomputedusingpotentialG.N.P.Afterthewar,theCommerceDepartment<br />
publishedannualreportsstatingthesizeofG.N.P.Thesereportswereusedbythebusinesscommunityto<br />
planinvestmentandmarketingstrategies.Astimewenton,peoplelookedtoG.N.P.figuresasproofthat<br />
societywas makingeconomicprogress.G.N.P.,whichbeganas a methodof.measuringgoodsand<br />
services,becamea methodof measuringa nation’sprogress,growth,wealth,andwell-being.<br />
WhatdoesG.N.P.measureandwhatdoesitfailtomeasure?GrossNationalProductmeasuresthe<br />
marketvalueindollarsofallretailgoodsandservicesproducedinagivenyear. Dollarvaluesoffinalsales<br />
areusedin orderto avoiddoublecounting. Forexample,if wecountedthe saleof steelandthenof<br />
automobiles,steelwouldbe countedtwice.G.N.P.countsonlythefinalsale,the automobile.<br />
EconomistsalsodistinguishbetweenrealG.N.P.,whichis caluculatedusingconstantprices,and<br />
current(nominal)G.N.P.,whichismeasuredincurrentprices.RealG.N.P.makesadjustmentsforprice<br />
increasesandis thereforea moreaccuratemeasure.<br />
G.N.P.doesnotincludetransferpayments(shiftsoffundsfromonesectoroftheeconomytoanother),<br />
securitiestransactions,usedgoods(resaleoffinalproducts),andnon-marketactivitiessuchasat-home<br />
childcareandhousework.G.N.P.failstomeasureleisuretime,thequalityandvarietyofgoodsavailable,<br />
andthedistributionofoutput.Thecoststosocietyofpollution,drugabuse,andothercontemporarysocial<br />
problemsaresometimesreferredtoasGrossNationalDisproduct.Inotherwords,anythingwhichwedo<br />
notplacea dollarvalueupon,is nottakenintoaccount.<br />
AlthoughG.N.P.givesan indicationof economichealth,G.N.P.figuresdo nottakeall economic<br />
activityintoaccount.Itisnotacompletelyaccuratemeasurement.Anationmayconcentrateonmilitary<br />
spending — makingweapons — butiftheseitemshavenoexchangeability inthemarketplace, thenthey<br />
are not an indicationof the affluenceof a society.Yet the G.N.P.recordsmilitaryspendingas<br />
wealth.G.N.P.doesnotmeasurethetypeof goodsproduced,northeirdistributionthroughoutsociety.<br />
Non-paidlabor,such as houseworkor in-homechildcare,is not recordedeither.Neitherbartering<br />
(exchangingoodsforgoods),northeundergroundeconomy(thatportionofthemarkethatisnotreported<br />
to government) is measured.<br />
Untilabettermethodcanbeused,however,theG.N.P.willremainthemostfavoredmeasurement<br />
of<br />
nationalwealth.
QUESTIONBANK<br />
UNITIII<br />
Questions1 and2 arebasedon thefollowingnewsstory:<br />
“ANOTHERSHIPWRECKED— For the fourthtime in six years,Rocky<strong>Point</strong><br />
claimsmorevictims.Millionsof dollarsin shipsandcargolost. Ships<br />
headingintothenearbyportmustcomedangerously closeto thiswellknown<br />
hazard.Citizensare concernedthatno lighthouseprotectshippinginto<br />
ourport.”<br />
(1) Privatebusinesses arenotlikelyto builda lighthouse because<br />
1) thecostof buildingthelighthouseistoohigh<br />
2) theriskof lossto shipowners is eliminated by Insurance<br />
3) a privatebusinesswouldhavegreatdifficulty collecting fees<br />
fromshipowners<br />
4) it wouldcostmore for a privatefirmto buildthe lighthouse<br />
thanforthegovernment to do so<br />
(2) Supposethatthestatedecidesto buildand operatea lighthouse to prevent<br />
shipwrecks.Whatwouldbe thefairestwayto payfortheproject?<br />
1) an incometaxon allshipowners<br />
2) a dockingtaxon allshipsusingtheseaport<br />
3) a generalsalestaxon allgoodssoldin thestate<br />
4) a generalsalestaxon allgoodssoldin theseaport<br />
(3) Unexpected inflationismostlikelyto benefit<br />
1) personslivingon fixedpensions<br />
2) lifeinsurancepolicyholders<br />
3) savingsbankdepositors<br />
4) peoplewhoowemoney<br />
(4) GrossNationalProductis a measureof<br />
1) thepricelevelof goodsandservicesold<br />
2) thatpartof production whichis usedby thegovernment<br />
3) themarketvalueof a nation’soutputof finalgoodsand<br />
services<br />
4) thequantityof goodsandservicesproducedby privatebusinesses<br />
(5) WhencomparingGrossNationalProductoverseveralyears,it is necessary<br />
to adjustfor<br />
1) changesin technology<br />
2) changesin thepricelevel<br />
3) productqualityimprovement<br />
4) newproductsthatenhanceourwealth
(6) Theconinercial<br />
bankingsystemcreatesmoneywhen<br />
1) businessfirmsextendcredi to customers<br />
2) individuals depositcurrencyin banks<br />
3) thenation’sgoldholdingsincrease<br />
4) banksmakeloansandinvestments<br />
(7) If thegovernment wereto levya taxof onedollaron everypairof pants<br />
sold,whichof thefollowingwouldmostlikelyresult?<br />
1) Supplierswouldsellmoreandchargea higherprice<br />
2) Consumerswouldpaya higherpriceforpantsandprobablybuya<br />
smallerquantity<br />
3) Consumerswouldpay a higherpriceand as a resultsuppliers<br />
wouldmakelargeprofits<br />
4) Supplierswouldincreasethequantitysoldinordertomakeup for<br />
thetaxespaidto thegovernment<br />
(8) Whichtax is likelyto altermost the patternof consumerchoiceamong<br />
variousproducts?<br />
1) a generalsalestax<br />
2) a personalincometax<br />
3) a specificexcisetax<br />
4) a businessprofitstax<br />
(9) A government budgetdeficitexists<br />
1) whenevertaxesarereduced<br />
2) wheneverthenationaldebtis decreasing<br />
3) whenevergovernment expenditures areincreased<br />
4) whentotalgovernment spendingexceedsrevenues<br />
(10)Themaximumgrossnationalproducta nationcanproducein anyoneyearis<br />
setby<br />
1) itsnaturalresources<br />
2) itsproductive resources<br />
3) theamountof moneypeoplehaveto spend<br />
4) demandforgoodsandservicesby families<br />
(11)Whichoneof thefollowingwouldusuallyreduceconsumerspending<br />
1) A declinein consumerincomes<br />
2) A reductionin personalincometaxrates<br />
3) An expectation thatpriceswillsoonrise<br />
4) Increasedgovernment paymentsto individuals<br />
(12)Whencommercial banksincreasetheirloansto businesses andconsumers, the<br />
resultis<br />
1) a decreasein thespendingpowerof consumersandbusinesses<br />
2) an increasein government controlovertheeconomy<br />
-<br />
3) an increasein the banks’excessreserves<br />
4) an increasein the nation’smoneysupply
(13)If yourannualmoneyIncomerIses50%whilepricesof the thingsyou buy<br />
riseby 100%,thenyour<br />
1) realIncomeisunaffected<br />
2) moneyIncomehasfallen<br />
3) realIncomehasfallen<br />
4) realIncomehasrisen<br />
(14)Oneof thereasonsa government mightreducetaxesis to<br />
1) slowdowntherateof inflation<br />
2) slowdowntherapidrisein interestrates<br />
3) increaseconsumerspendingandstimulatetheeconomy<br />
4) helpfinancespaceexploration andtripsto themoon<br />
(15)Whentheeconomybeginsa rapiddownturn,thepartof totalspendingthat<br />
changesby thelargestpercentis<br />
1) businesspendingon factories, machinery, andinventories<br />
2) stateandlocalgovernment spendingon allactivities<br />
3) spendingby familieson consumergoodsandservices<br />
4) businesspendingon wagesandsalaries<br />
(16)Iffromtimeto timetotalspendingfallsshortof productive capacity,the<br />
rateof growthof theeconomyovera longperiodwillbe<br />
1) higherbecauseproduction willbe concentrated on necessarygoods<br />
ratherthanluxuries<br />
2) lowerbecauseof a heavierelianceon therawmaterialsof<br />
foreigncountries<br />
3) higherbecauseinefficient plants,equipment, andlaborno longer<br />
needbe employed<br />
4) lowerbecausesomeproductive resourceswillnotbe fully<br />
employed<br />
(17)Rapidlygrowingeconomiesalwayshave<br />
1) a slowrateof inflation<br />
2) a highrateof investment<br />
3) a lowrateof population growth<br />
4) a rapidrateof population growth<br />
(18)Whichof thefollowingstatements abouttariffsis true?<br />
1) Tariffsdecreasemploymentin domesticindustries<br />
whoseproducts<br />
theyprotect<br />
2) Tariffsbenefitsomegroupsat theexpenseof thenationalevel<br />
of living<br />
3) Tariffsincreasethemarketforourexportsby reducingour<br />
imports<br />
4) Tariffsencouragethegrowthof ourmostefficientindustries
(19)Thosewhobelievethatpeopleshouldbe taxedaccordingto theirabilityto<br />
paywouldbemostlikelyto favor<br />
1) an excisetax<br />
2) a generalsalestax<br />
3) a progressive incometax<br />
4) a residential propertytax<br />
(20)A nationalprogramof freehousingfortheagedpooris established.The<br />
programis paid for by an increasein the incometax. Theseactions<br />
promoteone economicgoal,butworkagainstanother.Specifically, these<br />
actionsarelikelyto<br />
1) reducefreedombutpromotequity<br />
2) reduc equitybutpromotefficiency<br />
3) reducestabilitybutpromotegrowth<br />
4) reducesecuritybutpromotefficiency<br />
(21)Whichof the followingmakesup themajorportionof themoneysupplyin<br />
theU.S.?<br />
1) FederalReservenotes<br />
2) Nationbanknotes<br />
3) Currencyandcoins<br />
4) Checkingaccounts<br />
(22)As a resultof theGreatDepressionof the1930’s,thegovernments of many<br />
nationsbeganto operateundertheassumption that<br />
1) economicstabilityrequiresgovernment action<br />
2) growthof monopoliesshouldbe controlled<br />
3) governments shouldinterferelessin economicmatters<br />
4) therateof industrialization shouldbe limitedby government<br />
action<br />
(23)In describingthe New Dealera,most historiansagreethat the federal<br />
government<br />
1) increasedit’scontrolovertheeconomyof theU.S.<br />
2) preservedstates’rightsas supremeoverfederalpowers<br />
3) restricted theactivities of laborunions<br />
4) preventedtheestablishment of socialwelfareprogramsby the<br />
states<br />
(24)Whichis likelyto be themosteffectiveuse of federalpowerto control<br />
inflation?<br />
1) increasing personalincometaxes<br />
2) decreasingFRAinterestrates<br />
3 repealingthesurtax<br />
4 increasing Medicarepayments
(25)Inflationin theU.S.hasgenerallyoccurreduringperiodswhen<br />
1) consumerpurchasing<br />
powerexceededavailablegoodsandservices<br />
2) bankshavechargedexcessiveinterestrates<br />
3) labordemandedtheunionshopagreement<br />
4) pricesandsalarieswereregulatedby thefederalgovernment<br />
(26)WhichIs a basicassumption of thegraduatedincometax?<br />
- -<br />
-<br />
1) theabilityto payincreasesas wealthincreases<br />
2) eachwageearnershouldcontribute thesamepercentage of hisor<br />
herincome<br />
3) themiddleclassshouldbeartheburdenof financingthe<br />
government<br />
4) Citizenshouldpaythecostsof government servicesin<br />
proportion to theiruseof suchservices<br />
(27)An increasein percapitaincomewillmostlikelyresultfroman increase<br />
in<br />
1) thepopulation growthrate<br />
2) thenumberof importedgoods<br />
3) individual incometaxrates<br />
4) investments -incapitalgoods<br />
(28)In theU.S.,whichheadlinedescribesan eventthatwouldbe leastlikely<br />
to causean increasein theconsumerpriceindex?<br />
1) “BumperHarvestof Vegetables Expectedin California”<br />
2) “Thousands of TexasCattleSlaughtered WhenHarmfulPesticides<br />
AreFoundInTheirFeed”<br />
3) “FrostHitsOrangeGroveswithWorstFloridaWeatherEver”<br />
4) ‘U.S.ImposesOilEmbargoto ForceMiddleEastSettlement”<br />
(29)The basicpurposeof theConsumerPriceIndexis to providea measureof<br />
the<br />
1) Amountof goodsandservicesproducedannually<br />
2) valueof stocktrade dailyon theN.Y.StockExchange<br />
3) relativechangein thecostof living<br />
4) productivity rateof theaverageU.S.worker<br />
(30)Whatactionby the U.S.FederalReserveSystemwouldprobablyleadto an<br />
Increasein theamountofmoneyin circulation?<br />
1) restricting Installment buyingby consumers<br />
2) sellingGovernment securitiesin theopenmarket<br />
3) increasing therediscount ratechargedbanksbelongingto the<br />
FederalReserveSystem<br />
4) loweringthereserverequirements of bandsbelongingto the<br />
FederalReserveSystem
(31)WhenCongressauthorizes<br />
a reductionin theFederalincometaxrate,it is<br />
generallytryingto<br />
1) stabilizeprices<br />
2) balancetheFederalbudget<br />
3) increaseconsumerspending<br />
4) decreasedefensespending<br />
(32)In an attemp to relievea continuingproblemof unemployment, theFederal<br />
Government wouldbe mostlikelyto usethepolicyof<br />
1) grantingtax creditsto corporationsthat invest in new<br />
productive capacity<br />
2) reducingovernment spending<br />
3) increasing theinterestrateschargedby theFederalReserve<br />
Banks<br />
4) increasing taxeson personalincomes<br />
(33)If the U.S. were in the recessionstageof the businesscycle,which<br />
actionwouldtendto increasethetrendtowar depression<br />
1) curtailing newordersforgoods<br />
2) loweringinterestrates<br />
3) increasing government deficitspending<br />
4) reducingincometaxes20%<br />
(34)Duringa periodof recessionthe FederalReserveBoardcan stimulatethe<br />
economyby<br />
1) insistingthatallstatebanksjointheFederalReserveSystem<br />
2) loweringreserverequirements formemberbanksof theSystem<br />
3) insuringallloansmadeby memberbanksup to $15,000<br />
4) raisingtherediscount rateformemberbanks<br />
(35)“Grossnationalproductis increasing, pricesare steady,and thepercent<br />
of unemployed is increasing.”<br />
1) Technological unemployment is increasing<br />
2) Availability 0f creditis declining<br />
3) Moreforeigngoodsarebeingimported<br />
4) Moremoneyis beingspenton armaments<br />
(36)Whichsituationwillmost likelyoccurwhenthe economiconditionsin a<br />
nationchangefromrecessionto prosperity?<br />
1) a decreasein theincometaxrate<br />
2) a decreasein therateof unemployment<br />
3) a decreasein therateof inflation<br />
4) a decreasein averagepersonalincome<br />
(37)An economichangefromprosperityto recessionis likelyto be reflected<br />
mostaccurately in a state’sincomefrom<br />
1) salestaxes<br />
2) realestatetaxes<br />
3) customsduties<br />
4) inheritance taxes
(38)NewDeallegislation triedto overcometheGreatDepressionof the 1930’s<br />
by<br />
1) increasing taxes<br />
2) layingoffgovernment employees<br />
3) reducingthesupplyof money<br />
4) increasing spendingon publicprojects<br />
(39)Whichis a consequence of regressive taxessuchas propertytaxesandsales<br />
-<br />
taxes?<br />
1) thepoorbenefitat theexpenseof thewealthy<br />
2) middleIncomepeoplepaytheleasttax<br />
3) no onepaystaxeson necessities<br />
4) thewealthypaya smallerproportion of theirincomeas taxes<br />
thando thethepoor<br />
*(40)Ifa hightariffwereplacedon steelshippedintotheUnitedStates<br />
A) Thepriceof steelwouldgo down<br />
B) Foreigners wouldbuymoregoodsfromtheUnitedStates<br />
C) Americanreservesof ironorewouldlastlonger<br />
D) Thepriceof steelwouldgo up<br />
*(41)Thebestmeaningof “grossnationalproduct”is:<br />
A) Whattheprivatefirmsof a countryproduceduringoneyear<br />
B) Everything boughtandsoldformoneyin a countryduringoneyear<br />
C) Whata countryproducesthemostof duringoneyear<br />
D) Thetotalof everythingproducedin a countryduringoneyear<br />
*(42)Durjng a timeof fullemployment, if a citizenwantedto slowdownrising<br />
pricesin theUnitedStates,he shouldaskthegovernment to:<br />
A) Raisetaxes<br />
B) Increaseinvestment<br />
C) Makeloans<br />
D) Increasespending<br />
*(43)Ifwe wereimportingmostof ourtransistor radiosfromJapan,an increase<br />
in the tariffon all transistoradiosimportedintothe UnitedStates<br />
probablywould:<br />
A) Makesno differenceto us becausewe couldgettransistorradios<br />
fromothercountries<br />
B) Increasethetotalnumberof jobsin theeconomy<br />
C) Makeus paymorefortransistorradios<br />
D) Maketransistor radiosmoreimportantto us,becausewe would<br />
probablyhaveto getalongwithou them
*(44)Those whobelievethatpeopleshouldbe taxedaccordingto theirabilityto<br />
paywouldbe mostlikelyto favor:<br />
A) an excisetax<br />
B) a generalsalestax<br />
C) a progressive incometax<br />
D) a residential propertytax<br />
*(45)Oneof thereasonsa government mightreducetaxesis to:<br />
A) slowdowntherateof inflation<br />
B) slowdowntherapidrisein interestrates<br />
C) Helpfinancespaceexploration andtripsto themoon<br />
D) Increaseconsumerspendingandstimulatetheeconomy<br />
*(46)Which<br />
oneof thefollowingis likelyto causemorepeopleto be outof<br />
work?<br />
A) a decreaseIn taxes<br />
B) an increasein consumerspending<br />
C) a decreasein businesspending<br />
D) An increasein government spending<br />
*(47)Socjal<br />
securityIs bestdefinedas as:<br />
A) Healthplan<br />
B) Investment plan<br />
C) Typeof mortgage<br />
D) Retirement System<br />
*(48)InNewYorkStatemostof therevenueforeducationcomesfromwhich<br />
source?<br />
A) TheFederalGovernment<br />
B) ThesaleofMunicipalBonds<br />
C) StateandLocalTaxes<br />
0) A Lottery<br />
*(49)TheGrossNationalProduct(GNP)is generallyconsidered<br />
an Indicatorof a<br />
nation’seconomicwell-beingbecauseit:<br />
A) Measuresthetotaloutputof goodsandservices<br />
B) Includesonlythemostwidelyusedconsumergoodsandservices<br />
C) Increasesat thesamerateas securities averages<br />
0) Excludesexpenditures by FederalandStateGovernments.<br />
*(50)Oneof themainreasonsfortheincreasein socialsecuritypayroll<br />
deductions<br />
hasbeena sharprisein<br />
A prices<br />
B incometaxes<br />
C) thenumberof peopl employed<br />
D) thenumberof payrolldeductions
*(51)WhatIsthemajorcausefortheincreasein thenationaldebt?<br />
A) government waste<br />
B) deficitspending<br />
C) militaryexpenditures<br />
D) foreignaid<br />
*(52)Thevalueof theUnitedStatesdollardependsupon<br />
-- A) Howmuchgoldandsilverthegovernment owns<br />
B) Howmuchit coststo manufacture money<br />
C) Whatis happeningto priceson thestockmarket<br />
D) Howmuchyoucanbuywitha dollar<br />
*(53)Jftheamountof moneycirculating in theUnitedStatesis greatly<br />
Increasedat a timewhen thereis full employment,whatwouldbe most<br />
likelyto happen?<br />
A) Thepricesof manygoodsandserviceswouldrise<br />
B) We wouldallbe betteroffbecausewe couldbuymore<br />
C) Theinterestrateson loanswouldimmediately increase<br />
D) Businesses wouldtryto slowdownproduction<br />
*(54)Thebestmeasureof economicgrowthin a countryis thechangein:<br />
A) Theamountofmoneyincirculation<br />
B) Thenumberof automobiles produced<br />
C) Thesizeof thenationaldebt<br />
0) Theamountof goodsandservicesproduced<br />
*(55)Thefinalresultof a largedecreaseingovernment spendingfornational<br />
defensewouldprobablybe<br />
A) Muchunemployment in nondefense industries<br />
B) Increasedproduction of nondefense goods<br />
C) An overalleconomicboomin thenation<br />
0) An increasein priceswithinthenation<br />
*(56)Inflation<br />
canbe definedas a periodof:<br />
A Increasing unemployment<br />
B Shortageof money<br />
C) Risingprices<br />
0) Failingbanks<br />
*(57)Themaindisadvantage of a salestaxis thatit<br />
A) Primarilybenefitstoreowners<br />
B) Represents revenuethatis immediately returnedto theFederal<br />
Government<br />
C) Mostgreatlyburdenslower-income people<br />
0) Isusedprimarilyto payforsalariesof government.officials
*(58)TheFederalReserveSystemdirectlyInfluences theUnitedSlateseconomyby<br />
causingchangesIn<br />
A) Theamountof Federalincometaxescollected<br />
B Thesizeof theFederalbudget<br />
C Thesupplyof moneyandcredit<br />
D) Wagesandprices<br />
*(59)Toprotectdomesticindustries fromforeigncompetition, theUnitedStates<br />
Government may:<br />
A) Levytariffs<br />
B) REgulateinterstate commerce<br />
C) Levyexcisetaxes<br />
D) Limitexports<br />
*(60)Whichmostdirectlyreportsan increaseor a decreasein thecostof living<br />
in theUnitedStates?<br />
A) GrossNationalProduct<br />
B) ConsumerPriceIndex<br />
C) DowJonesIndustrial Average<br />
D) UnitedStatesBudgetReport<br />
*(61)Whjch wouldmostlikelyresultif theFederalGovernment wereto levya tax<br />
of onedollaron everypairof shoessold?<br />
TAXTABLE<br />
A) Consumerswouldpaya higherpriceforshoes<br />
B) Supplierswouldattempto increasethenumberof pairssoldin<br />
orderto offsetthetaxespaidto thegovernment<br />
C) Consumerswouldpay a lowerpriceper pairand supplierswould<br />
thusmakesmallerprofits<br />
D) Supplierswouldreducethecostof theshoes<br />
INCOME TAXPERCENTAGE RATE<br />
$O-3,000 0<br />
3,000-8,000 10<br />
8,001-14,000 20<br />
14,001-20,000 25<br />
(62)Thetaxshownin thetableis bestdescribedas a:<br />
A) graduatedincometax<br />
B) negativeincometax<br />
C) proportional incometax<br />
D) regressive Incometax<br />
(63)Salestaxesandexcisetaxeson gasolineandcigarettes areexamplesof<br />
A) regressive taxation<br />
B) Progressive taxation<br />
C) deficitspending<br />
0) paritypayments
*(64)Ifwe wantedto findoutwhetheran increaseinwagesovera periodof time<br />
represented an actualincreasein livingstandards, we shouldlookat what<br />
hashappenedto:<br />
A) Grossnationalproduct<br />
B) Consumerprices<br />
C) Thestockmarket<br />
D) Government spending<br />
*(65)Local governments spendmostof themoneytheytakein for:<br />
A) Fireandpoliceprotection<br />
B) Streetsandhighways<br />
C) Parksandrecreation<br />
D) Education<br />
*(66)Onepossiblecauseof inflationisthat:<br />
A) Morepeople‘areoutof workthanbefore<br />
B) Peoplearetryingto spendmoneyfasterthangoodsandservices<br />
arebeingproduced<br />
C) Manygoodsandservicesarebeingproduced,butpeoplearenot<br />
buyingthem<br />
D) Thedollarbuysmoregoodsandservicesthanat anyothertime<br />
*(67)Ifpractically allourworkershavejobsandourindustries areoperating<br />
at fullcapacity,butwe wantto increasethe productionof houses,what<br />
mustwe do?<br />
A Decreasetheproduction of someothergoods<br />
B Putmoremoneyintocirculation<br />
C) Getpeopleinterested in sellingtheirhouses<br />
D) Importbuildingmaterialfromforeigncountries
1) thepatternof growthor decline<br />
In realGNP<br />
2) a statisticshowingchangesin<br />
pricesof selectedgoodsand<br />
services<br />
3) a severeandpersistent decline<br />
Ineconomicactivity<br />
4) thevalueof allgoodsandservices<br />
producedandsoldina year<br />
5) theaverageinmoneythateach<br />
personreceivesforwork<br />
6) a shorttermdeclinein economic<br />
activity<br />
MATCHING<br />
7) incomemeasuredin termsof the<br />
goodsandservicesonemaypurchase<br />
a. depression<br />
b. GrossNationalProduct<br />
c. ConsumerPriceIndex<br />
d. BusinessCycle<br />
e. RealWages<br />
f. PerCapitaIncome<br />
g. recession
MATCHING<br />
1) an Itemof value,stocks,bonds,land,<br />
etc.<br />
2) a methodof exchangeinwhichonegood<br />
or serviceis tradedforanother<br />
3) moneyor propertyusedto producemore<br />
goodsor services<br />
4) government agencythatinsuresbank<br />
deposits<br />
5) theCentralbankingsystemof the<br />
UnitedStates<br />
6) anyobjectthatis usedas a mediumof<br />
exchange<br />
7) a debtor a claimagainstan individual<br />
or a corporation<br />
a. FederalReserveSystem<br />
b. F.D.I.C.<br />
c. barter<br />
d. money<br />
e. capital<br />
f. asset<br />
g. liability
UNIT iii- Essay Test Questions<br />
1. Gross national product (GNP) is an important indicator of the<br />
relative health of a nation’s economy:<br />
—Explain what is measured by GNP.<br />
—What kinds of goods and services are not measured by GNP?<br />
—What are the consequences of a natioflnot increasing its GNP?<br />
-Explain two ways the U.S. might increase its real GNP<br />
over the next ten years.<br />
2. Economic indicators help economist<br />
to make predictions about the<br />
future:<br />
-<br />
—List and explain the purpose of two economic indicators.<br />
-What is the difference between a recession and a depression?<br />
-How does the unemployment rate help the government to make<br />
economic decisions?<br />
—Is the published unemployment rate always accurate? Explain.<br />
-Why do unemployment rates vary from state to State or region<br />
to region in the U.S.?<br />
3. Money is a fundamental part of a capitalist system:<br />
-What is money?<br />
-What is money reol]y worth?<br />
-List 10 items that have been or could be used as money.<br />
4. Benjamin Franklin once commented: “these are only two things one can<br />
be certain of in life, death and taxes.”<br />
—What is a tax?<br />
-Explain the difference between a progressive and a regressive<br />
tax. Give examples of each.<br />
5. List and explain three areas of controversy surrounding taxes.<br />
6. Economic conditionsin the United States are affected by many<br />
factors such as:<br />
-Government budget deficits<br />
-Dependence on imported fuels<br />
—Government taxation policies<br />
—Competition fromforeign manufacutrers<br />
-Military spending<br />
—Individual or family purchasing power<br />
Choose three factors from the list above and explain how each has a<br />
specific effect on the United States economy and on the lives of<br />
individualsor fami1i s.
7. Oftenan actiontakento solve some problemor satisfy.someneed<br />
-resultsin a new and unforeseenproblem.<br />
(a) Selectthreeof the actions. bri9iT fo<br />
For each one seh?cted,<br />
describe its intendedpurposeand one unforeseenconsequence<br />
—<br />
that developed.<br />
• -UnitedStatesembargoof Iranianoil.<br />
-Enactmentof an incometax law.<br />
• -Passageof the <strong>Social</strong>SecurityAct.<br />
-Establishmentof the forty-hourwork week.<br />
-Establishmentof strictFederalenvironmentalcontrols.,<br />
(b) Selectthreeof the proposalslistedbelow. For each one<br />
selected,describeone problemit is designedto solve.<br />
Show how an Ti unforesI problemmay developas a consequence<br />
of enactingthe proposal.<br />
•<br />
•<br />
Proposals<br />
-Reductionof propertytaxes<br />
-<strong>Social</strong>izedmedicine<br />
—Ban on sellingarms to Africannations<br />
-Tuitiontax creditsfor private-schoolstudents<br />
—Tax on gas-guzzlingcars<br />
-Repealof the <strong>Social</strong>SecurityAct<br />
8. The economyof the UnitedStateshas been affectedby many actionsin<br />
history. SeveralsDch actionsarelisted below.<br />
EconomicActions<br />
—Implementationof AlexanderHamilton’sfinancialprogram- 1790’s<br />
—Inventionof the cottongin - 1790’s<br />
—Buildingof the Erie Canal - 1820’s<br />
—Passageof the ShermanAntitrustAct - 1890<br />
-Establishmentof New Deal programsby FranklinRoosevelt- 1930’s<br />
-Deregulatthon of some UnitedStates industries- 1970’s<br />
Choosethreeof the economicactionslistedabove and for each one<br />
chosen: •<br />
-Explainthe purposeof the action.<br />
-Discussan impactof the actionon the UnitedStateseconomy.
IV. United States and the World Economy<br />
: Skills<br />
Page 80<br />
(1) Geography affects potential creativity and production<br />
(2) World bank<br />
(3) European economic community<br />
(4) Concept of protectionism as related to world history<br />
(5) Today’s world is economically interdependent<br />
(6) Our foreign policy depends on our economic well—being<br />
(7) Foreign policy is a result of our economic needs<br />
(8) Economic strength gives a country power in international<br />
relations<br />
(9) History of economic development of Western Civilization<br />
(10) Traditional values can affect the economy of a<br />
nation. (Ex. — Protestant work ethic)<br />
(11) Instances of economic reform in world history.<br />
(12) Economic conflict can cause social unstability<br />
(ax. — apartheid)<br />
(13) International was results from economic causes<br />
(14) Religion can hurt economic progress<br />
(15) U.S. economic aid<br />
(16) World economic map and geographical features<br />
(17) Protectionism, etc.
IV. U.S. and World Economy<br />
Knowledge Obj<br />
Page 81<br />
(1) The interdependence of the world economies today<br />
(2) Major terms related to types of economic systems<br />
(3) Command economy compare to mixed economy<br />
(4) Describe the effects of scarcity, economic choice,<br />
and incentives on efficiency and equity<br />
(5) Analyze market, command and mixed economic systems<br />
by ownership of resources<br />
(6) Define terms related to international trade<br />
(7) Explain why countries trade with each other<br />
(8) List major imports and exports of the U.S.<br />
(9) Name and describe the different systems for valuing<br />
one country’s money over another<br />
(10) Why should we restrict World Trade<br />
(11) Why should we not restrict World Trade<br />
(12) Define terms related to less—developed countries<br />
(13) Identify conditions in the countries considered to be<br />
less—developed<br />
(14) Identify countries that are less—developed<br />
(15) Effects of poverty in less—developed countries<br />
(16) Explain the barriers to economics development in<br />
less—developed countries<br />
(17) Why does the U.S. give foreign aid.<br />
Skills Objectives<br />
(1) Use all world history skills included in the prior<br />
grade skills objectives 7—li.
Unit Fo — The U.S. and the World Economy<br />
I. Reasons for International Trade<br />
(A) Absolute advantage<br />
(B) Law of comparative advantage<br />
Page 82<br />
(C) The importance of exports and imports in the U.S.<br />
economy<br />
(D) Benefits and problems of international trade<br />
(1) Free trade<br />
(2) Protectionism<br />
(3) Other types of trade barriers<br />
(4) Services as export goods<br />
(E) Balance of Payments<br />
(1) Balance of trade surpluses and deficits<br />
(2) Capital account balance<br />
(3) Payments and deficits and surpluses<br />
(4) Supply and demand of foreign exchange and the<br />
determination of exchange rateè<br />
II. Characteristics of Alternative Economic Systems<br />
(A) Ownership of resources and means of production<br />
(B) Allocation of goods and services<br />
(C) The role of government in the economy<br />
(D) The role of consumers in the economy<br />
III. Economic Problems of Developing Nations<br />
(A) Poverty in the developing nations<br />
(1) Effects on the people<br />
(2) Effects on political stability<br />
(3) Effects on the developed nations
(B) Causes for Lack of Development<br />
(1) Scarce resources<br />
(2) Lack of human capital<br />
(3) Lack of investment — capital<br />
Page 83<br />
(C) Relations between the developed nations and the<br />
less developed nations<br />
(1) Investment from the private sector of developed<br />
nations<br />
(2) Aid from developed nations<br />
(3) Aid from international agencies<br />
IV. Economies of population, growth, resource scarcity, and<br />
economic growth<br />
(A) Growth of population<br />
(B) Use of the Earth’s resources<br />
(C) Ability of people to control the pollution, resulting<br />
from humans<br />
(D) The development of science and technology to the<br />
economic and enviromental problems faced by all<br />
people
Unit IV — Project Ideas<br />
Page 84<br />
(1) Identify enviromental problems in your area, such as<br />
water or air pollution. How do these problems affect<br />
your way of life? How do they affect the economy of<br />
your area? How are you personally affected? What do<br />
you think ought to be done about the problems? Who<br />
would pay the costs?<br />
(2) List the things that would help to create a higher<br />
quality of life for you, your family, and your community.<br />
Explain each one. Which ones can be called “economic”?<br />
Which ones can be measured objectively? How?<br />
(3) Interview a real—estate agent to learn about the<br />
environmental factors that affect property values . Which<br />
factors tend to increase property values.? Which ones<br />
tend to lower property values? What should be done about<br />
the things that have a negative effect? Who should bear<br />
the costs?<br />
(4) To reduce pollution<br />
, sacrifices must be made. What<br />
sacrifices would you be willing to make? Consider all<br />
forms of pollution —— air, water, soil, noise, solid<br />
waste. For example, would you be willing to pay more<br />
taxes to clean up the environment? Would you be willing<br />
to change some of your own habits and practices?<br />
(Example:Do less driving to help reduce air pollution.)<br />
(5) Nake a study of your own state’s pollution control<br />
. measures Evaluate each measure. How effective is it?<br />
Who pays for it? How does it compare with similar federal<br />
government measures? What should be the responsibility of<br />
your state in controlling pollution? Of the federal<br />
government?
Page 85<br />
(6) Make a list of all the ways in which you use energy ,<br />
directly or indirectly. Gasoline for a car is one<br />
obvious, example, but try to find many others in your<br />
home, school, or work place. What are the different<br />
types of energy that you use? Who supplies them? At<br />
what cost? How would you be affected by changes in<br />
energy costs? Which of your demands for energy are<br />
elastic? Inelastic<br />
? How can you help to conseve energy.<br />
(7) Write a paper on nuclear energy , giving the arguments<br />
for and against it. In addition to reading about the<br />
Three—Mile Island accident and the disaster at Chernobyl<br />
in the USSR, obtain information from power companies and<br />
others who favor nuclear energy. Draw your own conclusion,<br />
giving reasons for your position.<br />
(8) “By speeding up our industrial development we can create<br />
jobs for the unemployed and for young people now entering<br />
the labor force.” “Yes, but industrial development causes<br />
environmental problems.<br />
” Discuss these statements. Is<br />
there a ‘trade—off<br />
” implied here? Can we have industrial<br />
development without causing pollution?<br />
(9) Make a survey of the products that are commonly found in<br />
your home, including such food items as coffee, tea, and<br />
bananas. Which ones are imports ? If trade barriers are<br />
placed on these items, how will your own standard of<br />
living be affected?<br />
(10) Try to find out how your own community is affected by<br />
international trade . Do some of the business firms and<br />
farms in your region sell their goods to other countries?
Page 86<br />
Do any of the businesses rely upon imports? How would<br />
these enterprises be affected by trade barriers ?<br />
(11) To illustrate the principle of comparative advantage<br />
,<br />
list the things that you or your family pay others to<br />
do, even though you could do them better yourself.<br />
Explain why you do this. How does this help to explain<br />
why international trade takes place?<br />
(12) Write a paper on the issue of free trade vs. protectionism<br />
.<br />
To get both sides of the question, you might interview<br />
people who are involved. For example, the owner of shoe<br />
stores who sells foreign—made shoes will support free<br />
trade; a union leader who fears that American workers<br />
are losing their jobs when we buy imported goods will<br />
favor protectionist measures. You can also use books<br />
and articles. For example, see Issue 14, “Should the<br />
United States Raise Tariffs and Impose Quotas in Order<br />
to Protect Domestic Production and Employment” in Taking<br />
Sides:Clashing Views on Controversial Economic Issues by<br />
Thomas Swartz and Frank Bonello (Guilford, Conn. :The<br />
Dushkin Publishing Group, Inc., 1982).<br />
(13) “The United States should not be aiding other countries<br />
,<br />
because we have plenty of problems here at home.”<br />
Discuss this statement. Does the United States derive<br />
any benefit from foreign aid? If so, how? What forms<br />
of aid would be most effective? Why?<br />
(14) Plan an imaginary trip to several foreign countries<br />
that you would like to visit. What are the exchange<br />
rates of their currencies<br />
? Make a table that shows how<br />
much of each currency you could get for a U.S. dollar,
Page 87<br />
and how much U.S. currency a unit of each currency<br />
would buy. Such a table would be very useful if you<br />
actually made the trip, even though exchange rates<br />
can change daily. (For an additional challenge,<br />
make tables showing the value of each foreign currency<br />
in relation to every other currency on your list.)<br />
(15) Do research to learn how foreign trade is important to<br />
American American farmers . For example, read Chapter<br />
29, “Foreign Trade and Agriculture”, in the book<br />
<strong>Economics</strong>:Applications to Agriculture and. Agribusiness<br />
by E.P. Roy, F. L. Corty, and T. D. Sullivan (Danville,<br />
Illinois:The Interstate Publishers and Printers, 1981).<br />
You might also use such specialized books as The<br />
<strong>Economics</strong> of World Grain Trade by T. Grennes, P.R.<br />
Johnson, and M. Thursby (New York:Praeger, 1977) to<br />
obtain specific information.<br />
(16) Write a brief review of the book U.S. Trade Policies<br />
in a Changing World Economy , edited by Robert M. Stern<br />
(Cambridge, Mass.:The MIT Press, 1987).
3 Innovation’<br />
tPOl TIrCONOMiCs :,.. .. ,<br />
MARCH15. 1985. 11<br />
The men who wrote the U.S. Constitution gave<br />
Congress the power to encourage invrntive.<br />
non. “Innovation Is responsible for at least<br />
one third of all economic growth.” says a well.<br />
known economist.<br />
n a Detroit auto• • way is Through what’s•<br />
factory, the sleek, called “the multiplier<br />
I metallic arm of a effect” — a successful<br />
‘. robot sprays the fi-’ innovation’s spowning<br />
.“• nal coat of paint on a .:. of other innovations.<br />
new Ford.Within sever-’ When chemists found. ‘ Innovations . such as this robotweld.:spur economicgrowth b<br />
al years, say Borneex-:’ new ways to process ;•,; : boosting th. quantity and quality of lb. nation’s output. Such<br />
‘<br />
:. ports, cousins of SIdIcut this costs<br />
ro-.’ crude petroleum in the andniak. productsmoroailordabIe.’ •.. ‘<br />
bot will be doing the 1950s,for example sci- sue patents Patents en- 1950sand 1960s,Botkin<br />
,r laundry, cleaning, and entists were. able to ... courage innovation by “says, many U.S. corj, -,-.<br />
cooking in households make better fuelc pbs- protecting inventors’ rations grew “too large ‘<br />
. throughout the U S tics fibers, and artih- exclusive rights to their to be innovative “ “But . U<br />
:‘“. ‘<br />
When that happens. the, ‘cia1 rubber. ‘ inventions. ‘now,” he - says,<br />
household robot will Innovations also spur In modern times, U S companies are asking .<br />
.‘: earn its place in the growth by making prod- ingenuity has been “:‘How can ewe’recaptui<br />
long line of innovations ucts less costly — and amazingly .’ the productive. spirit of innovation<br />
:‘that’ are constantly. available . to more peo- “Since 1945,” Botkin” we see in smaller corn-j<br />
changing the way we pie. “Thirty yeci s ago, notes, “we’ve been the panies?’ “ Companies<br />
live, work, think, , and- a wristwatch was noth- primary source of inno-. SUCh as 3M.and IBM.:j ,’.’r:<br />
•<br />
play.<br />
: ing more than an cx- vation in the world.” ‘ “ have begun grouping ;“;i’<br />
s”’ Innovation is the way • pensive piece of jewel- Still, some experts” their employees into<br />
-‘ new ideas,’products, ry.” notes Dr. Vasu fear that we may be small work tearns,giv- !’<br />
and techniques• enter Ramanujam, professor losing . our creative- ing them more freedom.--”<br />
the marketplace. Of the of management policy . edge. The number of Others, like Digital<br />
thousands ‘of people at Cleveband’s Case I ,patents filed by U.S. Equipment’ Corpora- ;. I<br />
who try to build.”a bet- Western Reserve Uni- ‘<br />
ventors dropped from ‘,‘.,tion, now ‘offer big bo-..’<br />
•‘:: ter mousetrap,” only a versity. “Now it’s a almost 56.000in 1971to:’;nuses to employees<br />
•few succeed. Without functional timekeeper. less than 33.000in 1983. who come up with newS,.<br />
these tinkerers, though,,, sold in department’ Funds for research and . ideas. Probably the big- ‘<br />
.<br />
“<br />
the free-enterprise sys-j’ .stores. ”<br />
development, which gest trend, Botkinsays,<br />
• tern-wouldstumble to a amounted to 3 percent is the growing partner-<br />
halt. “Historically, I’d RESEARCHTE1’MS of the nation’s income i;; ship between industry :‘ ‘<br />
estimate that innova- Beforethe 1900s,most 20 years ago, have ;.‘. and research universi<br />
hon Is responsible for innovations were pro- dipped to less than 2 7 ties At Carnegie-Melat<br />
least one third of all duced by individual in- percent Ion University in Pitts<br />
economicgrowth “says ventors who worked ‘ burgh, for instance, a<br />
Barry P Bosworth, an alone Today most are FOREIGN * robotics institute is now<br />
economist at the Brook- created by teams of sci- COMPETiTION 1providing research to -<br />
;‘ii.ings Institution ‘in .“ enlists and engineers. Meanwhile, Japan and ‘. .more’than 20 diifexent.<br />
Washington, DC working together in West Germany have companies<br />
Andin today’s high- government, industry, been gaining ground..’. Botkin, among ‘oth<br />
tech economy. experts ‘and university labs. “if we keep lagging be- :“.rs, is hopeful. “For ,<br />
say, Innovation may In the U S. innova- hind our competitors,” years, we ye been slipplay<br />
an even bigger tion has long been says Bosworth, “our ping behind in producrole<br />
Says James Bot- viewed as a national balance of trade will’ tivity to Japan and to<br />
- kin, author of the book resource. To “promote ‘ continue to falter” as : low-wage countries In . ..<br />
The Innovators: ii you, the progress of science demand for U.S.’ goods ;‘. the Far East. Our one : ‘‘<br />
‘ can’t Innovate, you elm-. and the useful arts,” declines. •‘coniparative advantage<br />
ply can’t compete.” the writers of the U.S.. Fortunately, U.S. in- is our ”. brainpower.<br />
How does innovation ;‘Constitution gave Con-; dustry has begun to •.•.<br />
spur the economy? Ono gress the power to is- quicken its pace. In the • ‘.. —<br />
I<br />
)<br />
4)*<br />
_________<br />
‘ ‘
Competition<br />
Despite •xcesses. rivalries between bust<br />
messes have served the nation well. Vigorous<br />
competition, says one economist, makes the<br />
market “a powerful Instrument for efficiency<br />
and for serving consumers’ needs.”<br />
Economic com<br />
petition is inescapable<br />
in<br />
America. A su<br />
permarket might get<br />
your business because<br />
it’s closer 1 cleaner, or<br />
cheaper, or has fresher<br />
vegetables than its<br />
competitor. Inside the<br />
store, there may be 40<br />
• different breakfast ce<br />
reals, 15 brands of<br />
• soda, 10 kinds of cat<br />
food — all competing<br />
for your dollars. Every<br />
time you buy some<br />
thing, you make one<br />
competitor a winner.<br />
People have a limited<br />
amount of time and<br />
money. and within<br />
those limits they make<br />
choices. Competition<br />
provides those choices.<br />
“In theory, the more<br />
choices there are, the<br />
better off the consumer<br />
is,” says George<br />
Saunders, an econo<br />
mist in Washington,<br />
DC.“Ifyou get the max<br />
imum number of busi<br />
nesses competing on an -<br />
equal footing, consum<br />
[ erg will end up with the<br />
best deal.”<br />
The best deal usually<br />
results from each busi<br />
ness trying to better its<br />
rivals, he says. ‘With<br />
equal competition,<br />
businesses have to stay<br />
on their toes. They all<br />
have to come up with<br />
Innovative ways to win<br />
the consumer.”<br />
1 James Christian, an<br />
economist in Chicago,<br />
IL, recalls the Apple<br />
J Corp.’s first desktop<br />
I’<br />
SPECIAL RtPORT I ECONOMICS<br />
computer. “They start<br />
ed in a garage, and<br />
suddenly there were<br />
100different companies’<br />
following their lead.<br />
IBM would probably<br />
still be selling the same<br />
(large] mainframe com<br />
puter if Apple hadn’t<br />
pushed them.”<br />
Companies compete<br />
in several ways. Some<br />
compete on quality —<br />
providing, say, the<br />
best-made boots in a<br />
particular price range.<br />
Somecompete on price.<br />
offering the same boots<br />
others offer, but for less<br />
money. Some stand out<br />
with their service, sell<br />
ing the same boots oth<br />
ers do for the same<br />
price, but delivering<br />
them to your door. Fi-•<br />
nally, some manufac<br />
hirers try to win on im<br />
age, creating ads to<br />
make you think their<br />
boots are best because<br />
your favorite movie star<br />
wears them.<br />
PROFITMOrIvv<br />
Of course, no compa<br />
ny will compete unless<br />
it can make a profit —<br />
the difference between<br />
a company’s costs and<br />
the prices it charges.<br />
Consumers try to get<br />
the best goods for the<br />
cheapest price. Busi<br />
nesses try to get the<br />
most money for the<br />
least expense.<br />
Sauders notes. how<br />
ever, that “there are im<br />
perfections in the mar<br />
ketplace. There’s not a<br />
large number of corn-<br />
22<br />
petitors in every mar<br />
ket, so there’s not cxlways<br />
a lot of choice.”<br />
For example, some<br />
towns may have lust<br />
one record store. Until<br />
recently, most Ameri<br />
cans could make a<br />
long-distance phone<br />
call only through the<br />
AT&Tsystem.<br />
Many government<br />
regulations dampen<br />
competition, too. “Gov<br />
ernment tends to keep<br />
risky things from hap<br />
pening,” Christian<br />
says. “Youend up with<br />
a safe, but sedate, eco<br />
nomic environment<br />
where there is less<br />
choice.” For example,<br />
the Reagan Administra<br />
tion has persuaded Ja<br />
pan to limit the number<br />
of cars it sells in the<br />
U.S. The Administra<br />
tion hoped that such<br />
“voluntary” limits<br />
would reduce the risk of<br />
failure among less suc<br />
cessful U.S. carmakers.<br />
DEREGULATION<br />
Generally, however,<br />
President Reagan has<br />
lavored “deregula<br />
tion” — reducing the<br />
government’s role In<br />
the marketplace to fos<br />
ter competition. Dereg<br />
ulation has been suc<br />
cessful in the airline<br />
industry, Christian<br />
says. Consumers got<br />
.<br />
Ever purchas. Is a vets on hi euSeo . of a co ap .tit1oxa<br />
bitween products. Sup.rxia:h.ta don’t stockbrands that hay.<br />
lost that vets too many tI .s.<br />
•<br />
0<br />
2<br />
Ix a<br />
more flights to more cit-,<br />
ies at cheaper prices.<br />
But he says that dereg<br />
ulation has not worked<br />
well with the phone<br />
system, which became<br />
chaotic when phone<br />
services were opened to<br />
competition last year.<br />
President Reagan<br />
does not want full de<br />
regulation. Many gov<br />
ernment rules protect<br />
consumers from the ex<br />
cesses of competition. -<br />
The truth in advertising’<br />
laws prevent compa<br />
nies from lying about<br />
their products. Laws<br />
that forced carmakers.<br />
to limit exhaust fumes<br />
have made the nation’s<br />
air safer. Anti-trust<br />
laws prevent cornpeti-.<br />
tors from agreeing on<br />
the size of price hikes.<br />
The need for these<br />
rules, Saunders says,<br />
shows ihat a competi<br />
tive economy is not<br />
flawless. “It’s all sup<br />
posed to workon paper,<br />
but in practice it rarely<br />
does.”<br />
Yet, by and large,<br />
competition in the mar<br />
ketplace has served the<br />
nation well. “The mar<br />
ket, when competition<br />
Is vigorous,”says econ<br />
omist Leonard Silk, is<br />
a powerful instrument<br />
for efficiency and for<br />
serving consumers<br />
needs.” — Philip Sudo
MARCH15, 1985. 7<br />
- ‘!: SPECIAL REPORT, ECONOMICS .<br />
3 KEYS TO U.S. ENTERPRISE<br />
1 Incentives<br />
Tb. health .1 our free enterprise system d.<br />
pends on the proper mix of incentives, corn<br />
p.tltlon. and Innovation. Each of these forces<br />
works In a different way to keep the economy<br />
vlbranL This special report explains bow.<br />
In 1976.Steven Jobs<br />
and Stephen Woz<br />
niak decided to<br />
build the world’s<br />
best computer. For six<br />
months, they worked<br />
day and night in a ga<br />
rage. perfecting their<br />
dream-machine. Then<br />
• they sold Wozniak’s<br />
Volkswagen van for<br />
$1,350 and used the<br />
money to start Apple<br />
Computer Corporation.<br />
Today. Apple is one<br />
of the largest compa<br />
nies in the U.S. Jobs<br />
and Wozniak, barely in<br />
their 30s. are each<br />
worth over $100million.<br />
Thestory illustrates a<br />
basic lesson of U.S.free<br />
enterprise. If you have<br />
talent and a good<br />
idea, and if you‘re<br />
willing to sacrifice, you<br />
can chart your own<br />
course to success. Econ<br />
omists call the lure of<br />
success “incentive.” It’s<br />
what spurs people to<br />
work hard, invent new<br />
products, and risk their<br />
cash on dreams.<br />
All people who own<br />
businesses, for in<br />
stance, are motivated<br />
by the desire to earn a<br />
profit—the difference<br />
between a company’s<br />
costs and the prices it<br />
charges. The larger a<br />
company’s profits, the<br />
more it can pay its own<br />
ers, of course. But prof.<br />
Its are essential for a<br />
company’s growth, too.<br />
The reason, says Rn-<br />
•mon V. Reyes, a New<br />
York business consul<br />
tant, is that when a<br />
business makes a prof<br />
it, “it can buy more<br />
tools, hire more help.<br />
and invest in other new<br />
or growing companies.”<br />
Money isn’t the only<br />
incentive free enter<br />
prise offers.Just having<br />
a job, say psycholo<br />
gists, can satisfy a per<br />
son’sneed forapproval,<br />
self-respect, and pres<br />
tige. A job can also<br />
give a person a sense<br />
of belonging and finan<br />
cial security. For oth<br />
ers, like Jobs and Woz<br />
niak, a big lure is the<br />
freedom to work for<br />
themselves.<br />
CHANGING LURES<br />
What sort ofincentive<br />
motivates a person may<br />
depend on economic<br />
conditions during that<br />
person’s youth. During<br />
the 1950s and 1960s.for<br />
instance. Americans<br />
put job security at the<br />
top of their incentives<br />
list. “Having grown up<br />
during the Great De<br />
pression, they knew<br />
what it meant to be job<br />
less,” explains Barry P.<br />
Bosworth, a senior<br />
economist at the Brook<br />
ings Institution in<br />
Washington, DC. To<br />
day, though, more<br />
., 30, cbaii an of lb. board of Apple Cewput.t.<br />
co-founded lb. co pa y In 1977. WIth 4.500.rnploy.<br />
.a world.<br />
wide. App!. is on. of be nation’. Iwg.st corpoa’alions.<br />
Slev.rsP.Job<br />
Americans than ever<br />
are striking out on their<br />
own to become entre<br />
preneurs. people who<br />
run their own business.<br />
Last year alone, nearly<br />
700,000new businesses<br />
started up in the U.S.—<br />
almost five times the<br />
number in 1960. Of<br />
these, over one third<br />
were started by entre<br />
preneurs who are under<br />
30years old.<br />
Large corporations<br />
would like to capture<br />
some of that entrepre<br />
neurial energy. To do<br />
so. they’vebegun to of<br />
fer incentives beyond<br />
paychecks. To promote<br />
work and higher out<br />
put, for instance, some<br />
companies are giving<br />
their employees shares<br />
in the profits or chunks<br />
of company stock.<br />
On the national level,<br />
the Reagan Adxninistra<br />
lion has been trying to<br />
create more incentives<br />
to workhardand save.<br />
In 1981, President Rea<br />
gan couvu ced the U.S.<br />
Congress to pass the<br />
largest tax cuts in the<br />
‘•J ‘-<br />
64()<br />
nation’s history. The<br />
cuts were expected to<br />
save taxpayers $750bil<br />
lion by 1987.Supporters<br />
of the tax cuts hoped<br />
that allowing people to<br />
keep more of what they<br />
earned would encour<br />
age hard work and<br />
higher savings.<br />
RESISTING TAX<br />
IIICES<br />
To offset the govern<br />
ment’spressing need to<br />
borrow money, Con<br />
gress last year raised<br />
taxes by $50 billion.<br />
Some experts are push<br />
ing for more tax bikes.<br />
So far, President Rea<br />
gan has resisted their<br />
advice. “Every dollar<br />
the federal government<br />
does not take from us.”<br />
he told Congress last<br />
month, “will make our<br />
economy stronger, our<br />
lives more abundant.<br />
our futures more free.”<br />
The President’s support<br />
of incentives is another<br />
dramatic reminder of<br />
their central role in the<br />
free enterprise system.<br />
—Lee Kravitz
Handout15-1<br />
CASESTUDY:WHAT DOESCONSUMERPROTECTIONCOST?<br />
WhenGerald R. Ford was presidentof the United States,he said that<br />
governmentregulationmaycosttheaveragefamilyasmuchas$2,000ayearin<br />
higherprices.Thisfigureisonlybasedona• guesstimate”oftheextracoststo<br />
the consumer.It suggeststhat regulatorycosts are greater than most<br />
Americansthink.<br />
(Basedona statement byWilliamB. Mead, FederalRegulation:ThePriceYouPay.”Money,<br />
June1975,p.39.)<br />
Questions:<br />
1. Howdoesgovernmentregulationcostthe taxpayermoney?<br />
2. Doyouthink GeraldFordwasreferringto taxdollarswhenheestimated<br />
$2,000wasthe cost perfamilyfor regulation?<br />
3. Whatare someexamplesof goods and serviceswhich may havein<br />
creasedin pricebecauseof governmentregulation?<br />
4. Whataresomeof thebenefitsthatyouthinkconsumersobtainfromcon<br />
sumerprotectionlaws?<br />
5. Whyshouldconsumersbe concernedas to whetherthe extra costsof<br />
protectionare actuallyworth paying?Istherea differencebetweenthe<br />
short-termandlong-termeffects?<br />
6. Whywill individualconsumersmakedifferentjudgmentsabouttheworth<br />
of particulargovernmentregulations?
Handout15-2<br />
ISA SAFERLAWNMOWERWORTHTHEPRICE?<br />
How much Is safety worth to the consumer?<br />
Shouldallconsumerspayto makesureaproductIs<br />
reasonablysafe?Orshouldthosewhoarewillingto<br />
takea chance,or whoareunawareof the risks,be<br />
ableto buyacheaperbut hazardousproductwhen<br />
safermodelsareavailable?Thesearethe kindsof<br />
questionsbeingraisednowthattheU.S.Consumer<br />
ProductSafetyCommission(CPSC)hasbegunto<br />
developsafetystandardsfor thoseproductsknown<br />
to causea largenumberof injuries.Suchproducts<br />
include TV sets, book matches,swimmingpool<br />
slides,andpowerlawnmowers,amongothers.<br />
WhiletheCPSChasthetrnalwordonthecontent<br />
of the standards,muchof the preliminarydrafting<br />
has been done for the commissionby outside<br />
organizations.ConsumersUnion,underan agree<br />
mentwiththeCPSC,hasdrafteda proposedsafety<br />
standardfor powerlawnmowers.Predictably,the<br />
proposalhasbecomea matterof controversy.<br />
Thebasiccriticism heardfrom the industryand<br />
from at leastone Governmentagencyis that the<br />
cost of a lawn mower built to conform to CU’s<br />
proposedstandardwouldincreasecostsmorethan<br />
the gainsin safetywarrant.Sincethe contentionis<br />
one that will be heard time and again as the<br />
developmentof safety standards proceed, it’s<br />
worthexaminingclosely.<br />
Therearelittle harddataonthenumber,severity,<br />
andeconomicconsequencesof power-mowerIn<br />
juries.CU’sestimate,drawnfromthe bestavailable<br />
data,Includingstatisticscompiledby the National<br />
Electronic Injury Surveillance System, Is that<br />
161,000mower-relatedinjuries occur each year,<br />
Including60000that requiresomekindof hospital<br />
rnergency-roomtreatment.The Injuriesresult in<br />
3,500amputations;1,000casesa yearresultInthe<br />
lossof sri eye.<br />
Approximately68 per cent of the injuriesoccur<br />
whensomeonetouchesa movingmowerblade;20<br />
percentresultfromobjectsthrownbythe mowers;<br />
the remaining Injuries relate to electric shock,<br />
burns from fire and hot surfaces,and problems<br />
withthesteering,stability,brakes,anddrivetrainof<br />
riding mowers.<br />
The proposedrequirementscovera wide range<br />
of safetyproblemsassociatedwith lawn mowers.<br />
Theywould reducethe risk of injuryfrom thrown<br />
objects. They would require safeguardsagainst<br />
electricalshock,gasolinefires,and burnscaused<br />
by touchinga hot surface.Theywouldlimit noise.<br />
They would preventriding mowersfrom cutting<br />
grasswhenoperatedIn reverse,a causeof injuries<br />
to childrennot seenbythe operator.<br />
But by far the mostimportantproposalis aimed<br />
at preventingcontactwith the movingblade—the<br />
most frequentcauseof injury. That requirement<br />
callsfor a “deadman’control—scontrolthatstops<br />
the blade automaticallywheneverthe operator<br />
leavestheoperatingposition(toadjustthemower’s<br />
cuttingheight,for example,or to clearglassfroma<br />
cloggeddischargechute).<br />
Thepower-mowerindustry,speakingthroughthe<br />
Outdoor PowerEquipmentInstitute,objectsto a<br />
numberof theproposals.Itwantsno limitonnoise,<br />
since, it contends,noiseIsmoreadiscomforthana<br />
safety hazard.It advocatesless stringentshock,<br />
fire,andbum requirements. Itwantsridingmowers<br />
to continueto cut in reverse.AndIt wantsmanyof<br />
the requirementsto be voluntaryratherthan man<br />
datory....<br />
CU and the Industryagree that the proposed<br />
standardwouldincreasecosts—andweevenagree<br />
closelyIn our estimatesof the sizeof the increase.<br />
In the first year,the standardwould probablyadd
Handout153<br />
QUESTIONSON HANDOUT 15-2,<br />
“IS A SAFERLAWNMOWERWORTHTHEPRICE?”<br />
1. What is a primary issue in this controversyas stated in the first<br />
paragraph?<br />
2. Whydo somepeoplebelievethat presentfeaturesof powermowers<br />
shouldbe changed?<br />
3. Whataresomeof the recommendedchanges?<br />
4. Wouldyourfamilyallowyouto usea powerlawnmowerthat doesnot<br />
havethe recommendedsafetyfeatures?<br />
5. IfthechangesrecommendedbyConsumersUnionaremade,whatisthe<br />
estimatedimpacton the priceof mowers?<br />
6. BothConsumersUnionandthe powermowerindustryhavecompleted<br />
cost-benefitstudies.Thecost includesthe increasedcost of the lawn<br />
mowerdue to the additionalsafetymeasures.The benefitsare the<br />
saving of expensesassociatedwith injuries that occur with lawn<br />
mowersthat do not havethe additionalsafetyfeatures.Why is the<br />
benefitssidesodifficult to measure?<br />
7. WhatdoesConsumersUnionestimatewouldbethebenefitgainedfrom<br />
each dollar spent on safetyfeaturesfor lawn mowers?What is the<br />
OutdoorPowerEquipmentInstituteestimate?<br />
8. IfthestandardrecommendedbyConsumersUnionisuniformlyadopted<br />
for all newlawnmowers,whatarethe trade-otisto the consumer?<br />
9. Freedomand securityaretwopersonalas well as socialgoals.Some<br />
lawn-mowerbuyers are against the adoption of mandatorysafety<br />
measuresfor all lawn mowers.Theseconsumersbelievethey can<br />
operatemowerssafelywithoutgovernment-requiredsafetyfeaturesand<br />
theydo not wantto payanymorefor mowersthan theyhaveto. They<br />
alsothinktheyshouldbeableto buyonlythesafetyfeaturestheythink<br />
they need.Do theseconsumersplacemorepriorityon securityor on<br />
freedomwhentheypurchasepowermowers?Why?<br />
10. Other consumersbelievethe additional safetyfeatures should be<br />
required.Doesthis group seemto be more interestedin securityor<br />
freedomin its choiceof powermowers?Why?<br />
11. Do you believethe proposedsafetyregulationsfor power mowers<br />
shouldbe adopted?Whyor whynot?
approximately$40,or 32 percent,to the average<br />
retail price of a walk-behindpower mower and<br />
about$100.or 11percentto the averagepriceof a<br />
riding mower.Estimatedcost the first yearwould<br />
bebetween$270-millionand$380-million,depend<br />
ing on how manypowerlawn mowerswere pro<br />
duced.<br />
Becausebenefitsaresodifficult to calculate,CU<br />
couldgiveonlytheroughesteconomicguideto the<br />
costsandbenefitsof the standard.Ourreportsaid<br />
that,whenall mowersconformedto thestandard,it<br />
might cost anywherefrom 50 cents to $4.50for<br />
every$1reductionin the economiccostof injury.<br />
Accordingto the industryestimate,the standard<br />
wouldeventuallyreduceInjuriesby50percent,not<br />
75 per cent. But evenaccordingto the industry’s<br />
own estimatesof injurycosts,whichexcludepain<br />
and sufferingand other Intangibles,the industry<br />
calculatesCU’s standardwould cost $2.60 per<br />
dollar of injury when all mowersconformto the<br />
requirementsof the standard.<br />
A cost of more than $1 to reduceexpensesof<br />
injury by $1 is not necessarilyundesirable,CU’s<br />
report pointed out. When Injurieswith an over<br />
whelming potential for pain and suffering are<br />
involved,consumersmaywellbewillingto paythe<br />
premiumto minimizetherisk,justastheybuyinsur<br />
anceagainstotherrisks.
Handout3-4A<br />
CONSUMERPROTECTION<br />
The objectiveof safer productsIs obviouslya goodone, but at what<br />
costandbywhatstandards?“Unreasonablerisk” is hardlyascientificterm<br />
capableof objectivespecification.Whatdecibellevelof noisefroma cap<br />
gun Is an “unreasonablerisk” to a child’s (or adult’s)hearing?Thespec<br />
tacle of trained,highlypaid“experts” wIthearmuffsshootingcapgunsas<br />
partof the processof tryingto answerthat questionis hardlycalculatedto<br />
instill confidenceInthe taxpayerthat his moneyIs beingspentsensibly.A<br />
“safer” bicyclemaybe slower,heavier,and costlier than a less“safe” bi<br />
cycle. By what criteria can the CPSC[ConsumerProductSafetyCommis<br />
sion) bureaucrats,In IssuingtheIr standards,decidehow muchspeedto<br />
sacrifice,howmuchweightto add,howmuchextracost to Imposein order<br />
to achievehow much extra safety. Do “safer” standardsproducemore<br />
safety?Or do they only encourageless attention and care by the user?<br />
Most bicycle and similar accidentsare,after all, causedby humancare<br />
lessnessor error....<br />
Whenproductsenter the marketplacein the usual courseof events,<br />
thereis anopportunityfor experiment,for trial anderror.Nodoubt,shoddy<br />
productsare produced,mistakesare made,unsuspecteddefectsturn up.<br />
But mistakesusuallytendto beona smallscale—thoughsomearemajor,<br />
as in the recentcaseof the Firestone500radialtire—andcanbecorrected<br />
gradually.Consumerscan experimentfor themselves,decide what fea<br />
tures they like andwhat featuresthey do not like....<br />
[Cjompetltiondoes not protect the consumerbecausebusinessmen<br />
are moresoft-heartedthanthe bureaucratsor becausetheyaremorealtru<br />
istic or generous,or evenbecausethey are morecompetent,but only be<br />
causeit is in the self-Interestof the businessmanto servethe consumer.<br />
If onestorekeeperoffers yougoodsof lowerqualityor of higherprice<br />
thananother,you’renot goingto continueto patronizehisstore.if hebuys<br />
goodsto sellthat don’tserveyourneeds,you’renot goingto buythem.The<br />
merchantsthereforesearchout all overthe worldthe productsthat might<br />
meetyourneedsandmightappealto you.Andtheystandbackof thembe<br />
causeif they don’t they’regoing to go out of business.Whenyouentera<br />
store,no oneforcesyouto buy.Youarefreeto do soor goelsewhere.That<br />
Is the basicdifferencebetweenthe marketanda political agency.Youare<br />
freeto choose.ThereIs nopolicemanto takethe moneyout of yourpocket<br />
to payfor somethingyoudo not want or to makeyoudo somethingyoudo<br />
not want to do.<br />
SOURCE:<br />
ExcerptedfromFreetoChoose,copyright© 1980byMiltonFriedmanendRoseD.<br />
Friedman.Reprintedby permissionof HarcourtBraceJovanovich,Inc.
Handout3-4B<br />
GOVERNMENTREGULATION<br />
[In1978the]regulatorytabwasastaggering$96billion—nearly four<br />
timesthenation’sannualtradedeficit,three-quarters thenationaldefense<br />
budget,or$450foreveryman,womanandchildintheUnitedStates.Ofthe<br />
$96billion,thetaxpayerfootedthebill directlyfor$4.5billion—thecostof<br />
settingup and runningthe regulatoryagencies.Businessand industry<br />
shelledout theremaining$91.5billionfor itemsrangingfrompaperwork<br />
(anabsurd$25billion)to “compliance”withfinancial,environmental, social<br />
andhealth-related federaldemands.Passedontotheconsumer intheform<br />
of higherprices,regulationadded$2,000tothecostofanaveragehome,at<br />
least$22to theaveragehospitalbill,7 centsto a poundof hamburger.<br />
But that’sonlypartof the picture.Whenother“Invisible”costsare<br />
takenintoaccount—theimpactofbusinessfailurescausedbyoverzealous<br />
regulation,of slippingexportfigures,of saggingproductivity,of techno<br />
logicaleclipseInfieldsonceledbyU.S.expertise—then thedrainonthe<br />
nationasa wholebecomesIncalculable.<br />
Fewwoulddisputethe desirabilityof cleanerair andwateror safer<br />
productsInthemarketplace. Norwouldanyonedenythatsomeregulation<br />
hasbeena directresponseto pastabuse.Butcostslikethesesuggestan<br />
Irrationaltrendto regulationthatisdestructiveratherthanprotectiveofour<br />
system.<br />
As a formergovernment officialandasaneconomistwhohasspent<br />
thelastfouryears[from1975to 1979]directInga massIvestudyof theim<br />
pactof regulationonoursociety,I havebecomeacutelyawareofwhatone<br />
mightcall“regulatorymyopla.” Concernedwithbitsandpieces,thebureau<br />
cratswholastyear[1978]filled15,452pagesof theFederalRegisterwith<br />
newregulationsdo not—Infact,cannot—seewhattheyaredoingto the<br />
economy.Forthebulkof us,however, theeffectsof regulationrunamok<br />
areall tooclear.<br />
SOURCE:Excerptfrom“Timeto Contro’RunawayRegulation,”by MurrayL Weldenbaum,<br />
Reader’sDigest,June1979.Reprintedwithpermission.
Handout3-4C<br />
FOOD AND DRUGADMINISTRATION<br />
Severalyearsago,Prof.SamPeltzmanoftheUniversityofChicagoexamined<br />
the effectsof the 1962amendments to the Food,DrugandCosmeticActthat<br />
stiffenedFDAcontrolovertheintroductionof newdrugs.Hefoundthattherateof<br />
innovationinthedrugindustryhadbeenseverelycutback,that70percentfewer<br />
completelynewdrugswereintroducedbetween1962and1970onaperyearbasis<br />
thanbetween1950and1962,andeventheintroductionof thesenewdrugshad<br />
beensubstantiallydelayed — bytwoyearsontheaverage.Peltzmanconcluded<br />
thatthenegativeeffectson nationalhealthof reduceddruginnovationhadex<br />
ceededtheFDA ’s estimatesof positiveeffects.<br />
ResearchdonebyProf.WilliamWardelloftheUniversityof Rochester,who<br />
comparedtheexperienceofBritainandtheU.S.withnewdrugssince1962,sup.<br />
portedPeltzman ’s conclusion. AccordingtoWardell,Britain,whichhasamuchless<br />
rigidcontroloverthemarketingofnewdrugs,hadaclear-cutnetgainovertheU.S.<br />
Insomecases,thisBritishgainandtheimplicitAmericanlosswassubstantial.<br />
InthecaseofonetypeofdrugavailableinBritainandunavailableintheU.S.<br />
untilfiveyearslater(Nitrazepam, a hypnotic),he states,“theremayhavebeen<br />
3,700deaths(including50children)fromsedativesandhypnoticsin the United<br />
Statesduringthisperiod.Thecorresponding figuresforbarbituatesaloneare1,890<br />
deaths, including45children.Someofthesedeathswouldhavebeenpreventedifa<br />
safesedativewouldhavebeeninvolved.<br />
“FromNewZealandfiguresforNitrazepamusage,itwouldberealistictoas<br />
sumethatone-thirdofthedeathsdueto hypnoticswouldhavebeenpreventedif<br />
therehadbeenearlierintroduction, vigorouspromotion,andofficialendorsement<br />
(ratherthandiscouragement) ofaBenzodiazepine oracomparablesafehypnotic.<br />
“Thepointisobvious;introductionofa newdrugthatproducedfatalitiesany<br />
whereapproaching thismagnitudewouldberegardedasamajordisaster,butthe<br />
undoubtedoccurrenceofdeathsthroughfailuretointroduceadrughassofargone<br />
unremarked. Itwouldnottakemanyexamplesofthistypetoshowthatearlierintro<br />
ductionofsomenewdrugsmorethancounterbalance allthenewdrugtoxicityofthe<br />
pastdecade.”<br />
SOURCEJeflA.Schnepper“I Accusethe FederalGovernmentofFallingtheAmericanPeople,”USA<br />
Today.May1979, page12.ReprintedfromUSATODAY(May1979). Copyright 1979bySocietytor<br />
theAdvancement ofEducation.
Handout34D<br />
GOVERNMENTREGULATION<br />
inlightofthecontinuingrevelationsofcorporateneglectorworse,muchof<br />
thecurrentprotestationagainstgovernment regulationngsawfullyhollow.Virtu<br />
allyeveryenvironmental regulation, forexample,hasitsgenesisinsomeproblem<br />
thatthreatenedthepublicandfinallybroughta legitimatepublicdemandfor<br />
government action.Regulationisnotgoingtogoawayuntiltheproblemsdo.The<br />
wayweregulatecanandmustbeimproved, butletusfacethefactthatacontinued<br />
highlevel01government regulatoryactivityis essential to nationalgoalsof para<br />
mountimportance — tocontrollingcancerandprotectinghealth,topreventingcon<br />
sumerfraudanddeception, to cleaningupairandwaterpollution, to reducingoil<br />
importsandconservingenergy,to protectingusfromimproperlysitedormisman<br />
agednuclearpowerfacilities — thelist,obviously, is verylong.<br />
SOURCE:<br />
GusSpaeth,Enwcnmerdal<br />
Regulation,VftatSpeechesoftheDay.March,1980,page390.
Handout3-4E<br />
ECONOMICDRAWBACKSOF DEREGULATION<br />
Civilizedcommunities andintelligent partisansofbusinessconcludedlongago<br />
thatthehealthof marketcapitalismrequire steadygovernment attentionto the<br />
contextwithinwhichprofitsaremaximized. If,asMiltonFriedmanandhisdisciples<br />
haveinsisted,corporationsoughtofollownoimperativeotherthansingle-minded<br />
pursuitof profit,it is allthemoreurgenthatgovernment defineclearlythelegal<br />
limitsof thatsearch.Steel,paper,andaluminummillsstoppedtheiruseof air,<br />
water,andthelandscapeasdumpsforuntreatedemissionsandchemicalwastes<br />
onlyafterCongressmadetheseactionsbreachesof law.<br />
Thebenignfaceof capitalismhasbeenjustlycelebrated.Fortwocenturies,<br />
competitivemarketshavepromotedgrowthandefficiency,andwidenedthevoca<br />
tionalandconsumingchoicesofmostmenandwomen.Theothersideofcapitalism<br />
islessattractive.AsAdamSmithsharplyemphasized, businessmenaspiretomo<br />
nopoly,notcompetition. Inourtime,mergersincreaseaveragecorporatesizeand<br />
Kmitrivalry.Crowdsdonotcollude,rigmarkets,andsetprices.Smallgroupscan<br />
anddo.Bignessisbadnessbecausebignessnarrowsthescopeofcompetitivebe<br />
havior.<br />
Theirorganizational responsibilities, reinforcedbythebestof economicad<br />
vice,impelbusinessmanagersto cutcosts,thebetterto enlargeprofits.Thede<br />
signerofanewcardoesnotintendhomicidewhenheshavesafractionofaninch<br />
off a metalshieldor locatesthegasolinetankin a positionmotevulnerableto a<br />
crash.Whentheywerecompelledtodosobyforceoflaw,automobilemanufactur<br />
ersincorporatedinproductplanningconsiderations of safety,fueleconomy,and<br />
environmental impact.Asthesemandatorylegalrequirements arerelaxed, [manu<br />
facturers]willdiminishtheirattentionto suchobjectives.<br />
Thecompletelypredictableresultsolthederegulationcrusadeincluderever<br />
salof limitedprogresstowardparitybywomenandminorities, resegregationof<br />
manyschoolsystems,gravedamagetopub’icandworkerhealth,andmostironicof<br />
all,lesscompetitionandmoremonopoly.<br />
SOURCE: FromGreedIsNotEnough:Reaganomics byRobertLekachman (NewYork:Pantheon<br />
Books — aDivisionof RandomHouse,Inc.,1982),pp. 117and 119.Reprintedwithpermission.<br />
Emphasisinoriginal.
HANDOUT3-4F<br />
Name Class_____________<br />
Authorof statementonregulation<br />
Circlethebroadsocialgoalsthatunderpintheauthor’sargument:Economicfreedom,economicefficiency,economic<br />
equity,economicsecurity,fullemployment, pricestability,economicgrowth.<br />
Brieflysummarizetheauthor’spositionongovernment regulation:
HANDOUT 3-4G<br />
Name Class____________<br />
Directions:Indicatewhetheryoubelievetheauthorofthestatement<br />
thatyoureadwouldagreeordisagreewitheach<br />
government<br />
regulationlistedbyplacingacheckintheappropriatecolumn.(Ifnoindicationisgiven,placeacheckinthe<br />
can’ttell”column.)<br />
ExistingorPossible<br />
Government<br />
Regulation<br />
Author<br />
Would<br />
Favor<br />
Author<br />
WouldNot<br />
Favor<br />
Can’t<br />
Tell<br />
Testingofbicycles<br />
forsafety<br />
Settingrigorous<br />
standards<br />
fordrugsafety<br />
Bringingprivatepensionfundsundergovernment<br />
control<br />
RequiringairsafetybagsInall automobiles<br />
Settingrigorousafetystandards<br />
forcoalmines<br />
Insuringthatmatchesaresate<br />
Inspectingandgradingfoodproducts<br />
Controllingpollutiongeneratedbymanufacturing<br />
plants<br />
Settingsafetystandards<br />
fornuclearpowerplants<br />
Requiring<br />
labelsonfoodproductsthatgiveinformation<br />
aboutingredients<br />
andnutritional<br />
values<br />
Requiringhealthhazardlabelsonsmokingmaterials<br />
Inspectingbabyrattlesforthreatstoinfantsafety<br />
Requiringextensivemodifications<br />
tomakelawnmowers<br />
safer<br />
Settingquotasforminorityemployment<br />
inbusinesses<br />
thatselltothefederal<br />
government
HANDOUT 3-4G<br />
Name Class____________<br />
Directions:<br />
Indicatewhether<br />
youbelievetheauthorofthestatement<br />
thatyoureadwouldagreeordisagreewitheach<br />
government<br />
regulation<br />
listedbyplacingacheckintheappropriate<br />
column.<br />
(Ifnoindication<br />
isgiven,placeacheckinthe<br />
can’t teir column.)<br />
ExistingorPossible<br />
Government<br />
Regulation<br />
Author<br />
Would<br />
Favor<br />
Author<br />
WouldNot<br />
Favor<br />
Can’t<br />
Tell<br />
Testingofbicycles<br />
forsafety<br />
Settingngoroustandards<br />
fordrugsafety<br />
Bringingprivatepension<br />
fundsundergovernment<br />
control<br />
Requiring<br />
airsafetybagsinallautomobiles<br />
Settingrigorous<br />
safetystandards<br />
forcoalmines<br />
Insuringthatmatches<br />
aresale<br />
Inspectingandgrading<br />
foodproducts<br />
Controllingpollution<br />
generated<br />
bymanufacturing<br />
pLants<br />
Settingsafetystandards<br />
fornuclear<br />
powerplants<br />
Requiringlabelsonfoodproductsthatgiveinformationaboutingredientsandnutritional<br />
values<br />
Requiring<br />
healthhazardlabelsonsmokingmaterials<br />
Inspecting<br />
babyrattles<br />
forthreats<br />
toinfant<br />
safety<br />
Requiringextensive<br />
modifications<br />
tomakelawnmowers<br />
safer<br />
Settingquotasforminorityemployment<br />
inbusinesses<br />
thatsell<br />
tothefederal<br />
government
3-4<br />
Consumer Protection: Public Benefit vs. Economic Efficiency<br />
TIME REQUIRED Two class periods<br />
RECOMMENDEDGRADELEVEL 11—12<br />
MAJOR CONCEPTS Trade-offs and opportunity<br />
costs; broad social goals; trade-offs among goals; self<br />
interest and personal values; fiscal policy<br />
INSTRUC I1ONAL OBJECTIVES Students will:<br />
1 State which broad social goals usually underlie<br />
controversies about government regulation for the<br />
purpose of protecting consumers;<br />
2 Articulate their own hierarchy of vlues as those<br />
values apply to government regulation for protecting<br />
consumers;<br />
3 Take a position on a specific instance of govern<br />
ment regulation and state the social goals behind that<br />
position;<br />
4 Recognize that government regulation involves<br />
trade-offs among social goals.<br />
RATIONALE There is considerable debate about<br />
government regulation that is concerned with con<br />
sumer protection. The terms of the debate frequently<br />
take the form of a conflict between economic effi<br />
ciency (government regulation is seen as impairing<br />
efficiency) and the benefits to the public or some sec<br />
tors of the public. Another conflict is between the<br />
need for personal or environmental safety and eco<br />
nomic freedom. It is important that citizens compre<br />
hend the issues involved, whether or not they partici<br />
pate in public debate on the matter.<br />
The activities in this lesson are designed to give<br />
students a better understanding of the debate and the<br />
trade-offs involved between the alternative positions<br />
that may be taken. Because of the complexities of the<br />
subject, we strongly recommend that you read (or<br />
reread) Section IV of the JCEE’sMaster Curriculum<br />
Guide in <strong>Economics</strong>: A Framework for Teaching the<br />
Basic Concepts, (second edition, 1984) which is the<br />
basis for Handout 3-4H. You may also wish to con<br />
duct or review Lesson 3-1 with your class before un<br />
ertaking this lesson, unless your students have<br />
ome background in the topics this lesson takes up.<br />
MATERIAlS Copies of Handouts 3-4A, 3-4B, 3-4C,<br />
3-4D, or 3-4E for each group as described in proce<br />
dure 2, below; one copy of Handouts 3-4F, 3-4G,<br />
3-4 1- I, and 3-4! for each student.<br />
PROCEDURE<br />
I Start lesson by having students list the means<br />
with which government provides consumer protec<br />
tion. Indicate that there is currently considerable<br />
discussion about the amount of government regula<br />
tion of business, especially in relation to consumer<br />
protection.<br />
2 Split class into five groups. Each member of ev<br />
ery group should receive one copy of the same hand<br />
out from among the first five handouts, that is, either<br />
Handout 3-4A, 3-4B, 3-4C, 3-4D, or 3-4E. Each stu<br />
dent should also receive a copy of Handouts 3-4F,<br />
3-4G, and 3-4H.<br />
3 Make sure students understand the definitions<br />
of the various social goals listed in Handout 3-4H so<br />
that they can answer the second part of Handout<br />
3-4F.<br />
4 Have students read their group’s assigned hand<br />
out on regulation individually and then work alone<br />
to complete Handouts 3-4F and 3-4G.<br />
5 Have students in each group agree on a set of re<br />
sponses to the questions on Handouts 3-4F and 3-4G.<br />
One member of each group should be designated to<br />
report the group’s responses to the entire class.<br />
6 Reassemble the class and have each group’s re<br />
porter state what position the author of the assumed<br />
handout took with respect to government regulation,<br />
which social goals seemed to be the primary basis of<br />
the author’s argument, and how the author would<br />
probably react to the various regulations listed in<br />
Handout 3-4G.<br />
RESPONSESON HANDOUT34F FORSPECIFICREGULA<br />
TIONSMAYINCLUDETHE FOLLOWING:<br />
— Friedman (Handout 3-4A): Dominant broad<br />
social goal is the economic freedom of consum<br />
ers and producers from government regulation.<br />
A second consideration is the effect an “added”<br />
safety requirement has on economic efficiency.<br />
— Weidenbaum (Handout 3-4B): Dominant<br />
broad social goal is to maintain peak economic<br />
efficiency. Argues that government regulation
creates inefficiencies that hinder economic<br />
growthand full employment.<br />
— Schnepper (Handout3-4C):Dominant-broad<br />
socialgoalsare economicgrowth (drugindustry<br />
was hampered) 1 and the economic freedom of<br />
business and consumers (drug industry could<br />
not market some drugs and some consumers<br />
could not get drugsbecauseof FDAregulation).<br />
— Spaeth (Handout3-4D):Dominantbroad so<br />
cial goalsare equity (protectingconsumersfrom<br />
fraud and deception),as well as individual and<br />
national economicsecurity (protectingcitizens’<br />
health and protecting the economy from oil<br />
shortagesand mismanagementof nuclear power<br />
facilities).<br />
— Lekachnian(Handout3-4E):Dominantbroad<br />
social goals are economic equity (preventing<br />
concentrationof business-that leads to monop<br />
oly conditions)and economicsecurity (assuring<br />
the safetyofautomobilesand the environmentas<br />
76<br />
well as safeguardingthe rights of women and<br />
minorities).<br />
7 DistributeHandout 3-4!,which asks students to<br />
statetheir opinionsregardinga numberofexistingor<br />
possible regulations.Have students share their an<br />
swers and the reasons for them.<br />
8 Discusswith classthe choicesthat confrontgov<br />
ernmentwhen it considerswhetheror not to regulate<br />
something. Students should understand that any<br />
government decision about regulation involves<br />
trade-offsamongbroad social goals.<br />
9 ASSIGNMENT:Have individual students or<br />
groupsof students preparea statementsupportingor<br />
proposing a specific government regulation. They<br />
should carefullyanalyzethe consequencesofthe reg<br />
ulation and the broadsocialgoalsthat impelthem to<br />
take the position they do. Encouragethe students to<br />
do libraryresearch on the matter.<br />
EVALUATION Evaluate caliber of student re<br />
sponses to the activitiesand.their written reports.
Figure5-1: SALESOFCLOTHING ANDPERSONAL PRODUCTS<br />
INA RECENT YEAR<br />
•0 _w1 6<br />
ty<br />
He øea<br />
I.
Section 1. WHY NATIONS TRADE<br />
Name<br />
Class Date<br />
The simplified models below illustrate the need for trading partners. In some of the<br />
models, or situations, the partners have absolute advantages, and in other situations<br />
they have comparative advantages. Identify the advantages in each situation, and tell<br />
why the partners should or should not “trade.”<br />
1. Jim Cortona is an excellent hunter and a fair cook. He has asked Fred Williams to<br />
go on a hunting trip with him, although Fred is a poor tracker. However, Fred is a<br />
very good cook.<br />
2. Maria Sanchez is a skilled dentist and an average businessperson. She wants to go into<br />
business with Russell Chen, who does not know dentistry, but is a good businessperson.<br />
3. Jason Malevica is an outstanding accountant and an excellent buyer and has too much<br />
business to handle alone. Phylicia Thomas wants to go into partnership with Jason.<br />
Phylicia knows very little about accounting but is a good buyer.<br />
4. Myra Turner’s job pays her $82,000 a year. She and her husband, Kurt, who makes<br />
$25,000 a year, have started a small business at home. Myra prefers to be in a big<br />
office, while Kurt likes to stay at home. ________________________________________
Name<br />
CCass Date<br />
Section 2. THE PROCESS OF ECONOMIC DEVELOPMENT<br />
In his book The Stages of Economic Growth, economic historian W. W. Rostow iden<br />
tified five stages of economic development. A key stage is the “take off,” when savings<br />
and investment reach a level that will allow the economy to generate rapid industrial<br />
development. The passage below gives some hypothetical data on savings and invest<br />
ment for a country, called country A. Use this data to answer the questions that follow.<br />
The government of country A, a developing nation, wants to industrialize its nation.<br />
There are many natural resources in the nation and a great deal of land that could be<br />
used for cash crops. However, the economy is a traditional one, and most of the<br />
citizens are subsistence farmers. There is a pool of domestic savings. Part of it is in<br />
cash—$200 million. Most of it is in agricultural products saved by farmers. This latter<br />
pool is worth almost $800 million, but it is difficult to turn it into cash. In any case, the<br />
country needs at least $650 million of this total to carry on its normal economy. The<br />
country could also invite foreign investment. One resource company has offered to<br />
build a $100 million complex for mining and smelting ores, and will contribute to roads<br />
and railroads as well. Another corporation, if given control of several hundred thou<br />
sand acres of land, will grow cash crops for export. Much of the revenue would go to<br />
the investors. Jobs would be created, though, and the country would gain some money.<br />
However, increased demand for government services and maintenance of the new<br />
facilities might offset this money. In addition, the country would have to find more food<br />
to feed the new industrial workers.<br />
1. How much domestic capital is available for investment?____________________________<br />
2. How quickly can the nation industrialize using domestic capital only?<br />
3. Why do foreign corporations want to invest in country A? _________________________<br />
4. What would be the advantages of accepting foreign investment? ___________________<br />
5. What would the advantages be of refusing foreign investment?_____________________
C<br />
Section 2. EXCHANGE RATES<br />
Name<br />
Class Date<br />
The table below shows the recent rate of exchange between the dollar and the curren<br />
cies of some major industrialized nations. Each of the situations following the table<br />
shows a person buying foreign products or services. Help these people with their<br />
money problems by performing the conversion calculations. Show your work on the<br />
line following each situation.<br />
Foreign Exchange Rates<br />
Amount of Dollars per Amount of Foreign Currency<br />
Currency Unit of Foreign Currency per Dollar<br />
Pound (British) $1.44150 0.6937<br />
Franc (French) 0.15220 6.5700<br />
Yen (Japanese) 0.00646 154.6200<br />
Lira (Italian) 0.00072 1,386.0000<br />
Mark (West German) 0.4988 2.0050<br />
1. Margit is planning a trip to England after graduating from college. How many<br />
British pounds will she need if she plans to spend $2,000 dollars on her trip?<br />
2. Carlos imports West German binoculars. He wants to know how many dollars be will<br />
need to buy a pair of glasses costing 650 marks. __________________________________<br />
3. Anna, a bicycle racer, wants to buy an Italian bicycle priced at 693,000 lire (plural<br />
of lira). How much will it cost her in dollars? _________________________________<br />
4. Denis, a retired language teacher, wants to move to France. How many francs will<br />
he get for his monthly pension check of $2,750?<br />
5. Allen wants to invest in the stock of a Japanese electronics firm. The stock is cur<br />
rently selling for 3,092 yen on the Tokyo Stock Exchange. How many dollars will<br />
Allen need to buy 100 shares? ______________________________________________
I<br />
Chapter20 EXCHANGINGFOREIGNCURRENCY<br />
Name<br />
Class Date<br />
SusanPatterson,a salçsrepresentative foratextileexportfirm,frequentlytravelsabroadfor<br />
hercompanyWhenevershetravels,shehasto submitan expenseaccount.Althoughshe<br />
paysformeals,lodging,andsoforth,inthecurrencyofthecountrysheisin,shehastofigure<br />
the amountsin dollarson herexpenseaccountin orderto be reimbursed.<br />
Belowaretwocopiesof Susan’sexpensesfora recentone-weektrip.Thefirstisthecopy<br />
shemakesto keeptrackof dailyexpenditures. Thesecondis theoneshehasto submitto<br />
hercompany.Usingtheforeigncurrencyexchangeratetable,fill inthedollaramountsonthe<br />
secondexpenseaccountform.Example:if Susanpaid344.30francsin Francefor a hotel,<br />
dividetheamountpaidbythe unitsof currencyperdollar.(344.30÷ 6.4645= $53.26)<br />
ForeignCurrencyExchangeRatesFora RecentYear<br />
Unitsof CurrencyPerDollar<br />
Australia(dollar) 1.5713 Italy(lira) 1366.50<br />
Brazil(cruzado) 13.77 Japan(yen) 154.10<br />
G. Britain(pound) .6949 Mexico(peso) 787.00<br />
France(franc) 6.4645 W.Germany(deutsche<br />
mark) 1.9735<br />
DailyExpendituresIn Currencyof Location<br />
Day Country Lodging Meals Phone Taxi Tips Total<br />
Monday Italy 102,387 68,258 13,651 13,651 197,947<br />
Tuesday Italy 116,039 102,387 20,477 20,477 259,380<br />
Wednesday W.Germany 98.65 39.46 19.73 43.40 9.86 211.10<br />
Thursday Brazil 240.754165.240 21.39 42.79 470.179<br />
Friday Brazil<br />
Expense Account In Dollars<br />
Day Country Lodging Meals Phone Taxi Tips Total<br />
Monday Italy ————<br />
Tuesday Italy ————<br />
WednesdayW. Germany<br />
Thursday Brazil in flight<br />
Friday Brazil —— --—<br />
if
Lesson 11: Protectionism in Foreign Trade<br />
TIME REQUIRED: About three class periods<br />
RECOMMENDED GRADE LEVEL: 11-12<br />
CONCEPTS: Tariffs<br />
Quotas<br />
Subsidies<br />
Embargoes<br />
Instructional Objectives: Students will<br />
S Be able to explain the meaning of tariffs, quotas,<br />
subsidies, embargoes, nontariff barriers, and the<br />
like and the arguments for and against them;<br />
• Do the simulationabout free traders versus protec<br />
tionists and try to reach conclusions reasonably<br />
satisfactory to both consumer and producer inter<br />
ests.<br />
Rationale: Practically all governments engage in pro<br />
tecting domestic industries against competition from<br />
imports, and the process has been going on for centu<br />
ries. Protectionism still exists today, and students<br />
should learn how the pressures for and against it arise.<br />
(Many governments also promote exports by granting<br />
subsidies or other advantages to domestic producers.)<br />
Materials: One copy of Handout 11-1, 11-2, 11-3, or<br />
11-4for each group member (see Procedure 2); one<br />
copy of Handout 11-5for every student.<br />
Procedure:<br />
1. Start the lesson by asking:<br />
a. Can you think of any reasons why a country<br />
might want to restrict imports of any foreign<br />
goods or promote exports of domestic goods?<br />
(List responses on the chalkboard.)<br />
b. What are some of the methods of interfering<br />
with international free trade? (Tariffs, quotas,<br />
embargoes, subsidies, dumping, nontariff bar<br />
riers. Most students are acquainted with tar<br />
iffs. Definitions and descriptions of other mea<br />
sures affecting foreign trade may be found in<br />
almost all general texts on economics or on the<br />
economics of international trade.)<br />
2. Divide the class into four groups. Designate the<br />
groups as follows, distributing handouts (one for<br />
each group member) as indicated:<br />
I. Steel Manufacturers (Handout 11-I)<br />
II. Automobile Manufacturers (Handout 11-2)<br />
III. Rice Producers (Handout 11-3)<br />
IV. Rice Consumers (Handout 11-4)<br />
Instruct the groups to discuss each of the questions<br />
listed on their respective handouts. When agree<br />
ment on answers is reached, each member of the<br />
group should write the group decision in the<br />
appropriate space. (NOTE: You may wish to place<br />
a limit on the amount of time groups will be<br />
allowed.)<br />
3. After group discussions are completed reorganize<br />
students into groups of four, each group consisting<br />
of two steel manufacturers and two automobile<br />
manufacturers or two rice producers and two rice<br />
consumers. The opposing interests should:<br />
a. Present their positions as to what government<br />
trade policy should be;<br />
b. Attempt to formulate a trade policy to which<br />
both parties agree.<br />
4. Have each group present its compromises on pol<br />
icy. Conduct a class discussion in which students<br />
examine the suggested trade policies in terms of<br />
their potential benefits or costs to each of the fol<br />
lowing: business, workers, and consumers, as well<br />
as trade relations with foreign countries.<br />
5. Distribute Handout 11-5and have students read it<br />
either at home or in class. This news article shows<br />
bow protectionism among countries can build up<br />
and how complex the resulting problems can be<br />
come. To make certain that students grasp as<br />
many of the implications as possible, you may<br />
want to lead a class discussion centered on ques<br />
tions such as:<br />
a. Can you name all the products involved in this<br />
controversy? (Synthetic fibers, textiles, steel,<br />
oil, natural gas, plastics, fertilizers.)<br />
b. What is the basic complaint of the European<br />
Economic Community (Common Market)<br />
against the United States? (The U.S. govern<br />
ment has been keeping the prices of the chief<br />
raw materials—oiland natural gas—needed to<br />
make synthetic fibers, synthetic textiles, and<br />
plastics under price controls. Therefore, U.S.<br />
manufacturers of these products have been<br />
able to price them below those made in the<br />
Common Market. Producers in Britain have<br />
suffered the most.)<br />
c. What is the basic complaint of the United<br />
States against the European Economic Com<br />
munity? (Manufacturers of steel in the Com<br />
mon Market can sell it in the United States<br />
below prices charged for steel by U.S. manu<br />
facturers because Common Market manu<br />
facturers receive subsidies from their govern<br />
ments.)<br />
The strategiesin this lesson are based upon classroomactivities prepared by Elayne Feldman. Fndley Senior High <strong>School</strong>, Fridley, Minnesota.<br />
In their original form the material earned a first-place award in the 1976-77International Paper Company Foundation Awards Program for<br />
Teaching <strong>Economics</strong>.<br />
97
d. What do Common Market and U.S. govern<br />
ment officialsfear may happen in the longrun?<br />
(Mounting pressures in the Common Market<br />
and in the United States for protectionist poll<br />
cies and actions. If such pressures result in<br />
additional trade restrictions, the amount of in<br />
ternational trade could be adversely affected<br />
and cause slower economic growth as well as<br />
an increase in unemployment.)<br />
98<br />
Evaluation: Have students discuss the final compro<br />
mises reached in the simulation. (The probable conclu<br />
sion is that trade restrictions benefit some parties and<br />
hurt others. Economists, however, generally agree<br />
that for most nations when taken as a whole, the bene<br />
fits of free trade outweigb the disadvantages.) Assess<br />
the extent and quality of student participation in the<br />
discussion as well as the quality of the group reports<br />
and the individual students’ contributions to them.
Handout11-1<br />
STEELMANUFACTURERS<br />
(GROUPI)<br />
Name Class_____________<br />
DIRECTIONS:Your group representssteel manufacturersin<br />
Globaland.Readthefollowingparagraphanddecidewhether<br />
the industrywouldbe in favorof freetrade,protectivetariffs,<br />
quotas,orsubsidiesunderthegivencircumstances.Stateyour<br />
reasonsforyourdecisions.Answerthequestionsfollowingthe<br />
reading.<br />
Theemergenceof anefficientsteelindustryinZoisialandhascut intoGloba<br />
land’ssteelproduction.Globalandsteelfirmshavebeenpricedout of many<br />
marketsaroundthe world.Theyarenowevenstrugglingwith foreigncom<br />
petitorsfor marketsin neighboringNorthGlobaland.Environmentalprotec<br />
tion regulationsand lowerproductivityhavedriventhe priceof Globaland<br />
steelso highthatmanydomesticsteelusersareobtaininglargerandlarger<br />
quantitiesfrom imports.Your group,the steel manufacturers,is going to<br />
lobbyintheNationalParliamentto makeyouropinionsknown.Todoso,you<br />
will needto takea positionon the followingquestions.<br />
1. Whatpolicydoesyourindustrywantthe governmento follow andwhy?<br />
2. HowwouldyourrecommendedpolicyaffectGlobalandsteelproducers?Why?<br />
3. Howwouldyourpolicyaffectthe consumersin yournation?Why?<br />
4. Howwouldyourpolicyaffectforeignsteelproducers?Why?<br />
5. It yourgovernmentfailsto adoptyourstatedpolicy,whatcompromiseswouldyouaccept?<br />
FromMasterCurriculumGuidefortheNations<strong>School</strong>s,PartII.Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary). 1980.<br />
Joint Councilon EconomicEducation.1212Avenueof theAmericas,NewYork.NY 10036.<br />
99
Handout11-2<br />
STEELUSERS(GROUPII)<br />
Name - Class_____________<br />
DIRECTIONS:Your group representsthe Globalandautomobile<br />
manufacturers,an industrythat consumesmuchsteel.Read<br />
the following paragraphand decide whetherthe manufac<br />
turerswouldbeinfavorof freetrade,protectivetariffs,quotas,<br />
or subsidiesunderthe givencircumstances.Stateyour rea<br />
Sonsfor your decision.Answerthe questionsfollowingthe<br />
reading.<br />
Theemergenceof an efficientsteelindustryin Zoisialandhasloweredthe<br />
worldpriceof steel.AutomanufacturersinGlobaland,besidesbuyingagreat<br />
deal of steelfrom domesticproducers,havein recentyearsalso imported<br />
muchforeignsteel,becauseit islessexpensivethandomesticsteel.Thesteel<br />
manufacturersof Globalandarelosingmanysalesandwantthegovernment<br />
to protectthem.Yourgroup,theautomanufacturers, isgoingto lobbyinthe<br />
NationalParliamento makeyouropinionsknown.Todo so,youwill needto<br />
takea positionon the followingquestions.<br />
1. Whatpolicyor policiesdoesyourindustrywantthe governmento follow andwhy?<br />
2. Howwouldyour recommendationsin relationto question1affectdomesticsteelproducers?<br />
3. Howwouldyourpoliciesaffectothersteel-usingindustriesandconsumersin Globaland?Why?<br />
4. Howwouldyourpoliciesaffectforeignsteelproducers?<br />
5. If the NationalParliamentfails to adoptyourpolicies,whatcompromiseswouldyouaccept?<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s, Part II , Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary). 1980.<br />
JointCouncilon EconomicEducation.1212Avenueof the Americas,NewYork,NY 10036.<br />
100
Handout11-3<br />
RICEGROWERS(GROUPIII)<br />
Name_______________________________________________________________ Class_____________ DIRECTIONS:Your group representsthe rice producers of<br />
Globaland.Readthefollowingparagraphanddecidewhether<br />
the industrywould be in favor of productioncontrols.State<br />
your reasons.Answerthe questionsfollowing the reading.<br />
From1954to 1974theGlobalandMinistryof Agriculturecontrolledthe pro<br />
ductionof rice,Itdidsobysettingannualacreagerestrictionsontheplanting<br />
of rice. In 1974the ministryremovedthe restrictions,and 1975-76were<br />
bumperyearsfor the Globalandrice crop. The countriesof Samiokaand<br />
Hyloshavealso had good crops and havebeenespeciallysuccessfulin<br />
increasingriceexportsinrecentyears.SinceGlobalandisalsoariceexporter<br />
andtheworldpriceof ricehasdroppedfrom $17.50perhundred-weight in<br />
June1974to $6.75in 1977,partlybecauseof theaddedlargesuppliesfrom<br />
Samiokaand Hylos,the governmentof Globalandis decidingwhetherto<br />
reinstateproductioncontrols.You,thericeproducersof Globaland,arevery<br />
concernedaboutthefallingworldpricesfor rice.<br />
1. Whatpolicydo youwantyourgovernmentto adoptandwhy?<br />
2. Howwouldyourrecommendations in respecto question1affecttheGlobalandriceproducers?Why?<br />
3. HowwouldyourpoliciesaffectGlobalandconsumersof rice?Why?<br />
4. Howwouldyourpoliciesaffectforeignrice producers?Why?<br />
5. If theNationalParliamentfailsto adoptyourpolicies,whatcompromiseswouldyouaccept?<br />
FromMasterCurriculum Guidefor the Nation’s<strong>School</strong>s, PartII,Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary), 1980.<br />
JointCouncilon EconomicEducation,1212Avenueof theAmericas,NewYork,NY10036.<br />
101
Handout11-4<br />
RICECONSUMERS(GROUPIV)<br />
Name Class ____________<br />
DIRECTIONS:Your group Is an organization of Globaland<br />
consumers.Readthefollowingparagraphanddecidewhether<br />
theindustryor groupwouldbeinfavorof productioncontrols.<br />
State your reasons.Answer the questions following the<br />
reading.<br />
From1954to 1974theGlobalandMinistryof Agriculturecontrolledthe pro<br />
ductionof rice.Theydid so by settingannualacreagerestrictions,on the<br />
plantingof rice.In 1974the ministryremovedthe restrictions,and 1975-76<br />
werebumperyearsfortheGlobalandricecrop.Thecountriesof Samiokaand<br />
Hyloshavealso had good crops and havebeenespeciallysuccessfulin<br />
increasingriceexportsinrecentyears.SinceGlobalandisalsoariceexporter<br />
andtheworldpriceof ricehasdroppedfrom $17.50per hundred-weight in<br />
June1974to $6.75in 1977,partlybecauseof the addedlargesuppliesfrom<br />
Samiokaand Hylos,the governmentof Globalandis decidingwhetherto<br />
reinstateproductioncontrols.Yourconsumerorganizationisveryconcerned<br />
aboutholdingdownthe costof food.<br />
1. Whatpolicydo youwantyourgovernmento adoptandwhy?<br />
2. Howwouldyour recommendationsin respectto question1affectGlobalandrice producers?Why?<br />
3. HowwouldyourpolicyaffectGlobalandconsumers?Why?<br />
4. Howwouldyourpolicyaffectworldrice producers?Why?<br />
5. If the NationalParliamentfails to adoptyourstatedpolicies,whatcompromiseswouldyouaccept?<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s,PartII.Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary).1980.<br />
JointCouncilon EconomicEducation,1212Avenueof the Americas.NewYork.NY 10036.<br />
102
Figure16.1 HypotheticalCost/OutputRelationswithout Specializationand Trade<br />
Product Italy Brazil<br />
Pasta 100unitsof laborproduces<br />
200 boxesof pasta<br />
100unitsof laborproduces<br />
50 boxesof pasta<br />
Beef 100units of laborproduces<br />
50 pounds of beef<br />
100unitsof laborproduces<br />
200 pounds of beef<br />
Withoutspecializationand trade,the<br />
totalproductivityof pastaand beef<br />
equals:<br />
250 unitsof output + 250 unitsof output.<br />
Figure16.2 HypotheticalCost/OutputRelationswith Specializationand Trade<br />
Product Italy Brazil<br />
Pasta 200 unitsof laborproduces No productionof pasta<br />
400 boxesof pasta<br />
Beef No productionof beef 200 unitsof laborproduces<br />
400 pounds of beef<br />
Withspecializationand trade, the 400 unitsof pasta + 400 unitsof beef<br />
totalproductivityof pastaand<br />
beef equals:<br />
Figure16.3 HypotheticalCost/OutputRelationsto IllustrateComparativeAdvantage<br />
Product Italy Brazil<br />
Pasta 100units of labor produce 100units of laborproduce<br />
200boxesofpasta 25boxesofpasta<br />
Beef 100units of laborproduce 100units of labor produce<br />
200poundsofbeef S0poundsofbcef
C<br />
____________ OVERHEAD15 ___<br />
TEACHINGSUGGESTIONS<br />
Use this transparencyto reinforcestudents’ understanding of the reasonsfor internationaltrade. Remind them<br />
that internationaltrade, like any voluntaryexchange,occurs becauseboth the buyer and sellerexpect to gain<br />
from it. Trade allowsnations and people to specializein those things they do best.<br />
U Severalexampleswill reinforcethe notion of the benefitsof trade. Mention the following:A doctor may be<br />
an excellenttypist but will usuallybenefitby hiring a secretaryso that he or she can specializein caring for<br />
patients. Ask students to explainwhy the followingis true: Even if they are good housekeepers,working<br />
parents may hire a person to handle cleaningchores. (Becauseit allowsthe parents to specializein child<br />
care and the occupationsin which they have an advantage.)<br />
• The principle works exactlythe same way for trade betweencountries. Have the students give examplesof<br />
products we purchase from other countries becausewe lack the resourcesto produce them efficiently.<br />
Responseswill vary but might include such products as coffee,bananas, spices, and bauxite for aluminum.<br />
Ask: Can we grow coffeein this country? The students’first responsemight be that we cannot, but point<br />
out that we could if we were willingto build and operate huge greenhousesin order to duplicate the<br />
favorablegrowingconditionsof South Americancountries. Have them explain why this is not an efficient<br />
use of resources.<br />
• Ask: What concept do we use to explainwhy trade takes place betweencountries with very dissimilar<br />
resourcebases?(Absoluteadvantage)Remind the students that absolute advantageexistswhen a nation can<br />
produce a product at a lowercost than any other nation. Direct the students’ attention to Figure 16.1 on<br />
the transparency. Ask: How many boxesof pasta can Italy produce by employing 100units of labor. (200<br />
boxes)How many boxesof pasta can Brazilproduce using the same amount of labor? (50 boxes)Which<br />
country has the absolute advantagein the production of pasta? (Italy) Ask: Which country can produce beef<br />
more efficiently?(Brazil)<br />
• Refer the students to Figure 16.2 on the transparency. Ask: What does specializationmean? (When a<br />
country uses its resourcesto produce an item at the exclusionof another) Have them suggestin which<br />
products each country should specialize.(Italy—pasta;Brazil—beef)Ask the students if they think there is<br />
any danger in concentratingall of a country’sresourcesin the production of one item to the exclusionof<br />
another. Responseswill vary but students should recognizethat when two trading nations specialize,it is<br />
may be mutually beneficialto both countries. However, there is a danger that the price of the specialized<br />
product may fall on the world market.<br />
• Explain that situations in which nations enjoy an absolute advantageare rare and that countries usually<br />
make production and trade decisionsbased on their comparativeadvantage.<strong>Point</strong> out that a nation has a<br />
comparativeadvantagewhen its opportunity cost of production of a product is lower than that of other<br />
countries. Have the students reviewthe definitionof opportunity cost. (What a country must give up in<br />
order to produce a certain item, that is, what else it could have produced with the same resources)<br />
• Have the students examineFigure 16.3 on the transparency. Ask: Which country enjoysan absolute<br />
advantagein the production of both items? (Italy) Sinceit is unrealisticto expect that Italy will produce<br />
enough of both items to satisfythe wants of both countries while Brazilhalts production completely,they<br />
must determine which item Brazilcan produce most efficiently.Ask: By employingthe same 100units of<br />
labor, what can Brazilproduce more efficiently?(beef)Therefore, commonsense dictates that Brazilhas a<br />
comparativeadvantagein the production of beef, whereasItaly’scomparativeadvantagelies in the<br />
production of which item? (pasta)<br />
ANSWERKEYWORKSHEET15<br />
1. 2;½<br />
2. ½;2<br />
3. beef; pasta<br />
4. isounits;150units<br />
5. ItalycantradewithBrazil togetthe beefit is unable to<br />
produceas ethciently;Brazilcan trade surplus beef to get<br />
the pasta its consumersdesire.<br />
© D. C. Heath and Company
__________________<br />
[Name<br />
WORKSHEET15 __________________<br />
Class _____________<br />
L ABSOLUTEANDCOMPARATIVEADVANTAGE<br />
Date___________<br />
Answerthe followingquestionsor completethe followingstatements based on Figure 16.1on the transparency.<br />
1. How many boxesof pasta can Italy produce with just one unit of labor? ______________ How many<br />
pounds of beef can it produce with just one unit of labor? _____________<br />
2. How many boxesof pasta can Brazilproduce with just one unit of labor? —____________ How many<br />
pounds of beef can it produce with just one unit of labor? _____________<br />
3. It is clear that Brazilhas an absolute advantagein the production of , whereasItaly has an<br />
absolute advantagein the production of ______________<br />
Answerthe followingquestions based on Figures 16.1 and 16.2on the transparency.<br />
4. What is the differencebetweentotal productivitywithout specializationand with specializationfor Italy?<br />
For Brazil?<br />
5. By using more of its resourcesto produce pasta efficiently,Italy makes more units of pasta than its citizens<br />
can consume. Yet to do so means eliminatingbeef production. How will trade with Brazil benefitboth<br />
countries?<br />
Answerthe followingquestions or completethe followingstatements based on Figure 16.3on the transparency.<br />
6. In this example, how many units of labor must Italy employto produce just one box of pasta?<br />
_____________ How many units of labor to produce one pound of beef? _____________ How many<br />
units of labor must Brazil employto produce one box of pasta? How many units of labor<br />
to produce one pound of beef? ____________<br />
7. If Brazilproduces one additional box of pasta, how much less beef will it produce? What<br />
is Brazil’sopportunity cost of producing one box of pasta? If Brazil decidesto increase<br />
production of beef by one pound, how much will pasta production be decreased? _____________<br />
8. What will Italy have to give up if it increasespasta production by one box? ____________ What is<br />
Italy’sopportunity cost of increasingbeef production by one pound?<br />
9. Comparethe opportunity costs of each country in pasta production. Which country has to give up more in<br />
order to increasepasta output? Which country has to give up more in order to increase<br />
beef production? Therefore, compared to Brazil, Italy has a comparativeadvantagein the<br />
production of ______________<br />
and Brazilhas a comparativeadvantagein the production of<br />
5
BRUSSELS, Feb.5—WesternEuropeangovern<br />
mentsagreedtodayto allow Britainto restrictits<br />
soaringimportsof Americansyntheticfibers,but<br />
decidednot to allow other countriesto do so, to<br />
lessenthe danger of a damagingtrans-Atlantic<br />
tradewar.<br />
Foreignministersof the ninemembercountries<br />
of theEuropeanEconomicCommunityaccepteda<br />
reportby their ExecutiveCommission.It saidthe<br />
damagethatimportsof cheapAmericanfiberswere<br />
doingto Europe’stextileindustrydid notyetjustify<br />
generalprotectionistmeasures,althoughBritain’s<br />
casemaybedifferent.<br />
TonightBritain’sConservativeGovernmentwas<br />
reportedmovingtowarda decisionto put newre<br />
strictionson imports of Americanpolyesterfila<br />
mentyarn,whichnow accountsfor 26 percentof<br />
total nationalconsumptioncomparedwith less<br />
than4 percentin 1977.<br />
Britain’sTradeMinister,JohnNott,saidhe was<br />
“grateful” for the understandingshownhis coun<br />
try’sproblems,addingthat the Governmentwould<br />
announcenext Fridaywhetherit plannedrestric<br />
tions.<br />
RetaliationFeared<br />
Someofficialshereexpressedconcernthateven<br />
unilateralaction by Britain would strengthenthe<br />
handof protectionistforcesin the UnitedStates,<br />
increasingthe risk of retaliatoryactionthere.But<br />
othershopethatBritain’sstrongsupportfor Presi<br />
dentCarteronthe Afghanistancrisiswill dissuade<br />
himfromsuchretaliation.<br />
BydecidingagainstEurope-widerestrictionson<br />
United Statesfiber imports, the nine Common<br />
Marketgovernmentsandthe commissionhopeto<br />
strengthenPresidentCarter’s resolve to resist<br />
Handout11-5<br />
E.E.C.LETSBRITISHCURBU.S.FIBERS<br />
Londonto MakeDecisionFriday<br />
growingpressuresby the Americansteelindustry<br />
for newrestrictionson Europeansteelimports.<br />
Theyalsobelievethattoday’sdecisionmeansEu<br />
ropeis keepingits endof the privatebargainthat<br />
Roy Jenkins,commissionpresident,made with<br />
PresidentCarterin Washington10daysago,under<br />
whichboth leadersagreedto fight mountingpres<br />
suresIn Europeandthe UnitedStatesfor protec<br />
tionistaction.<br />
Duringtheirtalks,bothPresidentCarterandMr.<br />
Jenkinsreportedlyagreedthat any newtrade re<br />
strictionscarriedahighriskof spreadingintoday’s<br />
difficult economicclimate,underminingWestern<br />
effortsto preservefreetradedespiteslowingeco<br />
nomicgrowthand risingunemployment.<br />
U.S.PriceControlsCited<br />
Western Europeangovernmentsbelieve that<br />
America’soil and naturalgas price controlsnow<br />
giveits syntheticfiber andotherplasticsmanufac<br />
turers an increasinglyunfair price advantagein<br />
overseasmarkets.But in the UnitedStates,steelmakerscomplainthat<br />
Europeansteelmakersare<br />
beingunfairlysubsidizedbytheir governments.<br />
On February18, PresidentCarterwill send his<br />
chief tradenegotiator,ReubinAskew,to Brussels<br />
to try to resolvethese and other trade disputes<br />
smolderingbetweenEuropeandtheUnitedStates.<br />
Officialshere,however,seemdoubtfulof substan<br />
tial progress.<br />
Meanwhile,Europehasopeneddiscussionswith<br />
the UnitedStatesin Genevaon the broadertrade<br />
Implicationsof energypricecontrols,arguingthat<br />
the Westernindustrializedworld shouldaccepta<br />
commonposition,in casethe oil-exportingcoun<br />
tries of the MiddleEaststart providingcheapoil<br />
feedstockto the plasticsand fertilizerindustries<br />
theyarenowbuilding.<br />
Reprintedfromthe NewYorkTimes,February1980,p. 27. 0 1980 The NewYorkTimesCompany.ReprintedbypermissiOn.<br />
103<br />
/
FREETRADEOR PROTECTIONISM<br />
Name<br />
Class Date<br />
In the United States, the manufacturing sector has lost much of the domestic market to<br />
foreign competition. Some American companies have tried to correct the situation by<br />
modernizing their plants, paying lower wages, cutting costs, and improving quality.<br />
Other companies have not made such changes because they are faced with strong<br />
unions that are reluctant to give up employee benefits. Some of these unions and<br />
industries have therefore been pressuring Congress to pass laws protecting them from<br />
foreign competition.<br />
1. List and define the four types of trade restrictions that Congress can enact.<br />
a.<br />
b.<br />
C.<br />
d.<br />
2. Read the following cases of troubled American industries, and then answer the<br />
questions below.<br />
In 1985, foreign companies held 71 percent of the United States shoe market. In one 18-month<br />
period, 11,000 American shoe workers lost their jobs. American workers are paid an average of<br />
$6.71 an hour. In nations such as Brazil and Taiwan, the average pay is less than $1.00 an hour.<br />
Thus, foreign-made shoes are substantially cheaper than American-made shoes.<br />
In 1973, United States steel companies held 88 percent of the domestic market and employed<br />
500,000 workers. In 1985, the market share held by American companies had dropped to 69<br />
percent, and 200,000 jobs had been lost. United States steel companies had expanded their<br />
capacity, but demand for their steel had contracted. Furthermore, the wages of workers had<br />
gone up, old steel mills were becoming increasingly obsolete, and foreign companies were<br />
flooding the United States market with steel priced lower than Americans could match.<br />
a. Why are these American shoe and steel industries in trouble?__________________<br />
b. Which of the four trade is restrictio would these two industries want? Why?<br />
c. Who would gain from these restrictions? Who would lose? _____________________
0<br />
E<br />
U<br />
I<br />
Name<br />
Section 4. FREE TRADEOR PROTECTIONISM<br />
Class Date<br />
Imagine you are the “inquiring photographer” of a big city newspaper. You have<br />
received the following answers from five people to a question about whether or not the<br />
government should protect American industry and workers by erecting trade barriers.<br />
On the line following each opinion, label the point of view as either favoring free trade<br />
or favoring protectionism.<br />
1. Debbie Medina, homemaker: “I just bought back-to-school clothing for my children.<br />
Most of the items were made in Hong Kong or Taiwan. I like the quality and you<br />
can’t beat the prices.”<br />
2. Gary Valois, farmer: “Much of my income comes from selling wheat to other coun<br />
tries. I think a restrictive trade policy would hurt our sales abroad.” _______________<br />
3. MarIa Reed, steelworker: “Cheap foreign steel is destroying the American steel in<br />
dustry. Two guys on my shift were laid off last week, and I don’t think I’ll have a job<br />
by the end of the year.”<br />
4. Major Henry Mecom, U.S. Army: “If the American computer industry is swamped<br />
by foreign competition, our national security will be threatened. We can’t afford to<br />
depend on foreign sources for computer technology.”<br />
5. Francis Rosen, recent college graduate: “I’ve been looking for a car. I sure would<br />
like to support American industries, but the Koreans and Yugoslavs make the least<br />
expensive cars. I hope the government doesn’t raise the import duties.”_____________
____________ INDEPENDENTPRACTICEWORKSHEET ____________<br />
[Name<br />
CHAPTER17<br />
I 17.1THE UNITEDSTATESIN A WORLDMARKET<br />
L<br />
MAKINGSENSEOUTOFA WORLDECONOMY<br />
1. When a nationtakes part in a world economy,<br />
a. what benefitsmight the nation enjoy?<br />
Answerthe followingquestionsabouta world economy.<br />
Date_______<br />
b. what problemsmight the nation encounter? ______________________________________________<br />
2. What happens to a nation’sexchangerate if:<br />
a. it imports more than it exports?<br />
b. it exports more than it imports?<br />
3. What are some reasonsthat foreignersmight want to buy land, factories,and other property in the United<br />
States?<br />
4. II foreignerspurchased farms and factoriesin the United States,<br />
a. what advantagesmight there be for the United States?<br />
b. what disadvantagesmight there be for the United States?
“Go. man. go!” exclaims<br />
George Young. “That’s how<br />
I feel about the Reagan Ad.<br />
ministration’s trade sanc<br />
tions on the Japanese.”<br />
Young,34. the co-owner of<br />
Village Records & Tapes in Grosse<br />
Pomte. Mich.,is speaking against his self<br />
interest. He readily admits that higher<br />
tariffs on themanyJapaneseproductshis<br />
storesellscould forceprices upenoughto<br />
hurt his business. More than half of his<br />
compact discs.forexample.arepressedin<br />
Japan. Butsanctionsare necessary, says<br />
Young, because the “U.S.needs to be<br />
moreself-sufficient.I’ma realnationalist<br />
whenitcomesto trade.”<br />
That line,however,getsan immediate<br />
and sharp rebuttalinside his own shop.<br />
Ifwe havea tradewar withJapan.we’re<br />
in bad shape.” saysYoung’spartner,John<br />
Denomme.35. ‘Wealmost totallyrelyon<br />
Japanesehardwareto play our software.<br />
Nearly every component in home audio<br />
and videosystemsis manufacturedin Ja<br />
pan. If the Japanese decided they were<br />
going to make it difficultfor everybody<br />
else, they could.” Denomme is far from<br />
comfortablewiththatsituation.In facthe<br />
finds Japaneseeconomic power fright<br />
citing.” Nonetheless. he is dead set<br />
against protectionism:What good is it<br />
goingtodo’ The Japanesehaveit all over<br />
us in terms of goods.U.S.protectionismis<br />
like a spoiledchiid having.lnangrytut.”<br />
This exchange is not exactly typical.<br />
YoungandDenom.mearemuchbetterin<br />
formed.and far moreconcerned, thanthe<br />
great majoncy of their fellow citizens<br />
aboutthe threat of economic warfarebe<br />
tweenthe U.S.and Japan Buttheir argu<br />
ment does pointto some of the bewilder<br />
ing crosscurrents in American attitudes<br />
towaraJapan.its productsand tradepoli<br />
cies. As ?eflected in rids and interviews<br />
byTIME correspondents across the coun<br />
try,those attitudesare a strangemixture<br />
of admiration, envy resentmenttouched<br />
nowand then by fear. ano nolittleconfu<br />
sion. Protectionist senumeni does exist.<br />
but it is rarelyvoiced with much passion.<br />
And the sharpest cnthnms of Tokyo’s<br />
“unfair” trade policies are Ukely to be<br />
mixea ‘withequailyunsparing criticism—<br />
sometimes from the same person—of<br />
Americans for being ess energetic and<br />
skillfulthan inc ubiqunousJapanese.<br />
That.to be sure. is not the impression<br />
woria<br />
AMixofAdmiration,<br />
EnvyandAnger<br />
TheAmericanpublic is less worriedthan Washington<br />
anyonewouldget fromlistening to politi<br />
cians in Washington.Among them the<br />
dominant mood is unalloyed anger.<br />
Speech after speech in Congressaccuses<br />
Tokyoof wipingout Americanjobs with<br />
Hoodsof imports while keepingthe Japa<br />
nese marketclosed to U.S.and otherfor- t<br />
eign goodsand services.That resentment I<br />
does not just ring through debates on<br />
trade policy;it also creeps into remarks<br />
that are supposedto be focusedon bank<br />
ing, mergers, education, defense, sci<br />
ence—almostanything a legislatorfeels<br />
movedtoorate about.<br />
“Thelevelofanti-Japanese tradefeel<br />
ing is higher than ever before.”saysSec<br />
retaryof Commerce Malcolm Baldrige.<br />
One notableexample:resolutionscalling<br />
on RonaldReaganto takeactionagainst<br />
allegedJapanesedumping of microchips<br />
and the lack of market access for U.S.<br />
ch.ipmakerspassed bothHouseand Sen<br />
ate withouta singledissentingvote.Cali<br />
fornia Republican Pete Wilson intro<br />
duced the Senate resolutionby resorting<br />
to the crudestsarcasm: ‘Unlikein all of<br />
those grade-B Japanese horror movies,<br />
the Japanese semiconductorGodzilla is<br />
now destroyingeverything but Tokyo.”<br />
The U.S..said Wilson,shouldstrikeback<br />
“even if our retaliation.., precipitatesa<br />
tradewar.Indeed, the point is thatwe are<br />
alreadyat war withJapan.”<br />
Wilson’srhetoricis overheatedeven<br />
by Washingtonstandards. But foreigntradeexperts<br />
inside and outsidegovern<br />
ment,includingsomewhoconsiderthem<br />
selves dedicated free traders. soundjust<br />
slightly less exasperated.Says one Ad<br />
ministrationofficialwho has sat in trade<br />
negotiations:“The Japanesealways wait<br />
untilthe 59thminuteof theeleventhhour<br />
beforethey make any concessions.Even<br />
then theywon’tmove, becausetheywant<br />
to improve the relationship or because<br />
they recognize the validity of the [U.S.I<br />
argument.They just move becausethey<br />
are forcedto.”C. Fred Bergsten,director<br />
of the Institute forInternationalEconom<br />
ics, a Washington think tank, agrees:<br />
“They give us very clearly the message<br />
that they only move when hit over the<br />
headbya two-by-four.So.we willaccom<br />
modateandhit themoverthe head.”<br />
Outside Washington. however, atti<br />
tudes are nowhere near as bellicose. In<br />
deed, pollsconsistentlyturnup a surpris<br />
ingamountofadmiration fortheJapanese<br />
and their business prowess.In a poll for<br />
TIME by YankelovichClancy Shulman<br />
two months ago, respondentsdeclared<br />
51% to 23%that Japanese work harder<br />
than Americans. By 53% to 25%, they<br />
judgedJapanesecorporationsto be better<br />
managed than U.S. companies.The up<br />
shot: most respondents deemed Japan’s<br />
success in worldtradeto be well earned.<br />
Thoughhalfof those polled believedthat<br />
the Japaneseengagein unfair tradeprac<br />
tices. only 24% thought those practices<br />
werethe mainreasonfortheirexportsuc<br />
cess.Some68%believedthattheJapanese<br />
have been capturingmarketsaroundthe<br />
globe primarily ‘because they produce<br />
qualityproductsfora good price.”<br />
Answers to questions about sJapan<br />
invasionof the Americanmarketwerefar<br />
moremixed.Somewhatsurprisingly,50%<br />
of those surveyedthought U.S. products<br />
superiorin qualityto Japanesegoods.vs.<br />
I onJy 29% who believed Japanese mer<br />
chandise to be better. But they, divided<br />
just aboutevenlyon which productsoffer<br />
a better value for the price: 42% said<br />
American.41%Japanese.<br />
Protectionism?Despite the attrac<br />
tionsof Japanese products,respon<br />
dentsvoted60%to 35%to putlim<br />
its on the number of goods that can be<br />
sold in the U.S. But when asked about<br />
charginga tariff that wouldmake Jana<br />
nese products more expensive—<br />
i1e<br />
course that the Reagan Administration<br />
has since chosen to retaliateagamsi the<br />
alleged Japanesedumpingof microcnips<br />
and lack of market access—only 48<br />
were in favor,while 44% were op ’sed.<br />
Given the 3% margin of polling error.<br />
that is very close to an even split. Alti<br />
tudes toward Japaneseinvestmentn :tie<br />
U.S. have varied from poll to poLl.Some<br />
•l’his survey wu conducted by elephoneFebn afl<br />
17and IS among 1.014adult Amen nz.
50%of thepeopleansweringa LouisHar<br />
ris & Associatespoll in 1985thoughtthat<br />
the U.S. should discouragesuchinvest<br />
ment.whileonly 15%said it shouldbeen<br />
couraged.Butin the latestYankelovich<br />
survey.52% thoughttheopening of Japa<br />
nese-ownedmanufacturingplants in the<br />
US. is good for the Americaneconomy.<br />
and 62% said they would be willing to<br />
workfora Japanesecompany.<br />
EndividualAmericans voice equally<br />
mixed feelings. when they have any.<br />
Many,ofcourse.simplyhavenotbeen fol<br />
lowingthe latest trade disputes.even if<br />
their own jobs are affected by Japanese<br />
imports or investments.Workersstream<br />
ingoutof Chrysler’sJeffersonAvenueas<br />
semblyplantin Detroitlast weekat shiftchangetimegenerallydeclinedtoexpress<br />
any opinion about the Administration’s<br />
decision to impose sanctions on several<br />
Japaneseproducts.Reagan “is just blow<br />
ingsmoke.”volunteeredone. “Anyway,it<br />
ain’tgonna do nothing to help us.••Joel<br />
Padgett.treasurer of AZS Corp., an At<br />
lantachemicalcompanyowned by Toyo<br />
Soda ManufacturingCo. of Tokyo. as<br />
serts.“Ofour 200 employees. 198 proba<br />
blydon’tknowanythingaboutit.”<br />
Amongthosewhodo know,just a few<br />
expressviewsthatcould remotelybe con<br />
sidered ann-Japanese. “If unfair trade<br />
practicesgoon.Ifearformyjob.”saysDoug<br />
Kelly,32.an engineer at MicronTechnol<br />
og ’, a Boisechipmaker that has been in the<br />
forefrontofthecall forsanctionsand isone<br />
of thelasttwoAmerican firms to produce<br />
the chips under dispute. But many more<br />
peoplesoundfar too perplexedto holdany<br />
simplevews.<br />
Jon Deex. 31.a businessman in Tor<br />
rance.Calit. vows to buy U.S. products<br />
wheneverhe has a choice. When shop<br />
ping Ibea TV set six months ago. he re<br />
fused to look at Japanese models: he<br />
wouldconsider only RCAand Sylvania<br />
sets.“Eachpersohhas to do his ownpart<br />
totry to solve the tradedeficit,”explains<br />
Deex. Nonetheless, he opposes protec<br />
tionistlegislationbecause “welivein an<br />
interdependent, interconnected global<br />
village.Youjust can’toversimplify.”<br />
Dan Hilliard.a manufacturingengi<br />
neer at the Japanese-ownedNis<br />
san truckplant in Smyrna.Term..<br />
has no doubt that the Japaneseunfairly<br />
keepoutAmericangoods.Nissanhas sent<br />
him to Japan three times for training,<br />
where,he reports.“1saw veryfew Ameri<br />
can productson the marketthere,where<br />
as hereJapaneseproductsareall overthe<br />
place.’ Consequently, he believes the<br />
“U.S.Governmentis justified”in placing<br />
restrictionson Japaneseimports. Yet FIll<br />
hard has praise for the management<br />
methodsof his employer.Nissan’sproflts<br />
in Smyrna are down, he says. because<br />
“partsfrom Japancost much more than<br />
they did one year ago” as a resultof the<br />
risingexchangerateof the yenagainst the<br />
dollar. “But job security is one of the<br />
thingsthe companystressedwhenI start<br />
ed in 1981.and Nissanis trying tokeepits<br />
promiseand keepeverybodyon. If I had<br />
been at Ford. Chrysleror General Mo<br />
tors. I would probablyhave been in the<br />
s.reets bynow.”<br />
Joe Henson.presidentof Prime Com<br />
puter,an export-orientedcompanylocat<br />
ed on Route 128nearBoston.believesthe<br />
U.S.is taking a “reasonableand cautious<br />
approach”in tradepolicy toward Japan.<br />
“Wehave to be able to sell thingslike su<br />
percomputersandour Americanconstruc<br />
tion services”in Japan. he says, and if it<br />
takes retaliationagainst Japanese prod<br />
uctsto openTokyos markets.so beit. But<br />
Hensonhas no illusions that tradepolicy<br />
alone can solve the US’s problemof re<br />
gainingcompetitivenessinworldmarkets.<br />
“We have major challenges within our<br />
Vokee fromthe chonss an<br />
antl-bTVortSIWLhi Altoona.<br />
Pa.;ademonsfratlonIn front<br />
of theCapitolcallingto, mod<br />
omizatlonof domestJc indus<br />
fry;CommerceSecretary8a1 -<br />
thigr de,a1bln sesnicon<br />
tonsa etlo oe<br />
,-<br />
own economy,”he says. “We have to cut<br />
costs, improve quality and understand<br />
market requirements. The U.S.isconsum<br />
ing morethan it is producing.Wearebor<br />
rowingmoney to do it. and we have be<br />
comeadebtornation.Weourselveshaveto<br />
deal with this problemof overconsump<br />
lion.orwe will beforcedto stopit.”<br />
This idea that the U.S. is responsible<br />
formany ofitsowntradedifficulties,what<br />
ever practicesthe Japanese follow, runs<br />
through commentsbymanypeople much<br />
lessexpert thanHenson onworldeconom<br />
ics. Says Sheila‘Saunders.officemanager<br />
foramonthlymagazinein Atlanta:“There<br />
was notenoughforesight tosee thatJapan<br />
wouldeventuallyoutproduceus.Basically,<br />
we didnotmeet thecompetition.Weneed<br />
toadvanceourtechnology toproducequal<br />
ityproductscheaper.’<br />
Perhapsthemost sinking thing about<br />
I these andmany otherviewpoints is that<br />
they are expressed with a complete ab<br />
sence of the fiery anti-Japanese rhetoric<br />
so currentlyfashionablein Washington.<br />
The public is worried about Japanese.<br />
competition. disposed to believe that<br />
much of that competition is unfair.and<br />
willing to consider some limited retalia<br />
tion. Butit has considerablymorethana<br />
sneaking suspicion that much or’ the<br />
blamefor the American tradedeficitcan<br />
be placedright within the bordersof the<br />
U.S.. and it is in no mood to give up its<br />
Sonys.Toyotasor Minoitas.Congressand<br />
the Administration are impressed by the<br />
cries of protectionistlobbyistsand,jusufl-I<br />
ablyannoyedby thefrustrations 01 rtego<br />
tiating with theJapanese. Butoneques<br />
tion for them to ponder as they plo<br />
strategy is this:Whatif a trade war starts<br />
betweenthe U.S.and Japan.and Amencan<br />
consumers do not answerthe call to<br />
arms? —8rG.erg.L<br />
v.<br />
pert.d 6,’ simm-y Byn*stIS atás1t i<br />
aid<br />
Fra* £ $fan/A aita<br />
-“..<br />
-
World<br />
Trade<br />
Face<br />
Off<br />
I<br />
A dangerous U.S.<br />
confrontat(on<br />
It is no larger than a few<br />
grains of rice, but it was big<br />
enough to cause one of the<br />
most serious episodes be<br />
tween the U.S. and Japan<br />
since the end of WorldWar<br />
II. Itis the tiny microchip,a sophisticated<br />
bit of silicon that is the indispensable<br />
heart of the techtronicage,the raw mate<br />
rial for everything from tAlking teddy<br />
bearsto personalcomputersto interconU .<br />
nentalmissiles.Afterthe Reagan Admin<br />
istrationimposedtrade sanctionsagainst<br />
Japanin an attemptto protectAmerican<br />
makers of microchips.it suddenlylooked<br />
last week as if the U.S.and Japanwere<br />
headed for what could become a major<br />
traderow.In fact,TokyoTVcommenta<br />
torsdescribed the event with the phrase<br />
Kaisenzej,-ya(theeve ofwar),anexpres<br />
sionusedto describethedaysbeforePearl<br />
Harbor. In Washington. U.S.Trade Rep<br />
resencativeClayton Yeutter. while insist<br />
ing that a trade war was not at hand.<br />
nonetheless called the confrontationa<br />
“seriousdispute”<br />
Sizable shock waves rattled around<br />
the world in the wake of the U.S.action.<br />
whichwas prompted by allegedJapanese<br />
cheating in thesale of the usefulsemicon<br />
ductors and by Tokyo’salleged intransi<br />
gent protection of its domestic microchip<br />
mirket. Partially in response to thespec<br />
ter of tradeconfrontation,the DowJones<br />
average of 30 industrial stocks sank 57.39<br />
points as the week began, its third worst<br />
plunge in history. Yetthe mk ing 4<br />
year bullmarketin stocks,fueledin part<br />
• • .
ment money, recoveredquickly.and the<br />
Dowclosedthe weekat 2390.34.a record.<br />
In Tokyomoney markets. the price of the<br />
U.S.dollar slumped to a doleful 144.7yen.<br />
(he first time in postwar history that the<br />
greenback was worthless than 145.Only<br />
IS months ago it was 200. As tempers<br />
cooled by the end of the week, however.<br />
thedollar had dun bedbackto 146.05.<br />
In both the U.S. and Japan.the Ad<br />
ministration’stoughactionsparkedwide<br />
spreadconsternauon.Japan’slargestdai<br />
ly. Yomiuri Shimbirn.editorialized that<br />
thesanctions were“detrimentalto the in<br />
terests of American consumers.”The lib<br />
erai daily 4sahiShimbun declared darkly<br />
that “trade warhas now come about.’ In<br />
Manhattan.the usually pro-Reaganaut<br />
Wall StreetJournal warned that “highstakes<br />
traderetaliation,like Russian rou<br />
lene. Isa dangerousgame. and the world<br />
doesn’tbenefitwhen the Presidentof the<br />
United States leads bybad example.”<br />
Japanese ocials rushed to keep the<br />
trade conflict from spinning out of con<br />
trol. Foreign MinisterTadashi Kuranari<br />
urged that overall U.S-Japanese rela<br />
tionsshouldnot be undermined bythisis<br />
sue.” MakotoKuroda. a senior member of<br />
the country’s oowerfw Ministry ot’Inter<br />
national Tradeand Inoustry MIII).pre<br />
pared to hie o Washingtcn.His sob: to<br />
conveydismay at the bomosheilU.S.de<br />
cision to retaliate with some 5300 million<br />
worthof tariffs on a wide rangeof Japa<br />
neseelectronicgoods. Inaddition.former<br />
JapaneseForeignMinisterShintaro Abe<br />
has been namedas a spuciaien ny y To<br />
kyoto helpuefle; the tradeoilision. But<br />
thesanctions wil aJri ost er am1y go into<br />
effectas shdj’et n &‘r .’ouf April 17.<br />
The mca wes urtourte. t 1inie more<br />
than ii blip ...n.he girgar.Luan i.ime iif<br />
‘, annuai S.-J2pan :‘ace. uch to<br />
taied Ii2 i”i ,li’:. ‘as’,tear 3u tie iap a<br />
was Ito a pcw srlj. .ai rt.. Lc<br />
nes. age. Fur i’e ist tune. ox:g ariil<br />
Amcn an vrevaricesc”er tie rac1e x’ac<br />
ices t)f IS O! d Se ‘ar ct,I •rauingrarlner<br />
after ‘ai’aJa) ‘esu’ted .n a sharp<br />
.ino ,cni:ud ‘J,S.xo cm c re r.sc. atd<br />
. enzor dm 1ILs a’,t ’p )i&,ai: ‘T! s<br />
ti hc.pcü.Jl enc a stgna .oad ur trad<br />
og partne ”s tnat tt e tree de isover ‘&s<br />
Cornmere Secretary 1aicolm !3 sIurige<br />
2Utit tO T’P,st. “ou can’trely n ‘ords.<br />
You m’e to rel, n actiors.’<br />
Thoseactionsma inon pr(r”cleson e<br />
‘ryingtmimen s for r.er v’dely :out<br />
.d is d.y e perwnaland ‘l’.ica rienas.<br />
onatd Reagan and ispanese Pnnie<br />
tiruster Yasu iiro “.ak .sne. The ‘AC<br />
tates!reri re s.edo ec t., meet b Warn<br />
‘igic’nQn £.pnl 9. .ir .c ,ne iew strainn<br />
ty “elazhc’nslui) :.‘mes at a ame ien<br />
))11 ;2.GefS ae serious po1i’i ai .sou<br />
‘es. A iO?r,e Nakasone S rrentiy<br />
•ightingan ib’l oJule or ioii’ cal ur<br />
val. The U.S sar1 .ti ms ‘ere ar added<br />
’ae :uj ‘hal ou:d hel, forceti it 3.it ofof<br />
‘e before hs ter’rexpires.n Oc ,cber.<br />
For Reagan. wea:ened ‘o ‘he Iran.<br />
m scandal the sar.ctbis *era an Un<br />
Pre©edcntedga. ”nb*e. On one hand, they<br />
xressed •he Adntnts’,rat.j.,n s ‘pro-<br />
‘1 r”<br />
2
found disapproval” of Japanese trading<br />
practicesIn the sensitive semiconductor<br />
field.On the other. they werean integral<br />
part of the Administrations strategy to<br />
addressthecountry’sghastly tradedeficit.<br />
The semiconductor measures were also<br />
intended. ironicallyenough. to help block<br />
a risingprotectionist tidein the U.S.Con<br />
gress.buttheycouldjustas easilyhavethe<br />
opposit effect..<br />
The sanctionsactuallycheeredlegis<br />
latorswhoare prepanng a new versionof<br />
a toughomnibus tradebillthat passedthe<br />
House of Representatives last year but<br />
died in theSenate.Oneversionof the new<br />
bill is expected to reach the House floor<br />
on April 28. the day before Nakasones<br />
visit. Says SenatorMax Baucus of Mon<br />
tana.a leading congressional activist on<br />
trade issues: “The President’ssemicon<br />
ductoraction is sort of a turningpoint.<br />
Were goingto stop talking and start tak<br />
ingaction.”<br />
The clash over microchipsalso went<br />
far beyond commercial concerns in pit<br />
ting two vastly differentcultures against<br />
each other.Aftermorethan 130years of<br />
contact with the West. Japan is hard<br />
working,thriity, highly organized butstill<br />
relativelyinsular in its worldview.Onthe<br />
other hand. free-wheeling, free-spending<br />
and individualistic America is now be<br />
coming fully awareof the lossof its post<br />
warindustrialprimacy.By its latesttrade<br />
actions.Washington was clearlyattempt<br />
ing to forceTokyoto change not only its<br />
outlook butalso its historic attitudes.For<br />
the Reagan Administration, and indeed<br />
forAmerica.the issueof protectinghightech<br />
industries went beyond economics<br />
and politics to national pride. Long the<br />
world’stechnological leader—andstill in<br />
many respects the world frontrunner—<br />
the U.S.was fightinghardto protectthat<br />
role.<br />
The semiconductor fray, predicts<br />
ClydePrestowitz.an expert on Ja<br />
pan at sWashington Woodrow<br />
Wilson [nternationalCenter for’<br />
Scholars. “Is probablyjust the beginning<br />
of much more rocky times between the<br />
U.S.and Japan.” Or betweenJapanand<br />
just about everybodyelse. In Londonlast<br />
weektheConservative Cabinetof British<br />
PrimeMinister MargaretThatcherclos<br />
eted itself to discusseconomic measures<br />
againstthe Pacificisland power.Afterthe<br />
hour-longsession at 10 Downing Street.<br />
Thatcher dispatched one of her trade<br />
ministers to Japan with the threat that<br />
Britain might soon cakeretaliatory action<br />
tokeepadditionalJapanesebanksand se<br />
curitiesfinns fromoperating in London.<br />
The aim was to pressureTokyointo end<br />
ing its stonewallingof Britishfirms that<br />
want access to highly protectedJapanese<br />
financialmarkets.<br />
The British have urged their eleven<br />
fellowmembers of the EuropeanCommu<br />
nityto takepartin the Japanesesanctions<br />
campaign. and several E.C. members<br />
seem inclined to join in. Said European<br />
i Community Industrial Commissioner<br />
arl-Heinz Naj es: “Our patience has<br />
snapped.We have had enoughof giving<br />
the Japanesethe bene& of the doubt.”At<br />
a meeting of Community foreiga minis<br />
tersscheduledto takeplacelast weekend.<br />
the Netherlandsand WestGermany were<br />
expected to support the British proposal.<br />
Last month in Brussels the European<br />
CommissionurgedCommunitymembers<br />
to get toughwith Japan.The commission<br />
hadearlierslappeda 20%retaliatory tar<br />
iff on Japanese photocopyingmachines.<br />
which take up75%of the Si billionEuro<br />
pean market.<br />
Behind the sound and furyaimed at<br />
Japanwereprofoundalterationsin the fa<br />
miliar internationaleconomic<br />
landscape that will continueto<br />
shake trading relationshipsfor years to<br />
come. An unwholesometide of global<br />
protectionismhas been slowlyrising for<br />
severalyears.butnowitseemstot, head<br />
ing toward flood levels. That unsettling<br />
prospectcomesdespitetheavowedinten<br />
tionof most of theworld’strading<br />
to broaden free trade through a new<br />
roundof negotiationsinvolvingthe ô<br />
member General Agreementon Tanffs<br />
and Trade. Even though talks for that<br />
roundbeganin Uruguay last September.<br />
the Geneva-basedstaffof GATr is ueeply<br />
concernedabouttheoutcome.Inits latest<br />
annual report,issuedlast December.:re<br />
organizationdeclared thateconomicpoli<br />
cies being introduced around the world<br />
mightnot lead to open tradewarfareut<br />
could producea “prolongedstageation. ”<br />
Freetradehas beena centraltenetoi<br />
the postwareconomic order.The system<br />
thatwas putin placewith U.S.leadership<br />
tookas a cardinalprinciplethe beliefthat<br />
“beggar-thy-neighbor”protectionism in<br />
the prewaryears had helped cause the<br />
Depression-era misery and socialturbu<br />
lencethateventuallyled to WorldWarII.<br />
In economicterms.protectionistbarriers<br />
largely benefit inefficientcompaniesand<br />
hurt consumers by forcing them to pay<br />
moreforproducts.Even thoughthecom<br />
petition engendered by free trade .an<br />
cause temporary pain bydestroyingobso<br />
lete industry and generatingunemplov
, thefinalresult is moreiobs.<br />
I re incomeand moreopportunity<br />
lit evefYmanufactureris allowed to pro-<br />
I duce andexportwhat it makes best.The<br />
I vaiucof freetradehas been spectacularly<br />
I disp1 Yed in the tremendousexpansionof<br />
I pstwar Westernwealth.<br />
Protectionists.on the other hand. ar<br />
gue thatfreetrade is a finetheorybut it is<br />
notthe real world.Theyclaim thatat any<br />
giventimetrading nationsare subsidizing<br />
production costs. stopping imports by<br />
stealth andoff-loadingtheirownproducts<br />
on Lesssheltered trading partners. The<br />
strongestprotectionistargument is that<br />
industries may need either temporary or<br />
permanenthelp in combatting such un<br />
fair competition,usually in the form of<br />
trade restrictions. The biggest problem<br />
with the argumentis that temporaryhelp<br />
oftenturns intothe kind of permanent dc<br />
pendencethatfostersstagnation.<br />
The protectionist argumentis flaring<br />
up anew becauseof Japans phenomenal<br />
success.Afteronly 30 years of aggressive.<br />
imaginativebutoften highly protectedin<br />
dustriai growth. the Japanese are the<br />
prodigiesof the industrialized world, rev<br />
eling in a trade surplus of $83 billion in<br />
1986alone.SaysRobert Hormats.a part<br />
ner in the Goldman Sachs investment<br />
houseand a formertrade adviser to the<br />
Carterand Reagan Administrations: No<br />
countryin history has ever gained inter<br />
nationalwealthas fast as Japan.”Many<br />
economistsestimatethat theaccumulated<br />
Japanese balance of payments surplus<br />
could reach anywhere from $500 billion<br />
to St trillionby the year 2000.The Japa<br />
nese. like the OPECnations in their hey<br />
day. are already investing their current<br />
surplus funds aroundthe world.Lastyear<br />
they placed S132 billion abroad. roughly<br />
half of it in U.S.Government and corpo<br />
ratebonds.<br />
Japan’srise to such riches has been<br />
particularly painful for the U.S.. the<br />
world’s foremost militarypowerand To<br />
kyo’smost important ally. As of last year<br />
the U.S.hadalso becomethe world’sbig<br />
gest foreigndebtor1986 total:morethan<br />
$200 billion). That debt is steadily being<br />
compounded by the tradedeficit,which<br />
rose to a new recordof $169.8billionlast<br />
year.Of that total.$58.6billionwasowed<br />
to Japan.basedon $85.5 billion in Japr<br />
nese importsto the U.S. and only $26..<br />
billionworth of returnU.S.exports.<br />
The ironyis thatprobablyat noother<br />
time in postwarhistory havethe US. and<br />
Japan managed to cooperateas well as<br />
they have under Reagan and Nakasone.<br />
In the past five years, the two counthes<br />
havereached an unprecedenteddegreeof<br />
understanding onJapan’sstrategic rolein<br />
the Pacific.That Japanesecontributionis.<br />
quitesimply,invaluable.SaysKatsuroSa<br />
koh.a seniorfellowin Asianstudiesat the<br />
conservativeHeritage Foundation:‘Secu<br />
rity is the cornerstoneof the U.S.-Japa<br />
nese relationship.”Japan’s1987military<br />
budgetof $32 billion is now the world’s<br />
third largest afterthatof the U.S.and the<br />
SovietUnion. UnderNakasone.Japanis<br />
beginningto meet a long-standingbutun<br />
fulfilledcommitmentto safeguard its own<br />
sea-lanes up to [.000 miles off the Japa<br />
nesecoast.<br />
Butwhilethesecurity ties havethick<br />
ened, thetradeimbalance has widened.It<br />
isnowmorethan threetimesas greatas U<br />
wasonly fiveyears ago.Fromyear to year<br />
a tradedeficitmay not be a bad thing,but<br />
over time it becomes debilitating, since<br />
money must be borrowed abroad to 6nance<br />
the shortfall.Even then. such bor<br />
rowingcan be usefulif it is usedto finance<br />
(Ui to West steel at The<br />
dock hi Seattle; el.cb’oidca<br />
idphotogr t1c lImesadvsr<br />
Us. In Manhattan’s TLm<br />
Si TV sets on spluy hi<br />
Mew York. West to (ast<br />
Amei cai Thr<br />
Ioaded • Crayse ercon utsr<br />
thathasfacedhiddenba,i.rs
needed capital improvements,as the U.S.<br />
did in the 19thcentury.The current U.S.<br />
tradedeficit,however,is largelya resultof<br />
America’s passion for more consumer<br />
Another problem i the deficit’s in<br />
tractability. During the past 15 years, the<br />
U15. has had successivetradecrises with<br />
the Japaneseas the archipelagicpower<br />
house has conqueredworld markets in<br />
textiles, televisionsets, steel andautomo<br />
biles.In eachcase.the problemwas sup<br />
posedlysolved by the impositionof con<br />
trolson Japaneseexports to the U.S. But<br />
the imbalance has become worse, creat<br />
ing a climate—atleast in Washington—<br />
that threatens to undercut the much<br />
broadermutualityof interest that binds<br />
the U.S.and Japan.Saysan Adnunistra<br />
tionothcial:It reallyisa problemof per<br />
ception. The Japaneseare seen as being<br />
unfair.”<br />
Thatisnotthe Japanese view.Ascon<br />
cernoverthe U.S.trade deficithasgrown.<br />
Nakasonehas taken the lead in trying to<br />
persuade his count.rjmen to becomemore<br />
energeticconsumers.especiallyof foreign<br />
goods.in the interestsof averting a trade<br />
war. The Prune Minister two years ago<br />
made an unprecedented appearanceon<br />
nationaltelevisionto underscorethat ap<br />
peaLHe thenwenton a highly publicized<br />
expeditionto buyforeigngoods in Tokyo.<br />
Ac.that time he also announced relax-<br />
auons in the maze of bureaucratic regula<br />
tions that often seem to make the Japa<br />
nese market impenetrable to foreign<br />
competition.<br />
Nakasone’s efforts at liberalization.<br />
though.have bad littleeffecton U.S.-Jap<br />
anese tradefigures.Indeed, most econo<br />
mistsestimatethat if all protectionist bar<br />
riers in Japanwere removedat a stroke.<br />
Japanese imports wouldincrease byonly<br />
$8 billionto $15billion.<br />
The factor that has had the greatest<br />
single impact on Japanese trade is the<br />
Dumping: It’sa jungle’Ôut.There<br />
D<br />
umping is a topic that only an iriterna- —. ,<br />
.. 4..A. .’ ..<br />
uonal trade lawyer could love.The ha- a. . . . Ji .<br />
I - . 4’.-<br />
• sic concept is simple enough: dumping is $‘3iX W<br />
.‘seilinga product for less than the cost.of<br />
making it. That ha s. been a world-trade .<br />
I . problem ever smce mass production made .<br />
ii easy fo companies. inadvertently oroth’<br />
‘tU rfl out more goods than. -<br />
.<br />
‘comers.wane. with anything. ‘?71 -<br />
front too many dolls to excessserniconduc . }‘ ‘ :‘ 2<br />
-<br />
U.,M.dJ ,I ,.. i ‘ r 4<br />
• mrs manufacnwersoften .sell the products<br />
otherco nthCs as very cheapr prices Thebwt id e’oi, I, the256Kd<br />
rather than - - -<br />
thrxrwthemaway<br />
Dumping, however, can become’a jungle of complications once lawyers or<br />
- govenunearbureaucrats get together and try to figureout what really happened.<br />
. A trade ncgc*ator in Tokyosays.the U.S .-Japan semiconductor agteement, fr<br />
examplé is like thejewel beetle.an iridescent insect whosehuechanges depend<br />
osiwhich angle itis viewed fro m. ‘Oneguyr thinks it’sseen. ” he saya An-.<br />
other sa .ys .is sbiue’ • -<br />
• . SliJ Japan -a eed last year to stopduinping chipein the tTS and nor to se IP<br />
• thembë1owpmdtzxion.cost in other countries But ing ’analy after salesaf’mil- ’<br />
lionsc±ipa in t-f cctmuies in Febniary. the COnunercé Department conciudh&<br />
1 ‘.<br />
tha’a n ipewere sellingac.40%to6S% of thercosi ..•..<br />
The -?okyo- governzuens.concedes tlmt<br />
fdfzmpedroutsidethe-US. But it.arg ’ the-miesai being, denot by Yapa.<br />
nàe. chipmakers..who are under govesument‘uwoL but -.b ãsdepeadenr<br />
iiiessment Ofticiala . cikint to. be.dcing everything, they can’ tStop ’thaL<br />
promise& Not good enough ,. retorts. Commerce. Secretary Malcolm.Buldng<br />
.ff thc nefacruretstry to get out..of their-obligation no t. to dump i crd,-’<br />
tkers by g middlemen,that is .a4elibeTaze’ action..1 th go<br />
•<br />
_____<br />
.<br />
skyrocketingvalueof theyen,which<br />
has risen 60%against the US. dol<br />
lar since September 1985.The steep rise<br />
in the yen has helped push the iapanese<br />
economy into a trough. The change in<br />
currencyvalue was expected to helpcor<br />
rect the tradeimbalance by making U.S.<br />
exports to Japan cheaper and Japanese<br />
exports to the U.S. more expensive. Fi<br />
nally, after long and frustrating delays.<br />
there are signs that such changes are<br />
slowlycoming about. The Japanese claim<br />
their U.S.imports last year rose byalmost<br />
24%. When special circumstances are<br />
subtracted(notably, a $2.5 billion pur<br />
chase of gold for coins commemorating<br />
EmperorHirohito’s60 years of rule), the<br />
figure is more [ike 4.8%.Butat the same<br />
tune, global Japanese exports declined in<br />
volumeby 1.3%.<br />
Thereare additional reasons why the<br />
current semiconductor confrontation has<br />
more powerftilsignificancethan previous<br />
trade squabbles. One is the importance of<br />
the microchips—finelyetched electronic<br />
devices that process thousands of bits of<br />
information per second—to the burgeon<br />
ing world of high tech Semiconductors<br />
are now usedin virtually every advanced<br />
technology, including the Cray supercomputersthat<br />
are a key component of<br />
the Reagan Administrations Strategic<br />
Defense Initiative.SaysC. FredBergsten.<br />
director of the Washington-based Insti<br />
tute for International <strong>Economics</strong>:“Prac<br />
tically everyone in the U.S. agrees that<br />
semiconductorsis a critical industry and<br />
that it would be dangerous. both to the<br />
economy and to national security, to<br />
loseit.”<br />
So far. the U.S. has lost neither its<br />
ability to producesemiconductorsnorits<br />
capacity to manufacture other advanced<br />
and economically competitivehigh-tech-:<br />
nological goods. Last year the 11.3.pro<br />
ducedan estimated $227 billionworthof 1<br />
electronic products.includingS580 trilllion<br />
worth of supercomputersthat are<br />
widely consideredto be the world’smost<br />
advancedmacnines.<br />
he problemis that underthe re<br />
lentless technologicaladvance of<br />
T<br />
Japan. thdonceunquestionedU.S.<br />
dominance in thoseareas has been<br />
seriously eroded. In the semiconductor<br />
field, the US. in 1982enjoyed a 49.1%<br />
world-market share. while Japan had<br />
26.9%. Now Japanis the No. I producer.<br />
with 45.5%of the $45 billionworldmar<br />
ket.whilethe US. has 44%. In the overall<br />
area of high tech. the news for the U.S.<br />
has been even more depressing. In 1980<br />
the U.S.ran a record $27billiontrade sur<br />
plus in those advanced products Last<br />
year. for the first time. the American<br />
high-tech balance becamea deficitof S2.6<br />
billion. Says the Woodrow Wilson Cen<br />
ter’s Prestowitz “It used to be that —<br />
could say America should be movtngusto<br />
the future. Nowwaare findingout that.we<br />
don’t have a future.”<br />
That considerablyoverstates the css ,.<br />
-
ut many others have taken evenmore<br />
alarmist positions. In Februarya high<br />
leveladvisorypanel,reportingto Defense<br />
Secretary Caspar Weinberger.issued a<br />
study that warned of the unminent de<br />
mise of the US. semiconductorindustry<br />
unlessimmediateactionwas takentosave<br />
it. Amongother things. the panel called<br />
on the Detense Department to invest $2<br />
billionduringthe next fiveyears in micro<br />
chip researchanddevelopment.<br />
None of that concern entirely cxplains<br />
the fireworksthat have erupted<br />
over the complicatedUS-Japanese ru<br />
crochip agreement.Thecrisisactuallybe<br />
gan in the early 1980s. when both U.S.<br />
and Japanesesemiconductormanufactur<br />
ci’s. anticipating a substantialjumpin de- i<br />
mand.vastly increased their capacity for<br />
production of the microchips that are<br />
used in small numbers in<br />
personal computersand in<br />
much greater numbers in<br />
morecomplexmachines.In<br />
stead came a two-year<br />
slump that drove down.the<br />
priceof the indust.rys most<br />
important item, the 256K<br />
DRAM(dynamicrandomac<br />
cess memory) chip, from<br />
nearly540 to as little as $2.<br />
U.S. manufacturerscharged<br />
that the Japanese continued<br />
to advance their market<br />
share in the field by selling<br />
the chips at less than cost. a<br />
practiceknownas dumping<br />
tsee box).<br />
UndertheJulysemicon<br />
ductorpact.Tokyoagreed to<br />
abide by so-calledfair mar<br />
ketvaluesformicrochips set<br />
by the U.S. Departmentof<br />
Commerce.Japanesemanu<br />
facturerscouldnot undercut<br />
those prices in the U.S.<br />
market without violating<br />
American antidumping<br />
laws. Tokyo also made a<br />
commitmentto preventdumpingby Jap<br />
anese semiconductorproducersin other.<br />
so-called third-country (non-U.S. and I<br />
non-Japan)markets. and to encourage<br />
Japanesecompanies at hometo buymore<br />
foreign-madechips. meaning, by and<br />
large,those madein the U.S.<br />
Yetalmostas soon as the agreement<br />
wassigned. the U.S. began chargtngthat<br />
it was being violated.The main culprits.<br />
in Washington’s view, were Japanese<br />
manufacturerswho continued to dump<br />
semiconductors.eitherdirectlyorthrough<br />
middlemen. in such Asian markets as<br />
Hong Kong, Taiwan and Singapore.<br />
Washington was as sure of that activity<br />
‘as I’msitting here.”declares Commerce<br />
SecretaryMalcolmBaidrige. In January<br />
the Reagan Administration privately<br />
warnedJapan that some kind of retalia<br />
tion was likely unless the practice<br />
stopped. Washington finally conducted<br />
an investigationand satisfied itself that<br />
dumpinghad taken place. The Adminis<br />
World<br />
tration’spreliminary finding is that there<br />
has also beennoincreasein Japanesepur<br />
chasesof foreignmicrochips.<br />
Finally,thedaybeforePresidentRea<br />
ganannouncedthesanctions.thedecision<br />
was endorsed by the White House’s<br />
twelve-memberEconomic Policy Coun<br />
cil.a Cabinet-levelbodychairedeitherby<br />
the Presidentor. in his absence.by Trea<br />
surySecretary James Baker.With Baker<br />
in charge.thecouncilfrettedconsiderably<br />
over its decision. Accordingto one Ad<br />
ministrationinsider, there,were sharply<br />
differing views about the value of the<br />
semiconductor agreement in the first<br />
place.Nonetheless,the groupreluctantly<br />
agreed togoaheadwith retaliation.<br />
Muchaboutthesemiconductorpactis<br />
indeed questionablein economic terms.<br />
Amongotherthings,it raises the costs of<br />
American manufacturers who use thede<br />
vices to build computersand other prod<br />
ucts. thus making them more vulnerable<br />
to foreigncompetition.But to US. trade<br />
officials,the evidenceof allegedJapanese<br />
dumpingand Japan’srefusalto open do”<br />
mestic semiconductormarketswere the<br />
last straw. For one thing, the ink on the<br />
semiconductoragreementwas barelydry<br />
before,in Washingtonsview,it was being<br />
ignored.For another. that Japanese be<br />
haviorseemed to U.S.officialsto be part<br />
of a familiar Japanese attitude toward<br />
trade issues: delay followed by nominal<br />
agreementfollowedbyintransigence.<br />
The American list of similar com<br />
plaints on that score is long. In the past<br />
ten years. Washingtonhas pressedmight<br />
ily to open Japanesemarketsto such ex<br />
ports as beef.oranges andeven U.S-made<br />
baseballbats fora baseball-mad country.<br />
In almost all thosesituations,the U.S.has<br />
eventuallysucceeded,at leastto some ex<br />
tent. Last October. for exam Japan<br />
agreedto openits cigarettemarketto U.S. ’.<br />
manufacturers by suspendingits 2Oc tar-<br />
1ffon that product.American cigarette<br />
manufacturersestimatethattheirmarket<br />
in Japan will quintuple,to an estimated<br />
SI bithon annually. But in every such<br />
case,contendsan Administrationofficial.<br />
“we have had to land the full powerand<br />
majesty of the Governmenton the Japa<br />
nese.Everysinglethingis a fight thatgets<br />
upalmost to theCabinetlevel.”<br />
Addingto the frustration is a backlog<br />
ofothertradeirritants thatcouldcontinue<br />
to flareup.One is Japanesereluctanceto<br />
allowU.S.bidderstocompetefora sliceof<br />
the country’spremierconstructionpro<br />
ject, the $6.5billionKansai international<br />
airport nowunderconstructionnear Osa<br />
ka. Anotheris the long-standingAmeri<br />
can complaintthattheJapanese havenot<br />
been buying enough U.S.<br />
auto parts.Particularlygall<br />
ing to the U.S. was a state<br />
mentattributedto MIT!Offi<br />
cial Kuroda to theeffectthat<br />
American supercornputer<br />
manufacturerswerewasting<br />
their time trying to sell the<br />
advanced machines to the<br />
Japanese government and<br />
universities. So far. Minne<br />
apolis-basedCray Research<br />
has managed to sell only<br />
seven of its supercomputing<br />
systems(cost:$2.5million to<br />
$16 million each in Japan<br />
overthe pasteight years. All<br />
butone of the sales were to<br />
privateJapanese companies.<br />
AccordingtoCommerce<br />
SecretaryBaldnge. the new<br />
U.S. sanctions ensure that<br />
there will now be a “differ<br />
ent bargaining atmosphere<br />
in the future”and. he added.<br />
a “much healthier one.’<br />
Whether that proves to be<br />
true. some Japanese opinion<br />
molders. amid the rush to<br />
smooth over the incident,were thinking<br />
about the longer-termimplicationsof the<br />
U.S. action. Japanese business leaders.<br />
notes Kirnihiro Masarnura. an economist<br />
at Tokyo’sSenshu University. “are not<br />
aware of the extent of the impact they<br />
have had on their foreign competitors<br />
overthe past severalyears.NowtheJapa<br />
nese have no other choice but to think<br />
” globally.<br />
However,formany other.moreordi<br />
nary Japanese. the U.S. sanctions were<br />
botha puzzlementand a frustration. Says<br />
KenjiHatakenaka. 38.a project-develop<br />
ment managerat Sharpelectronics: “It’s<br />
hard (br rue to see what’sreally behind<br />
this.Japandoesn’tposethe kind of threat<br />
youwouldexpect to provokesuch a reac<br />
tion.”I*atakenakaclaims that the Naka<br />
sone government’sefforts to boost consumpuon<br />
in response to U.S.pressure are<br />
running into resistanceat the rice-roots<br />
level.Sayshe:“Thegovernmenttellsusto<br />
spend. but with currency instabilitygu.
eryone feelsit’ssafer to save. The govern<br />
ment says.‘Buythat TV today,’ butwe’d<br />
rather wait until the price comesdown.”<br />
In somecases.Japanese dismay at the<br />
sanctions is also taking an unpleasant<br />
turn.Surveys by Prime Minister Naka<br />
sones officeshowa conspicuous decline<br />
in Japaneseaffections for the U.S. The<br />
most recent soundingin Octoberrevealed<br />
that 67.5%of the sampling felt them<br />
selves to be friendly toward the US..<br />
down from 75.6%. The October reading<br />
was the lowestpro-Americanresult since<br />
the primeministerial surveys were start<br />
odin 1978.<br />
For Nakasone. a more important<br />
question is how many ____________<br />
Japanese are still<br />
friendly toward him.<br />
The answermay be not<br />
many.The Prime Min<br />
ister will know better<br />
after nationwide local<br />
elections on April 12,<br />
when he and the ruling<br />
Liberal Democratic<br />
Partyare now expected<br />
to cakea drubbing.The<br />
main reason for that is<br />
not the US. trade dis<br />
pute but Nakasone’s<br />
announced decision to<br />
impose an unpopular<br />
5% national saies tax.<br />
Nakasone has notmade<br />
a single appearanceon<br />
behalf of’ local candi<br />
dates—becauseno invi<br />
tations were extended<br />
to him. Jokes one To<br />
kyoacademic:lfPresi<br />
dent Reagan is a lame<br />
duck.our Prime ’Minis<br />
ter is a dying duck.”<br />
Nakasoneprobablydid<br />
not feelanybetterafter<br />
US. TradeRepresenta<br />
tive Yeuttertold a Sen<br />
ate FinanceCommittee hearing that he<br />
could not understand why Japan was<br />
planning to introduce the value-added<br />
tax. Replied Japanese Government<br />
Spokesman Masabaru GotodL “The tax<br />
system isour country’sinternalaffair.”<br />
US-Japanese tradedifficulties,notto<br />
menuonrelations betweenthe two coun<br />
thes in general. may become slightly<br />
frostierafter the Prime Minister leaves<br />
the scene. Observes Larry Niksch. an<br />
Asian affairs specialist at theCongressio<br />
nal Research Service; “Nakasone and<br />
Reagan have been the gluethathas kept<br />
the retation close.Belowthem there is a<br />
gooddealofanimosityon both sides.That<br />
ouid causeseriousdamagelater.”<br />
The harsh fact is that the effort to<br />
manage relauons between the close<br />
fl and allies cannot improve while<br />
the US. trade balance remaim so badly<br />
Of kilter. This year many economists<br />
no more than a S30 billion irafew<br />
tTTttfltLfl thetrade deficit,and quite a<br />
the US. de<br />
.‘-... ‘—..<br />
World<br />
balance will have to improvemore than<br />
the currentdeficit indicatesbecausethe<br />
countryis nowan internationaldebtor.In<br />
the currentissueof the quarterlyForeign<br />
4fi irs. HarvardEconomistMartin Feld<br />
stein, a former chairman of President<br />
Reagan’sCouncilof EconomicAdvisers.<br />
estimatesthat duringthe l990s the U.S.<br />
willneed to generateS60billionannually<br />
just to repaythe interestand principleon<br />
its burgeoning foreigndebt.Accordingto<br />
Washington Economist Bergsten. the<br />
pressurewill thus be on to create a $200<br />
billion improvement in the American<br />
tradebalance.Thatis liabletoadd to the<br />
considerable trade ferment on Capitol<br />
-<br />
—rtr . ...-‘N-4#e .<br />
..<br />
,<br />
cymakersmust speedily reducethe fed<br />
eral budget deficit, which has fueledso<br />
much excess U.S. consumption. But<br />
there will also have to be considerable<br />
changesin U.S.corporateandeducation<br />
al culture. American businessmen, who<br />
have traditionallypaid most of theirat<br />
tention to domestic markets. must be<br />
come moreaggressivein going afterfor<br />
eign sales. American managers also need<br />
to take a leaf out of Japanese manuals<br />
about greater worker involvement in<br />
productqualitycontrol.The U.S.educa<br />
tion system needs vast improvementbe<br />
fore it can produce blue-collar graduates<br />
on a par withJapaneseproductionwork<br />
ers. If U.S. business<br />
men want to penetrate<br />
foreign markets. there<br />
will have to be much<br />
greater emphasis in<br />
U.S.schoolson the suc<br />
cessful learning of for<br />
egn languages.<br />
- More. rather than<br />
less, openness in both<br />
the U.S. and Japan<br />
would also help. Ja<br />
pan’s need to reinvest<br />
its surplus cash is one<br />
impetus driving the<br />
country ever closer to<br />
the U.S. Another is<br />
Washington’s need for<br />
Japanese funds to ri<br />
nance the budgetdefi<br />
cit. Notes Goldman<br />
Sachs’ Hormats: “Ja<br />
pan and the U.S. are<br />
locked in an embrace<br />
from which there is no<br />
escape. It may create<br />
some discomfort. but<br />
there is no longer any<br />
wayoutof it.”<br />
The question re<br />
- mains of how much<br />
discomfort—not to<br />
Hill. As SenateMajorityLeader Robert mention occasional pain—may be in<br />
Byrd puts it. “It is time to make more volved. If. as the Reagan Administra<br />
pragmatic useof ourleverage.”<br />
tion hopes. the semiconductorskirmish<br />
Thatpressurewillbe borne notjustby spurs Tokyo to more urgent efforts to<br />
Japan but by all of sAmcrica trading settle trade disputes.it will have served<br />
partners. Fear of U.S. protectionism is a a useful purpose.<br />
considerablemotivation,forexample,be The history of trade sanctions.how<br />
hindCanada’sdesire to concludea histor ever. shows how dangerouscommercial<br />
ic free-trade agreementwith Washington conflicts can be. One soberingexample<br />
that wouldremovetariffs and most other dates back to 1941. when the U.S. and<br />
trade barriers between the two counthes other Westernpowers imposed sanc<br />
during the next 15years or so. President tions on the export of iron and manga<br />
Reagan was to endorse that effort once nese to Japan for its incursions into<br />
again in a meeting with Canadian Prime Manchuria.That embargoplayed a role<br />
Minister Brian Muironey on a one-day in the Japanese decision to attack Pearl<br />
state visit to Ottawathis week. Butother Harbor. Nothing remotelysimilarin the<br />
close U.S.allies fearthey may eventually way of hostility, of course.looms in the<br />
be leftoutin the cold.Saysa top Europe currenttradebattle.Butas the twosides<br />
an Communitytradeofficialin Brussels: confront each other. they need to be<br />
“Whatworriesus is that the US-Japa acutely aware that deep antagonisms<br />
nese trade deficit will be balanced on the over tradecan often contain the seed of<br />
backsof the Europeans.”<br />
future disaster. 9y C.a-g.<br />
Avoiding,that kind of protectionist<br />
debaclewill take considerableAmerican<br />
self-discipline.Among otherthinp. poli<br />
RuuIL<br />
iT-<br />
Searity Is th. corn. sLaea<br />
U,S.hoikopters m joint,nift<br />
ta’y ex’cise, nex Mo s,t Fi4<br />
pNt.d b, se4a Já’qto &tiI$<br />
Bury<br />
N1II.ithrand/Toéy.andtvisto Wr R.dman/<br />
oUi ’ Vn—<br />
“,,4<br />
,.<br />
0-<br />
1
Lesson 13: United States and InternationalTrade:<br />
Role of Governmentin Foreign Trade<br />
TIME REQUIRED: Approximatelytwo class<br />
periods<br />
RECOMMENDEDGRADE LEVEL: 11-12<br />
CONCEPTS: Tariffs<br />
Quotas<br />
Subsidies<br />
Embargoes<br />
InstructionalObjectives:Studentswill<br />
• Name and explaindifferentmethodsused by the<br />
U.S. governmentto restrict or encourageforeign<br />
trade;<br />
• State argumentsfor and against governmentre<br />
strictionson foreigntrade. i.e.. the cases for and<br />
against“protectionism”;<br />
• After participatingin a classroomsimulationthat<br />
--requiresthe determinationof nationalpolicycon<br />
cerningspecificimports—<br />
a. Namethe policyalternativespreferredby the<br />
variouseconomicinterests involved;<br />
b. State the effects of such policies on foreign<br />
producersand on producersand consumersin<br />
the United States:<br />
• Giveat leasttwoexamplesof currentU.S. govern<br />
ment restrictions on internationaltrade and the<br />
costsandiorbenefitsto the variouseconomicinter<br />
ests affected.<br />
Rationale:The free functioningof marketforcesin the<br />
internationaltrade of many manufacturedgoods and<br />
rawmaterialsis modifiedby governmentintervention.<br />
The volumeof internationaltrade has been growing<br />
and has becomeincreasinglyimportantto an increas<br />
ing numberof nations. Decisionsabout international<br />
tradeare, therefore.of majorintereststo U.S. citizens<br />
as businessmanagers.employers,and consumers,and<br />
students should be given a frameworkfor thinking<br />
aboutthe issues involved.<br />
Materials: One copy each of handouts 13-1through<br />
13-6foreverystudent:one copyeach ofhandouts13-7<br />
through13-10for everygroupmember(see Procedure<br />
3).<br />
Procedure:<br />
1. Start the lesson by asking:<br />
a. Can you thinkof any reasonswhythe United<br />
States might want to restrict imports of’any<br />
foreigngoodsor promoteexportsof domestic<br />
goods?(List responseson the chalkboard.)<br />
b. What are some of the methodsof interfering<br />
withinternationalfree trade? (Tariffs,quotas,<br />
embargoes.subsidies,dumping.nontariffbar<br />
riers.) Moststudentsare acquaintedwithtar<br />
iffs. If they fail to suggestother methodsof<br />
limitingtrade, do not press for additionalre<br />
sponsesat this time.<br />
2. Distributehandouts 13-1through 13-6. After the<br />
studentshavereadthe material,havethemdiscuss<br />
the articles and re-examinethe list on the board<br />
(step Ia, above)to determineif other reasonsand<br />
methods for restricting trade should be added.<br />
(NOTE:Definitions and descriptionsof measures<br />
affectingforeigntrade may be found in almostall<br />
generaltexts on economicsor internationaltrade.<br />
Handout 13-6illustrates how complex and how<br />
widethe effectsof protectionismcan become.)<br />
3. Dividethe class into four groups. Designatethe<br />
groups as follows,distributinghandouts(one for<br />
each group member)as indicated:<br />
I. U.S. Steel Manufacturers(Handout13-7)<br />
II. U.S. AutomobileManufacturers(Handout<br />
13-8)<br />
III. U.S. Rice Producers(Handout13-9)<br />
IV. U.S. ConsumerGroup(Handout 13-10)<br />
instructthegroupsto discusseachofthequestions<br />
listed on their respective handouts. When agree<br />
mentisreached.each memberofthe groupshould<br />
write the groupdecisionin the appropriatespace.<br />
(NOTE: You may wish to place a limit on the<br />
amountof time groups willbe allowed.)<br />
4. Aftergroupdiscussionsare completedreorganize<br />
studentsintogroupsoffour.eachgroupconsisting<br />
of two steel manufacturersand two automobile<br />
manufacturersor two rice producersandtwocon<br />
sumers.The opposinginterests should:<br />
a. Present their positions as to what the U.S.<br />
trade policyshouldbe. and<br />
b. Attemptto formulatea trade policyto which<br />
both parties agree.<br />
5. Have each grouppresent its compromiseson pol<br />
icy. Conducta class discussionin whichstudents<br />
examinethe suggestedtrade policiesin terms of<br />
their potentialbenefitsor costs to each of the fol<br />
lowing:business, workers, consumers.and U.S.<br />
trade relationswithforeigncountries.<br />
Evaluation:Have students locate at least two news<br />
articles describinga current incident of government<br />
restriction(or a requestfor restriction)on trade.They<br />
shouldthen write a short essay summarizingthe arti<br />
cles and describing the probable effects of the re<br />
strictionon the various economicinterests involved.<br />
(Students should attach the news articles to their<br />
report.)<br />
NOTE:Thestrategiesin this lessonarebaseduponclassroomactivitiespreparedby ElayneFeldman.FridleySeniorHighSchoo<br />
Fridley,Minnesota. In theiroriginalformthe materialsearneda first-placeawardin the 197&-77InternationalPapercompany<br />
FoundationAwardsProgramforTeaching<strong>Economics</strong>.<br />
d
I<br />
1<br />
fT...<br />
—rTTw<br />
Are we losing our abiZity<br />
o compere with other<br />
nations? The answer<br />
couid decid. how<br />
you ie cd<br />
________ :L ’cr<br />
• .<br />
:.n me<br />
THE BRONX.<br />
NY—Twoyears ago.<br />
seph Perranolosthisjob Ina<br />
factoryhere.That’swhyhe got an.<br />
giy when he discoveredthat the<br />
shoes he hadjust purchasedwere<br />
madeIn Brazil.<br />
“Ithrew those shoes against the<br />
wall,Iwasso mad.”PerranosaId.1<br />
bought them because they were<br />
cheapbut now I wish I hadn’tIt’s<br />
the pnnclpleofthe thing.”<br />
Perrano lost his job becauseof<br />
foreign-madeshoes.Americansbuy<br />
Imported shoes because they are<br />
cheaperthan U.S.-madeshoes.This<br />
has put many U.S. shoe factories.<br />
Including the one where Perrano<br />
worked,out ofbusiness.Thousands<br />
ofworkerghavelosttheirjobs.<br />
TheU.S.shoe lndustiy Is notthe<br />
onlyIndustryhurt by foreigncorn<br />
petition.TheU.S.automobile, steel.<br />
kelectronIcS. textile,and othermajor<br />
ustries also have been hard hit<br />
(see 9mph). U.S. consumers are<br />
just wildaboutcarsbuiltin Japan.<br />
video recorders from Taiwan. and<br />
shirts madeIn HongKOng.”88 S<br />
46(j<br />
MARCH9. 1987 1
KatySavageof the U.S.Commerce<br />
Department.<br />
The floodof foreign-madegoods<br />
has left the U.S.witha hugetrade<br />
deficit.ThedeficitIs thedifference<br />
between what the U.S. Imports<br />
(buys from other nations)<br />
100<br />
and what It exports(sellsto .<br />
othernations).<br />
In 1986, the U.S. trade<br />
deficithit an all-tlmehlgh<br />
of$170billion.That means<br />
that the U.S. spent $170<br />
billionmoreabroadthanIt<br />
took in. The tradedeficit<br />
worriesmany experts who<br />
fear the U.S. Is losing Its<br />
ability to compete In the<br />
worldeconomy.<br />
c_U,.<br />
What will happen If the<br />
U.S. loses its competitive<br />
edge?The result wouldbe<br />
bad news foralmost every<br />
American.<br />
if we cannot compete.<br />
there will be fewer good<br />
jobs and smallerincomes<br />
for all.” says economist<br />
PaulStrongoftheUniversi<br />
ty of California.Staying<br />
competitiveis thekeyto fu<br />
flareprosperity,hebelieves.<br />
Competitivenessalready<br />
Isa majorissuein the 1988<br />
Presidentialcampaign. “ThereIs<br />
real anxietyInthecountryoverIt.”<br />
says Congressman Richard Gep<br />
hardt (D-MO). it Issomethingthat<br />
people can grasp — a loss of Jobs<br />
and a decliningstandard ofliving.<br />
Is the U.S.’sabilityto compete<br />
reallyat risk?Ifso,why?<br />
The U.S. has been a majoreco<br />
noinicpowersincetheend ofWorld<br />
WarlIn 1918.Itsstrengthhasbeen<br />
Itsbasicindustries — suchas steel,<br />
automobiles,and textiles.<br />
In the past 20 years. however.<br />
manyothernations havedeveloped<br />
the same Industries.Theynow are<br />
competingwith the U.S. and grab<br />
bingtheirshareofworldmarkets.<br />
Japan and WestGermanyhave<br />
becometwooftheworld’smostsuc<br />
cessful Industrial nations. Their<br />
factorieshavea reputationforbeing<br />
efficient “Everyyear, the Japanese<br />
and the Germansget moreproduc<br />
a, l— l; c:”’ iv’<br />
:..<br />
.‘-. ..<br />
tive. If they continue In this way.<br />
the futurebelongs to them.”says<br />
economistJeffreyMandel.<br />
OthersAte CatchingUp<br />
WhatdoesItmeantobemorepro-<br />
.HaDBY.: IMPORS.<br />
_________________<br />
ducttve? Why should Americans<br />
worryaboutproductivity?<br />
Productivity measures the<br />
amount ofgoodsand servicesa na<br />
tion produces. comparedwith the<br />
amount of toil required to produce<br />
those goodsand services.<br />
In Japan. forexample.Ittakes 80<br />
to 100man-hoursto builda car. in<br />
the U.S..It takes 150to 160hours<br />
to build the samecar.<br />
The U.S. still leads the world In<br />
overallproductivity — but the gap<br />
Is closing. ‘Our productivityIs<br />
growingat a slowerratethan (ml<br />
othercountries.”saysJeromeMark<br />
of the U.S.Bureauof LaborStatis<br />
tica.‘We’restillhigher,but theoth<br />
eraare catchingup”<br />
Japan uses thelatest methodsto<br />
boost productivity.These methods<br />
includenewmanagement stylesand<br />
the use of robotsinstead ofhuman<br />
workerson assemblylines.<br />
-‘<br />
‘.—. ‘,. _“_wr$<br />
ais heldby1 -4 i.<br />
.8etwen19 a 19E6. at product ed metsto’a ge s<br />
e heldbyUT )O1S?_______ r -<br />
ot the thsr .<br />
-<br />
ee1981 idl ?<br />
“We’llhave to learn somelessons<br />
from the Japanese If we hope to<br />
competewith them.” says Peter<br />
Drucker.a managementconsul<br />
tant.Druckerpointsoutthat mat v<br />
of the new methodsused In Ja<br />
_____<br />
originated In the U. ,.<br />
“Theypracticethemandwe<br />
just preach them.Another<br />
differenceIs that theJapa<br />
neseworkharderforlower<br />
pay.”Druckersays.<br />
ShouldtheUS.Raise<br />
Tariffs?<br />
Manyexperts say that<br />
wagesare a bigpartof the<br />
problem.The averageU.S.<br />
workermakes more than<br />
the averageworkerIn any<br />
other country.. Because<br />
U.S. companiesmust pay<br />
higher labor costs, they<br />
havea bardtime keeping<br />
theirpricescompetitive.<br />
That Is one reason why<br />
U.S. shoe companies are<br />
losing out to shoe compa<br />
flies in Brazil. Brazilian<br />
companiespay their work<br />
ers muchless, so they<br />
chargeless fortheirsh. .,.<br />
This has enabledBrazilto<br />
sell a lot of shoes in the<br />
U.S.market.<br />
Unfair? Some people<br />
think so. They want Congressto<br />
put tanffs (Importaxes)on shoes<br />
and other Importedgoods. Since<br />
tariffswouldmakesuch goodsmore<br />
costly,fewerAmericanswouldbuy<br />
them.<br />
Otherpeople.includingPresident<br />
Reagan’strade adviser. Clayton<br />
Yeutter.opposehighertariffs.“The<br />
U.S.has alwaysbenefitedfromfree<br />
trade,and we shouldcontinueto<br />
practicelt. saysYeutter.<br />
FreetradeIsworldtradewithout<br />
tariffsorotherbarriers.Manyecon<br />
omists warnthat Ifthe U.S.raises<br />
tariffsto keepoutforeignproducts.<br />
othercountrieswouldretaliatewith<br />
theirowntariffsagainstU.S.goods.<br />
What can the U.S. do? Yeutter<br />
and otherfreetraders say the<br />
should developother parts . ..s<br />
economy.Insteadofrelyingonbasic<br />
manufacturing. ‘We cannot and<br />
shouldnot trytopush our wage1ev-
cidownto thelevelofcountrieslike<br />
Brazil,”economistSaulElkin told<br />
Junior Scholastic.“Wehave other<br />
alternatiVes.”<br />
Push High-Tech?<br />
What alternatives does the U.S.<br />
have?Manypeoplebelievethe U.S.<br />
shoulddomoreto developIts high<br />
tech Industries.The U.S. was the<br />
firstto manufacturesuch high-tech<br />
products as the transistorand the<br />
J computer.<br />
Japanand someEurope<br />
an nations havesincebuilt uptheir<br />
own high-tech Industries, but the<br />
U.S.stillhas an edge.<br />
“Whatwe have that nobodyelse<br />
• has Is theenvironment wherepeo<br />
pleare encouragedto makeup the<br />
wildestthings possible, says Kim<br />
Brown of Dataquest Inc. In San<br />
Jose. C This creativityis keeplng<br />
the U.S.high-techIndustrystrong.<br />
Noteveryonewillbe able to get a<br />
high-techJob. In the future,more<br />
• and moreAmericanswillbe work<br />
ing in serviceindustries.TheseIndude<br />
the many businesses that<br />
servepeople’sneeds.Banking.real<br />
estate,Insurance,healthcare,and<br />
telecommunications areallservices.<br />
Soarefast-foodrestaurants suchas<br />
McDonald’s. themeparkssuch as<br />
• DisneyWorld. andmovietheaters.<br />
ServiceIndustr Ies arethefastest<br />
growingpartof the U.S.economy.<br />
In recentyears.serviceshavebeen<br />
thesolesource of newjobs in the<br />
U.S..accordingto theBureauofLa<br />
borStatistics.<br />
Doesthis mean that mostAmeri<br />
canswillbe workingat McDonald’s<br />
• or BurgerKing?“This Is a mlsap<br />
prehenslon.’ says Elkin. “There<br />
are manydifferenttypesof service<br />
jobs and a lot require high-level<br />
skillsand a goodeducaUon.<br />
hnproveOurEducatlou?<br />
Manypeople say that the U.S.<br />
needsa better-educatedworkforce.<br />
PresidentReagansaidIn his recent<br />
State of the Unionaddress,“The<br />
quest for excellenceInto the 21st<br />
tury beginsin theschoolroom.”<br />
Whyall this focuson schooling?<br />
ExpertssayitIsthekeyto thedevel<br />
opmentof both high-techand ser<br />
VIcCIndusthes. Math and science<br />
aretwoofthemostcrucialsubjects.<br />
Above:Whatdoes the cartoonistseem to thinkabouttar7ffs? Howdo theywork<br />
tbr and againstUncleSam?Below:U.S.workersprotest in favorof tan’lffsto<br />
protect the autoIndustiy.<br />
Yettbesearetheones inwhichU.S.<br />
students maybe fallingbehind.<br />
Students In 15countries ,verc re<br />
centlytested fortheirknowledgeof<br />
math.U.S.studentscameIn 14th.<br />
HongKongstudentstoppedthelist.<br />
withJapanese studentsa closesec<br />
ond. The resultssuggest that the<br />
U.S.couldloseIts leadin high-tech<br />
Innovations.<br />
“'ThiscountryIs In legitimateper<br />
il of becominga second-classeco<br />
nomic power... If technological<br />
prowess Is allowed to slip away<br />
through Inferior education.” says<br />
HarryGray.formerchairmanof<br />
UnitedTechnologies.<br />
What do you think ? Do you be<br />
4.6L ,<br />
lieveyouare beingeducatedforthe<br />
jobsof thefuture?Whatshouldthe<br />
U.S. do to keep Its leadas a firstclasseconomicpower?<br />
*<br />
YOIM11 l<br />
WordM<br />
— 1. deficit a.gmu<br />
_2. alternative b. ability<br />
3. misapprehensionc.<br />
choice<br />
_4. legitimate d.shcr U<br />
.5. prowe e. m1s .u -<br />
standing<br />
QuviU<br />
1. In what ways doyou believe the<br />
U.S. has benefitedfromfreetrade?<br />
How has It been hurt by free trade?<br />
2. WhyIseducationimportant for<br />
American competitiveness?<br />
MARCH9. 19873<br />
I<br />
.7
(! :Ii<br />
Thinkfora moment.<br />
Howmanytimesa<br />
daydoyouuse prod<br />
uctsmadeInJapan?<br />
Chances are,youwakeup<br />
to a radioalarm“madeIn<br />
Japan. The toaster you<br />
use at breakfast, the car<br />
your parents drive, the TV<br />
set you watch all may be<br />
Japanese products.So.too.<br />
are many cameras, watch<br />
es, stereos. calculators.<br />
computers. and othercon<br />
sumerproducts.Japan to<br />
day Is the third most im<br />
portant manufacturing<br />
country In the world,after<br />
the United States and the<br />
SovietUnion.<br />
That Is mazlng, when<br />
youthink about It. Japan<br />
4 JUNIORSCHOLASTIC<br />
F<br />
IssmallerIn areathan Cali<br />
fornia.It has few natural<br />
resourcesand must import<br />
mostof the Iron.steel, oil.<br />
and other raw materials it<br />
needs.At the endof World<br />
War11.In 1945. its econo<br />
my lay In ruins, destroyed<br />
by U.S. bombs. TodayJa<br />
panhasa thrivingeconomy<br />
and one of the highest<br />
standards of living In the<br />
world.<br />
Howdo the Japanese do<br />
It?WhatIs It liketoliveIn<br />
Japan. to bea teenagerin a<br />
country known as “the<br />
world’s toughest conS<br />
tor?<br />
BeforeI visited Japan. I<br />
had beard a lot of stories<br />
aboutthe countryand Its<br />
I
people.Ihadread,forexample,that<br />
Japanese schoolsare like pressure<br />
cookers. Students compete fero<br />
clouslytogetIntogoodhighschools<br />
andcolleges.andspendup to three<br />
timesas longon homeworkas U.S.<br />
students. Strict discipline Is the<br />
rule in Japaneseclassrooms,and<br />
learningis by rote(memory),with<br />
UtileIndividualcreativity.Thepres<br />
sureonJapanesestudentsIssoin<br />
tense , Iwastold,thatsomecommit<br />
suicide.<br />
Whata Surpdsa!<br />
ImaginemysurprisewhenI visit<br />
cii 13-year .old HlsayoYasu<br />
da In her classroomat To<br />
kyo’sArakawaWard10th<br />
Junior High <strong>School</strong>.. I<br />
foundstudents laughing.<br />
questioning,talkingfreely.<br />
andIn general.actingJust<br />
likeU.S.students.<br />
1 want to go to college<br />
andIwillstudyveiyhard,”<br />
HLsayotoldmethrough an<br />
Interpreter. “Buttoo much<br />
studyingcan bejust as bad<br />
asnotenough.”<br />
ManyJapanesestudents<br />
dogoeverydayafterschool<br />
to the cramschoolscalled<br />
juku. Thejuku schoolspre<br />
pare them for the high<br />
school or collegeentrance<br />
exams.Gettingintoa topschoolIs<br />
necessaryto get a goodjob as an<br />
adult<br />
Hlsayogoesonlytwicea weekfor<br />
’a eru helpwithEnglishand math.<br />
Shehasa relaxedattitudeabout It.<br />
IamdoingwellIn school.Iwon’t<br />
need to go to Juku. shetold me.<br />
Hisayohasheardabouta fewcases<br />
ofteenagesuicide,butnothinglike<br />
thathashappenedat herschool.<br />
Hlsayo’sfriends say she Is veiy<br />
competitiveat heart and wants to<br />
be thebest in the class.Shehopes<br />
somedayto be a teacher.However.<br />
she worriesthat“societyIs moving<br />
so fastwith automationthat I will<br />
haveto workhard to keepup.”<br />
Learningon Computers<br />
Hlaayo’sfamilylives only a few<br />
blocksfromher school.HerhomeIs<br />
in an old industhal neighborhood<br />
anthenortheastedgeofTokyo,Ja.<br />
pan’scapitalandlargestcity.Many<br />
Japanese work forgiant znanufac<br />
turing corporations. Hlsayo’sfa<br />
ther. however. Is a self-employed<br />
businessman.Heis a lumberdeal<br />
er, like his father beforehim. Mrs.<br />
Yasudaworkspart timein a bakery.<br />
Theneighborhoodhas undergone<br />
major changesIn recentsyears.<br />
Manyold factorieshavebeen shut<br />
down or movedelsewherebecause<br />
theycausedtoomuchpollution.Mr<br />
pollutionIsone ofthe biggestprob<br />
lems facing Tokyo.a city of nine<br />
millionpeople.<br />
The peopleIn Hlsayo’sneighbor<br />
hood also have changed. Several<br />
thousand Koreans — Japan’s larg<br />
est minority — havemovedinto the<br />
neighborhood.Aboutonein sixstu<br />
dents at Hlsayo’sschoolIsofKorean<br />
ancestry.This Is unusual, sInce99<br />
percentofJapan peopleareethnic<br />
Japanese. Minoritiesmake up only<br />
47U<br />
Oppositepage:Japanesestudents re<br />
move shoes beforeentering school.<br />
Left:Students cleanupnelghbomoo4.<br />
Above:Hlsayowarnson computer.<br />
Note samisen(musicalInstrument)<br />
againstwall.<br />
onepercent of the population.Ex<br />
perts say that Koreans face the<br />
samekindof discriminationin Ja<br />
pan that blacksfaceIn theU.S.But<br />
as faras HLsayoIs concerned. ev<br />
ciybody’sequaL”<br />
HlsayosfamilyIs closelyinvolved<br />
In her education.It is not uncom<br />
monforMr.Ito,oneofherteachers.<br />
to stop by the house fora discus<br />
sionaboutherschoolwork.Hlsayo’s<br />
grandfather just boughthera Japa<br />
nese-madecomputerso she cando<br />
better in schooL“It ’s a newso iety<br />
today.”her fathersays. “Everyone<br />
needsto learnaboutcomputers.”<br />
A Dayat <strong>School</strong><br />
Hisayobeginsherdaywitha typi<br />
cal Japanese breakfast thatwould<br />
shock American teenagers: miso<br />
(soybean)soup. pickles.driedsea<br />
weed, and rice. She must be at<br />
schoolby 8:30.HerclassesInclude<br />
Japaneselanguage and literature.<br />
cheinlsuy, math, and English.HI<br />
sayoIs Inhersecondyearofjunior<br />
high.andknowsthatthenextyear<br />
willbe criticaltohereducational fu<br />
ture. That Is when she will take<br />
highschoolentrancexams.<br />
HIsayo schooldayIs muchlike<br />
that ofU.S.students. Butthereare<br />
duff Afterkmeh studentsdo<br />
MARCH9. 1987 5
eyeexercisesand meditate.<br />
On the day I visited, there<br />
was a specialevent.Before<br />
schoolended,thelocalPTA<br />
sponsoreda student clean.<br />
up oftheneighborhood.<br />
Armed with brooms,<br />
dustpans .<br />
and tzash bags.<br />
Mlsayoand her dassmates<br />
emptied out of school In<br />
searchof dirt. The funny<br />
thing Is that most of the<br />
neighborhoodIs kept so<br />
cleanby residents that the<br />
students had to look hard<br />
to find enough traSh to fill<br />
evenonegarbagebag.<br />
‘This kind of activityIs a<br />
good way for students to<br />
participatein the society<br />
they live In. They learn to<br />
!• workforthecommongood.”<br />
the principalexplains.The<br />
Ideaofworkingforthe com<br />
mon good Is important In<br />
Japan. From the youngest<br />
age. Japanese childrenare<br />
taught that they must be<br />
loyaltotheirfamily.commu<br />
nity.and nation.<br />
U.S.ExchangeProgram<br />
Hlsayo’sJuniorhigh par<br />
ticipates In an exchange<br />
L programwith aJuniorhigh<br />
school in NewYorkCity.<br />
Last year. an American<br />
.“<br />
teacherspentthe month of<br />
MayvlsltlngHisayoandher<br />
classmates, while Mr. Ito<br />
spent Octoberteaching In<br />
NewYork.Misayohas fond<br />
memoriesof her Americanteacher:<br />
“Sheshowedus videotapesand told<br />
us about lifeIn America.I wasvezy<br />
interested in the space program”<br />
Hlaayoalso watches AmericanW<br />
shows,such as LUtIeHouseon the<br />
Pe.<br />
Mlsayowouldlike to travelto the<br />
U.S. someday.When I was there.<br />
shewaslookingforwardto a 10-day<br />
schooltrip to SingaporeandMalay<br />
sia. She was vety excitedaboutit.<br />
althoughherparentswereworried.<br />
Myparents didn’twant me to go.<br />
said Hlsayo,“but I wantedto go so<br />
badlythat finallyIconvincedthem.”<br />
Becauseso many peoplelive In<br />
such a smallarea, spaceis ruwded<br />
• JUNIORSCHOLASTIC<br />
Worke, assembl•Hondamotorcyclesfor saleIn U.S.The<br />
U.S.-Japanbadeimbalanceis a majorproblemforthe U.S.<br />
In . Japan TheYasudahome,(orex<br />
ample,is smalland crampedbyU.S.<br />
standards. But Hlsayohas a room<br />
ofher ownto doher homework.She<br />
studies seated on tatamt mats.<br />
whichcoverthefloor.ThatIswhere<br />
she workson her computer and<br />
playsthesamlsen. an ancientJapa<br />
nesestring Instrument<br />
The familyaLsosits on the floor<br />
for dinner. Themenuwouldbe (a<br />
in4Ii r to anyonewhohas evereaten<br />
In a Japanese restaurant: sashimt<br />
(rawfish),sushi (roiled-upricewith<br />
bitsoffishorvegetableswrappedIn<br />
seaweed).tempura (battered.deepfried<br />
vegetables,meat or seafood).<br />
cookedvegetables,and greentea.<br />
jP7<br />
TradeCapwiththe U.S.<br />
I asked Mlsayoabout the<br />
tradeproblemwiththeU.S.<br />
TheU.S.is Japan’sbiggest<br />
trading partner. But fo<br />
many years. Japan ha<br />
been selling more to the<br />
U.S. than It buys. Last<br />
year, the U.S. tradedeficit<br />
with Japanwas 858.6 bil<br />
lion.Morethanhalfof that<br />
deficitwas due to Imports<br />
ofJapanesecars.<br />
U.S. officials complain<br />
that Japan has closedits<br />
doors to manyU.S. prod<br />
ucts. Japanese regulations<br />
are so strict that U.S.man<br />
ufacturersoftenfind It im<br />
possibleto get permlssloa<br />
to selltheirproductsthere.<br />
I askedHlsayoif she or<br />
her family regularly buys<br />
any U.S. products. She<br />
thoughta longtime. Even<br />
tually,she cameup with a<br />
list that includedCalifornia<br />
lemonsand grapefrults.her<br />
father’swhiskey.and blue<br />
jeans. Someonealso br ’<br />
toldher that the soybeai<br />
usedtomakesoysaucealso<br />
camefromtheU.S.<br />
Hlsayo feels confident<br />
aboutgrowingup in Japan<br />
today,and Is lookingfor<br />
ward to a bright future.<br />
She knows that her<br />
standard of Uvingis much<br />
higherthan that otherpar<br />
ems’ generation, and that<br />
It is among the highest In<br />
the world.lam luckyto be Japa<br />
nese,”she says. “ButI havea re<br />
sponslbthtyto helpmakemycoun<br />
try’sfuturehappen.” *<br />
WordMcã<br />
l. ferociously<br />
_2. Juku<br />
.3. minority<br />
_4. sashlml<br />
_5. deficit<br />
a. small group<br />
b. shortage<br />
c. Intensely<br />
d. cramschool<br />
e. rawfish<br />
1. WhyIs It amazingthat Jar<br />
has becomethe.world’sthird a<br />
Important Industrial nation?<br />
2. Howis Hlsayo’s life different<br />
fromyours?<br />
3. Whydoes Hlsayofeel she Is<br />
lucky to be Japanese”?
Eastchina<br />
Sea .- .<br />
-<br />
—--------<br />
• -.5<br />
PACIFIC<br />
CL4.<br />
• .• -. •.<br />
•<br />
•<br />
. -- -I<br />
•1<br />
(d)Hokkaldo.<br />
— 4.Thestraight-linedistancebe.<br />
Studythemapandfactsabove. tweenTokyoand OsakaIsabout(a)<br />
Thenanswer thequestions bywrit 100km.; (b)200 km.; (c)250 km.;<br />
tr ig theLeusrqi thecorrectanswer (d)400 km.<br />
ontheLinebeforeeachquestion. — 5.Touareat35’N.lWE.The<br />
— 1. Japan’sclosestneighborIs nearestcityIs (a)Tokyo:(biOeaka.<br />
(a) China: (b) the U.S.S.R.; (C) Cc)Kyoto:Id)Fukuoka.<br />
Southores4(d)NorthKorea.<br />
— 6. Tokyo’slatitude and longi<br />
— 2. MootofJapanIsmadeupoL tudelscloeestto(a)36<br />
’N, 140’E:<br />
(a)mountains; (b)lowlands; (C)pla (b)35’N.141’E:Cc)140’N.35’E:<br />
temas; (d)noneofabove. Id)141’N.37’E.<br />
S. Japenslargest Islandis (a) —. 7. ShIpsarebuntIn allof the<br />
Kyushu (b) Shlkoku;Ic)Honsbw followingcitiesexcept (a)Tokyo; (b)<br />
•..<br />
• -:<br />
JAPAN<br />
I.<br />
-—<br />
Sapporo; Ic)Nagasaki:(dl Yokoha.<br />
ma.<br />
— 8. WhIchof these productsIs<br />
manufacturedIn Kobe?(a)cars&<br />
icks: (b3 computers:Ic) iron &<br />
steel:(d l chemicals.<br />
—<br />
I<br />
4-<br />
JAPAN:<br />
FactstoKnow<br />
NamsiNippon.<br />
CspP4i Tokyo.<br />
Arw142.126eq.mL about<br />
thesizeofCalifornia. Very<br />
mountainous: only15%of<br />
the landsuitable(orfarm.<br />
lug. Mostpeopleliveinthe<br />
Lowlands alongthecoast.<br />
Populatloui121.500.000<br />
(half that of the U.S.).<br />
Rank seventhIn worldin<br />
population: about75%ur<br />
ban.25%rural.<br />
CUmat.rNorthernmost 1s .<br />
landsget severalfeetoC<br />
snowInwinter;twosouth.<br />
emmost Island.havea cil.<br />
matelikeFlorida.<br />
.mmeat Constitutional<br />
monarchy. Head of stateT<br />
EmperorHirohito.Head&<br />
government:Prime Minis<br />
terYasuhiroNakasone.The<br />
Dietmake , thelaws.<br />
£coso y; Primarilyan in<br />
dustrial nation.Hasfew<br />
natwal resources soItIm<br />
portsrawmaterialsandex<br />
portsmanufactured prod<br />
ucts. Grows70% of the<br />
foodIt needs.<br />
PerCapftaGNP810.100.<br />
.ff oa: Buddhismis tol .<br />
lowedby75%ofthepeople.<br />
but manyalso practice<br />
Shintoism.<br />
Utsr.cyRa 99%.<br />
U, fxpsctsscy 77years<br />
9. Aplane flyingfromTokyoto<br />
Sapporowouldhead in what diree<br />
tion?(a)north;Lb)south; (Cl eaat<br />
(dlwest.<br />
_1O.ThepopulationoftheU.S.Is<br />
about(a)onefourth;(b)onehalt;Ic)<br />
twotimes(dlthreetimesthesizeof<br />
Japan’spopulation.<br />
_.1
Directions: Read the article “Can the U.S. Compete?” and the article<br />
“The Japanese Way.” Complete the questions for the graph on page 2.<br />
Do the Word Natch on page 3, the Word Match on page 6, nd the map<br />
stions on cage 7. When you have finished the map questions answer the<br />
stions belpw Be sure to make your answers clearas this is a graded<br />
assignment.<br />
1. What are five -industriesthat have been hurt by foreign competition?<br />
2. Why do consumers buy foreign products instead of American products?<br />
3.What is meant by the term “trade deficit?”<br />
Li Explain the term “productivity.”<br />
.5. Eow might protective tarrifs work against the United States?<br />
6. why is education important for American competitiveness?<br />
7. Why is it amazing that Japan has become the.world’s third most tin<br />
portan.tindustrial nation? -.<br />
a,What group makes up Japan’s largest minority’ Kow are they treated’<br />
—<br />
—<br />
— — e —S — —<br />
-.<br />
9. What Is one way that Kisayo’s-lite is different from yours?<br />
10. Why does Eisayo she Is lucky to be Japanese”?<br />
•<br />
- - —<br />
47Q<br />
- a •‘<br />
-<br />
,‘- •-.t :<br />
— ‘- ‘c “4<br />
_%, _-_f’ .t.. .j<br />
-
1<br />
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER17<br />
Name ________________________________________ Class____________ Date__________<br />
8. The United States became<br />
a net debtor.<br />
7. The United States borrowed<br />
from foreigners; they<br />
invested in UnitedStates.<br />
17.2CAUSESOF THE TRADEDEFICIT<br />
STEPBYSTEP<br />
Explain how each step in this diagramleads to the next step up the ladder to a<br />
trade deficit. Beginat the bottom step.<br />
________________________________<br />
6. The Current Account showed ______________________________________________<br />
an ever-increasing deficit as<br />
the trade gap grew.<br />
5. Exports declined and imports<br />
increased.<br />
4. TheU.S. dollar appreciated.<br />
3. Foreign investorsmoved money<br />
to the United States to gain from<br />
higher interest rates.<br />
2. Interest rates soared.<br />
1. Ataxcutinl98]led<br />
to a federal deficit.<br />
U<br />
U<br />
____________________________________________________<br />
_________________________________________________________________
INDEPENDENTPRACTICEWORKSHEET<br />
CHAPTER17<br />
Name Class____________<br />
________________________________________<br />
Read the article. Then answerthe questions that follow.<br />
When the GeneralMotorsCorporation said last<br />
week that it wouldclose II plants, affecting29,000<br />
workers, industry analystsnoted that the world’s<br />
largest auto companyhad plenty of worries, such as<br />
high per-car production costs and declining<br />
consumerenthusiasmfor its products.<br />
However,none denied G.M.’s contention that<br />
its move also reflectedforcesaffecting all American<br />
manufacturers. Globalcompetition,pressure to<br />
remodel industry into smaller, more flexibleunits,<br />
and modem manufacturingtechnologyhave all<br />
eaten awayat industry’sneed for workers.<br />
Accordingto businessexecutives,labor experts<br />
and consultants, these forcesare likelyto eliminate<br />
hundreds of thousands of jobs in the domesticauto<br />
industry in the next few years and millionsmore in<br />
other industrial enterprises.<br />
“There’s no longer a direct link between<br />
prosperity in the marketplace and jobs,” sad Harley<br />
Shaiken, a labor professorat the Universityof<br />
Californiaat San Diego. “No matter how the market<br />
1. What action did GeneralMotors take? _______<br />
performs over the next fiveyears, GeneralMotors<br />
will end up employingfewerworkers. This<br />
announcementis not the end of the layoffprocess<br />
for GeneralMotors—it’sthe beginning.”<br />
G.M. confirmedsuch assessments.It labeled<br />
the layoffsannouncedThursday as the “first phase”<br />
of a processthat would continue. Indeed, on<br />
Saturdaythe company said that an additional 1,300<br />
workerswould be permanently laid off later this<br />
month at its year-oldBuick City plant in Flint,<br />
Mich.<br />
Globalcompetitionhas been the most visibleof<br />
the generalforcesexerting pressure on the American<br />
auto industry, but modernizationof manufacturing<br />
technologyis the most inexorablefactor.<br />
The United Auto Workers estimatesthat<br />
technologywill eliminate 120,000 obs in the<br />
industry in the next fiveyears, whateverthe levels<br />
of foreigncompetition.<br />
Source:TheNew York Times,November10, 1986.<br />
2. What problems does General Motors face in attempting to sell its cars at a profit to U.S. consumers?<br />
3. How does globalcompetitionaffectGeneral Motors? _____________________________________<br />
4. What will the effectsbe on automobileworkers as General Motors modernizesand installs newer<br />
technology?<br />
5. a. Will improvementsin General Motors’ssaleslead to the hiring of more workers? ______ b. Explain<br />
your answer.<br />
17.3SOLVINGTHETRADECRISIS<br />
A LONGTERMTREND<br />
6. If you were workingin an industry that was modernizing and reducing its work force, what might you do<br />
beforeyou were laid off? ____________________________________________________________<br />
Date__________
ENRICHMENTWORKSHEET________________<br />
CHAPTER16<br />
Name_________________________________________ Class____________ Date__________<br />
INTERNATIONALTRADE<br />
WORLDTRADE ANDTHEUNITEDSTATES<br />
Sincethe 1970’s,the United Stateshasbecomea net importer. This hasled to an<br />
enormoustradedeficit.Canthe United Stateschangethis patternof importing<br />
moregoodsthanit is exporting?Readthe articlebelowby Robert J.Samuelson<br />
and answerthe questionsthatfollow.<br />
It’sbeen the worstof timesfor U.S. manufacturers.Since 1980our markethas<br />
been inundatedwith carsfromJapan,pots fromSouthKorea,crankshaftsfrom<br />
Brazil,cementfromColombiaand pipesfromSweden.Our manufacturedimports<br />
haverisen morethan 90 percent;exports havestagnated. We now rankbehind<br />
Japanand WestGermanyas manufacturingexporters.So it may seem foolishto<br />
ask:is a manufacturingrevivalat hand?But the answermay be “Yes.”<br />
We’vebeen taking othercountries’productsand sending themdollars—bits<br />
of paper. The growth in our tradedeficitreflectsa deteriorationin our<br />
manufacturingtrade.Between1980and 1985,it swungfroma $17 billionsurplus<br />
to a $107billiondeficit. . . . But the exchangeof paperdollars forproductshas<br />
limits. Othercountries won’t—asa new governmentstudysays—”indefinitely.<br />
continue building dollar balances.”This is the strongestcasefor a manufacturing<br />
revival.<br />
The first glimmersmay be visible. . . . In Septemberthe tradedeficit<br />
declinedforthe secondconsecutivemonth;alsoin Septembernew ordersfor<br />
manufacturers had their best gain in nearlytwo years....<br />
Ours is the world’smostopen market to imports.This is not becausewe<br />
disavowprotectionism.Import restrictionscover—amongotherthings—autos,<br />
steel, clothesand semiconductors.Buta largeropennessoverwhelmsthese<br />
restrictions.As a multiethnic culture, we’reusedto outsiders.Our languageis the<br />
mostcommoninternationaltongue.Competitiveretailersconstantlyseek<br />
low-pricedandhigh-qualitygoods.With a vastmarket,costsof entrycan be<br />
spreadoverlargesales.<br />
The disadvantageis compoundedby a secondproblem:the dollar’srole<br />
as the major globalcurrency.To import, mostcountries haveto obtainforeign<br />
exchange—usablecurrencies,mostlydollars—throughexports,loansor foreign<br />
aid. Butwe pay in ourown currency.A large tradedeficittypicallyis correctedby<br />
a largecurrencydepreciation.But if globaltraders and investorspreferto hold<br />
dollars,as in the 1980s,the dollardoesn’tdrop.<br />
Paradoxically,manufacturersufferfromthe United States’singular<br />
importancein the worldeconomy.Manypressuresaffectexchangerates:interest<br />
and inflationrates, tradebalances,worldeconomicgrowth. But, ultimately,the<br />
dollar’sstrengthin the 1980sembodiesa renewed faith in the UnitedStates as a<br />
productiveand stablesociety.<br />
Source:Newsweek, Novesnber17,1986.<br />
I. Accordingto the article, what sector of the United Stateseconomyhas been hurt the most by imports?<br />
2. What, accordingto Samuelson,is the strongestcase fora manufacturingrevivalin the United States?<br />
3. What are the factorsthat havecontributedto making the United Statesmarketso open?<br />
1
Figure17.2 Exportsand Importsas a Percentageof NationalGNP<br />
EXPORTSas a Percentageof NationalGNP<br />
United South<br />
Year U.S. France Kingdom Japan Germany Egypt India Brazil Korea<br />
1955 4 15 22 11 20 24 7 N.A. 2<br />
1965 5 13 19 11 19 19 4 7 9<br />
1975 8 19 26 14 26 18 6 .7 27<br />
1985 7 24 30 16 35 18 7 11 37<br />
IMPORTSas a Percentageof NationalGNP<br />
United South<br />
Year U.S. France Kingdom Japan Germany Egypt India Brazil Korea<br />
1955 4 13 23 11 18 26 8 N.A. 10<br />
1965 5 12 19 10 19 21 6 5 16<br />
1975 8 18 27 14 24 37 8 11 36<br />
1985 10 24 28 13 31 19 9 9 37<br />
/ i.
Lesson8: Less DevelopedEconomies<br />
TIME REQUIRED: Three or four class periods. (If<br />
the activity in Procedure 9 is<br />
used, more time may be re<br />
quired.)<br />
RECOMMENDED GRADE LEVEL: 10-12<br />
CONCEPTS:<br />
Underdevelopment<br />
Measurement: rate vs. amounts; use of<br />
tables and graphs<br />
Interdependence<br />
Income per capita<br />
Structure of an economy<br />
Instructional Objectives: Students will<br />
• Understand the characteristics of developed mar<br />
ket economies, centrally planned economies, and<br />
developing economies in terms of income per cap<br />
ita, growth of income per capita, rate of population<br />
growth, structure of production, and similar data;<br />
• Comprehend the economic problems characteristic<br />
of developing countries, especially the less devel<br />
oped ones;<br />
• Evaluate proposals for solvingthe economic prob<br />
lems of developing countries.<br />
Rationale: At least two-thirds of the world’s popula<br />
tion live in economically “less-developed” countries.<br />
The growing economic interdependence of the world<br />
as well as humanitarian, political, and military<br />
considerations are makingthe fate of these countries of<br />
increasingly direct concern to the “developed” coun<br />
tries. As citizens of the United States and the world,<br />
students should be aware of conditions in the poorer<br />
countries.<br />
Materials:<br />
1. One each of handouts 8-1 through 8-8 for every<br />
student.<br />
2. In order to engage the interest of the students, you<br />
may wish to show the film “Tilt”; 19 minutes;<br />
McGraw-HillFilms, 1221Avenueof the Americas,<br />
New York, NY 10020. This film takes a light<br />
hearted, often humorous, but nonetheless forceful,<br />
approach to problems of population, pollution,<br />
protection of the environment, use of resources,<br />
national development, international relations, and<br />
world armament. The film offers no specific solu<br />
lions, only poses and considers some questions of<br />
priorities and inequalities that compound our cur<br />
rent world difficulties.<br />
3. Outline maps of the world (see Procedure 9).<br />
Procedure:<br />
I. Prior to lesson prepare one packet per student con<br />
sisting of one copy each of handouts 8-1 through<br />
8-7.<br />
61<br />
2. Distribute packets and have students read Hand<br />
out 8-1.<br />
3. OPTIONAL: To assist students in recording infor<br />
mation obtained from the statistical tables and<br />
graphs in handouts 8-4 through 8-7 on their work<br />
sheets (Handout 8-3A), you may wish to conduct a<br />
“walk-through.” Have students study the graph in<br />
Handout 8-4 and then ask:<br />
a. Which group of countries has the lowest rate<br />
of population growth? Which has the highest?<br />
b. What change occurred in the population<br />
growth rate for each group from the 1969—70<br />
average to the 1970—77average?<br />
c. Look at the worksheet. Based on the graph,<br />
what would you say was characteristic of<br />
population growth in the developed market<br />
economies? Centrally planned economies?<br />
The developing market economies as a whole?<br />
What additional information might you want<br />
to add for the three subclassifications of the<br />
developing economies?<br />
NOTE: If class seems to need more help, you may<br />
want to conduct similar “walk-throughs” with a<br />
subsequent handout or two.<br />
4. Have students work in pairs or in small groups to<br />
complete the worksheet and to formulate descrip<br />
lions of the three main categories of economies for<br />
Handout 8-3B.<br />
5. At the beginningof the next class period have one<br />
student (or group) write a description of developed<br />
market economies on the chalkboard. Have the<br />
remaining students study the description and com<br />
pare it with the descriptions they have written in<br />
Handout 8-3B. Where there are differences, have<br />
students refer back to the data and try to formulate<br />
a statement on which all can agree. Follow the<br />
same procedure for definingcharacteristics of cen<br />
trally planned and developing economies.<br />
6. Have students study the description of developing<br />
economies on which the class has agreed. Then<br />
ask: “What would you say are some of the major<br />
economic problems of developing countries?”<br />
7. Distribute Handout 8-8. Have students read it in<br />
class or at home.<br />
8. At the beginning of the next class period divide<br />
students into groups of five to six each. Instruct<br />
groups to use the reading and the graphs to com<br />
plete the following activities:<br />
a. List the major economic problems of develop<br />
ing countries.<br />
b. Suggest alternatives for solving each of the<br />
problems suggested.<br />
c. Evaluate these alternatives on the basis of the<br />
probable consequences.<br />
d. Discuss the various recommendations in terms<br />
of their appropriateness or inappropriateness
for each category of developing country (low<br />
income, middle income, capital-surplus oil<br />
exporters).<br />
9. OPTIONAL: To help students visualize where<br />
each type of economy is predominantly located,<br />
the followinggeographic exercise maybe helpfiul.<br />
Each student will need two unlabeled maps of the<br />
world, showing outlines of countries. Students<br />
must also have access to maps that indicate where<br />
the 178countries (or geographic entities) listed in<br />
the fivefold income classification of Handout 8-I<br />
are. On the first map, ask students to locate each<br />
country according to its income group, using a<br />
different color for each group.<br />
On the second map, ask students to color the<br />
countries according to whether they are consid<br />
ered to be in the First World, Second World, or<br />
Third World. Have them use a different color for<br />
62<br />
each of the three classifications. Inform the stu<br />
dents that the countries of Western Europe usually<br />
included in the First World are Austria, Belgium,<br />
Denmark, the Federal Republic of Germany, Fin<br />
land, Greece, Ireland, Italy, the Netherlands, Nor<br />
way, Portugal, Spain, Sweden, Switzerland, and<br />
the United Kingdom. The countries of Eastern Eu<br />
rope usually included in the Second World are Bul<br />
garia, Czechoslovakia, the German Democratic<br />
Republic (East Germany), Hungary, Poland, and<br />
Romania.<br />
Evaluation: Students can be evaluated on the basis of<br />
the completeness of Handout 8-3and/or on the basis of<br />
their contributions to the group discussion of proposed<br />
solutions to economic problems faced by developing<br />
countries.
Instructions:<br />
Youwill beaskedto examinethedataonhandouts<br />
8-4 through8-7. Thesematerialspresentgraphs<br />
andstatisticsaboutsomeof the majoraspectsof<br />
the worlds economies.You shouldthink about<br />
whatthisinformationrevealsconcerningthe state<br />
of variouseconomiesandthenwriteyourconclu<br />
sionsinHandout8-3A.Yourfindingswill constitute<br />
a list of characteristicscommonto economiesin<br />
thesamestagesof economicdevelopment.<br />
Afteryou havecompletedthe worksheet,care<br />
fullystudytheitemsyoulistedtodescribeeachtype<br />
of economyandwriteadefinitionor descriptionof<br />
eachtypeofeconomyasspecifiedinHandout8-3B.<br />
(Youmaywishto refertotheunderlyinggraphsand<br />
dataagain.)Beforeyoubegin,alsoreadandreview<br />
thefollowingbackgroundinformation:<br />
Inthisexercise,the classificationsystemsof the<br />
UnitedNationsor of the WorldBankareused.<br />
UnitedNationsClassification:<br />
1. DevelopedMarketEconomies<br />
2. CentrallyPlannedEconomies<br />
3. DevelopingMarketEconomies<br />
Thesethreecategoriescorrespondverywellto the<br />
three-partdivisionoftheworld—partiallyonecono<br />
mic,partiallyon politicalgrounds—usedfor quick<br />
journalisticor otherinformalreference:<br />
1. Theso-calledFirstWorld—developed countries<br />
whosepoliticalsystemstendto bedemocratic<br />
(the UnitedStates,Canada,the countriesof<br />
Western Europe, Japan, Australia, New<br />
Zealand);<br />
2. Theso-calledSecondWorld—developedcom<br />
mand economieswhose political system is<br />
communist(theU.S.S.R., thecountriesin East<br />
ernEurope);<br />
3. The so-calledThird World—aHthe world’s<br />
remainingeconomiesthat cannotbe charac<br />
terizedas developedregardlessof their polit<br />
icalsystem 1 (seeHandout8-2,“TheSemantics<br />
of ‘Development’ “).<br />
1. Forexample,the People’sRepublicof China,NorthKorea,<br />
Mongolia,Albania,andCubaareeconomicallyclassifiedin<br />
the Third World and politically classifiedin the Second<br />
Wortd.<br />
Handout8-1<br />
WorldBank:Classificationis basedon per capita<br />
incomein 1977:<br />
Low IncomeCountries-per capita incomesof<br />
$300or less;<br />
MiddleIncomeCountries-percapitaincomesof<br />
morethan$300to about$3,000;<br />
Capital Surplus Oil Exporters-per capita in<br />
comesof $6,000andhigher.<br />
IndustrializedCountries-per capitaincomesof<br />
$3,000andhigher;<br />
Centrally Planned Economies-per capita in<br />
comesof about$400to about$4,750.<br />
Threeof the World Bank’sgroups—LowIncome<br />
Countries,MiddleIncomeCountries,and Capital<br />
Surplus Oil Exporting Countries—makeup the<br />
DevelopingMarketEconomies,or ThirdWorld,of<br />
the previoussetof classifications.<br />
TheCapitalSurplusOil ExportersareSaudiAra<br />
bia,Libya,andKuwait.In 1977theyhadpercapita<br />
incomesof about$6,050,$6,700,and$12,300,re<br />
spectively.TheyarecalledCapitalSurplusOil Ex<br />
portersbecausetheir incomefromsellingoil is so<br />
greatthat they haveso far (1980)beenunableto<br />
spendall of their oil incometo satisfythe wantsof<br />
their consumersor for investmentpurposes(e.g.,<br />
buildoil refineries,docks,factories,roads,airports,<br />
schools,hospitals,etc.).Theyinvestheir“surplus”<br />
incomeeither in the stocksand bondsof enter<br />
prisesof thedevelopedcountriesor of thegovern<br />
mentsof thosecountries,in directlybuyingbusi<br />
nessesor realestatethere,and—tosomeextent—<br />
in giving foreign aid to someneedyThird World<br />
countries.Howlong SaudiArabia,Libya,and Ku<br />
wait remain in “capital surplus” depends on<br />
whethertheir importsgrowfastenoughto useup<br />
theirannual“surpluses,”whetherthedevelopment<br />
of newenergysourcesandenergyconservationin<br />
theoil-consumingnationswilldampenthedemand<br />
for oil significantly,on futurepoliticalandmilitary<br />
developmentsin the MiddleEast,ontheamountof<br />
foreignaid the threenationsgiveout,andon how<br />
muchthe priceof oil mayrise.<br />
OtherClassifications:Therearemanyotherways<br />
to classifycountries.Oneis to usethe WorldBank<br />
incomedatato group countriessolelyby income<br />
withoutjudgmentasto thecharacterof theirecon<br />
omiesor howtheyareorganized.Herearethe re<br />
FromMasterCurriculum Guidefor the Nation’s<strong>School</strong>s, PartII,Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary),1980.<br />
JointCouncilon EconomicEducation,1212Avenueof the Americas,NewYork,NY 10036.<br />
63
suits of this methodaccording to per capita income<br />
In 1977:2<br />
Lessthan $200(21 countrIes):Bangladesh,Bhutan,<br />
Burma,Burundi,CapeVerde Chad,Comoros,Ethio<br />
pia, Guinea-Bissau, India, Lao People’sDemocratic<br />
Republic,Malawi,Maldives,Mali,Mozambique,Nepal,<br />
Niger,Rwanda,Somalia,Sri Lanka,UpperVolta.<br />
$200-$499(41 countries):Afghanistan,Angola,Benin,<br />
Bolivia,Cameroon,CentralAfricanRepublic,China<br />
(People’sRepublicof), Congo(People’sRepublicof<br />
the), Djibouti,Dominica,Egypt (ArabRepublicof),<br />
EquatorialGuinea,Gambia(The).Ghana,Grenada,<br />
Guinea,Haiti,Honduras,Indonesia,Kenya,Lesotho,<br />
Liberia, Madagascar,Mauritarua,New Hebrides,<br />
Pakistan.Philippines,Rhodesia,St.Vincent,SaoTome<br />
andPrincipe,Senegal,SierraLeone,SolomonIslands,<br />
Sudan, Tanzania,Thailand,Togo, Tonga, Yemen<br />
(People’sDemocraticRepublicof),Zaire,Zambia.<br />
$500-$i,999(56countrIes):Albania,Algeria,Antigua,Ar<br />
gentina,Barbados,Belize,Botswana,Brazil,Chile,<br />
China(Republicof), Colombia,CostaRica,Cuba,Cy<br />
prus,DominicanRepublic,Ecuador,El Salvador,Fiji,<br />
2. SOURCE: 1979WorldBankAtlas, p.4. Theworldwide infla<br />
tionof recentyearshasraisedpercapitaincomesince<br />
1977,buthasprobablynotchangedtherelativerankingsof<br />
countries to anyimportantextent.<br />
Handout8-1 (concluded)<br />
64<br />
FrenchGuiana,Guatemala,Guyana,Iraq,Ivory Coast,<br />
Jamaica,Jordan.Kiribati (formerlyGilbert Islands),<br />
Korea (DemocraticPeople’s Republic of), Korea<br />
(Republicof),Macao,Malaysia,Malta,Mauritius,Mex<br />
ico, Mongolia,Morocco,Namibia,Nicaragua,Nigeria,<br />
PacificIslands(USTrust Territoryof the), Panama,<br />
PapuaNewGuinea,Paraguay,Peru,Portugal,Roma<br />
nia,St.Kitts-Nevis,St.Lucia,Seychelles,SouthAfrica,<br />
Suriname,Swaziland,SyrianArabRepublic,Tunisia,<br />
Turkey,Uruguay,YemenArabRepublic.<br />
$2,000-$4,999(31 countrIes):Bahamas,Bahrain,Bul<br />
garia,ChannelIslands,Czechoslovakia, FrenchPoly<br />
nesia,Gabon,Gibraltar,Greece,Guadeloupe,Hong<br />
Kong,Hungary,Ireland,Isleof Man,Israel,Italy,Mar<br />
tinique,NetherlandsAntilles,NewCaledonia,NewZea<br />
land,Oman,Poland,PuertoRico,Reunion,Singapore,<br />
Spain,TrinidadandTobago,UnitedKingdom,USSR,<br />
Venezuela,Yugoslavia.<br />
$5,000andover(29countries):AmericanSamoa,Aus<br />
tralia, Austria,Belgium,Bermuda,Brunei, Canada,<br />
Denmark,FaeroeIslands,Finland,France,German<br />
DemocraticRepublic,Germany(FederalRepublicof),<br />
Greenland,Guam, Iceland, Japan, Kuwait, Libya,<br />
Luxembourg,Netherlands,Norway,Qatar,SaudiAra<br />
bia, Sweden,Switzerland,United Arab Emirates,<br />
UnitedStates,VirginIslands(US).<br />
Democratic Kampuchea (formerly called Cambo<br />
dia), Iran, Lebanon, Uganda, and Vietnam are not<br />
included in this compilation.<br />
c
Section 3. FOREIGN AID<br />
Name<br />
Class Date<br />
Every year, a heated debate over the issue of foreign aid to developing nations takes<br />
place in the United States Congress. Many Americans think it is foolish to give away<br />
billions of dollars when there are so many problems that need attention at home.<br />
Imagine that you disagree with this point of view and that you are about to address<br />
Congress on this issue. Write the outline of the speech you plan to give. Include at<br />
least four reasons why foreign aid should be continued. Your speech should include at<br />
least one reason from each of these categories: humanitarian reasons, economic self<br />
interest, politics, and national security.<br />
Outline of Speech to Members of Congress
Handout8-2<br />
THE SEMANTICSOF “DEVELOPMENT”<br />
A numberof termshavebeenused,moreor less<br />
indiscriminately, to designatethepooreror lessin<br />
dustrializedcountriesasagroup: underdeveloped<br />
countries,”“have-notcountries,”“lessdeveloped<br />
countries”or LDCs,“developingcountries,”the<br />
“Third World” (the industrializedcountries are<br />
theFirstWorldandthe communistnationsarethe<br />
Second World), and sometimes—perhapsim<br />
politely—”backwardcountries.”Nowadaysa dis<br />
tinction is often madewithinthe Third World,so<br />
thatthistermdesignatespoorercountriesthathave<br />
beenmakingeconomicprogress,andthe “Fourth<br />
World,” designatesthose whose progresshas<br />
beennil or extremelyslow.Anotherdistinctionthat<br />
hasgainedcurrencyis betweenthelessdeveloped<br />
countriesthatpossessoil—i.e.,theOrganizationof<br />
PetroleumExportingCountries(OPEC)—andthe<br />
rest of the “Third World.”And the poorerLDCs,<br />
whoseprogresshasbeenmadeevenmoredifficult<br />
than before by the immenserise in oil prices<br />
beginningin November1973,havein someinst<br />
ancesbeencalledthe “Most SeriouslyAffected”<br />
nations(MSAs),whichamountsto a moreformal<br />
designationfor the ‘Fourth World.”<br />
TheOrganizationfor EconomicCooperationand<br />
Development (OECD),whichconsistsof theUnited<br />
States,Canada,Japan,Australia,NewZealand,the<br />
seventeen democratic countries of Western<br />
Europe—mostof them developed-plus Iceland,<br />
Yugoslavia,andTurkey,hascoinedausefulspecial<br />
designation.It is appliedto countriesthat cannot<br />
yetbeconsideredfullyindustrializedor developed,<br />
butwhosedevelopmenthasbeenrapid.TheOECD<br />
callsthem“NewlyIndustrializingCountries”andas<br />
of 1979the list includedGreece,Portugal,Spain,<br />
Yugloslavia,Brazil, Mexico, Hong Kong, South<br />
Korea,Singapore,andTaiwan.<br />
Inaddition,thereisthe“Groupof 77.”It consists<br />
ofacaucusofThirdWorld(developing)countriesin<br />
theUnitedNationswhoareactiveintheUnitedNa<br />
tionsConferenceonTradeandEconomicDevelop<br />
ment (UNClAD).UNCTADis an organizationin<br />
whichdevelopinganddevelopedcountriesdiscuss<br />
mattersrelatedto trade,aid, and the transferof<br />
moderntechnologyto the LDCs.The so-called<br />
Groupof 77nowincludesabout123countries.The<br />
Groupof 77 alsohasan offshootthat is quiteac<br />
tivelyinvolvedin monetarymatterswiththeInterna<br />
tionalMonetaryFund.Itiscalledthe“Groupof 24,”<br />
andismadeupof representativesofeightcountries<br />
each from Asia, Africa, and the WesternHemi<br />
sphere.<br />
UNCTADand similar forums are sometimes<br />
called“North-South”discussions.Aquicklookata<br />
map of the world suggeststhat most developed<br />
countriesare locatedin the NorthernHemisphere<br />
andmostdevelopingcountriesin the Southern.<br />
Keyinternationalagencieshaveadoptedsome<br />
what differing formal classifications.The main<br />
headingsusedbythreeof thechiefagenciesasof<br />
1980were:<br />
UnitedNations’ InternationalMonetaryFund’ WorldBank b<br />
DevelopedMarketEconomies IndustrialCountries LowIncomeCountries<br />
DevelopingMarketEconomies DevelopingCountries MiddleIncomeCountries<br />
CentrallyPlannedEconomies Non-OilDevelopingCountries<br />
Oil ExportingCountries<br />
CapitalSurplusOil Exporters<br />
IndustrializedCountriesc<br />
CentrallyPlannedEconomies<br />
‘The classificationshownfor theUnitedNationsisthatof theU.N.StatisticalOfficeasof early1980;thatshownfor theInternational<br />
MonetaryFundis a revisionadoptedin early1980.<br />
b Centrallyplannedeconomies,with the exceptionof Romania,Yugoslavia,Vietnam,Laos,the People’sRepublicof China,and<br />
DemocraticKampuchea(formerlycalledCambodia). arenotmembersof the InternationalMonetaryFundor theWorldBank.The<br />
WorldBank,nevertheless, publishestatisticsaboutmanycentrallyplannedeconomies.<br />
Insomeof thematerialaccompanying thislesson,thetitle IndustrializedCountries,usedbytheWorldBank,has beenchangedto<br />
DevelopedMarketEconomies.<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s, PartII,Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary),1980.<br />
JointCouncilon EconomicEducation,1212Avenueof theAmericas,NewYork,NV10036.<br />
65
Worksheet<br />
DevelopedMarket<br />
Economies<br />
(FirstWorld)<br />
Handout8-3A<br />
CHARACTERISTICS OF ECONOMIES<br />
CentrallyPlanned<br />
Countries<br />
(SecondWorld)<br />
Low<br />
Income<br />
DevelopingMarket<br />
Economies<br />
(ThirdWorld)<br />
Middle<br />
Income<br />
Capital<br />
SurplusOil<br />
Exporters<br />
NOTE:Usethe top portion of the third main column(DevelopingMarketEconomies)to list character<br />
isticscommonto ThirdWorldcountriesin general.In the lowerportion,the specialcharacteristicsof<br />
the indicatedsubdivision shouldbe listed.<br />
Name Class<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s, PartII,Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary),1980.<br />
Joint Council on EconomicEducation,1212Avenueof the Americas,NewYork,NY 10036.<br />
66
QuestIonson Handout8-3A<br />
Handout8-3B<br />
Defineor describethethreetypesof economicsystems,usingthe datayouhaveexamined.Uselessthan<br />
75wordsfor eachdefinition.<br />
DevelopedMarketEconomies(FirstWorld)<br />
CentrallyPlannedEconomies(SecondWorld)<br />
DevelopingMarketEconomies(ThirdWorld)<br />
Name Class<br />
FromMasterCurriculumGuidefor the Nation’s<strong>School</strong>s, PartII,Strategiesfor Teaching<strong>Economics</strong>:World<strong>Studies</strong>(Secondary).1980.<br />
Joint Councilon EconomicEducation,1212Avenueof the Americas.NewYork. NY 10036.<br />
67
C<br />
0)<br />
0<br />
Q)<br />
0<br />
2.<br />
1<br />
Handout8-4<br />
AnnualRatesofPopulationGrowth<br />
EJ 1960-1970average<br />
1970-1977average<br />
Developed Centrally<br />
Market Planned<br />
Economies Economies<br />
SOURCE:Wor’d Bank,WorldDevelopment Indicators(1979).<br />
Middle<br />
Low CapitalSurplus<br />
Income Income Oil Exporters<br />
DevelopingMarketEconomies<br />
68<br />
I
Handout8-5<br />
PerCapitaIncomeinU.S.Dollarsin1977<br />
(figures abovebars areaverageannual growth rates in per capita income, 1960-1977)<br />
6400<br />
6000,<br />
5600<br />
5200<br />
4800,<br />
4400<br />
4000,<br />
3600,<br />
3200<br />
2800<br />
2400<br />
2000<br />
1600<br />
3.4%<br />
1200 3.4% 3.6%<br />
800<br />
400<br />
Q __ _ ___ _ Ii<br />
1.4%<br />
_<br />
6.4%<br />
___ _ _<br />
Developed Centrally Low Middle Capital Surplus<br />
Market Planned Income Income Oil Exporters<br />
Economies Economies - Developing Market Economies<br />
SOURCE:WortdBank,World DevelopmentIndicators (1979).<br />
69
85<br />
80.<br />
75.<br />
70.<br />
I55.<br />
50<br />
45<br />
35.<br />
30<br />
25.<br />
20<br />
15 -<br />
10<br />
5<br />
0<br />
Handout8-6<br />
DistributionofProductionbySector,1977<br />
___ Agriculture<br />
lndustry<br />
Services<br />
Developed<br />
Market<br />
Economies<br />
Low Middle CapitalSurplus<br />
Income Income Oil Exporters<br />
- Developing Market Economies<br />
NOTE:Datafor centrallyplannedeconomieswerenotcompiledbytheWorldBank.<br />
SOURCE:WorldBank,World DevelopmentIndicators (1979).<br />
Manufacturing, construction,utilities,andmining(includingoil drilling,whichis especiallysignificantin the economiesof the<br />
capitalsurplusoil exportergroup).
Handout8-7<br />
Table8-7A. Labor ForcePartIcipation,1977<br />
Typeof Economy:<br />
.<br />
Percentof LaborForcein:<br />
Agriculture Industry Services<br />
DevelopedMarket 7 38 55<br />
CentrallyPlanned 62 25 32<br />
Lowincome 73 11 16<br />
MiddleIncome 46 22 32<br />
CapitalSurplusOil Exporters 48 19 33<br />
Table8-lB. Compositionof ExportsIn 1975<br />
(percentof total)<br />
Typeof Economy PrimaryCommodities Manufactures<br />
DevelopedMarket<br />
CentrallyPlanned<br />
Lowincome<br />
MiddleIncome<br />
CapitalSurplusOil Export<br />
24%<br />
47<br />
94<br />
82<br />
99<br />
Table8-iC. Sharesof WorldEnergyProductionand Consumption<br />
Developedmarketeconomies<br />
Centrallyplannedeconomies<br />
Capitalsurplusoil exporters<br />
Developingcountries<br />
76%<br />
53 8<br />
EnergyProduction EnergyConsumption<br />
36.6%<br />
29.8<br />
12.7<br />
20.9<br />
100.0% .<br />
17 1<br />
57.3%<br />
28.2<br />
0.7<br />
13.8<br />
100.0%<br />
SOURCE: Datain Table 8. 7A is from World Bank,World DevelopmentIndicators (1979),Table 19; Table 8-7B,WorldDevelopment<br />
Indica;ors (1978),Table7; Table8-7C,WorldDevelopmentReport, 1979,p. 37.<br />
71
Handout8-8<br />
CHARACTERISTICS OF DEVELOPINGNATIONS*<br />
Poverty<br />
Themostcommoncharacteristicof thedevelop<br />
ing nationsis the grinding povertyof the great<br />
majorityoftheirpeople.IntheUnitedStates,annual<br />
percapitaincomeis[in 1977was].. . about$8,520.<br />
MostofWesternEuropeandcountrieslikeCanada,<br />
JapanandAustralia . . [had]percapitaincomes<br />
(of $4,000or more].Percapitaincomeof Eastern<br />
EuropeandtheSovietUnion.. . [was]estimatedat<br />
about$3,125.Thedevelopingnations,with about<br />
two billionof the world’spopulation,havean an<br />
nualper capitaincomeof . . . [about]$500—.<br />
[approximatelyone-seventeenth]of that of the<br />
UnitedStates.<br />
Startlingassuchfiguresare,theyare mereap<br />
proximationsand more meaningfulto economic<br />
theoriststhanto the humanbeingswho live with<br />
them.How,for example,do wecomparethevalue<br />
adollarhasfor youwiththevalueit mayhaveforan<br />
Indonesianpeasant?To the peasant,it maymean<br />
thedifferencebetweenlivinganddying.Andwhat<br />
does$500percapitaincomemeanto a farmerin a<br />
countrywherealmostall of theannual$500winds<br />
up in the hands of wealthy landowners?(Re<br />
memberthat “per capita” is an average.) . .<br />
Overpopulationandtack of HumanCapital<br />
Mostlessdevelopedcountriessufferfrom high<br />
ratesof populationgrowth.Eventhoughtheymay<br />
experiencesomeincreasein economicgrowth,the<br />
increaseinpopulationcancelsoutits benefits.The<br />
economicpiebecomeslarger,butnotlargeenough<br />
to satisfytheneedsof thegrowingnumberof peo<br />
plewhomustsharein it.<br />
[E]conomicgrowth itself contributesto<br />
overpopulation—which inturnstealsawayitsbene<br />
fits.Economicgrowthgenerallymeansbetterliving<br />
conditionsand improvedhealth care.More chil<br />
drensurviveto breedmorechildren.Deathratesof<br />
adultsalsodecline,thus addingto the sizeof the<br />
population.Birth control and familyplanning<br />
wouldseemto beimperativeto solvethiseconomic<br />
andsocialproblem.<br />
Thereare signs that the populationgrowth of<br />
manylessdevelopednationshas begunto slow<br />
down,andthis is encouragingfor the longerrun.<br />
However,worldpopulation,whichtotaledabout4.3<br />
billionin 1979,is neverthelessexpectedto growto<br />
about6 billionbytheyear2000-an annualgrowth<br />
rateof about1.7percent,whichwouldresultin an<br />
enormousincreaseof about40percentin 20years,<br />
almostall of it in the lessdevelopedcountries.<br />
Mostof the richestcountriesareexperiencinga<br />
populationgrowthof 1 percenta yearor less.At a<br />
growthrateof 0.5percenta yearlt takes139years<br />
for the populationto double,and at 1 percent,it<br />
takesonly69years.Butobservehowsoondoubling<br />
takesplaceat annualgrowthratesof 2.0percent,<br />
2.5percent,and3.0percent,ratescommonamong<br />
the poorercountries:the doublingstake only 35<br />
years,28years,and23years,respectively. (In1979,<br />
the U.S.populationwasgrowingat 0.6percent,a<br />
doublingtimeof 116years.)<br />
In additionto overpopulation,however,thereis<br />
theproblemof “populationquality.”(Wearespeak<br />
ing here,of course,of the “economic”qualityof a<br />
people,notof its humanandculturalquality.)Most<br />
developingnationslack or are meagerlysupplied<br />
withhumancapital.Theirpeoplearegenerallywith<br />
out the educationaladvantagesnecessaryto de<br />
velop skills needed for a viable and growing<br />
economy—especiallya modern industrial econ<br />
omy. Literacy,without which very little human<br />
capitalcanbedeveloped,is itselfa pressingprob<br />
lemin manydevelopingnations.<br />
tackof Capital<br />
A third characteristiccommonto mostdevelop<br />
ingnationsislackof capitalformation.Asweknow,<br />
economic growth is impossiblewithout capital<br />
goodssuchasfactoriesandmachinery.Aswealso<br />
know,thefundsfor suchgoodscomefrom invest<br />
mentof aneconomy’ savings.Butpeoplecansave<br />
onlyif theyhavemorethanenoughincometo meet<br />
theirday-to-dayneeds.Howcanpeopleaccumulate<br />
capital for investmentIn the tools of economic<br />
growthwhentheycan barelymeettheir ownsub<br />
sistenceneeds?Theansweris,of course,thatthey<br />
can’t.<br />
It is truethat afewdevelopingnationshavelittle<br />
or nonaturalresourcesonwhichto baseeconomic<br />
‘FromPrinciplesof I.by Econo RogerCh shoIm andMarHuMcCarty,pp.378—391 • 01978 Scott,ForesmanandCompany.Glenview,<br />
Illinois.ReprintedbypermIssion.<br />
72
growth.Most,however,do havesuchresources—<br />
landexpanseforagriculture,forexample,ortimber<br />
landsor valuableminerals.Theproblem,however,<br />
is that oftentheseresourcesremainuntappedor<br />
onlypartiallytappedbecauseof lackof capitalfor<br />
properexploitation.<br />
In manylessdevelopednations,populationis so<br />
greatthatagriculturecannotpossiblyprovidesav<br />
ings for investmentin capital goods.Everything<br />
that is produced—foodand timberfrom the land,<br />
fish from the streams—isimmediatelyconsumed<br />
just to keepthe populationalive.Thereis no sur<br />
plusproductionto.savefor investmento nonagri<br />
culturalgoods.<br />
Somedevelopingnationshavenaturalmineral<br />
resourcesto helpthemtowardeconomicgrowth.<br />
But there,too, lack of capital goods is likely to<br />
hinderfull exploitationof the resourceand thus<br />
preventcapitalformation.<br />
Handout8-8 (continued)<br />
TheViciousCircleof Underdevelopment<br />
Theeconomicbind in whichdevelopingnations<br />
too oftenfind themselvesmaybe thoughtof as a<br />
kind of viciouscircle. . . . Startwhereyou will in<br />
sucha circle,thereseemsto be no wayout of it.<br />
Forexample,start[with] . . . agenerallyundevel<br />
opedeconomy.Suchan economyprobablyhasa<br />
populationwhich has few job-marketskills. This<br />
economicallybackwardpopulationmeansthatthe<br />
economywill remain less developed.This con<br />
stitutesacircleinitself.Ifweconsiderapidpopula<br />
tiongrowthwhichincreasesthepopulation,wesee<br />
that the situationgets worse.Underdeve$opment<br />
makesit impossibleto train the rapidlyincreasing<br />
population... . Aneconomicallybackwardpopula<br />
tion is a low-productivityeconomy.Low produc<br />
tivityleadsto lowpercapitaincome.Lowpercapita<br />
ináomemeansthat it is difficult to buy muchand<br />
essentiallyimpossibleto saveanything.Low sav<br />
ingsratesmeanthatlittle or nothingisavailablefor<br />
investmentin capitalgoodsor in humancapital.<br />
Lackof capitalreturnsus to low productivityand<br />
lowproductivityisassuranceofanunderdeveloped<br />
economy.Wearebackwherewestartedfrom.The<br />
viciouscircleremainsunbroken.<br />
Barriers to Economic Growth<br />
Theadverseeconomicconditionsof mostof the<br />
veloping nationspresenta challengethat must<br />
metif a stableworld societyis to endureand<br />
prosper.Gloomyasthesituationmaybe,despairis<br />
notthe answer..<br />
73<br />
What,then,canbedoneto solvetheproblemsof<br />
economicgrowthin developingcountries?Let us<br />
takea closerlook at theseproblemsandexamine<br />
someof thewaystheymaybesolvedor alleviated.<br />
Thesolutions,asweshallsee,mustcomefromtwo<br />
basic sources:through internal changesin the<br />
developingnationsand throughassistancefrom<br />
nationswhoseeconomieshavealreadyadvanced. *<br />
Mentionof outsideassistance,whichwewill dis<br />
cussindetaillaterinthischapter,bringsupapoint<br />
thatshouldbe notednow.It is truethat thedevel<br />
opednationshave,so to speak,beenthroughthe<br />
mill of economicgrowth. They havefaced and<br />
solvedmanyoftheproblemsnowfacinglessdevel<br />
opedcountries.But this is not to saythat all the<br />
developingnationsneeddo is followthe leaders.<br />
Economicandsocialconditionshavechangedover<br />
history.All culturesarenotthesame.All nationsare<br />
not born equal.Foradvancednationsto tell poor<br />
nationsto “do aswe did” is not only insufferably<br />
smug;it mayalsobetotallyimpossiblefor thepoor<br />
nations.<br />
Asanobviousexample,wemaytakethe caseof<br />
economicgrowthin theUnitedStates.Itdeveloped<br />
froma positionof greatlandexpanseandbountiful<br />
naturalresources.It hadtheadvantageof a skilled<br />
nativelaborforceandreadyaccessto the skillsof<br />
millionsof immigrantswhentheywereneededfor<br />
furthereconomicexpansion.It hadthe advantage<br />
ofaculturallymixedpopulationnotboundbysocial<br />
or religioustaboos againstcertain prerequisites<br />
of economicgrowth, such as an achievementoriented<br />
population (which produces entrepre<br />
neurs) and labor mobility. Overpopulationwas<br />
nevera problem.And it had the advantageof a<br />
political systemthat emphasizedindividualfree<br />
domto achievethebenefitsof agrowingeconomy.<br />
Othernowindustrializedandadvancednationshad<br />
similarif not identicaladvantages.Nodeveloping<br />
nationtodayis in suchan enviableposition.<br />
PopulationProblems<br />
Asalreadynoted,uncheckedpopulationgrowth<br />
is a powerfuldeterrentto economicgrowth. For<br />
example,eventhoughIndiadoubleditsagricultural<br />
outputbetween1945and1976,its economicgains<br />
from this advancewerepracticallywipedout by a<br />
doublingof the populationin the sameperiod.We<br />
havealso notedthat economicgrowthitself con<br />
tributesto populationgrowth.<br />
Editor’sNote:Use 01 ftalicor boldfacetypefollowsoriginal<br />
textthroughout.
Somenationshavemadea directattackon the<br />
problem.Familyplanningand birth control infor<br />
mationiswidelydisseminated.Birthratesarecom<br />
ingdowninsomeofthelessdevelopednations.But<br />
moreand fasterprogressneedsto be madeand<br />
manybarriersto thisprogressremain.Forexample,<br />
low-literacylevelsoften hinder disseminationof<br />
family-controlinformation through the printed<br />
word.Lackoftrainedmanpowerandpoortranspor<br />
tationfacilitiesmayobstructattemptsat personal<br />
instruction.Deliveranceof chemicaland medical<br />
meansof contraceptionmaybehinderedbylackof<br />
adequatefunds.Inaddition,apeople’sreligiousor<br />
culturalheritagemaycauseresistanceto contra<br />
ceptivemethodsand techniques.Eveneconomic<br />
considerationsmay enter the picture. In some<br />
underdevelopedagricultural countries, children<br />
are looked upon as a source of economic<br />
security—that is, a sourceof unpaidfarm laborto<br />
providefamilysustenance.<br />
Whateverthe obstacles,however,it is clearthat<br />
the lessdevelopednationsmustcontinueto work<br />
toward an economicallyacceptablereductionin<br />
populationgrowth.Withoutsuchreductionsvigor<br />
ouseconomicgrowthwill bevirtuallyimpossible.<br />
Employment andHumanResourceProblems<br />
Employmentproblemsin developingnationsare<br />
oftenof a differentnaturethanemploymentprob<br />
lemsin moreadvancedeconomies.In Westernna<br />
tions, whenaggregatedemandfalls, workersare<br />
“laidoff” andremainidleuntildemandquickens.In<br />
developingcountries,however,the problemis not<br />
so much idle labor as unproductivelabor. Such<br />
economiessuffer from what is called disguised<br />
unemployment.Most of the labor force may be<br />
hard at work. Workersmaytoil more and much<br />
longerthan in Westernnations.But theyproduce<br />
muchlessperlaborunit.Muchoftheworkinglabor<br />
forceis actually“unemployed”eventhoughit is at<br />
work.Forexample,whilethe laborforceis “work<br />
ing,” it maynot be producingmuchor muchof<br />
anythingwhichthe marketvalues.Thus,whileen<br />
ergyis expendedbythe workersandtheymanage<br />
to workupasweat,theymightaswellbeidlefor all<br />
thegoodthattheir effortdoes.<br />
Mostof the laborforce in developingnationsis<br />
engagedin productionthat islaborintensive;that<br />
is,in productionthatreliesheavilyon humanlabor<br />
inputsratherthan on the labor-savingdeviceswe<br />
callcapitalgoods.Agriculture,for example,isvery<br />
laborintensive,especiallyin nationslackingmod<br />
ernfarmequipmentandfarmingmethods.Andthe<br />
Handout8-8 (continued)<br />
74<br />
economiesof manydevelopingnationsareprimar<br />
ily agricultural.. . . [Ajfter a certainpoint, adding<br />
morelaborto agivenamountof landresultsin less<br />
production per worker. Unfortunately,the tradi<br />
tionsandcultureof manyunderdevelopednations<br />
contribute to overemployment(disguisedunem<br />
ployment)in agriculture.In manysocieties,if a<br />
fatheris a farmer,it is almostunthinkablethat his<br />
sonswill be anythingotherthanfarmersalso.<br />
Of course,lack of other productivework also<br />
contributes to overemploymentin agriculture.<br />
Manydevelopingnationshavelittle or no otherin<br />
dustryto absorbtheir laborforce.Andwhatindus<br />
try is availableis itself likelyto be laborintensive.<br />
Ownersof industry are likely to substitute<br />
humanlaborfor investmentin capitalgoodswhen<br />
laboris plentifulandcheap.Quickandhighprofits<br />
aretheresult—alongwith littleor norealgrowthin<br />
GNP.<br />
In other words, even though labor-intensive<br />
industriesmayprovidemuchneededemployment<br />
in overpopulatedcountries,such industriesare<br />
necessarilylow in productivity.More and better<br />
capitalgoodswouldseemto becalledfor.Buteven<br />
here caution is needed.Suddeninflux of labor<br />
savingcapitalgoods,thoughgoodin the longrun,<br />
mayresultin immediateandsevereunemployment.<br />
India, for example, could obviously use more<br />
capital goods.But manyof India’slabor unions<br />
havefoughtintroductionof certainlabor-savingin<br />
dustrial improvementson the groundsthat they<br />
wouldcauseunemploymentamongIndia’svastur<br />
banpopulation.<br />
Thereis a further dimensionto the problemof<br />
employment indevelopingnations.Asnotedabove,<br />
the qualityof the labor force is likely to be poor<br />
becauseof lackof healthcareandeducation.There<br />
is a lack of people with entrepreneurial,super<br />
visory,andotherskills neededin a modernindus<br />
trial economy.Thegeneralshortageof peoplewith<br />
entrepreneurialskills is particularlytroublesome.<br />
Unlesssomeoneiswillingto taketherisksinvolved<br />
in investment, therewill benocapitalformationand<br />
no jobs for others.Lackof entrepreneurshiphin<br />
derseconomicgrowth.<br />
Manylessdevelopednationshaveattackedthis<br />
humanresourceproblembyattemptingto improve<br />
their educationaland healthfacilities.But this is<br />
difficultto dowhensomuchof theeconomy’sout<br />
putis neededlot immediatelifesubsistence.Often,<br />
theysendtheir mostqualifiedyoungercitizensto<br />
educationalfacilities in industrializedcountries,<br />
such as WesternEuropeannations,the United
States,and,morerecently,theSovietUnion.Many<br />
suchstudentshavereturnedto their homecoun<br />
trieswith muchneededskills.<br />
Carefulplanning,however,isneededforthiskind<br />
of operationto attainitsfull potential.Somedevel<br />
opingcountriesfind thattheynowhavetoo many<br />
peoplewithskillstoo advancedfor theactualstate<br />
of theeconomy.Theymayhaveelectronicexperts,<br />
for example,but no computercapacitiesto absorb<br />
theirexpertise.Orhighlytrainedsurgeons,withno<br />
medicalfacilitiesadequateto their skills. In addi<br />
tion,thereis the so-calledbraIndraInproblem:A<br />
certainnumberof the bestqualifiedstudentswill<br />
electto remainin the host country,becausethe<br />
opportunitiesfor personalachievementaregreater<br />
therethanat home.Also,somecountrieslikeIndia<br />
andthePhilippineschurnout collegegraduatesin<br />
such largenumbersthat manyneverfind appro<br />
priate jobs, becauseindustriesand technology<br />
havenot grown fast enoughto providejobs for<br />
skilledlabor.<br />
Handout8-8 (continued)<br />
NaturalResourceProblems<br />
Somedevelopingcountrieshavea scarcityof<br />
natura!resourcesto addto theireconomicdifficul<br />
ties.Theymay,for example,beburdenedbylackof<br />
arableland,poor climate,lackof waterways,and<br />
absenceof mineralwealth.Little can be doneto<br />
overcomesuchhandicapsexceptto seethat what<br />
resourcesthenationdoeshaveareusedefficiently.<br />
Moderntechnologiessuitable to nations with<br />
abundantresourcesmaynotbeapplicablein coun<br />
tries with lessnaturalendowments.Miningtech<br />
niquesthat bring quick profitsbut arewastefulof<br />
thecommoditybeingminedcouldbedisastrousto<br />
a country with very limited mineral resources.<br />
Drainageandirrigationtechniquesthatworkwellin<br />
moderateclimatesmay actuallydepleteagricul<br />
tural resourcesin countries subject to severe<br />
weatherextremes.For example,during yearsof<br />
favorablerainfallthe peopleof the Sahel—those<br />
countriesonthesouthernborderoftheSaharades<br />
ertinAfrica—wereableto developlandsfor grazing<br />
andfarmingthathadpreviouslybeentoodryto use.<br />
However,whenthe rainiaIlswereveryslight for a<br />
fewyears,thefarmingandgrazing—nowessential<br />
to the livesof many—destroyed landandturnedit<br />
into desert(theSaharathusexpanded).Theresult<br />
wasstarvationfor hundredsof thousands.<br />
Afurthercomplicationariseswhenthe economy<br />
f a developingnationdependsprimarilyon a sin<br />
le naturalresource,or evenon relativelyfew re<br />
sources.World technologicalchangesmay sud<br />
75<br />
denlylessenor evenwipeout the valuesof such<br />
commodities.Syntheticfibers,for example,have<br />
cut drasticallyinto the marketfor hempproducts.<br />
Thedevelopmentof syntheticrubberand plastics<br />
hasseverelydamagedthe valueof naturalrubber,<br />
which is grown mostlyin lessdevelopednations.<br />
Technological Problems<br />
Aswe know,technologicaladvancesarean im<br />
portantcomponentof economicgrowth.Asa gen<br />
eraleconomicrule,progressin technologyoccurs<br />
alongwith capitalinvestment,whichis neededto<br />
developandutilizethe newtechnology.But,aswe<br />
havealsoseen,developingcountrieshaveparticu<br />
lar difficultiesin raisingcapital.However,the pic<br />
tureisnotalldark.Fortunately, thecostof research<br />
anddevelopmentof muchnewtechnologyhasal<br />
readybeenmet by the industrializednations.It is<br />
availablefor useor adaptationby developingna<br />
tions.. . . It isimportantto remember,however,that<br />
the situation maycall for adaptationratherthan<br />
adoption.Highlyefficientmethodsfor growingcer<br />
tain grains,for example,mayactuallybe counter<br />
productiveif the graindoesnot answerthe nutri<br />
tionaltraditionsof the populace.<br />
As the economyof a developingnationgrows,<br />
moreof theavailabletechnologieswill cometo be<br />
used,whichin turn will fosterfurthergrowth.Such<br />
nations,however,areforcedto bemoreselectivein<br />
theirchoicesof technologythanarethedeveloped<br />
countries. Technologyin industrializednations<br />
tendsto belaborsavingandcapitalconsuming.In<br />
developingnations,labor is plentiful and capital<br />
scarce.Often,developingnationsmustbe content<br />
withtechnologythat increasesproductivityandor<br />
ganizationalefficiencybutmayaddlittleto existing<br />
capitalgoods—newcomplexmachinery,for exam<br />
ple,or newfactories.Advancesin technologymean•<br />
slowandsteadyeconomicprogressfor developing<br />
nations.Theycannot,overnight,becomeindustri<br />
alizedgiantson the Westernmodel.<br />
SodalCapitalProblems<br />
Whatissocialcapital?Itisthecommunication<br />
networkand public socialserviceswithout which<br />
moderneconomiescannot function. It is paved<br />
roads,railways,airways,telephones,post offices,<br />
andmailservices.It iselectricgeneratorsandother<br />
energy-producingfacilities.It is schools,hospitals,<br />
sewageplants,and housing.Thelist could go on<br />
andon.
Developingnationsarelikelyto havea shortage<br />
of socialcapital—andfew waysto obtain it. Yet,<br />
• . . socialcapitalis essentialto vigorouseconomic<br />
growth.Theproblemis furthercomplicatedbythe<br />
fact that socialcapitalis seldomimmediatelypro<br />
ductive.Thetemptationisto neglectaccumulation<br />
of socialcapitalinfavorof moreimmediatelyprofit<br />
able investmentin capitalgoods.Thedilemmais<br />
that both typesof investmentare neededsimul<br />
taneously.<br />
Government andEconomicGrowth<br />
Theroleofgovernment indevelopingcountriesis<br />
of greatimportanceto theireconomicgrowth.It is<br />
historicallytruethatgovernment intervention, inthe<br />
economicgrowthof mostWesternnationsstarted<br />
at a relativelylow level.But, . . . interventionhas<br />
grownwith economicgrowthitself.And,it is ob<br />
viousthatgovernment interventionintheeconomic<br />
lifeof developingnationsistodayat leastaspreva<br />
lentasit nowis in developednations—andin many<br />
underdevelopedcountriesmuchmoreso.Leaving<br />
asidethe pros and consof suchintervention—its<br />
potential for loss of personal freedoms, for<br />
example—whyis the roleof governmentso impor<br />
tantto thegrowthof underdevelopednations?The<br />
basic answerwould seemto be that there is no<br />
otherinstitutionpresento dothejob.Thecharac<br />
teristics necessaryfor a viable marketsystemto<br />
workits Westerneconomicwondersareabsent.<br />
Forexample,onlygovernmentcandealwiththe<br />
basicproblemof overpopulationin developingna<br />
tions.Onlygovernmentcanlauncha contraceptive<br />
campaignmassiveenoughto haveanyrealeffect.<br />
Governmentis [often]the only institutionthat.<br />
provide[s]the social capital necessaryfor eco<br />
nomic expansion. And only government can<br />
imposemonetaryand fiscal policiesto guide the<br />
economytowarda patternof economicgrowth.<br />
It is imperativethen that the governmentof a<br />
developingnation be honest,stable,and strong<br />
enough to fulfill these functions. Unfortunately,<br />
somedevelopingcountrieslack the political and<br />
socialtraditionsnecessaryto this kind of govern<br />
ment. Others,becauseof internal and external<br />
pressure,find sucha governmentdifficult to main<br />
tain. Such problems can only be solved with<br />
time—andperhapsbyhumanity’sinstinctfor social<br />
aswellasself-preservation.<br />
Givenanablegovernment,whatcanthe leaders<br />
of developingnations do to promoteeconomic<br />
growth?In somesituations,governmentmayonly<br />
need to ensure basic conditions conduciveto<br />
Handout8-8 (continued)<br />
76<br />
growth—socialstability,for example,or anorderly<br />
businessclimate.In othercases,morepositivein<br />
terventionis needed.<br />
Governmentmayengageinlong-rang economic<br />
planning.It may inauguratefive-yearor ten-year<br />
plansto coordinategrowthto thebenefitof allsec<br />
tors of the economy.It maytakepositivestepsto<br />
dealwithoverpopulation, trainits citizensin indus<br />
trial and businessskills, and provide necessary<br />
socialcapital.<br />
Governmentmayalso dictateland reformsand<br />
other economicreformationsto increasesavings<br />
for investmentin growthcapacity.Properlandre<br />
formwouldeliminatetheholdingof largefarmsby<br />
absenteelandlordswho“rent” parcelsof landto a<br />
largeclassof peasantry.Suchreformscouldmake<br />
farmersmore productiveand hencegive them a<br />
potentialfor saving.A farmer,or anyoneelsefor<br />
that matter,is moreproductiveandworksharder<br />
whenworkingfor himselfthan whenworkingfor<br />
others.Taxincentivesmaybe usedto inducethe<br />
wealthyto invest in the nation’sneededcapital<br />
goods.Thepowerof taxationmayalsobe usedto<br />
redistributethe nation’swealthmoreequallyand<br />
towardinvestmentinthenation’sgeneralwelfare.If<br />
the nation’slevel of sustenanceis high enough,<br />
governmentmaytax all its citizensto decreaseim<br />
mediateconsumptionin favor of capital invest<br />
ment.<br />
Cautionis in order,however.Tooharshandarbi<br />
traryuseof governmentpowercaneasilybecome<br />
counterproductive.Anovertaxedcitizenrymaylose<br />
incentiveto produceor to sacrificefor thecommon<br />
good.Capitalmayfleethe nationfor morepermis<br />
siveandprofitableeconomicclimes.Toavoidsuch<br />
possibilities,andfor other politicalandeconomic<br />
reasons,somedevelopingnationsresortto infla<br />
tionary policies to enhancegrowth.Theysimply<br />
print moremoneyto payfor ongoingneeds.This<br />
kindof “taxation” fallsmostheavilyonthenation’s<br />
alreadypoor or near-poorand will ultimatelyde<br />
stroyeconomicgrowth.<br />
In addition,the governmentsof lessdeveloped<br />
nationsmustbe carefulnot to try to do too much,<br />
not to overregulatethe economy.Such actions<br />
couldstifle initiativeandslowgrowth.<br />
TheProblemof CapitalAccumulationandInvestment<br />
Eachof the challengesto economicgrowth in<br />
developingnationsthatwehaveenumeratedabove<br />
Isrelatedin onewayoranotherto perhapsthemost<br />
importantchallengeof all—theproblemof howto<br />
accumulatecapital for investmentin growth.We
knowthat most developingnationsare woefully<br />
weakin the productivefacilities—factories,heavy<br />
machinery,and so on—necessaryfor economic<br />
growth.Andwehaveseenthatthe basicpovertyof<br />
theeconomyandits peopleisthe rootof theprob<br />
lem.Aneconomythat barelyprovidesenoughfor<br />
itscitizens’sustenanceof lifecannothopeto accu<br />
mulatesavingsfor investmentin capitalgoods.<br />
Thesituationis not a greatdealbetterfor devel<br />
opingnationswithsomewhatmoreadvancedecon<br />
omies.Althoughsomedomesticsavingmayoccur,<br />
it islikelyto beslight.It maynotbeenoughto give<br />
theeconomythekindof boostit needsto beginand<br />
maintainthe processof capitalaccumulation.In<br />
vestmentin capital goods increasesproduction,<br />
which in turn increasescapital accumulation.If<br />
originalinvestmentistoo meager,theprocessmay<br />
neverreallybesetin motion.Theeconomycannot<br />
breakout of the vicious circle of underdevelop<br />
ment.<br />
A shortageof savingsis nottheonlyunfortunate<br />
characteristicof capitalaccumulationin lessdevel<br />
opedcountries.Theinvestmentprocessitself has<br />
problemspeculiarto or aggravatedby socialand<br />
economicconditionsin manysuchcountries.<br />
In the first place,wealthycitizensof developing<br />
nationsmayhesitateor refuseto investtheir sav<br />
ingsin domesticcapitalgoods.Wealthylandlords,<br />
for example,maypreferto spendtheseprofitson<br />
purchasingmoreland or on grandioseconsump<br />
tion.Orsaversmaynotwishto risktheir moneyby<br />
investingin an undevelopedomesticeconomy.<br />
Whatprofit will therebe, for example,from in<br />
vestingin a shoefactory if the populationis too<br />
poor,to buy shoes?Lackof domesticmarketis a<br />
disincentiveto investment.Or why shouldpeople<br />
investin a steelmill,say,in a countrywith no rail<br />
waysandfew roadsto bring iron ore to the plant<br />
andto distributethe plant’sproduction,or where<br />
facilitiesto producethe plant’s raw materialare<br />
poorlydeveloped?Lack of social capital and of<br />
complementaryindustriesis a furtherdisincentive<br />
to invest.<br />
Furthermore,mostdevelopingnationslackedu<br />
catedworkers.Theyalsohavea lackof managerial<br />
talent.Underthesecircumstances,successof a<br />
newbusinessenterprisemaybeariskyproposition.<br />
In addition,investorsin the domesticindustriesof<br />
lessdevelopednationsmayfacecripplingcompeti<br />
tionfromtheproductsof thealreadyindustrialized<br />
nations....<br />
Handout8-8 (continued)<br />
77<br />
ForeignInvestment in DevelopingNations<br />
ForeignPrivateCapitalInvestments<br />
Historically,foreign private investmentshave<br />
beenimportantsourcesof capitalfor developing<br />
nations.Untilcomparativelyrecenttimes,suchaid<br />
was more often than not primarilyfor exploitive<br />
ratherthan developmentalpurposes.Colonialism<br />
wastheorderoftheday;thebulkof theunderdevel<br />
opednation’swealthwasextractedfor the benefit<br />
of foreign, more “advanced” countries.Today,<br />
such blatanteconomiccolonialismis almosten<br />
tirely a thing of the past.Nationalism—asenseof<br />
countryandculture—hasall but wipedit away.<br />
Privateforeign capital no longer “follows the<br />
flag.” That is, it is for the mostpart truly private.<br />
Investorswhorisktheirsavingsin foreignlandsno<br />
longerdo so with assurancethat their profits are<br />
moreor lessguaranteedby the militarymight of<br />
their industrializedhomeland.It is worth noting,<br />
however,aswe shallseebelow,that rumblingsof<br />
“economicimperialism”arestill heard.<br />
Privatecapitalinvestmentsfromforeignsources<br />
may take the form of moneyinvestmentin an<br />
alreadyestablishedbusinessor industry.Or the<br />
moneymaybe usedto set up a newfirm, with as<br />
muchmanagerialresponsibilityas possiblebeing<br />
givento localresidents.Sometimes,capitalgoods<br />
aresentdirectlyto adeve’opingnation,alongwith<br />
personnelto operate machineryand/or to train<br />
localpeopleto do so.<br />
Aflowof privateforeigncapitalmaybringimpor<br />
tant peripheralbenefitsto lessdevelopednations.<br />
Mostsuchnationswelcomeprivateaidandarewill<br />
ing to do all that they can to encourageits con<br />
tinuedflow. To encourageprivateforeign capital<br />
they knowthey mustprovidesocialcapitaland a<br />
stable political and economicclimate. A stable<br />
economyandgovernmentanda satisfiedcitizenry<br />
mean higher productivity. Domestic economic<br />
growth feeds on foreign capital and engenders<br />
furthercapitalflowsfm foreignsources.Growth<br />
feedson growthto the benefitof all.<br />
Foreignprivatecapital investment,however,is<br />
not the perfectsolutionto the problemof capital<br />
accumulationin developingnations.Suchinvest<br />
mentsalsobringproblems.Althoughpoliticalcolo<br />
nialismis moreor lessdeadin our times,various<br />
formsofeconomiccolonialismarestillapossibility.<br />
Developingnationsoftenfind thereis conflict be<br />
tweentheir own nationalinterestsand the profit<br />
motivatedinterestsof the suppliersof capital....
In mostcases,however,problemsarisingout of<br />
foreigncapitalflowsaremoresubtleandcomplex.<br />
Evenwhenthe developingnationand the foreign<br />
providersof capitalattemptto strikea balancebe<br />
tweentheir sometimesconflictinginterests,prob<br />
lemsmaystill occur.Too oftenthe operationand<br />
maintenanceof capitalgoodsboughtwith foreign<br />
capitalbecomethe prerogativeof foreign mana<br />
gersandworkers.Locallaboris employedonlyfor<br />
low-skilland dead-endjobs. Little or no attempt<br />
maybe madeto train and educatethe local labor<br />
force andthus contributeto long-termeconomic<br />
growthof thedevelopingcountry.<br />
Problemsof foreigncapitalinvestmentmayalso<br />
arise from the attitudesand actionsof the host<br />
country.As we havenoted,the powerof taxation<br />
maybe usedto increasecapitalaccumulationin<br />
underdevelopednations.Butit mayalsobeusedto<br />
discriminateagainstthe legitimateprofit expecta<br />
tions of foreign investors.Host countriessome<br />
timeserectobstaclesto the interestsof foreignin<br />
vestorsin theform of regulationsthat inhibitgood<br />
businesspracticesor restrict the flow of profits<br />
earnedby foreign investments.Somedeveloping<br />
nationsmay deliberatelylag in supplyingsocial<br />
capitalnecessaryfor profitableinvestment.Inaddi<br />
tion,theremaybethe problemof officialgraftand<br />
corruptionto addto the difficultiesof doing busi<br />
nessin foreignlands.And,of course,thereis al<br />
waysthethreatthatthehostnationmaynationalize<br />
(takeover,sometimeswith littleor no recompense)<br />
the propertyof foreigninvestors.<br />
Theactualbarriersto foreigninvestmentmaynot<br />
beashighasbusinessthinks.But,if investorsthink<br />
therewill be problems,the barriersmaybe “real”<br />
becauseinvestmentwill be reduced.<br />
ForeignGovernment Investment<br />
In the interestof world order and in their own<br />
self-interest,foreign governmentsalso contribute<br />
to thesocialandeconomiccapitalaccumulationof<br />
the developingnations. The United States,for<br />
example,givesaidintheformof low-costloansand<br />
outrightgrantsto manydevelopingnations.Foodis<br />
sentto poorernationsin on-goingprogramsandin<br />
particularemergencies.Loansfor capitalimprove<br />
mentsandtechnicalassistanceare madethrough<br />
our Agencyfor InternationalDevelopment(AID).<br />
Theseareverylong-rangelow-costloans.In point<br />
of fact, the loansare often morelike grantsthan<br />
loans.Thereceivingnationis seldompressedfor<br />
repayment,andsometimestheloanis repaidinthe<br />
overvaluedcurrencyof the developingcountry.<br />
Handout8-8 (continued)<br />
78<br />
Aswithprivateforeigncapital,thecontributionof<br />
foreigngovernmentsto capitalaccumulationpre<br />
sentsproblemsfor the developingnation.First,of<br />
course,there is the dangerof political or military<br />
dominationbythedonornation.Inaddition,foreign<br />
capital maybe usedunwiselyand thus not con<br />
tribute to domesticsavingsnecessaryfor growth.<br />
Or it may be wasted on grandiose projects—<br />
monumentalgovernmentbuildings,for example<br />
—thatcontributelittle to economicexpansion.All<br />
too often developingnationsdevotetoo muchof<br />
foreign aid to building up militaryforces.Finally,<br />
thedevelopingnationmayfinditselfsodebtridden<br />
that its dreamof economicgrowthis shatteredin<br />
the cold dawnof nearor actualbankruptcy.<br />
In additionto acting as suppliersof capitalfor<br />
developingnations,foreign governmentsplay a<br />
vital role in an importantaspectof theireconomic<br />
growth we haveonly touchedupon. . .—foreign<br />
trade,as it relatesto the economicwell-beingof<br />
developingnations(andof all nations).<br />
Mostforeignaid, however,is administeredon a<br />
more business-likeand internationalbasis. For<br />
example,theInternationalBankfor Reconstruction<br />
and Developmentwasformedin 1944at a confer<br />
enceof worldleaders.CommonlycalledtheWorld<br />
Bank,it operatesin amannersimilarto commercial<br />
banks but for the express purpose of lending<br />
capitalto underdevelopednationsto stimulateeco<br />
nomic growth. The five largest contributors of<br />
funds,or shareholdersin the bank,arethe United<br />
States,GreatBritain,France,WestGermany,and<br />
[Japan . Othershareholdersrepresentvarious<br />
blocksof nationsthroughouttheworld.Becauseof<br />
soundmanagementanditslargeinitialfunding,the<br />
bank is able to borrow funds from world money<br />
markets .. . It passesthesefundsalongto needy<br />
nationsatalowerratethantheycouldlikelyreceive<br />
elsewhereor if theytriedto borrowdirectlyfromthe<br />
moneymarkets.<br />
TheWorldBankalso operatesthe International<br />
DevelopmentAgency(IDA).IDAloansaremadeto<br />
needycountriesthat havelittle or no short-range<br />
meansof repayment.Theloansextendfor40years,<br />
with no repaymentnecesspryat all for the first 10<br />
years.Thereis a nominalservicechargefor the<br />
loan, but no interest charge.The World Bank,<br />
throughitsaffiliate,InternationalFinanceCorpora<br />
tion (IFC),also makesloansto privateindustries<br />
withindevelopingnationsfor expansionbeneficial<br />
to the economicgrowthof the nation.<br />
World Bank loans are usedfor building social<br />
capital in the developingnatior —for education,
healthservices,roads,airfields,energygenerators,<br />
and so on. Or, amongmanyotherpurposes,they<br />
maybeusedfor industrialdevelopment,especially<br />
in mining,iron,andsteelmanufacture.Orfor flood<br />
controlandirrigationprojectsto assistagricultural<br />
production.<br />
However, thereareproblemswithsuchloanpoli<br />
cies.TheWorldBankhasnotedthat eventhough<br />
the growthcapacityhasincreasedin thosecoun<br />
trieswhereloansaremade,theverypooroftenare<br />
notreallybeinghelped.Theincreasedwealthisnot<br />
Handout8-8 (concluded)<br />
79<br />
spreadevenly;becauseof powerand ownership,<br />
the upperclasses(evenin socialist-orientedevel<br />
oping countries)manageto net nearlyall of the<br />
gains.Soin1977,WorldBankPresidentRobertMc<br />
Namaraannounceda shift in direction.TheBank<br />
would start instituting a basic-needspolicy with<br />
loanspartiallycontingenton the loansbeingused<br />
for projectsthatredistributewealthto thosesuffer<br />
ing abjectpoverty.Moreloanswouldbe madefor<br />
projectsthat improvedthe health,food, housing,<br />
andeducationof the poor.
Lesson 9: The Problemof Modern CommandEconomies—<br />
MeetingConsumerNeeds<br />
TIME REQUIRED: Two or three class periods<br />
RECOMMENDED GRADE LEVEL: 11-12<br />
CONCEI1 S:<br />
Determinants of supply and demand in<br />
a command economy (U.S.S.R.)<br />
Investment policy<br />
Consumer needs<br />
Economic growth<br />
Instructional Objectives: Students will<br />
• Summarizethe goals of a U.S.S.R.-style economy;<br />
• Describe Soviet progress toward meeting these<br />
goals;<br />
• Understand the conflict between consumer needs<br />
and capital-militaryneeds in the Soviet Union, and<br />
why it poses a major problem for that country.<br />
Rationale: A student is in a better position to view<br />
Soviet economic policies today, particularly in respect<br />
to its relations with the United States, if the student<br />
understands the conflict in the Soviet Union about the<br />
allocationof resources between the needs of the con<br />
sumer and capital/military requirements, and how the<br />
authorities attempt to ameliorate that conflict.<br />
Materials: One copy each of handouts 9-1, 9-2, and,<br />
9-3for every student.<br />
Procedure:<br />
1. Distribute Handout 9-1. Explain to students that<br />
the table summarizes the amount of labor time that<br />
a typical factory worker in the United States and in<br />
the Soviet Union must have expended (as of May<br />
1976)to make enough money to buy the commodi<br />
ties givenon the list. These figures serve as a rough<br />
index of standards of living. (The comparison<br />
would be more favorable to the U.S.S.R. if it in<br />
cluded the costs of rent, medical services, and cer<br />
tain of the basic foodstuffs, which are cheaper for<br />
consumers there than in the United States.)<br />
2. Have students compare the worktime of the items<br />
listed and ask: With these comparisons in mind,<br />
what do you think would increase the satisfaction<br />
of the Soviet consumer?<br />
3. Distribute Handout 9-2.The material studied in the<br />
previous exercise compares the effort that must be<br />
expended in two different countries in order to<br />
attain some important constituents of a given<br />
80<br />
standard of living.The result conforms to the usual<br />
assumption that the higher the per capitaincome<br />
(or, as in the foregoing example, the lower the<br />
amount of labor time needed to buy something),<br />
the higher the materialquality of people’s lives.<br />
Handout 9-2 presents an array of countries with<br />
some different and nonmarket measures of the<br />
quality of life: the infant mortality rate, the average<br />
life expectancy, and the percent of the population<br />
age 15and older that is literate. These three indica<br />
tors are also incorporated in a singleindex in order<br />
to express their combined effects. It shows relative<br />
per capita income is a reasonably good indicator of<br />
the quality of Life.After students have studied the<br />
handout, see if they reach the above conclusion by<br />
themselves. Among other things, ask them espe<br />
cially about the disparity between per capita in<br />
come and the quality of life in Saudi Arabia, the<br />
seeming disparities for South Africa vs. Cuba, and<br />
why the data for the Low Income Countries appear<br />
to make sense. Most importantly, note whether the<br />
students realize that the Soviet Union stands much<br />
closer to the United States in the comparisons here<br />
than in those of the previous exercise. <strong>Point</strong> this<br />
out if students do not. Discuss the implications of<br />
all the foregoing anomalies: Although the amount<br />
of per capitaincome is a reasonably good indicator<br />
of the physical quality of life, it may not be com<br />
pletely reliable in all circumstances.<br />
4. Distribute Handout 9-3. Have students read it in<br />
class or as a home assignment. After students have<br />
completed the reading have the class discuss the<br />
following:<br />
a. What has been the general evolution of the<br />
Soviet economy from the 1917revolution to<br />
the present, i.e., what changes have taken<br />
place in the mix of private and public enter<br />
prise, the pattern of investment, the structure<br />
of the economy, the rate of economic growth.<br />
b. How does the Soviet economy compare with<br />
the U.S. economy in respect to (i) the mix of<br />
public and private enterprise; (ii)the structure<br />
of production, (iii) the rate of economic<br />
growth; (iv) per capita income; (v) patterns of<br />
consumption and investment?<br />
c. What does the comparison of the consump<br />
tion-investment patterns of the United States<br />
and the U.S.S.R. imply for the consumers in<br />
each country?
Name<br />
Class Date<br />
FUNDINGECONOMICGROWTHINDEVELOPINGNATIONS<br />
Developing nations can seek investments from foreign companies to finance new<br />
enterprises such as railroads, steel mills, and mines. In addition, developing nations<br />
can seek foreign aid from other governments. This aid can come in any of four ways:<br />
Economic assistance: loans and grants that add to a nation’s capital resources<br />
Humanitarian aid: food, clothing, medical supplies<br />
Technical assistance: the assistance of engineers, technicians, teachers, health care<br />
professionals, and others, to teach skills to citizens of developing nations<br />
Military assistance: economic and technical assistance given to a nation’s armed forces.<br />
1. What are the costs and benefits of investing in developing nations for foreign<br />
corporations?<br />
2. What costs and benefits of foreign assistance are faced by the people of a<br />
developing nation?______________________________________________________<br />
3. What advantages and disadvantages do governments face in giving foreign aid to<br />
developing nations? ____________________________________________________<br />
4. Study the following chart. Tell what type of aid you think each country needs most.<br />
Infant mortality<br />
(deaths per 1,000<br />
births)<br />
Haiti<br />
112<br />
Ethiopia<br />
-<br />
145<br />
China<br />
71<br />
Uganda<br />
96<br />
Population per<br />
physician<br />
8,200 58,940 1,920 26,810<br />
Daily calorie supply<br />
as percent of<br />
requirement<br />
96 76 107 83<br />
Adult literacy rate 23 15 69 52<br />
Per capita GNP (dollars) 300 140 300 220<br />
Percent of labor force<br />
in agriculture<br />
74 80 69 83<br />
Source: The Development Data Book. (Washington D.C.: The World Bank)<br />
a. Haiti:<br />
b. Ethiopia:<br />
c China: —<br />
d. Uganda:
I<br />
Name<br />
Class Date<br />
DECISION-MAKINGIN A DEVELOPINGCOUNTRY<br />
Asyou have learned, consumer decisions come in many forms. Groups make consumer<br />
decisions, as well as individuals. One type of group decision is how a community<br />
should spend government grants. There may be many important projects that need<br />
money to be implemented, but only a limited amount of money is available.<br />
Read the passage below describing the situation in a mountain village in a develop<br />
ing country. The people of the village must decide how to spend the grant money from<br />
the government. Then answer the questions that follow.<br />
The village of Sanjar is part of the country’s Rural Development Program. Under the program,<br />
the government provides money for improvements that the village could not have made other..<br />
wise. The village council decides what improvements will be made each year, and uses the<br />
money to buy the necessary materials. The villagers provide volunteer labor to complete the pro<br />
ject.<br />
Last year, the village rebuilt a bridge that connects the village to the main highway. This<br />
year, the council must choose between two worthy projects. The first is to improve the road that<br />
leads to the market town. The second is to improve the system that brings water to the village.<br />
The road needs to be strengthened so that cars, trucks, and buses can travel over it during the<br />
rainy season. This would require the village to buy tons of gravel. The villagers would need to<br />
grade the road and spread the gravel. The improved road would allow the villagers to transport<br />
their goods to market. It would also provide access to much-needed medical care, available only<br />
in the market town.<br />
Improving the town’swater supply requires rebuilding storage tanks, replacing pipes, and<br />
moving the water taps to a more convenient site. This would require the purchase of cement for<br />
the tanks, and new pipes and taps. The cleaner water would reduce disease in the village. It<br />
would also make hauling water to homes much easier.<br />
1. What are the major problems that the village faces? List at least four of them.<br />
2. Ii you were on the village council, which project would you vote for? Why?<br />
3. What would be the opportunity costs of completing the project you would vote for?<br />
4. Relate the experience of Sanjar to your own community. Name two or three impor<br />
tant projects that are competing for scarce funds. Then explain the opportunity costs<br />
of each project.
Handout 9-1<br />
ComparativeStandardof Living<br />
(approximateworktimearequiredfor averagemanufacturing<br />
employeeto buyselectedcommoditiesin retailstoresin<br />
Washington,D.C.,andat state-fixedpricesin Moscow<br />
during May1976)<br />
Commodity Washington,D.C. Moscow<br />
Whitebread(1 kg.) 21 minutes<br />
Hamburgermeat,beef(1 kg.) 34 minutes<br />
Sausages,pork (1kg.) 71 minutes<br />
Potatoes(1 kg.) 8 minutes<br />
Apples,eating(1 kg.) 16minutes<br />
Sugar(1 kg.) 9 minutes<br />
Milk (1liter) 7 minutes<br />
Eggs(10) 10minutes<br />
Vodka(0.7liters) 67 minutes<br />
Cigarettes(20) 10minutes<br />
Soap,toilet (150grams) 5 minutes<br />
Lipstick 31 minutes<br />
Pantyhose 17minutes<br />
Men’sshoes(black,leather) 6.7hours<br />
Man’sbusinesssuit 25 hours<br />
Refrigerator,small(150liters) 47 hours<br />
ColorTVset,large(59cm.<br />
screen) 3.9weeks<br />
Smallcar (Fiator Zhiguli) 6.9months<br />
20minutes<br />
3.5hours<br />
2.6hours<br />
7minutes<br />
5.4hours<br />
65minutes<br />
21minutes<br />
97minutes<br />
9.8hours<br />
23minutes<br />
72minutes<br />
7.8hours<br />
9 hours<br />
36 hours<br />
106 hours<br />
168 hours<br />
19.5weeks<br />
3.1years<br />
SOURCE:RadioLibertyResearchSupplement, June16,1976.Reprintedwithpermissionof the<br />
NationalFederationof IndependentBusiness,SanMateo,California.<br />
‘Worktimeis basedon averagetake-homepayof maleandfemalemanufacturingworkers.<br />
Incometaxes,socialsecuritytaxes,andhealthinsurancepremiumsin theUnitedStateshave<br />
beendeductedfromwages;familyallowancesin theU.S.S.R.havebeenadded.Thedataare<br />
for a workerwith threedependents.Hourlytake-homepayin January1976was$3.83for<br />
Americanworkersand$1.10for Russianworkers.<br />
82
Handout9-2<br />
PhysicalQualityof Life (PQL)<br />
InfantMor- Life Expec<br />
PerCapita POLindexa tality (rate tancyat Literacy<br />
income (scalerange: per 1,000 AgeOne (%aged15<br />
(1977U.S.$) 0—100) live bIrths) (years) arid over)<br />
High IncomeEconomies<br />
United States 8,520 94 16 72.2 99<br />
Saudi Arabia 6,040 29 152 52.0 15<br />
Japan 5,670 96 10 73.7 98<br />
EastGermany 4,680 94 16 71.2 99<br />
Czechoslovakia 3,890 93 21 71.5 100<br />
Italy 3,440 92 21 72.5 94<br />
Poland 3,150 92 25 70.8 98<br />
U.S.S.R. 3,020 91 28 70.0 100<br />
Middle Income Economies<br />
Brazil 1,360 66 82 65.4 66<br />
South Africa 1,340 53 117 57.9 57<br />
Cuba 910 85 29 71.1 78<br />
Low Income Economies<br />
Kenya 270 39 119 55.7 23<br />
Afghanistan 190 17 182 47.9 8<br />
India 150 41 122 55.9 34<br />
Zaire 130 32 160 51.3 31<br />
SOURCE:Percapita income:World Bank,WorldDevelopmentIndicators (1979),Table 1; POLdata: Morris DavidMorris.Measuring<br />
the Conditionof the World’sPoor: ThePhysicalQualityof Life Index (NewYork: PergamonPressfor theOverseasDevelopment<br />
Council, 1979),App. A.<br />
ThePOLindexis a simpleaverageof thethreecomponentsshown,with equalweightgivento each.For this purpose,the components<br />
wereconvertedto a scalerangingfrom 0 to 100.Zero is designatedasthe worst experienceobservedin the post-WorldWarII period,<br />
and 100as the best experienceanticipatedby the end of the century.<br />
83
Handout9-3<br />
THEEVOLUTIONOF THESOVIETECONOMY*<br />
Inthemorethanhalfa centurysincetheBolshe<br />
vistRevolutionof 1917,theSovietUnionhasunder<br />
gonemajoreconomicchanges.Lenin’sNewEco<br />
nomicPolicyof 1921—1927, which providedfor a<br />
restorationof privatefarmingand marketingbut<br />
the retentionof stateenterprisein the keyindus<br />
tries,constitutedonlya pausein themovemento<br />
wardsa socialistsociety.Duringtheseyears,the<br />
advocatesof balancedeconomic growth, who<br />
wouldhavepaidmoreattentionto consumerpref<br />
erencesandwouldhaveplacedmorerelianceon<br />
thefreefunctioningof the marketsystem,lostout<br />
to theadvocatesof unbalancedgrowth,whoseaim<br />
wasthe forced and rapid industrializationof the<br />
Sovieteconomy.In 1924,the privatecapitalistsec<br />
tor of thiseconomyaccountedfor 23.7percentof<br />
grossindustrialoutput,whereasthesocialistsector<br />
accountedfor 76.3percent.By 1937,aftertwo of<br />
Stalin’sfive-yearnational plans, the elimination<br />
of the NewEconomicPolicy,and the forcedand<br />
widespreadcollectivizationof agriculture,the pri<br />
vatecapitalistsectorwasall buteliminated—itpro<br />
videdonly0.2percentof grossindustrialoutput.By<br />
1937,Stalin had completedthe transition from<br />
a mixed private-public-enterpriseconomyto a<br />
mainlypublic-enterpriseor socialisteconomy.<br />
Thetransformationof the Sovieteconomyafter<br />
1928wasaccompaniedby rapideconomicgrowth<br />
andsignificantchangesin the structureandfunc<br />
tioningofthiseconomy.Accordingto officialSoviet<br />
statistics,whicharenotfullyacceptableto Western<br />
analysts,gross industrial output increasedsixty<br />
timesin the years1913to 1965,at an averagean<br />
nual rate of about 8.2 percent.... [Therewere]<br />
largeincreasesin the outputof majorindustriesin<br />
theyears1928-1970. [But]in 1928,theSovietecon<br />
omy was .. . little advancedover its position in<br />
1913.The big upsurgein economicgrowth took<br />
placeafterthe SecondWorldWar.<br />
In the yearssince1917,majorchangeshaveoc<br />
curredin the structureof the Sovieteconomy.In<br />
1913,whenthe Russianeconomywaslargelyagri<br />
cultural,52.8percentof thetotal numberof indus<br />
trial workerswereemployedin the light andfood<br />
industries,and14.4percentin theengineeringand<br />
metalworkingindustries.In 1965,only26.3percent<br />
of theworkerswereemployedinthe lightandfood<br />
industries,and34.1percentwereemployedin the<br />
heavyindustries.Althoughtodaythe SovietUnion<br />
isoneof theworld’smajorindustrializedcountries,<br />
acomparisonof nationalincomebysectorof origin<br />
in the SovietUnionand the UnitedStatesreveals<br />
some very significant economicdifferencesbe<br />
tweenthesetwo largeindustralizedcountries.<br />
Whereas21 percent of Soviet national in<br />
comeoriginatedin the agriculturalsectorin 1969,<br />
only 3 percentof the U.S.nationalincomecame<br />
from this sector.Also,the servicesectoris much<br />
largerintheUnitedStatesthanintheSovietUnion.<br />
Thissectoraccountedfor 57percentof the United<br />
Statesnationalincome,but for only32 percentof<br />
theSovietnationalincome.Ananalysisof thecom<br />
positionof fixed investmentin the UnitedStates<br />
andthe SovietUnionshowsthat the SovietUnion<br />
investsrelativelymoreheavilyin industryandagri<br />
cultureandlessin housing,trade,education,trans<br />
portation,communications, andotherservicesthan<br />
doesthe UnitedStates.<br />
TheAmericaneconomicsystemis a maturein<br />
dustrialeconomywiththeworld’shigheststandard<br />
of living. . . . [In 1977,percapitaGNPin the United<br />
Stateswas$8,520,ascomparedwith $3,020in the<br />
SowietUnion.The SovietGNPin 1977was esti<br />
matedto be $780billion; the AmericanGNPas<br />
$1,875billion.Withalargerpopulation(259million)<br />
thanthatoftheUnitedStates(220million)andGNP<br />
estimatedto belessthanone-halfthatof theUnited<br />
States,theSovietUnionhadamuchlowerstandard<br />
of living.]GNPis considerablyhigherin . . . [most]<br />
of the WesternEuropeancountriesthanin the So<br />
viet Union. Furthermore,the Soviet Union’sper<br />
capitaGNPis muchsmallerthanthat of EastGer<br />
manyand Czechoslovakiabut largerthan that of<br />
most of the other EasternEuropeancountriesas<br />
well asthe Asiaticcommunistcountries.<br />
The Americaneconomycan be describedas<br />
a high-consumption,low-investmenteconomy,<br />
whereastheSovieteconomyisalow-consumption,<br />
high-investment economy... . [In1970,arepresen<br />
tativeyear,)privateandpublicconsumption[took)<br />
up72percentof. . . [GNP)intheformerandonly56<br />
percent in the latter. The situation is reversed<br />
* ExcerptedfromComparativeEconomicSystems:CompetingWaystoStability,Growth,andWelfare,2ndedition,byAllanG.Gruchy,<br />
pp.415-419and438-445.CopyrightC 1977HoughtonMifflinCompany.Reprintedbypermissionof the publisher.<br />
84
egardinginvestment.Privateand public invest<br />
mentuse17.8percentof GNPin theUnitedStates;<br />
theseinvestmentsabsorb33 percentof the Soviet<br />
GNP.Both nationsdevotea sizablepart of their<br />
outputto nationaldefense.<br />
Since1917,theeconomicgapbetweentheSoviet<br />
UnionandtheUnitedStateshasbeenclosing.The<br />
SovietUnionhasborrowedthe industrialtechnol<br />
ogyof the West,increasedits supplyof engineers<br />
andtechniciansfrom310,000in 1941to 2,554,000<br />
in1965,organizedatotalworkforceof 128million,<br />
andestablisheda large-scaleindustrialsystem.In<br />
1913,accordingto Sovietcalculations,the output<br />
perindustrialworkerin Russianindustrywasoneninth<br />
that in the UnitedStates,but by 1968this<br />
labor-productivitygapwasreducedto one-half.By<br />
1968,5.5percentof all industrialenterprisesem<br />
ployed42 percentof all industrialworkers,and<br />
accountedfor 56 percentof total grossindustrial<br />
output.In 1970,the SovietUnionclaimedto have<br />
surpassedthe UnitedStatesin the levelof output<br />
for coal,coke,iron ore,pig iron, lumber,cement,<br />
wheat,cotton,andwool.<br />
TheNinthFive-YearPlanstates:“If we assume<br />
that the UnitedStatesdevelopsin the 1971—1 975<br />
periodatthesamerateasin the1966—1970 period,<br />
in 1975thenationalincomeproducedin the USSR<br />
will constitute80 percentof the levelin the United<br />
States,industrialoutputwill constitute85 percent<br />
ofthelevelintheUnitedStates,andwithrespecto<br />
agriculturaloutput the USSRwill approximately<br />
reachthe levelof the UnitedStates.”Evenif these<br />
total goalswerereachedin 1975[(actualperform<br />
ancefell far short of thesegoals)],the per capita<br />
gapbetweenthetwocountrieswouldstill belarge,<br />
sincetheSovietUnion’spopulationexceedsthatof<br />
the UnitedStatesby approximately39 million. A<br />
factorfavoringtheSovietUnionhasbeenitshigher<br />
annualeconomic-growthrate.Accordingto thesta<br />
tisticsof theJoint EconomicCommittee,industrial<br />
productionin the SovietUnionincreasedatthean<br />
nualrateof 6.7percentin the years1960.-i971;in<br />
the UnitedStatesthe growthratewas4.7percent.<br />
Whilehighergrowthratesin theSovietUnionhave<br />
helpedInthepastto narrowtheeconomicgapwith<br />
respectto the UnitedStates,the reductionof this<br />
gapmaybe moredifficult in thefuture.In the past<br />
decade,theindustrialgrowthratehasbeendeclin<br />
ing in the Soviet Union as the movementfrom<br />
low-productivityto higher-productivityeconomic<br />
activitieshassloweddown,and alsoas laborhas<br />
movedinto the lower-productivityserviceindus<br />
tries.If theseeconomictrendscontinue,theSoviet<br />
Handout9-3 (continued)<br />
85<br />
Unionwill find it increasinglydifficultto reducethe<br />
Soviet-Americanper capitaoutput or nationalin<br />
comegap.<br />
Inspiteof theincreasingconcernwithconsumer<br />
welfarein the SovietUnionsince1953,the Soviet<br />
economy remains a high-investment,low-con<br />
sumptioneconomy . . . [From1928to 1965]private<br />
consumptionas a shareof GNPdecreasedfrom<br />
64.7to 46.2percent,whilepublicconsumptionin<br />
creasedfrom 5.1to 9.9percent.Totalprivateand<br />
publicconsumption,whichaccountedfor 69.8per<br />
cent of GNPin 1928,continuedto declineafter<br />
1928,until in 1965totalconsumptionwas56.1per<br />
cent of GNP.Defense,which took up only 2.5<br />
percentof GNPin 1928,hadincreasedto 11.3per<br />
centby 1965.Totalinvestment,whichabsorbed25<br />
percentof GNPin 1928,accountedfor30.4percent<br />
in 1965. Althoughtotal privateconsumptionde<br />
clinedasa relativeshareof GNPduringthe years<br />
1928—1965, absoluteper capitaprivateconsump<br />
tion rose,becausetotalprivateconsumptionwasa<br />
decliningrelativeshareof a GNPthatwasincreas<br />
ing in absolutesize.Thestatisticson thetrendsin<br />
per capitaconsumptionshowthat this consump<br />
tion increasedafter1944butatadecliningaverage<br />
annualrate.Thereis noevidenceof anysignificant<br />
change in these trends since 1965. The Soviet<br />
societyis still far from beinga consumers’society,<br />
andno prospectof anymajorchangein thisdirec<br />
tion appearslikelyin the nearfuture.<br />
The Ninth Five-YearPlan, 1971—1975<br />
The first five of the five-yearplans,coveringthe<br />
Stalinistperiod1928—1953, emphasizedextensive<br />
planning,in whicheconomicgrowthwasachieved<br />
by increasinglaborand capitalinputs.Stresswas<br />
placeduponsecuringplanfulfillmentwithoutmuch<br />
regardfor efficiencyor rationaleconomicdecision<br />
making.Stalin’santipathytowardtheeconomicsof<br />
the Westernworldmadeit difficultfor Sovietecon<br />
omists to underline the importance of using<br />
economicsciencein orderto maximizethe output<br />
fromagivensupplyof scarceresources.Duringthe<br />
years1953—1964, betweenStalin’sdeathandKhru<br />
shchev’sremovalfromoffice,aninterestdeveloped<br />
in a kindof planningthatwouldpaymoreattention<br />
to the intensiveandletficient use of labor and<br />
capital. Not much was accomplishedduring the<br />
Malenkov-Khrushchevera (1953—1964) to make<br />
planningmorerationalandefficient.Muchof Khru<br />
shchev’sconcernwasfocusedon the agricultural<br />
problem,whichhadbeenbadlyneglectedbyStalin.
Handout9-3 (continued)<br />
DuringtheSixthFive-YearPlan(1956—1960), aban High economicgrowth is essentialfor industrial<br />
doned in 1958,and the Seven-YearPlan (1958— progressandthesupportof the militaryandspace<br />
1965)planningand management techniqueswere explorationprograms.<br />
not much improved; considerable advance, Someof themajortargetsof theNinthPlan[were<br />
however,wasmadeintheuniversitiesandresearch the following:] . . . Nationalincome,officially re<br />
centersof the U.S.S.R.Academyof Sciencesin portedasgrowingat anannualrateof 7.1percent<br />
mathematicaleconomicsandits theoreticalimpli in the planperiod1966—1970, wasexpectedto in<br />
cationsfor planningandmanagement.<br />
creaseattheannualrateof 6.8percentintheyears<br />
The Eighth Five-YearPlan, which began in 1971—1975. Industrialoutput, havingincreasedat<br />
1966,drew attention to the new era in Soviet theaverageannualrateof 8.5percent,accordingto<br />
planning,In whichintensiveratherthanextensive theEighthPlan,wasestimatedto increaseata rate<br />
planningwouldbeemphasized,andthetraditional of 8 percentin the NinthPlan.Forthefirst time In<br />
methodsof planningwouldundergoconsiderable Sovietplanningexperience,consumergoodswere<br />
modification.Theeconomicreformsintroducedby projectedin the years1971—1975 to increaseat a<br />
BrezhnevandKosyginin 1965werecalculatedto fasterrate(8.3percent)than producergoods(7.9<br />
improve greatly the planning and management percent).With real per capitaincomerisingat an<br />
system.Whilethesereformshavenotbeenaseffec averageannualrateof 5.6percentandthe flow of<br />
tive as their originatorsassertedthey would be, consumergoods enlarged,some positive steps<br />
nevertheless,they representa markedimprove could havebeentakenin the years1971—1975 to<br />
mentoverthe economicdecisionmakingcarried improvethegeneralpopulation’sstandardof living.<br />
on byplannersandenterprisedirectorsduringthe A majorfeatureof theNinthPlanwastheprojec<br />
Stalinera.In spiteof the setbacksexperiencedby tionof alargeannualimprovement Inlaborproduc<br />
the Brezhnev-Kosyginreforms,Westernanalysts tivity.Thisproductivityin industrywasprojectedto<br />
generallyagreethat the reformmovementin the increaseatanannualrateof 6.8percentandwasto<br />
SovietUnionis by no meansdead.. . . The Ninth be accompaniedby an annualincreaseIn capital<br />
Five-YearPlan continuedthe effort “to provide investmentat the rateof 6.7percent.Earlierfive<br />
further improvementof the planningsystem,to yearplanshadsecuredhigh economicgrowthby<br />
continueto pursuea risein the scientificsubstan makinguseof largeinputsof laborandcapitalinto<br />
tiationandthe accuracyin the balancingof plans, the economy.The Sovietplannerscan no longer<br />
and optimumcombinationof branch,territorial, dependuponsecuringlargeincreasesinthesupply<br />
andcombinedplanning.”<br />
of labor,becausetherateof populationgrowthhas<br />
The Ninth Five-yearPlan (1971—1975) was the beenfalling;also,thepossibilityno longerexistsof<br />
secondplanto becarriedout sincethe endof the anylarge-scaleshiftsof laborfromtheagricultural<br />
Khrushchevera.Likethe EighthPlan(1966—1970), to the industrialsector.<br />
theNinthPlanwasdesignedto copewithadeclin<br />
ing economicgrowth rate at a time when the<br />
nationalgoalsemphasizedthe importanceof en<br />
largingconsumerwelfareaswellassecuringahigh MajorNinth-PlanTargets<br />
economicgrowth rate.The report of the Central The Ninth Plan presentedcontrol figures or<br />
Committeeof the SovietCommunistpartyto the targetsforindustry,agriculture,personalconsump<br />
24thpartyCongressin 1971statedthat “Themain tion,andothersectorsof theeconomy . . . Besides<br />
taskof thefive-yearplanis to ensurea substantial the usualincreasesin Suchbasicoutputsassteel<br />
risein the materialand culturalstandardof living and electric power,the industrialtargetsshowed<br />
(oftheworkersandemployees]onthebasisof high large plannedincreasesin the output of oil and<br />
ratesof developmentof socialistproduction,a rise natural gas and a very limited increaseIn coal,<br />
In productionefficiency,scientific and technical which is losingout to oil andgas.Thechangesin<br />
progress,and a fastergrowth of labor productiv the fuel Industry are accompaniedby major<br />
Ity.”Whetheror nottheSovietplanningauthorities changesinthechemicalIndustry,wheretheoutput<br />
achieveda significantrise In the generalpopula of plasticsandsyntheticresinswasplannedto in<br />
tion’s standardof living during the plan period creaseat an annualrateof 16.1percent;this rise<br />
1971—1975, theyintendedto maintainhigh growth waswellabovethe rateof expansionof steel,elec<br />
ratesfor nationalincomeandindustrialproduction. tric power,oil andotherbasicrawmaterials.<br />
86
A 10.2percentannualincreasein the outputof<br />
chemicalfertilizerswasplannedto providefor siza<br />
ble annualincreasesin meat,grains,milk, eggs,<br />
andotherfoodproducts.Thecomprehensiveplan<br />
for agricultureproposedaredistributionof national<br />
incometo theadvantageof the agriculturalsector.<br />
This meant that agriculture during the years<br />
1971—1975 was to receivelargersuppliesof ma<br />
chinery,fertilizers,herbicidesand otherchemical<br />
products.Outputperonehundredhectaresof land<br />
wasprojectedto increaseone-third.Theoutputof<br />
meatmeasuredin kilogramsper personper year<br />
wasplannedto increasefromforty-eightin 1970to<br />
fifty-ninein 1975.Theseimprovementsin agricul<br />
tural output were expectedto contributesignifi<br />
cantlyto a higherstandardof living.<br />
Furtherimprovementsin the standardof living<br />
wereto beachievedbyraisingpercapitaconsump<br />
tionfrom815rublesin 1970to 1,083rublesin 1975<br />
(measuredin1965prices).Thelightindustrywasto<br />
increasethesupplyof scarceconsumergoodsand<br />
improvethe qualityof consumergoodsin general.<br />
The supplyof householdchemicalproductswas<br />
projectedto riseattheveryhighannualrateof 13.4<br />
ercent.Theamountof totalfloorspaceperurban<br />
residentwasplannedto go from11squaremeters<br />
in 1970to 11.9in 1975.The supplyof domestic<br />
services,suchasdry cleaning,laundering,andcar<br />
repairing,was projectedto double during these<br />
years,while the annualoutput of passengercars<br />
was planned to rise from 513,000in 1970 to<br />
1,260,000in1975.Iftheseconsumergoalshadbeen<br />
achievedby 1975,the Sovietsocietywouldnotyet<br />
be a consumersociety,but considerableprogress<br />
wouldhavebeenmadein raisingthe nation’sstan<br />
dardof living.<br />
PerformanceundertheNinthPlan,1971—1975<br />
AlthoughtheSovietgovernmenthailedtheNinth<br />
Five-YearPlanat the Twenty-fifthCongressof the<br />
Communistparty,February24, 1976,as a major<br />
contributionto stableeconomicprogress,it was<br />
concededthata numberof productiontargetshad<br />
not beenmetby 1975andthat muchof whatwas<br />
producedwasof poor qualityand not the desired<br />
assortment.... Nationalincome,which had been<br />
projectedto increase38.6percentoverthefive-year<br />
planperiod,increasedonly28percentoratanaver<br />
age annual rate of 5.1 percent instead of the<br />
‘lanned6.7percent.Ananalysisofthestatistics...<br />
showsthat the productionof consumers’goods<br />
wascurbedin favor of producers’goods;the in-<br />
Handout9-3 (continued)<br />
87<br />
creasein realpercapitaincomefell muchbelowits<br />
planned goal; agricultural production was far<br />
belowits target;and the productionof steel,oi’,<br />
andgaswhileimpressivewasbelowtargetedgoals.<br />
TheSovietgovernmentattributedtheinadequate<br />
performanceof theSovieteconomyto a numberof<br />
factorswhichincludedthewastefuluseof rawma<br />
terials,poorindustrialmanagement,a slownessin<br />
adaptingtechnologicaladvancesto industry,bot<br />
tlenecksinthesupplyandcontractsystembetween<br />
industrialenterprises,deficienteconomicplanning<br />
procedures,anddelaysin completingnewinvest<br />
mentprojects.It shouldbe pointedout that while<br />
the SovietUnionsufferedan economicslowdown<br />
during1971—1 975,it wassparedmanyof the eco<br />
nomicdislocationsthat werevisiteduponthe ad<br />
vancedWesterneconomiesduringtherecessionof<br />
1974—1975.<br />
Oneof the factorsthat hasbeena drag on the<br />
performanceof theSovieteconomysince1970has<br />
beenthefluctuatinglevelof grainoutput.TheNinth<br />
Planprojectedanaverageannualoutputof 195mil<br />
lion metrictons of grainsin 1971—1 975.Thegrain<br />
output whichfell to 167million tons in 1972,in<br />
creased222.5 million tons in 1973; in 1975,<br />
however,it againfell to an estimated140million<br />
tons.Inanexceptionallygoodyearlike1973,apart<br />
of theharvesthasbeenlostbecauseof inadequate<br />
transportation,storage,and other facilities. In a<br />
poor harvestyearlike 1972,the rationingof prod<br />
ucts like meat,poultry, and dairy products has<br />
beenmadenecessary. Inorderto offsettheadverse<br />
developmentsin the Soviet Union’sagricultural<br />
sector,deliveriesof farmequipmentfromtheheavy<br />
industries have been speededup; supplies of<br />
chemicalfertilizers have been increased;pools<br />
of sparepartshavebeenestablishedonthecollec<br />
tive and statefarms;and, in somecases,factory<br />
workershavebeendraftedto increasethesupplyof<br />
farmworkers.<br />
Asa consequenceof theseeffortsto bolsterthe<br />
agriculturalsector, output has been transferred<br />
from the heavyindustrysector,whichin turn has<br />
drawnresourcesfromthe consumergoodssector.<br />
As has beenexplained,the Ninth Planhad pro<br />
posedto reversethe pre-1971trendsand to in<br />
creasethe supplyof consumergoodsat a faster<br />
annual rate than the supply of producergoods.<br />
After the disastrous1972crop year,there was a<br />
reversionto the pre-1971programof favoringthe<br />
supplyof producergoodsoverthat of consumer<br />
goods.
TheTenthFive-YearPlan,1976—i980<br />
InJune1975,the SovietCouncilof Ministersmet<br />
and examinedthe draft of the basicdirectionsin<br />
the constructionof the TenthFive-YearPlanfor<br />
1976—1980. TheCouncilinstructedthe StatePlan<br />
ning Committeeto payparticularattentionto the<br />
followingmattersintheirfurtherworkonthisdraft.<br />
Thedevelopmentof the economyduringthis fiveyearperiodis<br />
to be basedon acceleratedtechno<br />
logicalprogress,increasedlaborproductivity,and<br />
improvedqualityindices.Theincreasedeffective<br />
nessof capitalinvestment isto beachievedthrough<br />
the modernizationandreequipmentof existingin<br />
dustrialenterprises,increasingcapacityat these<br />
enterprises,andacceleratingtheprocessof putting<br />
newplantandequipmentintooperationandbring<br />
ing themup to theirfull outputpotentials.<br />
Inthis plan,specialattentionisto begivento the<br />
discoveryof additionalresourcesof metalsandto<br />
the productionof equipmentfor the metallurgy,<br />
chemical,and electrical engineeringindustries.<br />
Fuelproductionisto beenlarged,andspecialsteps<br />
areto betakenduringthe planperiodto conserve<br />
the useof fuel resources.The materialand tech<br />
nical base of the agricultural sector is to be<br />
strengthenedfurther in orderto increaseagricul<br />
turaloutput.Thepeople’sstandardof livingisto be<br />
raisedfurtherbyensuringhighgrowthratesof con<br />
sumergoods,expandingconsumerservices,and<br />
improvingthequalityof bothconsumergoodsand<br />
services.No mentionwas madeby the U.S.S.R.<br />
Councilof Ministersof increasingthe supplyof<br />
consumergoodsat a ratefasterthan that of pro<br />
ducergoods.In general,the TenthFive-YearPlan<br />
Handout9-3 (concluded)<br />
appears to continue the basic directions that<br />
guidedthe NinthPlan.<br />
It is clearfrom [available]. . . statisticsthat<br />
theTenthPlanismuchmoremodesthantheNinth<br />
Plan. National income is projectedto increase<br />
during 1976—1980 at a slower rate than during<br />
1971—1 975.Also,thereisareturnto thetraditionally<br />
higherrateof growthof producers’goodsthancon<br />
sumers’goods due to the shortagesand bottle<br />
necksin the suppliesof basicindustrialmaterials,<br />
especiallyfuels,andto theexpandingmilitarybur<br />
den.UndertheTenthPlan,majorinvestmentsareto<br />
bemadein westernSiberiainorderto increasethe<br />
outputof oil andgas.Specialattentionisalsoto be<br />
givento the improvementof agriculture,whichwill<br />
take 33 percentof total investmentin the years<br />
1976-1980.<br />
Thesuccessof the TenthPlanwill dependvery<br />
muchuponthe improvementin laborproductivity<br />
in the variousbranchesof theeconomy,sincethe<br />
laborsupplywill increaselessthan4 percent.Dur<br />
ing the TenthPlan,the improvementin laborpro<br />
ductivityis projectedto provide90 percentof the<br />
increasein industrialoutputandall the increasein<br />
agriculturaloutputin the planperiod.Sucha large<br />
improvement in laborproductivitywill requirerapid<br />
advancesin industrial management,economic<br />
planning,andthe applicationof technologicalad<br />
vancesto industry.Theseareadvancesthat many<br />
WesternSovietanalystsdonotbelievewill beforth<br />
coming.It is their viewthat too muchof the tradi<br />
tional overcentralizedplanningsystemsurvivesin<br />
spiteof economicreformsto preventhe needed5<br />
percentannualoverallincreasein laborproductiv<br />
ity if theTenthPlanis to be successful.<br />
88
Name<br />
Class Date<br />
Section 4. OBSTACLESTO DEVELOPMENT—ACASE STUDY<br />
Some economists believe that certain preconditions are necessary before a developing<br />
country can become industrialized. Not only must a society have investment capital,<br />
but it must be ready to use it. In the left column below are listed some necessary<br />
preconditions for economic development. In the right column, explain the economic<br />
situation that prevented Indonesia under Sukarno from achieving each precondition.<br />
Preconditions for Industrialization Problems of Sukarno’s Indonesia<br />
1. Psychological readiness to<br />
accept change<br />
2. National unity<br />
3. Infrastructure (transportation<br />
system) in place and maintained<br />
4. Honest, effective political<br />
leadership without excessive<br />
government regulation of<br />
economic activity
Name<br />
Class Date<br />
Section 1. CHARACTERISTICSOF DEVELOPINGNATIONS<br />
The following tables give comparative information for the United Kingdom, Brazil (a<br />
fairly industrialized developing nation), and Thailand (a relatively unindustrialized<br />
developing nation). Use the data to answer the questions below.<br />
Comparative Health Data<br />
Country Infant Mortality<br />
(per 1,000 births)<br />
Life Expectancy<br />
(years)<br />
United<br />
11 73<br />
Kingdom<br />
Brazil<br />
Thailand<br />
80<br />
76<br />
60<br />
61<br />
Comparative Economic and <strong>Social</strong> Data<br />
Country Per Capita Income Percent of GNP<br />
In Dollars for Education<br />
United<br />
Kingdom<br />
Brazil<br />
Thailand<br />
8,693 5.5<br />
1,987 3.2<br />
746 3.9<br />
Number of People<br />
per Physician<br />
711<br />
1,632<br />
6,870<br />
Telephones per<br />
100 Population<br />
1. The country with the best health facilities is____________________________________<br />
2. The country with the worst health facilities is __________________________________<br />
3. The country with the least infant deaths is ______________________________________<br />
4. The country with the most infant deaths is ____________________________________<br />
5. The country with the lowestper capita income is _______________________________<br />
6. The country with the highest per capita income is ______________________________<br />
7. Which country is Brazil closer to in per capita income and percent of GNP spent for<br />
education?<br />
51.7<br />
8. What do the statistics for telephones per 100 population tell us about the United<br />
Kingdom as opposed to Brazil and Thailand? _________________________________<br />
7.7<br />
1.3
I<br />
Name<br />
Class Date<br />
Section 1. COMPARINGSOCIALISMAND CAPITALISM<br />
Youhave learned that in a socialist system the decision-making process is centered in<br />
the hands of political leaders. In a capitalist system, economic decision making is<br />
deOentralized. It is in the hands of individuals operating in the market. Each of the<br />
following situations represents what happens in either a socialist or a capitalist system.<br />
In the blank marked a, identify the system. In the blank marked b, identify the decision<br />
maker who is talking.<br />
1. “We try to satisfy the customers. After all, it’s their wants and needs that will deter<br />
mine what we produce.”<br />
a. b.<br />
2. “To reduce alcohol abuse, we will cut the production of alcoholic beverages in half<br />
and double the price.”<br />
a.<br />
3. “We need bright, young engineers to complete our new power plants. Notify the top<br />
20 graduates of our technical schools to report to the Commissioner of Public<br />
Works.”<br />
a.<br />
b.<br />
4. “We need more experienced carpenters in order to complete these housing units on<br />
time. We will have to offer higher wages and benefits.”<br />
a.<br />
5. “It has been decided to expand public transportation rather than increase the pro<br />
duction of automobiles. This will reduce air pollution.”<br />
a.<br />
b.<br />
6. “We should give tax breaks to companies producing pollution-preventing devices.<br />
This will help other companies fight pollution by keeping costs down.”<br />
a.<br />
b.<br />
b.
Name<br />
Section 2. SOCIALIST THEORY VERSUS HISTORY<br />
Class Date<br />
In 1848 Karl Marx predicted the eventual collapse of capitalism in Western Europe. In<br />
the following chart, the history of industrial capitalism and its great achievements since<br />
1848 are outlined. Review what you learned in Section 2 and then complete the chart<br />
by filling in the parallel developments as predicted by Marx.<br />
History of Industrial Capitalism<br />
Since 1848<br />
1. The growth of a prosperous mid- 1.<br />
die class made up of profes<br />
sionals, business proprietors, and<br />
skilled workers<br />
2. General rise in the standard of 2.<br />
living<br />
3. Emergence of labor unions to 3.<br />
protect workers’ rights<br />
4. Continuation of cyclical business 4.<br />
activity, but no worsening trends<br />
in business<br />
5. Many of the hardships of early in- 5.<br />
dustrialism alleviated by social<br />
insurance programs for the<br />
unemployed, disabled, and aged<br />
History of Industrial Capitalism as<br />
Predicted by Karl Marx<br />
4.,
(<br />
Section 3. THE SOVIET ECONOMIC SYSTEM<br />
Name<br />
Class Date<br />
Economists often disagree, but this is especially true of Communist economists and<br />
capitalist economists. The following passage is what a Soviet economist might say about<br />
the problem of scarcity in economic systems during a debate with an American<br />
economist. Read the Soviet’s statement and then write a possible response from the<br />
American economist. Keep in mind the real needs of consumers, personal freedom,<br />
and the market.<br />
Soviet Economist: You Westerners make such a fuss about scarcity being the central<br />
economic problem. We socialists believe you are wrong—the major issue is waste in<br />
the system. Your wasteful capitalism allows private business to spend billions of dollars<br />
on advertising to convince consumers to buy still more billions of dollars worth of<br />
goods they don’t really need. Your highways are choked with automobiles that almost<br />
any driver is allowed to buy. That is why your public transportation systems are in<br />
shambles. In our socialist state, we would not permit such waste. Workers live close to<br />
their jobs and use public transportation. The resources that are saved are devoted to<br />
ensuring that everyone can live decently. There will always be enough for everyone if<br />
we prohibit socially wasteful spending.<br />
American Economist: ____________________________________________________
Name.<br />
Class Date<br />
Section 4. THECONVERGENCEOF ECONOMICSYSTEMS<br />
Some economists believe that in the future, capitalist and socialist economies will<br />
display many similarities. They think that capitalist systems will adopt socialist ideas,<br />
and socialists will adopt capitalist ideas. To see whether there is evidence of many such<br />
similarities, write as many examples of them as you can think of in the following chart.<br />
<strong>Social</strong>ist Practices Adopted by Capitalist Practices Adopted by<br />
Capitalist Systems <strong>Social</strong>ist Systems<br />
1. 1.<br />
2. 2.<br />
3. 3.
Section 5. DEMOCRATICSOCIALISM<br />
Name<br />
Class Date<br />
Imagine that you are a high school student in Great Britain. Write a letter to a friend in<br />
the United States, describing what you like and dislike about Britain’s economic<br />
system. Give your opinion on such topics as business ownership, economic planning,<br />
social programs, taxes, and personal freedom in the nation.<br />
Dear ____________________________<br />
Date _________<br />
Sincerely ours,
ENRICHMENTWORKSHEET<br />
CHAPTER17<br />
Name Class _____________ Date___________<br />
THE UNITEDSTATESIN THE WORLDECONOMY<br />
THE UNITEDSTATES-JAPANESERICEDISPUTE<br />
Japan is a large importer of food from the United States.However, becauseit is<br />
self-sufficientin rice, it has a closed-marketpolicyon rice imports. American<br />
farmers are trying to change Japan’spolicyand open the door to rice imports.<br />
Read the followingarticle about the dispute and answer the questions that follow.<br />
The United States said today that it was not prepared to take direct action this<br />
year to compelJapan, the largest foreignbuyer of Americanfood, to open its<br />
domesticmarkets to rice grown in Californiaand the South.<br />
But the chief United States trade official,Clayton K. Yeutter, said the Reagan<br />
Administrationwas looking for assurancesthat Tokyo would begin negotiatingthe<br />
issue by next summer.<br />
The announcementby Mr. Yeutter came almost sevenweeks after a complaint<br />
was filed by the Rice Millers Association.The Virginia-basedtrade group, which<br />
represents growersand processors,charged that Japan was unfairly closingits<br />
markets by imposingstringent restrictionsand paying high subsidiesto Japanese<br />
farmers.<br />
Mr. Yeutter said the rice dispute, involvinga food staple that is closelytied to<br />
Japaneseculture and history, was one of the more delicatetrade issues he had<br />
considered.<br />
He also said that the Americanposition was complicatedby the fact that the<br />
United Statesis itself operating an export-subsidyprogram for its rice growers.<br />
The complaintby Americanrice growersdrew widespreadattention in Japan,<br />
where rice has a near-sacredstatus and its growersexert powerfulpolitical<br />
influence.The Government’srice policiescause Japaneseconsumers to pay five<br />
times what Americanspay for rice.<br />
Americangrowerssay the Japanese rice market amounts to $1.6 billion<br />
annually, and they insist that they could gain a sizableportion of it.<br />
Accordingto trade experts, the rice dispute is one exampleof growing<br />
tensions among developednations over trade in food. Most of these countries have<br />
farm policies,similar to those of the United States, that try to increaseexports<br />
even as domesticproducers are protected by quotas, tariffs, and other barriers.<br />
Americanrice growersexpressedirritation with the Administration’sresponse.<br />
“This is less than a politicallycourageousway to deal with our complaint,” said<br />
Ralph S. Newman, Jr., president of the Farmers’ Rice Cooperativeof California<br />
and a member of the Millers Association.“It fliesin the face of the strong<br />
statements made by the President, who has indicated he favorsfair trade.”<br />
Source:TheNew York Times,October24, 1986.<br />
1. What is the cause of the rice dispute between the United States and Japan?<br />
2. What has complicatedthe Americanposition on the rice issue?<br />
3. What role does nationalpoliticsplay in this trade dispute between the United States and Japan?<br />
4. Do you think the United Statesgovernmentshould take any action against Japan?
SKILLSWORKSHEET<br />
CHAPTER16<br />
Name__________________________________________ Class_____________ Date___________<br />
INTERNATIONALTRADE<br />
ANALYZINGA POSITiON<br />
Throughout most of the 1980’s,the United States rang up its worst trade<br />
deficitsin history. To solvethe trade deficitproblem, some leaders advocate<br />
heavytariffs or stiff quotas. Supporters of free trade denounced such<br />
“protectionist” measures.<br />
Read the followingexcerpt from Newsweekmagazinewritten by Rich<br />
Thomas. It suggeststhat a “nonprotectionist” tariff might solvethe trade problem.<br />
After you have read the excerpt, answer the questions.<br />
There is a solution to the U.S. trade problem. And, believeit<br />
or not, it addressesthree of the biggestinternational economicproblems<br />
simultaneously.It is, in short, a way out, a policythat guaranteesa steep<br />
reduction in the horrendous U.S. trade deficit, a sharp declinein the<br />
export surplusesof countries like Japan, Germanyand Taiwan, and<br />
significantrelief for the Third World’sdebtor nations.<br />
The solutionis now beginningto take shape in Congress. Known as<br />
the “auctionablequota plan,” it’s simpler than it sounds. In essence, it<br />
means countrieswith persistentlylarge and growingcurrent-account<br />
surpluseswould be required to cut those surpluses dramaticallyor else<br />
facea stiff specialtariff imposedby the United States. Blatant<br />
protectionism?Not necessarily.<br />
The hope is to reviveworld trade, not entangle it in a stickier web of<br />
protection. The billionsof dollars raised under the tariff would go to the<br />
World Bank rather than the U.S. Treasury; the bank, in turn, would send<br />
the funds to debtor countries undertaking genuine economicreform. And,<br />
finally,the policywould eliminateall the “temporary” import restraints<br />
the [Reagan]administrationhas imposed since 1981.<br />
The proposal’score is the tariff. It would be set off by a numerical<br />
tripwire; if, say, a country had a trade surplus for four straight years that<br />
reached at least 2 percent of its total output, the tariff could be triggered.<br />
If those countries didn’t chop their surpluses by 30 percent within a<br />
year, they would face a 30 percent reduction in their exports to the United<br />
States. They could avoid the tariff by paying the differencebetween their<br />
surplus and the numericaltrigger directly to the LDC’s (lessdeveloped<br />
countries). Or, instead of writing checks to the needy, they could avoid<br />
sanctionsby importing more from the LDC’s, from the United States—or<br />
from everyone. -<br />
Source:Newsweek,January 12,1987.<br />
1. What are three of the biggestinternationalproblems this proposalhopes to solve?<br />
2. What sanctiondoes a country with consistentlylarge trade surplusesface?<br />
3. How would this proposalhelp less developedcountries?
___________________<br />
SKILLSWORKSHEET<br />
CHAPTER17<br />
Name Class_____________ Date___________<br />
__________________________________________<br />
1. “BuyAmerican”(carbumper slogan)<br />
THE UNITEDSTATESIN THE WORLDECONOMY<br />
COMPARINGPOINTSOF VIEW<br />
Eachof the statementsbelowdealswith someaspectof America’strade<br />
problemsor worldtradein general.Think about the economicconceptsthatrelate<br />
to eachstatement.Then, in the spaceprovided,tell in yourown wordswhatyou<br />
thinkthe statementmeansand whetheryou agreeor disagreewith it.<br />
2. “A TacoBell*economyis not my visionof America’sfuture.”(U.S. SenatorLloydBentsen,Texas, on the<br />
growth of serviceindustriesin America)<br />
TacoBellis acompanythat franchisesfast.foodrestaurants.<br />
3. “Competitionis the enemyof wageincreases.”(AudreyFreedman, labor economist)<br />
4. “Inflation’slegacystill cripplesdebt-ladenfarmers and developingcountries. Both borrowedon<br />
expectationsof rising prices.”(Robert J. Samuelson,magazinecolumnist)
The Flow of WorldTrade<br />
The flow of WorldTrade<br />
Soi, : G.nsr.JPçreemu.1 onTwtffsw Trads.<br />
OPEC<br />
lb ’ansparency<br />
12<br />
Explanation<br />
GraphStiNts<br />
The graphillustratesthe flow of worldtrade 1. Forwhichtypeofcountryare eo41s the<br />
amongthfferentgroupsoftheworld’scountries. highest?Thelowest?<br />
It alsoshowsthe intratrade,or tradeamong L Whatlsthevalueat tradeamongEastern<br />
membersof eachpnnclpal groupof countries, bloccountries?<br />
suchastheEasternbloc.<br />
3. Whati thetotalvakieof worldtrade?
Figure20-2:UNITEDSTATES BALANCE OFTRADE, 1966-1986<br />
Balance ofTrade<br />
(inBillionsofDollars)<br />
+105<br />
+90<br />
+75<br />
+60<br />
+45<br />
+30<br />
+15<br />
10 —15<br />
—30<br />
1-45<br />
-75<br />
—90<br />
—105<br />
—120<br />
—135<br />
—150 1966 1968 19701972 1974 1976 1978 1980 1982 1984 1986<br />
Years<br />
Source: Statistical Abstract oftheUS.,Historical StatisticsoftheU.S.,BureauoftheCensus<br />
r
Figure21-1:DEGREEOFCENTRAUZATION OFDECISIONMAKINGIN<br />
SELECTED NATIONS<br />
I<br />
Soviet Great United<br />
Union Britain States<br />
[><br />
AlbaniaMozambique Mexico Taiwan<br />
aZrn
Dute Collected a<br />
PercefitageDutiableknperb<br />
Figure20•3:TARIFFRATES INTHEUNITEDSTATES, 1820•1986<br />
vj 11111111<br />
1820 1840 1860 1880 1900 1920 1940 160 19 0<br />
$ow’ce:Statistical Abstract oftheU.S..Historical Statistics oftheU.S..BureauoftheCensus
Figure20-1:UNITEDSTATES EXPORTS ANDIMPORTS INARECENT YEAR<br />
(inbillionsofdollars)<br />
Machinery<br />
bnsport<br />
Equipment<br />
$95.7<br />
Raw<br />
Materials -<br />
$21.0<br />
Chemicals<br />
$21.2<br />
Exports linpoit<br />
Machinery and<br />
Manufactured Foodand ianspofl<br />
GoodS ibtal:$229.0LMAmmaisEqU )me d<br />
$30.3<br />
blal:$2613<br />
Source:Sstica/ At5lrej meU$, Buie Ve Cei us
Billions<br />
ofDollars<br />
2,500<br />
2,000<br />
1,500<br />
1,000<br />
500<br />
0<br />
TheGrossNationalDebt,1940-1987<br />
I I I I I I I<br />
1940 1950 1960 1970 1980 1987*<br />
*Est)mate Years<br />
Source: Historical Statistics oftheU.S.,Statistical<br />
Abstract oftheU.S.,BureauoftheCensus
GUIDELINESFORCONDUCTINGA DEBATE<br />
Debate is often used productivelyin the formulationand developmentof laws.<br />
Role playinga debate providesparticipants with an opportunity to increasetheir<br />
understandingof the purpose and value of debating matters of public policy.<br />
PROCEDURES: 1. Identify, or help participantsidentify, a debate topic or issue.<br />
2. Organizethe role play of a debate by consideringthe entire class as the<br />
legislativebody, with the instructor assuming the role of the presiding officer.<br />
Individuals may then be assignedto groups representing variouspositions<br />
in regard to the issue.<br />
3. Allowtime for each group to meet independently to elect a chairperson<br />
and secretaryand to write a proposed bill designed to alleviate problems<br />
raised by the issue. As each group completesthe writing of its proposed bill,<br />
the chairpersonreports to the presiding officerand asks that the bill be placed<br />
on the agenda.<br />
4. Conduct the debate using the followingprocedures:<br />
a. The presidingofficercalls the sessionto order, indicates that all votes<br />
willbe decided by a simple majority, announces the issue, and opens the debate.<br />
b. The first bill on the agenda is introduced by the group’s chairpersonor by<br />
a person delegatedthis responsibilityby the chairperson. The group<br />
spokespersonstands, addressesthe presiding officer,and describesthe bill<br />
the group has written.<br />
c. After the chairpersonor group spokespersonhas completed presentation<br />
of the bill, he or she may remain standing and recognizetwo other members<br />
of the group who may then make additional commentson the bill.<br />
d. The bill is discussedand debated. Representativesfrom other<br />
groups may ask questions, offer criticisms,or suggestneeded<br />
modifications.The chairpersonor spokespersonfor the group that<br />
developedthe bill responds to the questions, criticisms, or suggested<br />
modifications.<br />
e. When the discussionand debate are completed, members may move that<br />
(1) the bill be voted upon, in which case the motion is secondedand the<br />
members vote on the adoption of the bill; (2) the sessionbe adjourned to<br />
enable the groups to considerthe bill that has been presented.<br />
f. If the sessionis adjourned, each group meets to decide upon a course of<br />
action. A group may caucus to decide whether to support the bill that has<br />
been presented, whether to suggestamendments to the bill, or whether to<br />
bargain with the group that wrote the bill; in which case, votes may be<br />
swappedfor amendments.<br />
g. If amendmentsare proposed, they are individuallydebated and voted upon.<br />
h. If the first bill or the amended first bill is not passed by a majority vote,<br />
the secondbill on the agenda is presented by the chairperson or<br />
spokespersonfor that group. The second bill is consideredfollowingthe<br />
procedures used to consider the first bill (items d through I above). If the<br />
second bill or an amended version of the second bill, is not passed, the<br />
third bill is then presented, and so forth.<br />
i. After all of the bills have been presented and if none has been passed,<br />
each group meets individuallyto decide upon a course of action. A group<br />
may decide to attempt to gather support for its bill by (1) convincing<br />
people from another group to vote on behalf of its bill; (2) changing<br />
positionand voting as a block or as individualsfor one of the other bills;<br />
or (3) developinga compromisebill worked out with members of the<br />
other groups. During this period, representativesfrom different groups<br />
may meet in an attempt to work out an agreement.<br />
j. The chairpersonof each group presents each amended bill to the<br />
presiding officer,who callsfor a general session,and the debate procedure<br />
is repeated. This processis continued until (1) a bill is passed or (2) the<br />
time allotted for the sessionis up and the sessionis adjourned.
PROJECTIN ECONOMICS<br />
UNIT4<br />
Name________________________________________ Class____________ Date__________<br />
SIMULATION:INTERNATIONALCONFERENCE<br />
TEACHERDIRECTIONS<br />
RECOMMENDED<br />
TIME: Two or three classperiods<br />
OBJECTIVES: 1. to understand the relationshipbetween economicgrowth and other issuesof<br />
worldwideconcern<br />
2. to evaluatea proposed resolution<br />
3. to developand organizean argument for a position<br />
MATERIALS: Provide one or more copiesof the followingfor each group. (These items can be<br />
found at the end of this project.)<br />
• Role Card<br />
• EvaluationWorksheet<br />
PROCEDURES: 1. Explain to the class that as participants in an internationalconference,they are<br />
goingto evaluatea resolution. The examplehere relates to economicgrowth,<br />
but the procedure can apply to other issues. See page 2 of Teacher Directions<br />
(over) for general guidelinesfor conducting a debate.<br />
2. Divide the class into three groups. Assignone group to the committee<br />
favoringeconomicgrowth, one to the committeeopposed to economicgrowth,<br />
and one to the committeefavoringpartial economicgrowth. Write the<br />
followingresolutionon the chalkboard: The nationsof the worldshouldcalla<br />
stopto unrestrictedeconomicgrowth.<br />
3. Cut up the role cards and distribute them to the appropriate groups. Explain<br />
that each role card describesa committee’sposition and task.<br />
4. Have each committeeresearchthe topic and prepare a presentation for its<br />
point of view.<br />
5. Allowstudents one classperiod to prepare their presentations. When all the<br />
groups are ready, have a representativefrom each explain the group’sposition.<br />
The representativeshould also provide facts to support the positionand<br />
answer questions from other groups.<br />
6. Have every member of the conferencevote on the resolution. Announcethe<br />
passageor defeat of the resolution. (If you wish, allowthe class to amend the<br />
resolution before it is put to a vote.)<br />
7. Distribute copies of the evaluationworksheet. Have the students answerthe<br />
questions. Discuss their answers.
_______<br />
PROJECTIN ECONOMICSUNIT4 ______<br />
SIMULATION: INTERNATIONALCONFERENCE<br />
ROLECARD<br />
COMMITTEE FAVORINGPARTIAL ECONOMICGROWTH<br />
You are a memberof the committeethat favorspartial economicgrowth. You<br />
do not believethat zero economicgrowth or all-out economicgrowthis the<br />
answer. You believethat the right kind of growth will help people solvetheir<br />
problems. Beforethe conferencemembers vote on the economicgrowth<br />
resolution, your committeewillpresent its viewsto the rest of the conference<br />
members. In your presentationyou must support your position with facts. You<br />
may use facts from your textbook (chapter 15), outside sources,or the items<br />
listed belowto prepare your presentation. In your presentation, you should<br />
address the relationshipof economicgrowth to pollution, population growth,<br />
and the supply of natural resources. You might begin with the following<br />
assumptionsand find facts to support them.<br />
• Shortagesof resourceswill lead us to find substitutes, recycle,and conserve.<br />
• Technologyand economicswill help humankind meet their challenges.<br />
• Even without rapid populationgrowth, we may run out of resources.<br />
• Someeconomicgrowth would limit a rise in unemploymentrates.<br />
• Pollution can be minimizedif we enforcestrict laws on companies.
PROJECTIN ECONOMICS<br />
UNIT4<br />
Name __________________________________________ Class_____________ Date___________<br />
Answerthe followingquestions.<br />
SIMULATION: INTERNATIONALCONFERENCE<br />
EVALUATIONWORKSHEET<br />
1. What problems are associatedwith economicgrowth?What are the benefits? _________________<br />
2. What problemsare associatedwith no economicgrowth? What are the benefits? ______________<br />
3. What problemsare associatedwith partial economicgrowth?What are the benefits? __________<br />
4. Which arguments about economicgrowth seem most convincing?Why?<br />
5. How can the world have some of the benefitsof growth while minimizingthe opportunity costs?
t<br />
Name<br />
Class Date<br />
Section 6. SOCIALISMIN THE DEVELOPINGWORLD<br />
Some African and Latin American nations have adopted forms of socialism in their<br />
economies. Why has this happened? Some of the reasons are given in Chapter 20. To<br />
demonstrate your understanding of the economic problems of developing nations, ex<br />
plain the reasons why a socialist-type economy is sometimes attractive to these nations.<br />
Give examples of such nations.<br />
Africa<br />
1. Reasons for adopting socialism:<br />
2. Examples:<br />
Latin America<br />
1. Reasons for adopting socialism:<br />
2. Examples:
C<br />
Name Class Date<br />
OPEC: ANINTERNATIONAL CARTEL<br />
Before1973veryfewAmericanshadheardof<br />
OPEC(theOrganization ofPetroleumExporting<br />
Countries) thoughithadbeenformedadecade<br />
earlierduringthe1960s.Itsgoalwastoorganizean<br />
effectiveoilmonopolyandreduceoreliminatecom<br />
petitioni’nthemarketplace. OPECeffortsto corner<br />
themarket”inoilhadbeenlargelyunsuccessful prior<br />
to 1973dueprimarilytothenatureofacartel.Tobe<br />
effectivein eliminatingcompetition,a cartellike<br />
OPECmust 1) controlthe bulk of the market,<br />
2) membersof the cartelmustreducetheir own<br />
nation’sproduction,and3)membersmustnotpro<br />
ducemorethantheagreedamount/orselltheiroil<br />
belowthepricefixedbythecartel.<br />
OPECnationswereabletofulfillthefirstcriterion<br />
forsuccessincethebulkoftheworld’scrudeoilwas<br />
controlledbyitsmembernations.However, thetemp<br />
tationnotto reduceproductionandinsteadover<br />
produceandselltheiroilbelowthefixedpricewastoo<br />
greatfor someOPECnations.Asa result,OPEC’S<br />
policywasnotsuccessful.<br />
In 1973,however, the YomKippurWarerupted<br />
betweenArabnationsandIsrael,Thisconflicthelped<br />
unitetheArabnationsandcreatedadetermination<br />
amongOPECnationstorenewtheireffortstocontrol<br />
worldoilproductionandprices.ThisnewOPECunity<br />
resolveallowedthecarteltonearlytriplethepriceof<br />
oilafter1973.Onlyin recentyears,sincethe mid<br />
19SOshasOPECbegunto loseitsgripontheworld<br />
oilmarket.Why?Whathappened?<br />
Economistsgenerallyagreedthatthreeofthefac<br />
torsthatcancauseacollapseofacartelare:(1)the<br />
increased availability of substitute products<br />
(2)decreasedemandforthecartels’product,and<br />
(3) increasedproductionof the productby nonmembers.Althoughmanyeconomistsbelievedthat<br />
oneormoreofthesefactorswouldcausetheOPEC<br />
cartelto collapseafterthe 1973YomKippurWar,<br />
OPECheldfirm.Anditwasaidedbytheinabilityofthe<br />
UnitedStatesandothernationstoestablishapolicy<br />
to createalternateenergysourcesand/ordevelop<br />
andencourageotheroilsources.Asaresult,OPEC<br />
Inthe1970sandearly1980ssteadilyincreasedthe<br />
priceofoil.Between1979and1980,followingmore<br />
politicalturmoilin the MiddleEast,OPECprices<br />
soaredfrom$12abarrelto$36abarrel.Thissharp<br />
pricehikefueledinflationinthe UnitedStatesand<br />
manyothernations. Italsocreatedamassiveconser<br />
vationeffortandswitchtoalternatefuels,leadingto<br />
reducedoil consumption,a worldwideoil glut,<br />
and eventuallya cutbackin productionby the<br />
OPECnations.TheresultofthecollapseinOPECoil<br />
pricestolessthan$15abarrelby1987hasbeenfelt<br />
worldwide.<br />
TodayOPECis attemptingto regainsomeof its<br />
solidarity.SaudiArabiahasbeenurgingmember<br />
nationstore-establishpricestability.Itsgoatof“sta<br />
bility” is a priceof $20 a barrelby 1992,thenan<br />
Increaseto $25 a barrel,withnearlya 50 percent<br />
expansioninOPECexportsabove1986levels.World<br />
widereactionto thelatestOPECeffortsto stabilize<br />
pricesat theselevelsperbarrelamounthasbeen<br />
negative.Mosteconomistsbelievethatworldcon<br />
sumersofoilwillbeabletoconserveanduseoiland<br />
otherenergysourcesmoreefficiently.Nationsmight<br />
bebestservedbysimplybypassingOPEC’S “stability”<br />
pitchesand goingwith free marketprice deter<br />
mination.<br />
1. ExplainhowOPECwasabletocontrolworldprices<br />
foroil.<br />
2. Howhasthe OPECcartelaffectedthe United<br />
Stateseconomy?
Name Class Date<br />
ANEWCI{INESE REVOLUTION<br />
“ an Marxseeswhatwearedoing,andhe ItisstilltoosoontoknowwhetherChina’slimited<br />
doesn’tlikeit. Sohehaspunishedmeby attemptstointroducefeaturesofcapitalismwilllead<br />
makingmedeaf.”Thesearethe “joking” topermanent change.DengXiaopingisover80years<br />
wordsof partiallydeafDengXiaoping(dungshow- old,andnoonereallyknowswhetherthoseleaders<br />
ping), theleaderofCommunist China,whoisattempt whowillfollowhimwillcontinuehis“economicrevo<br />
ingto reformChina’seconomysothatit meetsthe lution.”It doesseemclear,however, that Chinese<br />
needsofhiscountry’s1billionpeople.China’s“eco citizensfaor this revolutionand probablywould<br />
nomicrevolution” inthe1980sseemstobeattempt resentattemptsto changetheirnationbackto its<br />
ingtoachievegoalsthatcontradicteachother:state Marxisteconomicpolicies.<br />
ownershipandprivateproperty, centralplanningand<br />
competitivemarkets,totalitariangovernmentand<br />
limitedeconomicfreedom.NowonderDengbelieves<br />
thatMarxisfrowningonhim.<br />
1. DescribethechangesintheCommunist Chinese<br />
Deng’sreformswereaimedfirstatChina’sagricul economyintroducedunder DengXiaoping’s<br />
turalsector.Beginninginthelate1970s,acontract<br />
“I -,.<br />
systemwasbegunin farming.Underthis system,<br />
Chinesefarmfamiliescontractoragreetodelivercer<br />
tainamountsofagriculturalproductstothestateat<br />
afixedprice.However, oncefamilieshavedelivered<br />
thesecrops,theyarefreetogrowanythingtheywish<br />
andsellittoothermarketsforthegoingprice.Under<br />
thisnewplan,manyChinesefarmershaveimproved<br />
their lives.Somearenowableto buymorefarm<br />
machinery,which makesit possibleto further 2. Explainwaysin whichthe Chinese“economic<br />
increasetheiragriculturaloutput.Foodproduction,<br />
revolution”is contraryto traditionalMarxist<br />
onceaseriousproblemintheChineseconomy, has economicpolicies.<br />
increasedapproximatelyby 8 percenteachyear<br />
since1978.<br />
Thedevelopment ofprivatebusinessinChinahas<br />
followedtheagricultural example.Ofcourse,allbasic<br />
industriesarestillownedandoperatedbythestate,<br />
but the Chinesearenowpermittedto startmany<br />
kindsofsmallbusinesses—restaurants, retailshops,<br />
maidservices,transportationsystems—that often<br />
competewith oneanotherandwithgovernmentownedbusinesses.<br />
Asaresult,increasedvarietiesof 3. WhymighttheSovietUnionbeconcernedwith<br />
clothingandconsumergoodshavebecomeavailable<br />
totheChinesepeople.Two-andthree-bicycle families CommunistChina’seconomicreforms?<br />
arecommonnow amongcity dwellers.Television<br />
ownershiphasincreasedramatically. Farmerswho<br />
notlongagoknewlittleornothingaboutlifeoutside<br />
theirvillagenowwatchthe government-controlled<br />
televisionewsandothergovernment programsthat<br />
bringthemin touchwiththe nationbeyondtheir<br />
village.
(<br />
CHINA’SBOLDREFORMS<br />
Name<br />
r Ctass Date<br />
Chapter 20 lists the major characteristics of the Soviet communist economy. Many of<br />
these characteristics can also be used to describe the economy of the People’s Republic<br />
of China. However, China has recently allowed capitalistic elements into its economy.<br />
Read the passage and answer the questions that follow it.<br />
China, in an attempt to invigorate its economy, has introduced capitalistic principles to<br />
its people. Until recently, for example, high.school graduates were told by the government<br />
either to enroll for higher education or to do a particular job. Today, young people find<br />
work on their own. In fact, more than 10 million small businesses, have been started in the<br />
last eight years in a country where government control had been the norm.<br />
Other labor reforms have improved productivity. For instance, China used to have a<br />
policy guaranteeing every worker lifetime employment. This policy removed one incentive<br />
for employees to work harder. Since 1986, however, managers of the many state-run<br />
companies have been able to hire and fire workers hired after 1986. When their contracts<br />
expire, workers now may look for jobs elsewhere.<br />
Deng Ziaoping, who became China’s leader in 1977, initiated many of these labor<br />
reforms. He also ended communal farms, making every family responsible for a plot of<br />
land. Although all families must sell a certain amount of goods to the government at a set<br />
price, they can sell whatever is left for a profit.<br />
Government regulation has also been decreased. More than one-hall of China’s<br />
businesses are no longer directly overseen by the government. And pay has been tied to<br />
performance, rather than to a government standard.<br />
Success of these reforms is evident. Factory output increased about 18 percent in 1985.<br />
Average annual income for the Chinese worker has more than doubled since 1982.<br />
Electrical appliances, are no longer as rare in rural villages. And China is moving to solidify<br />
its gain by developing more industries to make use of its vast resources and huge<br />
population.<br />
1. Howhave China’s reforms made its economy different from the Soviet economy?<br />
2. What elements of communism are still present in the Chinese economy?<br />
3. What benefits have the reforms brought the Chinese?_____________________________
ILLUSTRATION<br />
UPDATES<br />
P. 34, Figure 2—i<br />
PER CAPITAPERSONAL INCOME AND ITS AVERAGE ANNUAL GROWTH*<br />
Annual Chsnge<br />
Aerag Annual Percentage orPerCapita<br />
PerCapita<br />
Growth of Per Capita Personal Personal Income<br />
State P’wnal Income, 2983 ,1980-I983 Jncome<br />
1984—1985<br />
AL.ASKA 17,756 9.2 1.2<br />
CONNECTICUT 37,627 8.7 6.5<br />
NEW JERSEY 16.368 8.6 6.4<br />
MASSACHUSETTS 15.790 9.1 7.0<br />
MARYLAND 25,356 7.8 6.3<br />
CALIFORNIA 15,255 6.6 5.4<br />
NEW YORK 15,237 8.5 6.2<br />
COLORADO 14.413 7.8 4.1<br />
ILLINOIS 14,397 6.4 5.0<br />
DELAWARE . 34,337 7.3 4.7<br />
NEW HAMPSHIRE 14,308 8.8 6.9<br />
VIRGINIA 14,164 . 8.1 6.6 (<br />
MINNESOTA 14,073 6.4 63<br />
KANSAS 14,046 7.3 5.5<br />
NEVADA 13,981 5.2 5.3<br />
NEBRASKA 13,699 62 9.0<br />
RHODE ISLAND 13,592 7.8 5.7<br />
HAWAII 13,542 5.8 3.9<br />
VNITED STATES AVG. 13433 7.1 5.3<br />
FLORIDA 13,397 8.0 4.9<br />
MICHIGAN 13,298 5.4 5.4<br />
WASHINGTON 13.267 5.7 4.0<br />
TEXAS 13.165 7.1 4.7<br />
NORTH DAKOTA 13.034 9.0 6.1<br />
OHIO 12,979 6.1 5.3<br />
PENNSYLVANIA 32.959 7.0 5.4<br />
Timc frame of categories wasrevised. Average annual percentage growth of per capita personal incovnt ’<br />
is given [or 2980—l983.Percent of annual change from 2983 to 1984 is also given.<br />
aT : U.S.Dept.of Commei
(<br />
Ajinualchange<br />
A%era8eAnnualPertentage orPerCapita<br />
Per Capita Growth orPerCapita Peraonal Perional Income<br />
Ir,onaI Income, 1985 Income, *980—1983 1984—1985<br />
WYOMING 32,955 2.7 5.9<br />
WISCONSIN 32,883 6.0 4.1<br />
MISSOURI 12,784 7.4 59<br />
IOWA 12,779 5.8 5.4<br />
ARIZONA 32,454 6.7 5.3<br />
INDIANA 12.276 5.9 4.7<br />
OREGON 12.365 5.3 4.8<br />
GEORGIA 12.158 8.5 5.3<br />
OKLAHOMA 32.103 6.8 4.1<br />
VERMONT 11.599 8.6 7.3<br />
MAINE 31,423 7.8 5.3<br />
NORTH CAROLINA 11.334 7.6 4.3<br />
SOUTH DAKOTA 11.207 6.5 2.8<br />
LOUISIANA 11.015 6.9 2.6<br />
TENNESSEE 10.934 6.9 5.3<br />
NEW MEXICO 10.741 6.6 4.7<br />
MONTANA 10,726 6.3 1.1<br />
IDAHO 10,605 5.1 4.5<br />
KENTUCKY 10,585 6.2 3.4<br />
SOUTH CAROLINA 10.514 7.1 4.0<br />
ALABAMA 10.510 7.3 5.2<br />
ARKANSAS 10.180 8.1 4.6<br />
UTAH 10,366 5.7 4.6<br />
WEST VIRGINIA 10.132 5.3 4.2<br />
MISSISSIPPI 9.035 6.5 4.0<br />
Capyilght C 1986.by Menili PublishingCo.<br />
Usei ol £co.,onti : ?7 ’fncj,I n —p j iy ib .<br />
..
P. 38, Figure 2—3<br />
HOWTHE DOLLARIS SPENT<br />
(Basedon Whata Typical“Middk Class”Urban<br />
Fi*nulyof Fuurwith AnnualEarnings of $25.407<br />
Spentin Autumn.1981)<br />
Thisis thelastavailableupdatefor thisgraph.<br />
The U.S. Governmenihas discontinuedthis<br />
statisticalseries. The graph will not be updated<br />
in the future.<br />
Source: Basedonfiguresin Mc ’,uh LoborRe ’zesi, Juls 1982<br />
P. 185, Figure 8—1<br />
P. 58, FIgure 3—1<br />
1985TOTALU.S. POPULATION—<br />
238.8 million<br />
48.3%in CivilianLaborForce<br />
51.7%not in Civilian Labor Force<br />
Vaenof <strong>Economics</strong>: Principle, and Pr ,<br />
BUSINESS ORGANIZATIONS<br />
INTHEU.S.IN 1983<br />
1ii<br />
NUMBERS<br />
SALES PROFITS<br />
5.9<br />
C]Corporations<br />
Q Partnerships<br />
U Sole Proprietorships<br />
.<br />
Source:SO! B? .dIg:irl, Winter 1986 1985.<br />
I<br />
(<br />
(
P. 197Figure 8—4<br />
DISTRIBUTIONOF MEN’SANDWOMEN’SJOBS<br />
BY OCCUPATION,1982<br />
CRAFTWORKERS<br />
TRANSPORTEQUIPMENTOPERATORS<br />
LABORERS<br />
FARMERSAND FARM MANAGERS<br />
FARM IJBORERS AND SUPERVISORS<br />
MANAGEL AND ADMINISTRATORS<br />
OPERATIVES (checkers, assembkrs.<br />
dressmakers, gas station attendants,<br />
packers, wrappers, painters, welders)<br />
PROFESSIONALAND TECHNICAL<br />
SALES IcORKERS<br />
SERVICE WORLERS<br />
CLERICAL<br />
PRIVATE HOUSEHOLDWORKERS<br />
I 1 1 1 1 I U I I I I I I I I 1<br />
1009080706050403020100% 102030405060708090 100<br />
WOMEN MEN<br />
arce: So U.S.Department of CommerceandBureauof theCenws<br />
Copytight (“ 1,86. by Menftl Publishing Co.<br />
ItJwi rii of E.cor.omks: PilncI ks and c1keo Pa haveShepublisherspenntsslonSoip,oduce S1<br />
ii pete. 9
F. 204, Figure 8—6<br />
THE MINIMUM WAGE<br />
r U<br />
C<br />
U<br />
E<br />
C<br />
E<br />
C<br />
ZI<br />
A. Minimum w.gc<br />
‘5—<br />
Ic .<br />
3.50<br />
1230<br />
1980 1982<br />
Years<br />
1984 1986<br />
B. Minimum wageadjustedlot Inflation<br />
4.00<br />
3.50<br />
1940 1945 1950 1955 19o0 1965 1970 1975<br />
Years<br />
C. Minimum wageasa perceni of averagemanufacturingearnings<br />
E<br />
3<br />
2.50<br />
2<br />
en<br />
.50<br />
AC<br />
je<br />
_________<br />
___________<br />
1980 1982 1985<br />
Years<br />
Source:Rjj: wic l Siwissics of the United States. Colo,,wZTimes ‘0 the Pent;<br />
ISiotisiic Abstvw of the United Stales<br />
1980 1985 1990<br />
(<br />
(<br />
(
(<br />
P.218,Figure 9.3<br />
BIWEEKLY PAYCHECKAND WITHHOLDiNG STATEMENT<br />
SMITH, SMITH, AND SMITH<br />
ATTORNEYS AT LAW<br />
THE CENTRAL BANK<br />
Memo<br />
‘:O3LI,.O 5: I ?85 r?<br />
SAMYAMAGUCHI<br />
SIXHUNDREDNINETEENAND64/100<br />
212 2.195903<br />
Number __________<br />
jANUARY18 86<br />
DATE_____________<br />
ic I irny<br />
.tircr 1ic.t.<br />
PLEASEDETACHANDRETAINTHIS PORTION<br />
AS YOURRECORDOF EARNINGSANDDEDUCTIONS<br />
619.64<br />
Doflars<br />
CIK Nt!.t5t<br />
P 2.195,903<br />
[__DA L PAY ESD O SO IMP SO MRS MIS( J J CR L J ] ISS J j GROSS<br />
I<br />
110118614<br />
9DO2<br />
1TE<br />
I<br />
1<br />
1376 CDI 320 80000<br />
I<br />
29 94 57 20 J j 619:641<br />
i STATL 11 CI 11 flCA ] OSDS 01 111 -K SEl 1 }<br />
Sam Yamaguchi is a married taxpayer with no children who filesa joint return. His bi<br />
weeklywage is $800.The amount of federal taxes deducted every two weeksis determined<br />
by tax tables supplied by the Internal Revenuesystem.<br />
• 1 I<br />
Pay to *hc<br />
Order of: -
P. 221 FIgure 9—4<br />
I4<br />
SOURCESOF STATEANDLOCALREVENUES, 1984<br />
SalesTaxes<br />
Properi Taxes<br />
5. -<br />
Ijiiiiiii1<br />
Motor<br />
Vehiclesand<br />
Operators<br />
HigherE.ducai ion<br />
_______________<br />
Licens”Ns.\<br />
[“ 25.3<br />
______________<br />
_______________<br />
f” 20.5%<br />
—<br />
I4.8 ’J —j-r<br />
Utility Revenues<br />
insuranceTaxes<br />
and Contributions<br />
Corporate incomeTaxes<br />
IntergovernmentalRevenues<br />
__________________<br />
STATE LOCAL<br />
Sou,u e,uoJ Gowe,nwi Fina,wez ui 1983.1984<br />
IndividualincomeTaxes,<br />
CopyTlghl C tUb, by Merrill Publishing Co.<br />
(<br />
(<br />
I
(<br />
P. 244 Figure 10-2<br />
THE CHANGING PATTERN OF STATE<br />
AND LOCALGOVERNMENT EXPENDITURES,<br />
1980- 1984 (BILLIONS OF $ 1984)<br />
$459.9<br />
K-;T 1 iic2<br />
Education<br />
Public Welfare<br />
__________________ — Highways<br />
__________________<br />
(63 ]2<br />
1980<br />
— Hospitals<br />
..1nieres* on the Debt 5<br />
Police<br />
Other Expenditures<br />
revised data based on Govawnen:al Fpiances in I98O I98L 1983-1984<br />
5&rce: Gov nnwn ai fu’aincs.sI,, J98O .39 J. 1983.1984<br />
Copyitg)it t 1986,b’yMeidil IPul<br />
1984<br />
$503.3
P. 246—247, Figure 10—3<br />
THE FEDERAL BUDGET, FISCAL YEAR 1987*<br />
Individual<br />
Income Ta.x<br />
Sial Insurance<br />
Taxesand<br />
Ccttñbutions<br />
Corporate<br />
IncomeTax<br />
Excise Taxes<br />
Other<br />
RECEIPTS$850.4<br />
$143.6<br />
$38 .0<br />
$302.8<br />
$86.7<br />
$35.2<br />
‘39.7<br />
Proposedin PresidentRonald Rca?an’ Budgct Messageto Congress,February S, 1986<br />
Sowve: Officeof Mana emeni andBudget.February 1986<br />
$330.e<br />
$282.7<br />
$148.0<br />
$105.2<br />
$27.4<br />
$26.4<br />
$73.7<br />
EXPENDITURES$994.0<br />
ii<br />
7<br />
Income Security<br />
(includes <strong>Social</strong> Security)<br />
National Deknst<br />
Interest on Debt<br />
Healthand Medicare<br />
Education. Training,<br />
Employment.<br />
and <strong>Social</strong> Services<br />
Veterans’<br />
Benefitsand Services<br />
Other<br />
Co,vrI lit C $986 b’ ’ MerrIllPublishingCo.<br />
(
Corporate1ncom Ta<br />
Exds Taxes<br />
Other<br />
Co,vrti’ht C’ 1986,by Mer,jIl pubitihing Co.<br />
S<br />
RECEIPTS EXPENDITURES<br />
Education.<br />
Training. Employment,<br />
& <strong>Social</strong> Ser’ic s
RhItkin i nt t4 I1ii!I r<br />
1111111 I I II<br />
1. .. .. , ,. , s , tTl I<br />
1. P4 0 4. t.. i. P. 0 1. P4 •j<br />
0 0 0 0 0 0 C C.. 0 .,<br />
DO VI<br />
C<br />
— C U’<br />
‘0<br />
m<br />
z<br />
F,,<br />
— z<br />
‘0<br />
V.<br />
o<br />
rn<br />
-<br />
‘0 _<br />
U’<br />
U.<br />
‘0 4.-<br />
0’ —<br />
0<br />
0<br />
vi<br />
—<br />
‘0<br />
0’<br />
‘0<br />
-J<br />
ci<br />
‘C<br />
-4<br />
‘C<br />
0<br />
‘0<br />
U.<br />
‘C<br />
‘0<br />
0
aris’l. The steep dccli iw reIk it’tl Ihe cul lapse<br />
of OPEC,tilt’ cattel that successlullvhxt’d inter<br />
national oil pt-ice’stot the benefit of its 13 nle’nt<br />
ber nations for nearly IS yeats.<br />
OPEC’s suecss had been dramatic. In 1970,<br />
for example, the benchmark price for oil on in<br />
k,rnational markets was only $1.35 per barrel.<br />
The price rose to $2.10 in 1973. and, after the<br />
Arab-Israeli war, promptly rose to $9.60 after<br />
the Arab members of OPEC imposed an oil boycon<br />
on nations that supported Israel. OPEC na<br />
tions then continued to raise the benchmark<br />
price until the “official” price of oil reached $34<br />
per barrel in 1983.<br />
Tb 1’ steep increase in oil prices, however, re<br />
quired more than announcements of new, and<br />
higher, “official” prices. In fact, OPEC was able<br />
to increase the price of oil only after it created<br />
an artificial shortage on international markets.<br />
This was accomplished by establishing produc<br />
tion ceilings for each of its member nations. As<br />
long as the ceilings reduced the overall produc<br />
tion f oil by OPEC nations, prices would be<br />
forced up.<br />
While OPEC was able to cause a short-term<br />
increase in oil prices, two things began to hap<br />
pen. First, the demand for oil began to fall as<br />
oil-consuming nations cut back on their use of<br />
oil. For example, federal legislation in the<br />
United States set speed limits at 55 miles per<br />
hour to conserve gas, automakers were required<br />
to produce more fuel efficient cars, and many<br />
consumers switched to smaller cars. Tempera<br />
tures in federal buildings were set to conserve<br />
fuel in both winter and summer, and many<br />
homeowners switched to wood and coal stoves<br />
for heat.<br />
Second, the supply of oil increased as higher<br />
prices made it profitable for other countries, in<br />
cluding Norway, the United States, Britain, and<br />
Russia to produce more oil. As a result, the<br />
world production of oil increased from approx<br />
imatch’ 55.9 million barrels per day in 1974 to<br />
623 billion in 1979.<br />
By the earls’1980’s, the worldwide effects of<br />
increased supply and reduced demand were ev<br />
ident. OPEC was pressured to either lower the<br />
official price of oil, or Cut their own production<br />
even more to offset the additional non-OPEC<br />
supply. At the same time, OPEC was having<br />
problems with some of its member nations.<br />
Several poorer countries (Nigeria, Ecuador, and<br />
Venezuela) were widely suspected of cheating<br />
on their quotas to increase their own oil reve<br />
nues. Other countries, such as Iran and iraq,<br />
were at war and were exceeding their quotas to<br />
finance military expenditures. The burden,<br />
then, of reducing oil production fell on Saudi<br />
Arabia. This country reduced its own produc<br />
I ton (tout nt’arlv It) million hasit’k pet dtiv<br />
1980 to neatly 2 millioti in 19S5.<br />
in<br />
Over 4tll, OPEC’oil production fell huni an es<br />
tin ated 31 million barrels per day in 1979 to lt<br />
in 1985. While OPEC was able to prop up prices<br />
by withholding supply, the cost to them was in<br />
creasingly clear. In the early 1970’s, they pro<br />
duced almost 60 percent of the world’s oil sup.<br />
p By 1985, it had fallen to nearly half that—<br />
at 30 percent.<br />
Saudi Arabia desperately wanted OPEC and<br />
non-OPEC nations to agree on a new global<br />
price and reduce production to maintain prices.<br />
Since their own output levels had been dropped<br />
so low, they could not cut production further.<br />
However, when other nations—including OPEC<br />
members—failed to cooperate, Saudi Arabia<br />
formally abandoned their own production ceil<br />
ings and began to flood the world markets with<br />
oil.<br />
The impact on oil prices was dramatic.<br />
Prices that had been in the $27-$28 range in<br />
late 19 5 plunged to urtder $l . barrel in early<br />
1986. While the3 have rebounded a little since<br />
then, the flood of oil on world markets is sure<br />
to keep the price of oil well under $20 per bar<br />
rel for some time vet.<br />
Analysts offer several explanations as to wh<br />
Saudi Arabia chose to break ranks and lead the<br />
collapse of’oil prices. One explanation is that<br />
they had reduced their own production to such<br />
a low level that they could not afford to reduce<br />
production an further. It is clear that Saudi<br />
Arabia felt that it was making considerable sac<br />
rifices that were benefiting other nations who<br />
chose to ignore production ceilings.<br />
Another explanation is that Saudi Arabia<br />
was becoming increasingly concerned over the<br />
possibility that Iran might defeat Iraq in the<br />
current war. A collapse of oil prices in 1985<br />
would make it more difficult for Iran to finance<br />
the war from the sale of oil. Since Saudi Arabia<br />
was more closely allied with Iraq than iran,<br />
low oil prices might be of some consequence if’<br />
the war continued.<br />
A third explanation offered is that Saudi Ara<br />
bia is trying to drive some marginal oil produc<br />
ers permanently out of business. If the price<br />
falls below $15 a barrel for very long, for ex<br />
ample, many countries will be forced to close<br />
their wells since it usually costs more than that<br />
to pump a barrel of oil out of the ground. Once<br />
the marginal producers are permanently out of<br />
the market, oil production can be restricted and<br />
the price of oil will increase.<br />
Regardless of the explanation, experts gener<br />
ally agree that the Fall of OPEC was inevitable,<br />
if not overdue. Historically, cartels have a rec<br />
ord of success followed by failure, especially<br />
CapytightC 956, byMenfilPubllshtngCo.<br />
- — — — __4 __ S__ .L. nI ,.ipi’ .Inr toe 39
. 1 i.uI•,I %% IItIIt ’t)Il)t ’I h1’iii II ) tht.si o,i puu<br />
tint! iin qu. t.,s. And, ii tlieue ate ot li .i 111)1 —. ii -<br />
$t i %I)tii Its UI IflIII)III, ii Is (luIIIIIiIt lot hit t.utid<br />
to ttittit total tt,ild puotlUttIt uI. Iin.tllv. the<br />
Itct that m.tiiv nations •et’e ahk to icdu -t’<br />
their demand lot oil made the downlall even<br />
mole certain. In the cnd, lht n triet tux’cesot<br />
supply and demand. along with the short term<br />
sell-interests of ih ’ OPEC’nations caused the<br />
dramatic decline in oil prices.<br />
P. 494-496 POPULATION<br />
The rate of population growth is a concern of<br />
most countries.The United fes St Bureau of the<br />
Census continually maLes population projec<br />
lions basedon researchsarnplin techniques.In<br />
1983,the CensusBureau made population pro.<br />
jections to the war 2000.Total U. S. population<br />
40<br />
will iise flint’ than 14.4peucentto over 267 mu<br />
hioti. lIu vevei, the most signilicant population<br />
chiui t’ till take place in the western portion of<br />
the Uniied Stales.The population there will rise<br />
4 percent. The Northeast will experiencesome<br />
decline, and the population of the Midwest will<br />
essentiall slav the same.<br />
Thtee stales will experience more than a 100<br />
petcent increase in population over the period<br />
1980to 2000. The ’ arc Arizona. Nevada. and<br />
Wyoming. California will conhinuC to be the<br />
most populous stale with a projected population<br />
in 2000 of 30,613,100.Texaswill move into sec<br />
ond place, followed by Florida, which will move<br />
up from seventhplace.<br />
The table below shows the projected popula<br />
tions for individual states.It also gives a break<br />
down of the changesin population rank. A map<br />
lollows the table on the next page.<br />
PROJECTED POPULATIONGROWTH iN THE UNITED STATES 1980-2000<br />
POPULATION PROJECTIONS BY STATE<br />
PROJECTEL) PERCENT<br />
POPULATION CHANGE<br />
STATE 2000 FROM I90 RANK IN 1980 RANK IN 2000<br />
ALA. 4.415.300 —13.5 22 24<br />
ALASKA 630,70t - 57.5 50 49<br />
ARIZ. S2.50O 4105.4 29 15<br />
ARK. 2,835.400 424.1 33 32<br />
CAL. 30.613.100 *29.3 1 1<br />
COL 4.t 5t’.D0O 461.2 28 21<br />
CONN. (1 3.0 62.40<br />
. —1.5 25 29<br />
DEL. 638.200 #7.2 47 48<br />
FLA. 17.438,000 + 79.0 7 3<br />
GA. 6.708.200 422.8 13 11<br />
HAWAII 1277.700 432.4 39 42<br />
IDAHO 1.512.200 .s -6O.2 41 39<br />
ILL. $1,187,500 —2.0 3<br />
•<br />
6<br />
IND. 5.679,200 43.4 12 14<br />
IOWA 2.972,100 .u -2.O 27 30<br />
KANS. 2,494.400 45.6 32 34<br />
KY. 4,399,900 20.2 23 25<br />
LA. 5.159.800 +22.7 $9 19<br />
ME. 1.308,000 #16.3 38 41<br />
MD. 4,581,900 +8.7 18 22<br />
MASS. 5.490,400 44.3 I $6<br />
MICH. 9,207,600 #0.5 8 8<br />
MINN. 4,489,400 # 10.1 21 23<br />
MISS. • 2.939.200 416.6 31 31<br />
MO. 5.080.000 +3.3 13 . 20<br />
MONT. 936.000 + 22.4 44 44<br />
WEB. 1.661.900 +5.9 33 38<br />
CopyrightC’$986,by Mervlll PublishingCo.<br />
Usersof : Economk Princlpka and Pctkea have shepublisher’spennluion to repmducrthispage.<br />
I
STATE<br />
NE%.<br />
N.H<br />
NJ.<br />
N.M.<br />
N.Y.<br />
NC.<br />
N.D.<br />
OHIO<br />
OKLA.<br />
ORE.<br />
PA.<br />
RI.<br />
S.C.<br />
S.D.<br />
TENN.<br />
TEXAS<br />
UTAH<br />
VT.<br />
VA.<br />
WASH.<br />
W.VA.<br />
WIS.<br />
wYo.<br />
U.S.<br />
$aur : U.S.Dept.a Co,ninercr<br />
) PROJECTEI<br />
PEK( EN1<br />
POPULATION CHANGI.<br />
2000 FROM I9$O<br />
RANI IN 1981) RAP* IN 2000<br />
3.918.800<br />
I.3 6.500<br />
7,427.600<br />
3.727.300<br />
14.990200<br />
6.867.800<br />
682.000<br />
I0.3 6.800<br />
3.944.500<br />
4.025300<br />
31207,600<br />
925,800<br />
3,907.100<br />
687. 600<br />
5.4)9.600<br />
20.739,400<br />
2.777.400<br />
625.000<br />
6389.400<br />
5132.500<br />
2.067.700<br />
5.215.500<br />
1.002.200<br />
267.461,600<br />
4340.1<br />
44$.)<br />
40.9<br />
432.9<br />
— 14.6<br />
416.9<br />
+ 4.5<br />
—4.)<br />
4 304<br />
452.9<br />
— 5k<br />
—2.3<br />
425.3<br />
— 0.4<br />
4 18.1<br />
445.8<br />
490.1<br />
422.2<br />
4 19.5<br />
441.2<br />
+6.3<br />
+ 30.8<br />
+112.9<br />
4 18.1<br />
Copyrtgh* C;1N, by Menu) PublishingCo.<br />
U.., of <strong>Economics</strong>: ?dnclpki andPcsctke. havethe publisherspermission $oreproducethispage.<br />
43<br />
42<br />
9<br />
37<br />
2<br />
JO<br />
46<br />
6<br />
26<br />
30<br />
4<br />
40<br />
24<br />
45<br />
17<br />
3<br />
3.<br />
48<br />
14<br />
20<br />
34<br />
36<br />
49<br />
36<br />
40<br />
9<br />
37<br />
4<br />
10<br />
47<br />
7<br />
27<br />
26<br />
5<br />
45<br />
28<br />
46<br />
17<br />
2<br />
33<br />
50<br />
12<br />
‘3<br />
35<br />
38<br />
43<br />
0 more than 40<br />
o<br />
di clinu ’<br />
2O-39<br />
41
ILLUSTRATION<br />
UPDATES<br />
P. 34, FIgure 2-1<br />
PER CAPiTAPERSONALINCOME AND ITS AVERAGE ANNUAL GROWTH*<br />
AnnualChange<br />
Average AnnualPercentage of PerCapita<br />
PerCapita<br />
Gtos ’th of PerCapitaPer ona1 PersonalIncome<br />
State naj Pe Income 95 Income, 1980- 1983 1984—1985<br />
ALASKA 17.756 9.2 1.2<br />
CONNECTICUT 17,627 8.7 6.5<br />
NEW JERSEY 16,368 8,6 6.4<br />
MASSACHUSETTS 15,790 9,3 7.0<br />
MARYLAND 15.356 7.8 6.3<br />
CALIFORNIA 15.255 6.6 5.4<br />
NEW YORK 15,237 8.5 6.2<br />
COLORADO 14,413 7.8 4.1<br />
ILLINOIS 14.397 6.4 5.0<br />
DELAWARE 14,337 7.3 4.7<br />
NEW HAMPSHIRE 14.308 8.8 6.9<br />
VIRGINIA 14,164 8.1 6.6 (<br />
MINNESOTA 14,071 6.4 6.5<br />
KANSAS 14,046 7.3 55<br />
NEVADA 33,981 52 5.1<br />
NEBRASKA 13,699 62 9.0<br />
RHODEISLAND 13,592 7.8 5.7<br />
HAWAII 13,542 5.8 3.9<br />
UNITED STATES AVG. 13,451 7.) 3.3<br />
FLORIDA 13,397 8.0 4.9<br />
MICHIGAN 13.298 5.4 5.4<br />
WASHINGTON 33,267 5.7 4.0<br />
TEXAS 13,165 7.1 4.7<br />
NORTH DAKOTA 13,034 9.0 6.1<br />
OHIO 12,979 6.3 5.3<br />
PENNSYLVANIA 12.959 7.0 5.4<br />
T*meframe of categories was revised. Average annual percentage growth of per capita personal incomv<br />
is given for 3980—1983.Percent of annual change from 1983 to 1984 is also given.<br />
lource: U.S.Dept.of Commerce<br />
Copyright C’1986. by Merrill Publishing Co.<br />
(
(<br />
Annual Change<br />
AverageAnnual Percentage<br />
of Per Capita<br />
Per Capita Growth of Per Capita Personal Personal Income<br />
State Ironal Income, 1985 Income. 1980—1983 1984—1985<br />
WYOMING 12.955 2.7 5.9<br />
WISCONSIN 32,883 6.0 4.1<br />
MISSOURI 12.784 7.4 5.9<br />
IOWA 12.779 5.8 5.4<br />
ARIZONA 12,454 6,7 5.3<br />
INDIANA 12.276 5.9 4.7<br />
OREGON 12,165 5.3 4.8<br />
GEORGIA 12.158 8.5 3.3<br />
OKLAHOMA 12,103 6.8 4.1<br />
VERMONT 11.599 8.6 7.1<br />
MAINE 11,423 78 5.3<br />
NORTH CAROLINA 31.314 7.6 4.3<br />
SOUTH DAKOTA 11.207 63 2.8<br />
LOUISIANA 11.015 6.9 2.6<br />
TENNESSEE 30.934 6.9 5.1<br />
NEW MEXICO 10,741 6.6 4.7<br />
MONTANA 30.728 6.1 1.1<br />
IDAHO 10,605 5.1 43<br />
KLNTUCKY 10.585 6.2 3.4<br />
SOUTH CAROLINA 10.514 7.1 4.0<br />
ALABAMA 10310 7.3 5.2<br />
ARKANSAS 10,380 8.1 4.6<br />
UTAH 10.166 5.7 4.6<br />
WEST VIRGINIA 10,112 5.3 4.2<br />
MISSISSIPPI 9.035 63 4.0<br />
Co,i,rti’hiC 1986. b Menu! Pubflshin’
P. 38, Figure 2—3<br />
.1<br />
• I<br />
HOW THE DOLLAR IS SPENT<br />
(Basedon What a Typical “Middk Class”Urban<br />
Familyof Fourwith AnnualEarnings ol $25,407<br />
Sps nl in Autumn. 1981)<br />
This is the last available update for this graph.<br />
The U.S.Governmenthas discontinued this<br />
statistical series.The graph will not be updated<br />
in the future.<br />
Souyre: Easedon figuresui MonthlyLQborRMesi, July1982<br />
P. 185,Figure 8-1<br />
P. 58, Figure3-1<br />
1985 TOTAL U.S. POPULATION —<br />
238.8 million<br />
48.3%in Civilian Labor Force<br />
51.7%not in Civilian Labor Force<br />
BUSINESS ORGANIZATIONS<br />
IN THE U.S. IN 1983<br />
U Coranons<br />
NUMBERS 10.1%<br />
SALES PROFITS<br />
Partnerships<br />
EJSole Proprietorships<br />
Source:SO! Badktht,Winter 1985-1986<br />
-1. 1%<br />
ht Co ysti C 1986, Merr Ill PublishingCo.<br />
(<br />
(<br />
(
P. 197 Figure 8—4<br />
DISTRiBUTION OF MEWS AND WOMEN’S JOBS<br />
BY OCCUPATION, 1982<br />
CRAFTWORKERS<br />
TRANSPORT EQUIPMENTOPERATORS<br />
LABORERS<br />
FARMERSAND FARM MANAGERS<br />
FARM LABORERSAND SUPERVISORS<br />
MANAGEkS AND ADMINISTRATORS<br />
OPERATIVES (checkers, assemblers.<br />
dressmakers, gas station attendants,<br />
packers,wrappers, painters. welders)<br />
PROFESSIONALAND TECHNICAL<br />
SALES L’ORKERS<br />
SERVICE WORt ERS<br />
CLERICAL<br />
PRIVATEHOUSEHOLDWORKERS<br />
, I -‘ 1 ! I I I I 1 I I I I I I<br />
1009080706050403020100% 102030405060708090100<br />
WOMEN MEN<br />
Source: U.S.DeparimernofCommerceandBureauci theCensus<br />
Copyright (‘ 1986,by Merrfll PublishingCo.<br />
r: rgwI frg and Prattle,, havethe publisherspermission toreproduce thispage. 9
P. 204, FIgure 8—6<br />
THE MINIMUMWAGE<br />
U<br />
£ C<br />
E<br />
S<br />
E<br />
C<br />
U<br />
C<br />
£<br />
5<br />
E<br />
C<br />
iii<br />
A. Minimum wage<br />
3.50<br />
3<br />
2.50<br />
1980 1982 1984<br />
Years<br />
1986<br />
B. MinimumwageadjustedForinflation<br />
3.rc<br />
3<br />
230<br />
I .<br />
2<br />
1940 1945 1950 1955 1960 1965<br />
Years<br />
1970 1975 980 1985 1990<br />
C. Minimum wageasa percent of averagemanul.cturing earnings<br />
30<br />
.40<br />
.3c<br />
__________<br />
3980 1982<br />
Years<br />
3985<br />
Source: SSiswriical 5u:iztks of theU.,st,I Siwes.Coio,i& Timesto ui,<br />
SMtu:ic 1 Abaroc: of theUnitadSlates<br />
Pesertt:<br />
CopyrIghtC 1986,by Merr<br />
Ill Publishing Co.<br />
II ‘ I ie this s a.<br />
(<br />
(<br />
(<br />
p
(<br />
P 218, FIgure 9-3<br />
BIWEEKLYPAYCHECKANDWITHHOLDINGSTATEMENT<br />
SMITH,SMITH,ANDSMITH<br />
ATTORNEYSATLAW<br />
Payto the<br />
Order of: —<br />
THE CENTRAL BANK<br />
Memo<br />
SAMYAMAGUCHI<br />
SIXHUNDREDNINETEEN_AND 64/100<br />
I<br />
212 2195903<br />
Number __________<br />
DATE 3ANUARY18<br />
id øuhj<br />
rTr<br />
.t..ur<br />
PLEASE DETACH AND RETAIN THIS PORTION<br />
AS YOUR RECORD OF EARNINGS AND DEDUCTIONS<br />
DATE J PA ED ‘.0 %0 EMP O MRS J MISC j CR 1’. J J<br />
I I I<br />
1:O1’86 I<br />
14;86<br />
619.64<br />
Dollars<br />
CHLC LMMR<br />
P 2,195,903<br />
I\S GROSS<br />
1 1 1 1<br />
1376 Co 320 800 00<br />
90 ;02 29j94 j 57 2O 619 64<br />
P’LDLkAL STATE J CIT J J RET 1 I B0 DS JOTHLR ET<br />
SamYamaguchi is a married taxpayer with no children who files a joint return. His bi<br />
weeklywage is $800.The amount of federal taxes deducted every two weeksis determined<br />
by tax tables supplied by the Internal Revenuesystem.<br />
Copyilgbi C 1986. by Merr*flPublishing Co.<br />
.1’ •• , ,, .,.<br />
I. . . ...
P. 221, Figure 9—4<br />
44<br />
SOURCESOF STATEANDLOCALREVENUES, 1984<br />
1J individual 1” 48<br />
I<br />
3.6c<br />
3.9’<br />
STATE<br />
Other<br />
income Taxes<br />
Propert Taxes<br />
Motor Vehiclesand<br />
Operators Licens<br />
Source: Go ,.ne,ual Fina,wu hi i983. ! 984<br />
SalesTaxes<br />
HigherEducation<br />
Utility Revenues<br />
InsuranceTaxes<br />
and Contributions<br />
Corporate Income Taxes<br />
Intergovernmental Revenues<br />
— it,’;;<br />
233 -j:lIli<br />
LOCAL<br />
CopyrightC $986.by MeriiH Publishing Co.<br />
L1rr of <strong>Economics</strong>:Pñnclples and Pmctlces havethe publisher’spennisalon to reproduce thispage.<br />
(<br />
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(..
(<br />
P. 244, FIgure 10—2<br />
THE CHANGING PATTERN OF STATE<br />
AND LOCALGOVERNMENT EXPENDITURES,<br />
1980- 1984 (BILLIONS OF $ 1984)<br />
(6 Ti1.<br />
$459.9<br />
Education<br />
Public Welfare 12 I2.4c 11 ::J<br />
Highways<br />
— Hospitals<br />
.k,terest on the Debi<br />
,ev, ed data based on Governmental Financesin 1980.1981. 1Q83-!984<br />
-‘ o.gc<br />
1980’ $984<br />
Source:Gov ’nme’nQ1 Fi,wncr5 n 1980-1981. 1983.1984<br />
__<br />
$503.3
P. 246—247,FIgure 10—3<br />
THEFEDERALBUDGET,FISCALYEAR1987*<br />
Individual<br />
Income Tax<br />
<strong>Social</strong> Insurance<br />
Taxesand<br />
Coninbutions<br />
RECEIPTS $850.4<br />
$143.6<br />
$38 .0<br />
$302.8<br />
Lowor: Office ManajemenlandBudget.Fcbruarv 1986<br />
$330.o<br />
$282.7<br />
$348.0<br />
Corporate $86.7 $105.2<br />
IncomeTax $27.4<br />
Excise Taxes<br />
Other<br />
$35.2<br />
$39.7<br />
$26.4<br />
$73.7<br />
EXPENDITURES $994.0<br />
propoaed in President Ronald Reagan’s Budgct Message to Congress, February 5, 3986<br />
Income Security<br />
National Defense<br />
Interest on Debt<br />
Health and Medicare<br />
E4ucation, Training,<br />
Employment.<br />
and <strong>Social</strong> Services<br />
Veterans’<br />
Benefitsand Services<br />
Other<br />
3986. by MereII Publishing Co.<br />
(<br />
(
CorporateIncomc Tax<br />
RECEIPTS EXPENDITURES<br />
Education,<br />
Training. Employment,<br />
& <strong>Social</strong> Seric s<br />
Benefits<br />
and Services<br />
Copyright C 1986,by Merrill Publishing Co.<br />
UsersoF<strong>Economics</strong>:Principks and Pi.cticrs hive she ubIIshers irrmiuion to itnoduce this wi e.<br />
19
P. 248, FIgure 10—4<br />
20<br />
FEDERALGOVERNMENTDEFICIT,1940-1985<br />
60<br />
40<br />
20<br />
0<br />
—20<br />
—40<br />
—60<br />
—80<br />
-100<br />
—120<br />
—140<br />
-160<br />
—180<br />
Z-200<br />
C —220<br />
—240<br />
E —260<br />
—280<br />
— 300<br />
—320<br />
— 340<br />
—360<br />
— 380<br />
Yeats<br />
1940 1945 1950 1955 3960 3965 1970 3975 1980 1985 1990<br />
Suurce: Ecunun,icReportof thePes deut. I98<br />
I<br />
0 Surplus<br />
0 Deficit<br />
Copyright C 1986 by Merrill PublishingCo.<br />
User, of <strong>Economics</strong>:Frincipks and Practices havethe publisher. permission to reproduce thispage.<br />
(<br />
(
vlit’,i th ii I) lI inenibtis in he to cheat oii plo<br />
tIlki 11)11qiu it.is. And, if ilit’ie .ii•i’ 01liei hull—cal -<br />
Pd)Lll eS of titIt put. ii is (lii 11 11(11 11)1 Ilit calit’l<br />
to 1:1)11111,1Ioi.iI vuiltl plI)(lUCt loll. Iin.ill liii ’ ,<br />
fact that many natioiis wt’rt. abic to i-educe<br />
their dematid fur oil made the downfall even<br />
more certain, in the end, the market forces of<br />
upptv and demand, along with the short term<br />
sdf-intercsts of the OPEC nations caused the<br />
di-umaik decline in oil prices.<br />
P. 494-496 POPULATION<br />
The rate of population vth gro is a concern of<br />
most countries. The United StalesBureau of the<br />
Censuscontinually makes population projec<br />
tions basedon researchsampling techniques.In<br />
1983,the CensusBureau made population pro<br />
jections to the ‘cat- 2000.Total U. S. population<br />
40<br />
will uist’ more th.un14.4 percent to over 267 mil<br />
lion. However, tlit’ most significant population<br />
chaiige will take place in the western portion of<br />
tile United States.The population there will rise<br />
4S percent. The Northeast will experiencesome<br />
decline, and the population of the Midwest will<br />
essentially slay the same.<br />
Three states will experience more than a 100<br />
percent increase in population over the period<br />
1980 to 2000. The ’ are Arizona, Nevada, and<br />
Wyoming. California will continue to be the<br />
most populous state with a projected population<br />
in 2000of 30,613,100.Texaswill move into sec<br />
ond place, followed by Florida, which will move<br />
up from seventhplace.<br />
The table below shows the projected popula<br />
tions for individual states.It also gives a break<br />
down of the changesin population rank. A map<br />
follows the table on the next page.<br />
PROJECTED POPULATION GROWTH IN THE UNITED-STATES 1980-2000<br />
POPULATION PROJECTIONS BY STATE<br />
PROJECTED PERCENT<br />
POPULATION CHANGE<br />
STATE 2000 FROM 1980 RANK IN 1980 RANK IN 2000<br />
ALA. 4415.3(X) +135 22 24<br />
ALASKA 630.700 + 573 50 49<br />
AR IZ. 5.582500 + 105.4 29 15<br />
ARK. 2,835.400 +24.1 33 32<br />
CAL. 30.613,100 +29.3 J I<br />
COL O 4,65hbO<br />
+61.2 28 23<br />
CONN. 3.062,400 —1.5 25 29<br />
DEL. 638.200 4.72 47 48<br />
FLA. 17.438,000 +79.0 7 3<br />
GA. 6.708.200 +22.8 13 I<br />
HAWAII 1.277.700 +32.4 39 42<br />
IDAHO 1.512.200 .4-60.2 41 39<br />
ILL. 11.187,500 —2.0 5 6 •<br />
IND. 5,679,200 ‘4.3.4 12 14<br />
IOWA 2.972,100 +2.0 27 30<br />
KANS. 2,494.400 +5.6 32 34<br />
KY. 4,399.900 20.2 23 25<br />
LA. 5,159,800 422.7 19 19<br />
ME. 1.308,000 + 16.3 38 . 4<br />
MD. 4,581,900 +8.7 18 22<br />
MASS. 5,490,400 +4.3 11 16<br />
MICH. 9,207,600 + 0.5 8 8<br />
MINN. 4,489,400 *10.1 22 23<br />
MISS. 2.939.200 .116.6 31 31<br />
MO. 5,080.000 +3.3 15 20<br />
MONT. 936,000 + 22.4 44 44<br />
NED. 1,661,900 +5.9 35 38<br />
Copyright C 1986.byMerrill Publishing Co.<br />
Users of Economke: P’rhwlpks aod Practices have the ,ubtlsher’s ,ermtuton to reiroduct this “e.<br />
(<br />
(<br />
(
1. Whatdoes the graph show?<br />
SKILLS WORKSHEET<br />
CHAPTER11<br />
Name __________________________________________ Class_____________ Date___________<br />
I GOVERNMENT INTHEUNITEDSTATESECONOMY<br />
READINGA GRAPH<br />
L<br />
Personal<br />
income tax<br />
4,<br />
1950I<br />
39.9% I<br />
As you know, taxes are transfers of incomefrom individualsand businessesto<br />
government.The graph belowdeals with taxes collectedby the federal<br />
government.Note the changingpercentagesof income contributed by the various<br />
typesof taxes. Study the the graph and answer the questions that follow.<br />
Corporate<br />
incometax<br />
2. Name someexamplesof “Other taxes.” ________________________________<br />
3. Whichtypeof taxprovidesthe governmentwith the largest percentageof its money?<br />
4. Were corporationsmore heavilytaxed in 1950or in 1986?Why?<br />
“P<br />
26.5%<br />
<strong>Social</strong><br />
Security<br />
I11.0 /c(<br />
Other<br />
taxes<br />
4,<br />
22.6%<br />
1960 44.0% 23.2% 15.9% 16.9%<br />
1970J<br />
1980<br />
46.9% ( 17.00/c ( 47.2%<br />
23.0% (13.1%I<br />
’ I12.5° I .5°,’o 30<br />
1986<br />
*1988<br />
J<br />
45.6% (8.1%I 37.1% I9.2%I<br />
J 43.0% ( 13.1%( 36.4% I•I<br />
EsumatebyL.7SN&WR EconomicUnit, assumrngpassageof tax-reformbill.<br />
Source:OfbceofManagement andBudget.<br />
5. Which type of tax increasedthe most between 1950and 1986?Why do you think this happened?<br />
S
(<br />
barrel. The sleep decline rdle ’cletl Ilk collapse<br />
of OPEC,the cartel that suecesthillv fsed inter<br />
national oil prices for tlw benefitof its 13nwrn<br />
ber nations for nearly IS years.<br />
OPEC’s success had been dramatic. In 1970,<br />
for exampk. the benchmark price for oil on in<br />
lernational markets was only $1.35 per barrel.<br />
The price ruse to $2.10 in 1973, and, after the<br />
Arab-Israeli war, promptly :rosc to $9.60 alter<br />
the Arab membersof OPECimposedan oil boy<br />
cott on nations that supported Israel. OPEC na<br />
tions then continued to raise the benchmark<br />
price until the “official” price of oil reached $34<br />
per barrel in 1983.<br />
The steep increase in oil prices, however, re<br />
quired more than announcements of new, and<br />
high ’:, “official” prices. In fact, OPEC was able<br />
to increase the price of oil only after it created<br />
an artificial shortage on international markets.<br />
This was accomplished by establishing produc<br />
tion ceilings for each of Its member nations. As<br />
long as the ceilings reduced the overall produc<br />
tion of oil by OPEC nations, prices would be<br />
forced up.<br />
While OPEC was able to cause a short-term<br />
increase in oil prices, two things began to hap<br />
pen. First, the demand for oil began to fall as<br />
oil-consuming nations cut back on their use of<br />
oil. For example, federal legislation in the<br />
United Stales set speed limits at 55 miles per<br />
hour to conserve gas, automakers were required<br />
to produce more fuel efficieni cars, and many<br />
consumers switched to smaller cars. Tempera<br />
tures in federal buildings were set to conserve<br />
fuel in both winter and summer, and many<br />
homeowners switched to wood and coal stoves<br />
for heat.<br />
Second, the supply of oil increased as higher<br />
prices made it profitable for other countries, in<br />
cluding Norway, the United States, Briiain, and<br />
Russia to produce more oil. As a result, the<br />
world production of oil increased from approx<br />
imately 55.9 million barrels per day in 1974 to<br />
623 billion in 1979.<br />
By the early 1980’s, the worldwide effects of<br />
increased supply and reduced demand were ev<br />
ident. OPEC was pressured to either lower the<br />
official price of oil, or cut their own production<br />
even more to offset the additional non-OPEC<br />
supply. At the same time, OPEC was having<br />
problems with some of its member nations.<br />
Several poorer countries (Nigeria, Ecuador, and<br />
Venezuela) were widely suspected of cheating<br />
on their quotas to increase their own oil reve<br />
nues. Other countries, such as Iran and Iraq,<br />
were at war and were exceeding their quotas to<br />
finance military expenditures. The burden,<br />
then, of reducing oil production fell on Saudi<br />
Arabia. This country reduced its own produc<br />
I<br />
-<br />
*1(111irO1fl ’ nearJ I U flU (lion na ie. .<br />
I9() to nearly 2 million in 1985.<br />
Overall, OPEC oil production fell from an es.<br />
timaled 31 million barrels per day in 1979 to l<br />
in 1985. While OPEC was able to prop up prices<br />
by withholding supply, the cost to them was in<br />
creasingly clear. In the early 1970’s, they pro.<br />
duced almost 60 percent of the world’s oil Sup.<br />
ply. By 1985, ii had fallen w nearly half that—.<br />
at 30 percent.<br />
Saudi Arabia desperately wanted OPEC and<br />
non.OPEC nations to agree on a new global<br />
price and reduce production to maintain prices.<br />
Since their own output levels had been dropped<br />
so low, the could not cut production further.<br />
However, when other nations—including OPEC<br />
members—failed to cooperate, Saudi Arabia<br />
formally abandoned their own production ceil<br />
ings and began to flood the world markets with<br />
oil.<br />
The impact on oil prices was dramatic.<br />
Prices that had been in the $27428 range in<br />
late 19 5 plunged to unth” $1’ barrel in early<br />
1986. While the) have rebounded a little since<br />
then, the flood of oil on world markets is sure<br />
to keep the price of oil well under $20 per bar<br />
rel for some time yet.<br />
Analysts offer several explanations as to why<br />
Saudi Arabia chose to break ranks and lead the<br />
co 1apse of oil prices. One explanation is that<br />
they had reduced their own production to such<br />
a low level that they could not aulàrd to reduce<br />
production an further. Ii is clear that Saudi<br />
Arabia fell that it was making considerable sac<br />
rifices that were benefiting other nations who<br />
chose to ignore production ceilings.<br />
Another explanation is that Saudi Arabia<br />
was becoming increasingly concerned over the<br />
possibility that Iran might defeat Iraq in the<br />
current war. A collapse of oil prices in 1985<br />
would make it more difficult for Iran to finance<br />
the war from the sale of oil. Since Saudi Arabia<br />
was more closely allied with Iraq than Iran,<br />
low oil prices might be of some consequence if<br />
the war continued.<br />
A third explanation offered is that Saudi Ara<br />
bia is trying to drive some marginal oil produc<br />
ers permanently out of business. If the price<br />
falls below $15 a barrel for very long, for ex<br />
ample, many countries will be forced to close<br />
their wells since it usually costs more than that<br />
to pump a barrel of oil out of the ground. Once<br />
the marginal producers are permanently out of<br />
the market, oil production can be restricted and<br />
the price of oil will increase.<br />
Regardless of the explanation, experts gener<br />
ally agree that the fall of OPEC was inevitable,<br />
if not overdue. Historically, cartels have a rec<br />
ord of success followed by failure, especially<br />
CcpyrtghtC 1956,b Merdil PublishingCo.<br />
Ua.is of <strong>Economics</strong>:PrincIpIe andFcHc.s have the publIshers permission to teproduce this page.<br />
‘9<br />
I
(<br />
PROJECTED PERCENT<br />
POPULATION CHANGE<br />
STATE 2000<br />
FROM 1980<br />
RANk IN 1980 RANk IN 2000<br />
HEy. 1,918.800 .140.1 43 36<br />
N.H. 1.363.500 448.1 42 40<br />
Ni. 7427.600 +0.9 9 9<br />
N.M. 3.727.300 .32.9 37 37<br />
NY. 14.990,200 — 34.6 2 4<br />
NC. 6,867.800 436.9 JO 10<br />
ND. 682.000 +45 46 47<br />
OHIO 10,356.800 —4.1 6 7<br />
OKLA. 3944500 +30.4 26 27<br />
ORE. 4,025.300 .52.9 30 26<br />
PA. 11,207,600 -5k 4 5<br />
LI. 925,800 —2.3 40 45<br />
S.C. 3.907.100 425.3 24 28<br />
S.D. 687.600 —0.4 45 46<br />
TENN. 5,419.600 4 18.1 37 17<br />
TEXAS 20.739,400 ‘+45.8 3 2<br />
UTAH 2,777.400 490.1 36 33<br />
VT. 625,000 +22.2 48 50<br />
VA. 6,389,400 419.5 14 12<br />
WASH. 5,832,500 +41.2 20 13<br />
W.VA. 2,067,700 +6.1 34 35<br />
WIS. 5.215.500 410.8 36 18<br />
WYO. 1.002,200 +112.9 . 49 43<br />
U.S. 267,461,600 418.1 — —<br />
Lowu: U.S.Depi.d Commeiu<br />
0 more than 40%<br />
o<br />
20-39%<br />
Co ’rT( ht C 1,86. blfMenill Publishing Co. IIII<br />
S
• .1<br />
No.6<br />
Thisisthesecondoftwoissuesdevotedto<br />
international economics. Itisbasedonthe<br />
NewYorkFed’spublicationTheBasicsof<br />
ForeignTradeandExchange .<br />
Differentcountriesusedifferentcurren<br />
cies.Whenbusinessesellmerchandise<br />
abroadtheygenerallywanttobepaidintheir<br />
ownmoney.Thus,exportingandimporting<br />
meanscurrenciesmustbeexchanged, and<br />
thatrequiresanexchangerate-thepriceof<br />
onenation’scurrencyintermsofanother.<br />
Let’sseehowexchangeratesarede<br />
termined.Thenwe’llseewhathappensto<br />
exchangerateswhennation settleuppay<br />
mentsdifferencesamongthemselves.<br />
Buyingsomeone else’smoney<br />
Supposeyou’reanAmericanwine<br />
wholesalerwhowantsto importFrenchwine.<br />
TheFrenchexporterquotesa priceof 5,000<br />
francsforyourorder.Youwillhaveto get<br />
francsfromyourbanker.<br />
Convertingdollarsintofrancsoran<br />
otherforeigncurrencyispartofa commercial<br />
bank’sjobbecausemanyofthesetransac<br />
tionsinvolvetheexchangeof bankdeposits.<br />
Butwheredoesthebankheregetfrancs?It<br />
buysthemintheforeignexchangemarket.<br />
Youcan’ttourtheforeignexchange<br />
marketasyoucana stockorcommodity<br />
market,becausebuyersandsellerstradeby<br />
telephone, ,cableandmail. IntheU.S.,the<br />
bulkofforeignexchangeactivitygoesthrough<br />
a smallnumberofAmericanandforeign<br />
banksanddealers,mostly inNewYorkCity,<br />
whotradewithotherbanksanddealersboth<br />
intheU.S.andabroad.<br />
Bankssatisfycustomerdemandsby<br />
buyingforeigncurrencyfromsomecustomers<br />
and sellingtoothers.Bankssometimesuse<br />
foreignexchangebrokers,ratherthandealing<br />
directlywitheachother,to savetimeandto<br />
remainanonymousuntilthetransactionis<br />
arranged.Anonymitypreventscompeting<br />
‘i aboutoneanother’s<br />
TheFederalReserve<br />
BankofNewYork<br />
April 1989<br />
Inadditiontocustomersandcompeti<br />
tors,NewYorkbanksdealwithforeignbanks.<br />
If NewYorkbanksasa groupdon’thave<br />
enoughofa foreigncurrencyorhavetoo<br />
much,theytradewithbanksabroad.For<br />
example,if francsareinshortsupply,a bank<br />
maycableorphonea buyorderto itsbranch<br />
orcorrespondent bankin Paris.<br />
Whenthewineimporterphoneshis<br />
bankerfor5,000francs,herequeststheybe<br />
paidtotheexporter.Thebankexecutesthe<br />
orderbycablingitsbranchorcorrespondent<br />
bankin Paristo pay5,000francsto thewine<br />
exporter.Theimportercouldhaverequested<br />
thatthefundsbedeposite directlyintothe<br />
exporter’sbankin France.Healsocouldhave<br />
boughta francdraftfromhisbankandmailed<br />
it tothewineexporterdirectly.Thedraftis an<br />
order-muchlikea check-bytheimporter’s<br />
bank,drawnandpayableata bankin Paris.<br />
Whatevermethodof paymentchosen,it<br />
resultsinthetransferof a bankdepositfroma<br />
U.S.bank’sbalanceata Parisbanktothe<br />
Frenchexporter’saccount.Nocurrencyis<br />
shipped.<br />
Ofcourse,thefirstthingthewineim<br />
porteraskedthebankerwasthecostof 5,000<br />
francs.Let’ssaythebankersaidthepriceof<br />
onefrancis20cents($1willbuy5 francs)and<br />
it willcosttheimporter$1,000to get5,000<br />
francsforimmediate,orspot,payment.The<br />
1to 5 exchangerateisthepriceofthedollar<br />
intermsofthefranc. Likeotherprices,it is<br />
determinedbysupplyand demand.The<br />
supplyanddemandforfrancsisdetermined<br />
byfactorslikeproductioncostsin France<br />
relativeto U.S.costs,andbyU.S.demandfor<br />
FrenchgoodsandFrenchdemandforours.<br />
Americanimportersof Frenchgoods<br />
buyfrancswithdollars.SodoAmerican<br />
touristsgoingto France,Americansplanning<br />
to investthere,thoseowingmoneyto the<br />
Frenchandspeculatorswhoexpecto sell<br />
francslaterata higherprice.Ontheother<br />
sideoftheAtlantic,Frenchmen,whodotheir<br />
localbusinessinfrancs,needdollarsto pay<br />
fortheirimportsofAmericangoods,to make<br />
offdebthereandspeculate.
If U.S.demandforfrancsequalsFrench<br />
demandfordollars,therewillbenochangein<br />
theexchangerate;it willstayat$1for5 francs.<br />
Butif Americansincreasetheirdemandfor<br />
Frenchgoodsandneedmorefrancswhilethe<br />
demandfordollarsdoesnotgoup,thedollar<br />
priceoffrancswillbehigher,sayperhaps,<br />
$1.10for5francs.TheAmericanwineimporter<br />
thenwouldhaveto pay$1,100to buy5,000<br />
francs.<br />
Coveryourself...<br />
Theimportercertaintlydoesn’twantto<br />
paythebillnowtoavoida possibleriseinthe<br />
exchangerate.Thatwouldtieupmoney,which<br />
isexpensiveintermseitherof interesthat<br />
couldbeearnedorcurrentransactionsthat<br />
couldbefinanced.Andtheprospectof having<br />
to paymorethanexpecte dueto anincrease<br />
intherateaddsanelementof riskfortheim<br />
porter. Toavoidanunexpectedcostincrease,<br />
whichwouldcutintoprofitsorperhapscausea<br />
loss,theimportercangetprotection,orcover,<br />
byordering5,000francsnowforuseatthetime<br />
paymenthastobemade.This iscalleda for<br />
wardtransaction.Whenthewineisdelivered,<br />
theimporterpaysthebankforthefrancsor<br />
deredearlierandthenhasthemsenttothe<br />
exporter.<br />
Differentpeopleinthemarketwillhave<br />
differentexpectationsabouthefranc-dollarex<br />
changerateofthefuture.Someimportersof<br />
French-madeproductsmaybelievethatthe<br />
spotratewon’tchange.Othersmightthinkthe<br />
ratewilldrop.Thus,everyoneneedingfrancs<br />
doesn’tgointothemarketforforwardexchange<br />
to covertheirtransactions.If,onbalance,<br />
marketexpectationsarefora raterise,buyers<br />
offorwardexchangewillpaya bitmore,ora<br />
Sometimestheirtransactionswamptheex<br />
changerateproducedbynormaltrade<br />
transactions.<br />
Exchangeratescangodownaswellas<br />
up. Inthiscase,theexportercansuffera loss.<br />
Let’slookata U.S.machineryproducerselling<br />
farmequipment.Toearnthe$100,000it costs<br />
to producea machine,includingprofit,the<br />
producerwouldchargea Frenchimporter<br />
500,000francsif francsare20centsinthespot<br />
market.<br />
Ifthedollar-francexchangeratefell<br />
betweenthetimetheFrenchimporterplaced<br />
theorderandthetimepaymentisdue,the<br />
exporter’sprofitcouldbecutor a losssuf<br />
fered. Ifthefrancfellto 15cents,theexporter<br />
wouldreceive500,000francsworthonly<br />
$75,000(15centsx 500,000)ratherthan<br />
$100,000(20centsx 500,000).<br />
Tocoversucha risk,theexportercould<br />
arrangeto sellfrancsintheforwardexchange<br />
marketatthetimethecontractis madewiththe<br />
Frenchimporter.If marketsentimentisthatthe<br />
ratewillfall,theexporterwouldhaveto sell<br />
francsforwardat a discount,thatis,belowthe<br />
spotrate. Iftheforwardfrancis,say,at 19<br />
cents,theexporter’sreceiptswouldbe$95,000<br />
(19centsx 500,000).Tooffsetthe$5,000cost<br />
ofthe.forwardtransaction, theexportercould<br />
raisethesellingpricefrom500,000francsto<br />
526,320francswhich,whensoldontheforward<br />
exchangemarket,wouldbring$100,000<br />
(526,320x 19cents= $100,000).Needlessto<br />
say,theexporterunstheriskof losingthe<br />
Frenchcustomerto a competitorbyadding<br />
26,320francstothepriceoriginallyplanned<br />
beforelearningoftheforwarddiscount.<br />
Commercial banksandotherforeign<br />
exchangedealersholdingforeigncurrencies<br />
covertheirexchangerisksintheforwardmar<br />
ket. Sodopurchasersofforeignsecurities.For<br />
premium,abovethespotrate.Thesizeofthe example,if a U.S.investorboughta 90-daybill<br />
premiumvarieswiththeoutlook-larger whena issuedbytheBritishgovernment,heorshe<br />
bigriseisexpected,smallerwhenlessofa rise wouldwantto makesurethatwhenit matures,<br />
is expected.Thoseexpectingthefuturespot thepoundsreceivedhadnotlostsomeoftheir<br />
rateto behigherthanindicatedbytheforward valuebecauseofa dropinthedollar-pound<br />
premiumwillbewillingto paythepremiumnow. exchangerate. Forprotection, theinvestor<br />
Therearespeculatorsinthemarketwhose couldsellpoundsfor90days’futuredeliveryat<br />
businessisanticipatingthatthefuturespotrate thetimethesecuritywasbrought. Thepro<br />
willdifferfromcurrentmarketexpectations. ceedsfromthematuredBritishsecuritywould
thepoundsdelivered.Thedifferencebe buyingandsellingofthoseguessingatsuch<br />
tweentheinterestratereceivedonthesecurity thingsasfuturegovernmental policies,espe<br />
andanydiscountonforwardpoundsisthe ciallyastheyaffectinflationrates.Inrecent<br />
investor’sprofit.<br />
yearsthesellingof largeamountsof a currency<br />
froma countryexperiencingheightenedinfla<br />
...becauseratesswing.<br />
tionto onewithmorestablepricebehaviorhas<br />
hada destabilizinginfluenceonforeignex<br />
If GreatBritain,forexample,hasa changemarkets.<br />
balance-of-payments deficit,marketforceswill Themovementof exchangeratescould<br />
causeitsexchangeratetofallbecausepounds wellspellthedifferencebetweenprofitandloss<br />
willpileupinthehandsofothers.Sincethe forinternational tradersandinvestors.Wide<br />
supplyofpoundswillbegreaterthanthede fluctuationsinexchangeratessuggesta<br />
mand,thepriceofthepoundwillfallandthe greaterdegreeof risk. Andhighriskwilleither<br />
priceofothercurrencieswillrise. Theopposite discouragepeoplefromenteringintointerna<br />
occurswhenBritainrunsa surpluswhenfor tionaltransactionsorcausepricesto risesub<br />
eignmoney-flows intoGreatBritainexceed stantiallyto financethecoveringof risk. In<br />
whatit paysout. Inthatcase,thedemandfor eithercase,worldtradeandinvestmentwould<br />
poundsexceedsthesupplyandthepriceof sufferandthebenefitsofcomparativeadvan<br />
poundsgoesupwhilepricesofothercurrencies tagewouldbelessened.<br />
fall. OnbehalfoftheFederalReserveSys<br />
Expectations inforeignexchangemar temandtheUnitedStatesTreasury,theFed<br />
ketscancauseinternational tradersandinves eralReserveBankof NewYorkintervenesin<br />
torstorescheduletheirborrowingandlending, theforeignexchangemarketwhenit becomes<br />
whichwillalsocauseexchangeratesto fluctu disorderly.TheFedbuysorsellsdollarsto<br />
ate. Ifafallinthepriceofthepoundisex moderatethedollar’sfluctuationsagainstother<br />
pected,foreignersdelaypayingtheirpound currencies.Foreigngovernmentsalsointer<br />
debts.Theywouldalsorenewoutstanding veneintheforeignexchangemarketo counter<br />
linesofcreditinpounds.Ineachcasethey disorderlyconditions.However,whengovern<br />
hopetoeventuallypaybackpoundsthathave mentsintervene, theyarepledgednotto ma<br />
cheapened.Atthesametime,Britishbusi nipulateexchangeratesto gainanunfaircom<br />
nesseswouldtryto paytheirforeigndebts petitiveadvantage.<br />
promptlybecauselower-pricedpoundswould<br />
increaseforeignexchangecosts.Thesesocalledleadsandlags”have,attimes,played<br />
animportant roleinforeignexchangemarkets.<br />
Therearealsoday-to-dayfluctuations INTERNATIONAL ECONOMICSisa multime<br />
duetoseasonalandtemporaryfactorsrather diapackagedesignedforseniorhighschool<br />
thanbalance-ofpaymentspositions.Exports andfreshmancollegestudents.It containstwo<br />
sometimesbunchatcertaintimesoftheyear. full-colorfilmstripswithtwoseven-minuteaudio<br />
Andsometimesa countryreceiveslargepay cassettes-bothwithaudibleand inaudiblepulsing.<br />
mentsfromoverseasdueperhapsto a corpora<br />
tionsendingprofitsbackto itshomecountry.<br />
Whatever thecauseofthebulgeinreceipts,the<br />
priceoftheforeigncurrencyweakensbecause<br />
it isbeingsold. Similarfactorsworkinthe<br />
oppositedirection.Aseasonalburstof imports Theprogramprovidesclear,easy-to-under<br />
orpaymentsmadeabroadwillstrengthenthe standbackgroundinformationpluslesson<br />
foreigncurrencyinvolvedbecauseit is being plans,a glossaryandfourspirit-duplication<br />
bought.<br />
activitymasters.Cost $35.95.Orderscanbe<br />
Exchangeratesarealsoaffectedbythe<br />
senttotheaddressonthebackcover.<br />
I
StudentActivity<br />
X<br />
x50O<br />
X = 100dollars<br />
In question5 , studentscansetup thesametypeof<br />
quationcomparingfrancstopounds:<br />
Xpounds .5 pounds<br />
1,000francs . 5francs<br />
x =<br />
5<br />
X = 100pounds<br />
Solongasoneratiobetweentwocurrenciesis<br />
(.5 ) pounds<br />
known(5francs) , anyotheratiobetweenthosesame<br />
twocurrenciescanbeeasilyfoundasshownabove.<br />
FederalReserveBankofNewYork<br />
PublicInformationDepartment<br />
33LibertyStreet<br />
NewYork,N.Y.10045<br />
Editors: DanielRosen<br />
RichardD.C.Trainer<br />
country FOREIGNEXCHANGESPOTRATE<br />
(Indollars) (inunitsofforeignexchange)<br />
Inthisactivity,studentsareaskedtoconvertdollar<br />
France 1franc. .20<br />
valuestoforeigncurrenciesandviceversà.Theabilityto<br />
makethesekindsof conversions is important to<br />
Germany 1mark .40<br />
every<br />
studentwhomaysomedaytraveloutsidetheU.S.either<br />
on business,forpersonalpleasureor dueto military<br />
assignment.Youmaywantto mentionthisinorderto<br />
furthermotivatestudentsduringtheactivity.<br />
If studentsfind it difficulto makethe proper<br />
conversions, youmighthelpthemsetupthe“problem”in<br />
simplealgebraicterms.Forexample,In question1,<br />
studentshouldsetupanalgebraicequationcomparing<br />
francstodollars:<br />
Xdollars .20 dollar<br />
=<br />
500francs 1franc<br />
$1=<br />
5francs<br />
$1 = 2 1/2marks<br />
Spain lpeseta=.40<br />
Enqland ipound= .40 $1 100pesetas<br />
$1 = 1/2pound<br />
Youjustreturnedfroma fournationEuropean<br />
tourandaretallyingyourexpenses.Howmuch<br />
didthefollowingactivitiescostindollars?<br />
Foreign<br />
ExchangeValues<br />
Dollar Value<br />
1.Threemealsatexclusive<br />
Parisianrestaurants 500francs &IQQ<br />
2. Rentinga Mercedes in<br />
Germanyandmotonng<br />
throughtheRhinetand<br />
900marks 1Q<br />
3.Purchaseofa leather<br />
coatandjacketinSpain 6,000pesetas $Q<br />
4. RailtourofEngland,<br />
WalesandScotland 45pounds Q<br />
Total 5610<br />
5.AflerParis,youtouredLondon.OnThreadneedle Streetyourealize<br />
youstillhad1,000francsinyourwalletsoyouexchanged themfor<br />
poundsatthelocalbank.<br />
Howmanypoundsdidyoureceive? 100pounds<br />
6.Toexpressyourappreciation totheSpanishtailorwhocreatedyour<br />
leathercoatandjacket.yougavehima 100pesetanotetip.After<br />
leavingthestore,yourealizewhatyouactuallygavehimwasa 100<br />
marknote.<br />
Howmuchofa tipdidthatrepresent inpesetas? 4.000<br />
andindollars? 40dollars<br />
I
I<br />
WhatWe:,<br />
•‘ BuyandSell<br />
•<br />
e<br />
S<br />
10Biggest ImpOrts<br />
Petroleum .... .:. .,.<br />
.<br />
. . .<br />
Motorvehicles,parts... .<br />
In1981. .<br />
$78.5bil.<br />
.<br />
.. . 27.4bit.<br />
Iron,steel $12.1bit.<br />
Electricatmachinery‘parts. ... $ 9.4bit.<br />
TV,radio,soundproducts... $ 9.2bit.<br />
Clothing $ 8.0bit.<br />
Nonferrousmetals $ 7.1bit.<br />
Naturalgas<br />
$ 5.8bit.<br />
Cbemicats $ 5.6bit.<br />
purpose Special machinery.. $ 5.3bit.<br />
An 10Biggest Exports<br />
Motorvehicles,parts $16.2bit.<br />
Aircraft,parts $14.7bit.<br />
Industrialmachinery $11.5bit.<br />
Electncalmachinery $11.5bit.<br />
Officemachinery, computers $ 9.8bit.<br />
Power-generating machinery $ 9.5bit.<br />
Chemicals $ 9.2bit.<br />
Corn $ 8.0bit.<br />
Wheat $ 7.8bit.<br />
Soybeans $ 6.2bit.<br />
4
k a EU3tInIIiOTII coiporatlon?(geeGlo y of Ecvnor c Thins)Whydoe. thecartoonistportraythee’•<br />
theaedglng .Uegian to thecountrythatgivesthemTM the bestdeal”? In theopinionofDanielP.Moynth , fon r<br />
U& Aitha sdor soIndia,the amitinatlonalcorporation ‘ii arguablythe most creativekitemationalinstitutI of<br />
the century.”t the multinationalhas, at tines, provedto be dinvptlveto foreigneconomies.Whatire the<br />
po lM endnegativeaspectsof a multinationalcorporation?
QUESTIONBANK<br />
UNITIV<br />
U.S.andtheWorld<br />
(1) SpecIalization and divisionof laborby nationsfollowedby increasing<br />
-<br />
international tradeprobablywould:<br />
A) increasetotalworldproduction ofwantedgoodsandservices<br />
B) eliminatedifferences in standardsof livingamongnations<br />
C) increasethelikelihood of world-wide unemployment<br />
D) lowerlivingstandardsin thewealthynations<br />
(2) If U.S.farmoutputremainsthesamehowwillseveralyearsof badweather<br />
inEuropeandtheSovietUnionaffectAmericanfoodprices?<br />
A) raisethem<br />
B) decreasethem<br />
C) makeno change<br />
D) cannotbe determined<br />
(3) “Americans area mixed-upeople.Everyoneknowsthatbaseballis farless<br />
necessarythanfoodand steel.Yet theypayballplayersa lotmorethan<br />
farmersandsteelworkers.” Why?<br />
A) Theemployersof theballplayersaremonopolists<br />
B) Ballplayersarereallyentertainers ratherthanproducers<br />
C) Therearefewerprofessional ballplayersthanfarmersor<br />
steelworkers<br />
D) Goodballplayersarescarcecomparedto thedemandfortheir<br />
services<br />
(4) Rapidlygrowingeconomiesalwayshave<br />
A) a slowrateof inflation<br />
B) a highrateof investment<br />
C) a lowrateof population growth<br />
D) a rapidrateof population growth<br />
(5) Whichbest illustratesthe applicationof the ideaof laissez-faire to<br />
international trade?<br />
A) a nationencouragesitsownexportswhilediscouraging imports<br />
B) nationsrefuseto tradewithanyoneexcepttheirallies<br />
C nationseliminatequotasandtariffson importsandexports<br />
D a wealthynationanda poornationjointogetheras trading<br />
partners<br />
/
(6) In whichrespectdoes the economyof the SovietUniondifferfrom the<br />
economyof theUnitedStates?<br />
A) emphasison technological<br />
progress<br />
B) useofmoneyas a mediumof exchange<br />
C) emphasisgivento theproblemof continualeconomicgrowth<br />
0) mannerof decidingwhichgoodsandserviceshallbe produced<br />
(7) Whichsituationrepresentedan attemptto put the economictheoryof<br />
comparative advantageintopractice?<br />
A) creationof theEuropeanCommonMarket<br />
B) placementof an embargon UnitedStatesgrainsalesto the<br />
SovietUnion<br />
C) development of a nationalpolicyof economicself-sufficiency<br />
D) establishment of theNorthAtlanticTreatyOrganization (NATO)<br />
(8) Whichproblemis cotrwon to theUnitedStatesandto mostof theindustrial<br />
nationsof theworld?<br />
A) littlefluctuation in thevalueof thecurrencyin eachnation<br />
B) energyneedswhicharegreaterthanpresentresources<br />
C) unstablepoliticalconditions<br />
0) a decreasing standardof living<br />
(9) Most capitalistscriticizethe economicsystemsin communistcountries<br />
becauseit<br />
A) overemphasizes theproduction of consumergoods<br />
B) requirestoomuchdependence on foreignimports<br />
C) payswagesthataretoohighforthequalityof workmanship<br />
0) provideslittleincentiveto improvemethodsof production<br />
(10)Whichisa globaleffectof thegrowthof technology?<br />
A) Economicactivityhasbecomemoredependenton domesticnatural<br />
resources<br />
B) International cooperation hasbrokendown<br />
C) Culturalisolationhasbecomeincreasingly difficulto maintain<br />
0) Governments viewnationalism as an obstacleto progress<br />
(11)In most nationsof the world,the long-termeffectof the Industrial<br />
Revolution<br />
hasbeento<br />
A) strengthen theextendedfamilystructure<br />
B) placewomenin a second-class position<br />
C) encourageeducationandincreaseliteracyrates<br />
0) increasepoverty<br />
(12)Whichbestcharacterized theUnitedStatestradegapin theearly1980’s?<br />
A) Thedollardeclinedin value<br />
B) Retailsalesdeclinedmorethantheproduction of goods<br />
C) The NationalGovernment’s expenditures were greaterthan it’s<br />
income<br />
0) Importsexceededexports
(13)Whichstatementconcerningproductionand use of oil and gas is more<br />
accurate?<br />
A) TheUnitedStatesenergyuseis consistent withItscurrent<br />
energyresources<br />
B) Energyuseisoutof balancewithenergyproductioninmostareas<br />
of theworld<br />
C) Energyresourceshaveexceededneedin thepasttenyears<br />
D) TheMiddleEast’sreputation as an oil-producing regionis not<br />
- -<br />
justifiedby thefacts<br />
(14)A negativeffectof theincreasing dependence of industrialized nationson<br />
automation hasbeen<br />
A) an increasein therateof taxation<br />
B) an increaseInthecostof production<br />
C) a lossof jobsforunskilledworkers<br />
D) a declinein theliteracyrate<br />
(15)The oil—producing nationshave been able to raisethe priceof oil by<br />
workingtogetherto controlthe supplyof oil. What lessonmight<br />
copper-producing nationslearn from the actionsof the oil-producing<br />
nations?<br />
A) refuseto sellanycopperto oil-producing nations<br />
B) forman organization of copperproducersto controlthepriceof<br />
thismineral<br />
C) encourageforeigninvestment to developotherresources<br />
D) competewithoneanotherto raiseprices<br />
(16)A basicdifference betweencomunismandcapitalismis that,in a communist<br />
economicsystem<br />
A) thereis a smalldemandforconsumergoods<br />
B) majorindustries areunderthedirectionof laborunions<br />
C) industryplanningis controlled by thegovernment<br />
0) monopolies areillegal<br />
(17)Whichhypothesisis most clearlysupportedby the populationgrowthof<br />
modernindustrial<br />
societiesoverthepastfifteenyears?<br />
A) themorethatpeoplecanaffordchildren,themorechildrenthey<br />
tendto have<br />
B) largefamiliesareas necessaryin an industrial societyas they<br />
wereina preindustrial society<br />
C) theamountof foodavailableis directlyrelatedto population<br />
growth<br />
D) peoplewithhigherincomeandeducational levelstendto have<br />
smallerfamilies<br />
(18)In a comparison of theeconomicsystemof theUnitedStatesandtheSoviet<br />
Union,whichhasbeenmostcharacteristic of theUnitedStatesonly?<br />
A) expansionof theproductive capacityof thenation
B) reductionof thenumberof hoursandtheinsecurity of theworker<br />
C) raisingof literacyandculturalevels<br />
0) emphasison privateownership<br />
(19)Whichisgenerallycharacteristic of a nationundergoing theprocessof<br />
industrialization?<br />
A) lessopportunity forsocialmobility<br />
B) conflictsbetweenmodernideasandtraditional waysof life<br />
-<br />
- - C) shiftsin thepopulation fromurbanto ruralareas<br />
D) Increased relianceon theextendedfamilyto supplysociety’s<br />
basicneeds<br />
(20)The longlinesof consumerswaitingoutsidemanystoresin Russiatellus<br />
thatmanyconsumergoodsareprobably:<br />
A) pricedtoolow<br />
B) ingreatsupply<br />
C) notin demand<br />
0) pricedtoohigh<br />
(21)Thereare many differenteconomicsystemsin the world. Whichis the<br />
problemtheyallhavein common?<br />
A) peoplewantmorethancanbe produced<br />
B) bigbusinesses aretoopowerful<br />
C) laborunionsaretoopowerful<br />
0) farmersareproducingtoomuch<br />
(22)Which of the followingis the most importantdifferencebetweenthe<br />
economicsystemof the UnitedStatesand the economicsystemof Soviet<br />
Russia?<br />
A) wagesandsalariesaremuchmoreequalin Russiathantheyarein<br />
theU.S.<br />
B) thegovernment hasnothingto do withtheeconomyin theU.S.<br />
C) mostof thefactories, farmsandequipmentareownedby the<br />
governmentinRussia<br />
0) Theeconomyof Russiahasalwaysgrownmoreslowlythanthe<br />
economyof theUnitedStates<br />
(23)In a capitalisteconomicsystem,suchas the UnitedStates,who has the<br />
mostinfluencein decidingwhatwillbe produced?<br />
A) laborunions<br />
B) thefederalgovernment<br />
C) consumers<br />
0) businessmen<br />
(24)Vinelandis a countryin whichthe governmentownsmajorindustries, such<br />
as railroadsand elr ctric powercompanies.Privatecitizensown other
industries suchas farmsandshoefactories.Peoplearepaidaccordingto<br />
howgooda Jobtheyhave,but thegovernmenthelpsthe poorandgenerally<br />
paysformedicalcareandschooling.Vinelandis:<br />
A) <strong>Social</strong>istic<br />
B) Conmunistic<br />
C) Capitalistic<br />
D) fascistic<br />
(25)When Con,nunist Chinabuildsa canalentirelywith hand labor,we can<br />
probablyassumethat:<br />
A) capitalis relatively scarcethere<br />
B) canalsbuiltby handarebetter<br />
C) laborisrelatively scarcethere<br />
D) theyhavean abundanceof naturalresources<br />
(26)Ifwe wereimportingmostof ourtransistorradiosfromJapan,an increase<br />
in the tariffon all transistoradiosimportedin the UnitedStates<br />
probablywould:<br />
A) Makeno difference to us becausewe couldgettransistor radios<br />
fromothercountries<br />
B) Increasethetotalnumberof jobsin theeconomy<br />
C) Makeus paymorefortransistor radios<br />
D) Maketransistor radiosmoreimportanto us,becausewe would<br />
probablyhaveto getalongwithou them<br />
(27)Bushlandis a countryinwhichthegovernmentownsallthe industries and<br />
thefarms.Production andwagesaresetby thegovernment.Thegovernment<br />
provideseducation,child care and medicalcare for all the people.<br />
Bushlandis a:<br />
A) marketeconomy<br />
B) mixedeconomy<br />
C) comandeconomy<br />
D) traditional economy<br />
*(28)Grassland is a countryinwhichthereis verylittlegovernment ownership<br />
of farmsandbusinesses.Peoplemay trainforjobsandstartbusinesses as<br />
besttheycan. The governmentdoesnotusuallycontrolpricesandwages.<br />
Grasslandis<br />
1) Coninunistic<br />
2) Capitalistic<br />
3) <strong>Social</strong>istic<br />
4) Cooperative<br />
*(29)Thevalueof theU.S.dollardependsupon:<br />
1) Howmuchgoldandsilverthegovernment owns<br />
2) Howmuchitcoststo manufacture money<br />
3) Whatis happeningto priceson thestockmarket<br />
4) Howmuchyoucanbuywitha dollar
*(30)Ifa hightariffwereplacedon steelshippedintotheU.S.<br />
1) Thepriceof steelwouldgo down<br />
2) Foreigners wouldbuymoregoodsfromtheU.S.<br />
3) AmerIcanreservesof ironorewouldlastlonger<br />
4) Thepriceof steelwouldgo up<br />
*(31)Whjch Ismoreclearlya characteristic of capitalism thanof socialism?<br />
1) limitedeconomicompetition<br />
2) privateownershipof businesses forprivateprofit<br />
3) politicaleadership by electedofficials<br />
4) government controlof themeansof production<br />
*(32)Jndeveloping nations,themajorobstacleto industrialization is usually<br />
a lackof<br />
1) investment<br />
capital<br />
2) watertransportation<br />
3) manuallabor<br />
4) extensivelandresources<br />
*(33)Jfa writerwishedto portraytheU.S.economicsystemasmoreeffective<br />
than that of the SovietUnion,the writercouldbest comparethe two<br />
nations’<br />
1) agricultural productivity<br />
2) unemployment rates<br />
3) provisionof freemedicalcare<br />
4) provisionof government-sponsored housing<br />
*(34)Anationhasa favorablebalanceof tradeif it<br />
1) sellsallof theproductsitmanufactures<br />
2) buysmostof itsproductsfromfriendlynations<br />
3) exportsmorethanit imports<br />
4) heavilytaxesitsexports<br />
*(35)Jna capitalist<br />
economy,thebasicreasonforstartinga businessis to<br />
1) makea profit<br />
2) providea vitalsocialservice<br />
3) providejobsto workers<br />
4) helpthegovernment meetitseconomicgoals<br />
*(36)IntheU.S.,manypeopleareopposedto drillingforoilin thewatersoff<br />
thecoastof theU.S.because<br />
1) thedemandforoilis decreasing<br />
2) thehealthof theworkersdrillingforoilmaybe harmed<br />
3) theremaybe harmfuleffectsto theenvironnient<br />
4) itmayencouragemorepeopleto useoilforheating
*(37)Whfch Isan advantageof livinginan ageof computers?<br />
1 Largeamountsof information canbe processedquickly<br />
2 Computerization helpsto reduceunemployment<br />
3 Theuseof computershascreateda morepersonalized society<br />
4) Workershavea greatersenseof self-esteem<br />
*(38)Theconomyof theSovietUniondiffersmostfromtheeconomyof theUS.<br />
in that,In theSovietUnion<br />
1) allworkersreceivethesamewages<br />
2) pricesarecontrolled by theworkers<br />
3) thegovernment determines whatis to be produced<br />
4) workingconditions aresuperiorto thoseIn theU.S.<br />
*(39)Whichactionby a nationwouldbe mostlikelyto reduceitstradedeficit?<br />
1) eliminating ll strategicexports<br />
2) increasing exportsandreducingimports<br />
3) increasing taxeson exports<br />
4) loweringthequalityof exportedgoods<br />
ad e BetweentheUnitedStatesandThePeople’sRepublicof China1972—1974<br />
— = Value<br />
Exportsto China<br />
Value importsFrom China<br />
I44 MIL<br />
U.S. of<br />
of U.S.<br />
1972<br />
1973<br />
0*32 NIL.<br />
0 64<br />
—<br />
1974<br />
•øc’ im .iU 3 iØ UL<br />
Usethisinformation to answerquestions40-43.<br />
—<br />
$% MIL<br />
‘LW ‘‘ .1LD<br />
(40)Themostvalidconclusion thatcanbe drawnfromtheinformation in the<br />
graphis that<br />
A) In 1974,theU.S.exportsweremorethantentimesgreaterthan<br />
itsimportsfromChina<br />
B) Therapidgrowthof tradebetweentheU.S.andChinais the<br />
resultof worldwideinflation<br />
C) Chinais notinterested in increasing exportsto theU.S.<br />
D) Iftherateof growthof traderemainsthesame,Chinawillsoon<br />
havea favorablebalanceof<br />
tradewiththeUnitedStates
(41)Whichproductmost likelyaccountsfor the bulkof the U.S.exportsto<br />
China?<br />
A) automobiles<br />
B) farmcornodities<br />
C) electrical appliances<br />
D) clothing<br />
(42)Thedatainthegraphreflectstherecentchangein<br />
A) tariffratesby China<br />
B) relationsbetweentheUnitedStatesandChina<br />
C) UnitedStatesproductivity<br />
D) Worldeconomiconditions dueto inflation<br />
(43)In futureyears,Chinain its relationswiththe UnitedStateswillmost<br />
probablybe interested in<br />
A usingtradeasa meansof introducing politicalphilosophy<br />
B increasing theamountof imports<br />
C) exportingheavymachinery<br />
D) establishing a morefavorablebalanceof trade
1) anytaxon Imports<br />
2) an unfavorable balanceof trade<br />
MATCHING<br />
3) abilityof onenationto produce<br />
a productat a lowercostthanother<br />
nation<br />
4) a recordof allpaymentsmadefrom<br />
onenationto anothernation<br />
5) abilityof onenationto produce<br />
an itemat a loweropportunity cost<br />
6) a lawthatcutsoffimportsfromand<br />
exportsto specificountries<br />
7) a reductionof thevalueof<br />
a nation’scurrency<br />
8) thepriceof onenation’scurrency<br />
in relationto thecurrencyof<br />
anothernation<br />
MATCHING<br />
1) a conditionwhena nation’sbirthrate<br />
isthesameas itsdeathrate<br />
2) theaveragenumberofyearsa<br />
personis likelyto live<br />
3) thenumberof peoplepersquaremile<br />
ina givenarea<br />
4) an international businessorganization<br />
suchas OPEC<br />
5) an international businessorganization<br />
thattriesto assistunderdeveloped<br />
nations<br />
6) an Illegalunderground activity<br />
7) a tradeorganization of western<br />
Europeanations<br />
8) a government policyadvocatingthe<br />
liftingof traderestrictions<br />
a. absoluteadvantage<br />
b. comparative advantage<br />
c. balanceof payments<br />
d. devaluation - -<br />
e. tradedeficit<br />
f. embargo<br />
g. foreignexchangerate<br />
h. tariff<br />
a. worldbank<br />
b. cartel<br />
c. blackmarket<br />
d. freetrade<br />
e. comon market<br />
f. lifeexpectancy<br />
g. zeropopulation growth<br />
h. population density
ESSAYQUESTION<br />
1) DurIngthe 1970’sand 1980’s,manyof the lessdevelopedcountrieshave<br />
beenat war. ThesecountriesInclude: El Salvador,Honduras,Nicaragua,<br />
Iran,Iraqand Cambodia.Discussthe effectthesewarshavehad on the<br />
possibilities foreconomicdevelopment in anytwoof theabove.<br />
2) Imagineyou havebeenelectedmayorof a city in whichthereare many<br />
severelydepressedneighborhoods.To improveconditionsIn these- neighborhoods you decideto use thesamemethodsusedby<br />
plannersin Tess<br />
developednations.Explainthe methodsyou<br />
woulduse and why you feel<br />
thesewouldbe themosteffective.<br />
3) A primaryreasondevelopedcountrieshavea<br />
relativelyhealthyeconomyis<br />
becausetheyhavea<br />
goodeducationsystem. Explainhow a good education<br />
systemcouldhelptheeconomiesof<br />
lesserdevelopednations.<br />
4) A goodcommunication networkand accessto recenttechnological advances<br />
areessentialto a healthyeconomy.Nametworecen technological advances<br />
anddescribehowtheyhelpa nation’seconomyandimprovetrade.<br />
5) Uncontrolled<br />
populationgrowthis the patternin many lesserdeveloped<br />
nations.What are the potentialdangersto thesenationsand to the<br />
developednationsif thispatternof growthcontinuesin the21stcentury?<br />
6) Manypeoplein th e U.S.arguethatthegovernment shouldseverelylimitthe<br />
numberof foreigncarsimportedintothecountry.<br />
a Discussthreereasonswhypeoplewantlimitations<br />
on importedcars<br />
b Discusstworeasonspeoplemayusewh’opposethepolicyof limiting<br />
foreignimportcars<br />
7) Sometimes,foreigngoodsare cheaperthanthe pricesof similarAmerican<br />
goods.<br />
a) Whyarethesegoodscheaper?<br />
b) Howdo theseimportshelpcertainAmericans?<br />
c) Howdo theyhurtotherAmericans?<br />
d) Shouldbe bantheseimports?Explainyouranswer.<br />
*8) Therearemanyimportantissuesfacingthepeopleof theU.S.today.<br />
Issues:Taxsystemreform<br />
Drugtestingof employees<br />
Toxicwastedisposal<br />
Defensespending<br />
Illegalimmigration<br />
a) Selec twooftheissuesfromthelistabove. Foreachissue<br />
selected,explainwhy it is an importantissuein theU.S.today.<br />
b) Selectanyoneof theissuesfromthelistanddiscusstwodifferent<br />
pointsof viewwhichhavebeentakenconcerningthisissue
*9) 0Standardof Living”can be definedas the necessities, comforts, and<br />
luxuries enjoyedbyindividuals orgroups<br />
ThepeopleoftheU.S.haveoneofthehigheststandards oflivingIn<br />
theworld.<br />
Explainhoweach0f three0f thefollowing factorshashelpedbringabout<br />
thishighstandardof living.Foreachfactorchosen,includespecific<br />
examples tosupport youranswer.<br />
Factors:Scientific advances<br />
Naturalresources<br />
Laborsupply<br />
Freeenterprise system<br />
Educational opportunities<br />
*10)Theheadlines belowappearedIn thelocalnewspaper of an industrial city<br />
inN.Y.state.<br />
uMarksChemical toCloseLocalFactory”<br />
“Fischer toLay0ff800MoreWorkers”<br />
UAssociated Electronics toStopTelevision SetProduction”<br />
a) Choosetwoof the factorslistedbelow.For eachfactorchosen,<br />
discusstheimpactof thesituation illustrated by theheadlines on that<br />
factor:<br />
Factors:Localtaxbase<br />
Property values<br />
Otherlocalbusinesses<br />
Employment<br />
<strong>Social</strong>Services<br />
b) Discusstwostepsthelocal,state,or FederalGovernment mighttake<br />
tolessentheimpactofthesituation illustrated bytheheadlines.<br />
11) Today,developing nationseekto improvethelivesoftheirpeoplethrough<br />
economicdevelopment.To reachthis goal,developingnationsface<br />
decisions of whetherto movetowarda coninand economyor towarda market<br />
economy.<br />
a) Explainhowtwocharacteristics ofa coninand economymightenable<br />
developing nationstoachievethisgoal.<br />
b) Explainhow two characteristics of a marketeconomymightenable<br />
developing nationstoachievethisgoal.<br />
c) Fewnationschoosetofollowanabsolute and con economyapproach or<br />
an absolutemarketeconomyapproach.Identifya nationthathas<br />
sough to developitseconomyin the20thcentury.Show,by using<br />
specific historical examples, howthenationhasuseda characteristic<br />
ofeachoftheseconomic systemsInthisattempt
12) One philosopher has said,“Ignorantheadsreadonlythe pastIn history,<br />
wiseonesalsoreadthefuture.”<br />
a) Explainthemeaningof thequotationabove<br />
b) Belowisa listof predictions thathavebeenmadeby social<br />
scientistsfOr the year 2000. Selecttwo predictionswhichyou<br />
believearelikelyto occurandselecttwootherpredictions whichyou<br />
believearenotlikelyto occur. In eachcase,explain,by referring<br />
to specifichistoricalevidence,whyyou believethe prediction will<br />
- -<br />
- - or willnotoccur.<br />
Predictions:<br />
1) Oil—richnationswillcontroloil—hungry nations<br />
2) Existingnuclearweaponswillbe destroyedandtheirproduction<br />
outlawed<br />
3) TheU.S.willwithdrawfromItsdefensealliancesandfollowa policy<br />
of isolation<br />
4) TheU.S.willspenda smallerpercentof itsbudgeton defenseand<br />
moreon improvingthequalityof lifeforitspeople<br />
5) Coninun lsm willbecomethedominantformof social,economic,and<br />
politicalorganization in theworld<br />
6) TheU.N.willbecomea genuineworldgovernment; nationalboundaries<br />
willdisappear<br />
7) Chinawillbecometheleaderof worldconTnunism<br />
8) Thenumberof Asianslivingat or belowthesubsistence levelwill<br />
increase<br />
9) Therewillbe a federation of Africanationsruledby onecentral<br />
government<br />
10) World-wide concernforhumanrightswilltendto dominateinternation<br />
relations<br />
13) Many problemstoday can be consideredglobalproblemsbecausetheir<br />
existencein onecountryor areaaffectsotherareasof theworld.Someof<br />
theseproblemsare:<br />
Scarcityof energysources<br />
Lackof investment capital<br />
Poverty<br />
Choosetwoof theproblemslistedabove.Foreachonechosen:<br />
Showhow thatproblemis a globalproblembecauseits existencein one<br />
countryor areaaffectsotherareasof theworld<br />
Discussan attempto dealwiththeproblem
14) Thegraphsbelowshowsocioeconomic datafora varietyof nations.<br />
JDUL L\@L ®1 1P ®L1<br />
Urns, t4attordPvodi cf (GNP)<br />
PerCe,.I ,<br />
I.<br />
(FALl.. 197 5)<br />
Sw .*i<br />
Chhio<br />
dia<br />
USSR<br />
N—<br />
MsaI<br />
lted lAi<br />
S,otss<br />
Ssdsri<br />
USSR<br />
Ensr y<br />
FL<br />
Co tsumptlo PerCopito<br />
Of 234 5 I 234 567 8 9 lOll<br />
ds Yhovsa. ofDollars ole ts of To. ânds of lG!a rc s of<br />
Ms&icc<br />
0<br />
I<br />
WontMortobtyRals<br />
B) Forthegeneralization givenIn answerA discusstwo reasonswhy the<br />
difference exists.<br />
C) Fromthenationslistedin thegraphs,selecttwonationswithlowper<br />
capitagrossnationalproducts.For each one chosen,discussa<br />
specificstepwhichthatnationhastakento helpimprovethe<br />
situationshownin thegraphs.<br />
I<br />
255075100125 150175200<br />
Per1,000LiveBtrlP<br />
A) Statea generalization on whichreflectsa basicdifference between<br />
thenationswithhighpercapitalgrossnationalproductsandnations<br />
withlowpercapitagrossnationalproductsas<br />
shownin thegraphs.<br />
sl .
15) Currently, worldleadersarereferring tothenationsoftheworldtnterms<br />
f and “South”.Thisdivisionis not merelygeographic, as<br />
Illustrated bythedottedlineonthemapbelow.<br />
A) Usingthemapabove,discusstwobasicdifferences, otherthan<br />
geography andclimate, betweenthenationsofthe“North t’ andthoseof<br />
the“South.”Usingspecific examples, discusshoweachdifference has<br />
affecteda nationor areaof the“North”anda nationor areaof the<br />
“South.”<br />
B. Explainhowandwhya specificnationor areaof the“North”anda<br />
specific areii!the“South”areinterdependent.
*1<br />
16. Chernenko wasa Sovietleaderwhodiedin 1985.Usingtheabovecartoon<br />
andyourknowledge ofeconomics, answereachofthefollowing questions:<br />
1) Whatbasiceconomic problemIsdescribed inthecartoon?<br />
2) WhyIsthisproblemsocommonintheSovietUnion?<br />
3) Whatstepsare currentSovietleaderstakingto solvethe above<br />
problem?<br />
4) Haveyoueverwaitedina longlineforsomeitem?If so,whatwas<br />
theItem,andwhywereyouwillingtowait?<br />
* Denotes<br />
questions appropriate forgeneralstudents
MULTIPLECHOICE<br />
UNITI TESTBANKANSWERSHEET<br />
1.2 15..3 29.3 43.4<br />
2. 2 16.3 30.4 44.2<br />
3. 4 17.1 31.2 45.1<br />
4.3 18.3 32.4 46.4<br />
5. 4 19.2 33.4 47.4<br />
6. 2 20.4 34.3 48.1<br />
7.3 21.3 35.4 49.3<br />
8.4 22.3 36.2 50.2<br />
9.1 23.4 37.4 51.1<br />
10.2 24.2 38.1 52.1<br />
11.4 25.2 39.1 53.4<br />
12.2 26.1 40.2 54.3<br />
13.1 27.1 41.4 55.3<br />
14.1 28.1 42.2 56.3<br />
MATCHING<br />
1.0 6.1 11.M<br />
2.J 7.0 12.P<br />
3.N 8.C 13.K<br />
4.H 9.E 14.B<br />
5.L 10.A 15.F<br />
MULTIPLECHOICE<br />
UNITII TESTBANKANSWERSHEET<br />
1.1 14.4 26.3 38.1<br />
2.4 15.3 27.4 39.2<br />
3.4 16.4 28.3 40.2<br />
4.4 17.4 29.4 41.2<br />
5.2 18.2 30.3 42.1<br />
6.1 19.3 31.4 43.4<br />
7.3 20.2 32.2 44.4<br />
8.4 21.1 33.3 45.4<br />
9.3 22.1 34.3 46.1<br />
10.2 23.4 35.3 47.3<br />
11.3 24.3 36.3 48.2<br />
12.1 25.4 37.3 49.3<br />
MATCHING — LABOR MATCHING — BUSINESS<br />
LC 1.B<br />
2.E 2.E<br />
3.H 3.C<br />
4.D 4.F<br />
5.1 5.H<br />
6.B 6.6<br />
7.A 7.0<br />
8.F 8.A<br />
9. J<br />
10.6
MULTIPLECHOICE<br />
UNITIIITESTBANKANSWERSHEET<br />
1.3 18.2 35.1 52.0<br />
2. 2 19.3 36.2 53.A<br />
3.4 20.1 37.1 54.0<br />
4.3 21.4 38.4 55.B<br />
5.2 22.1 39.4 56.C<br />
6.4 23.1 40.0 57.C<br />
7.2 24.1 41.D 58.C<br />
8.3 25.1 42.A 59.A<br />
9.4 26.1 43.C 60.B<br />
10.2 27.3 44.C 61.A<br />
11.1 28.1 45.D 62.A<br />
12.4 29.3 46.C 63.A<br />
13.3 30.4 47.0 64.A<br />
14.3 31.3 48.C 65.D<br />
15.1 32.1 49.A 66.B<br />
16.4 33.1 50.A 67.A<br />
17.2 34.2 51.B<br />
MATCHING — ECONOMICINDICATORS MATCHING - BANKING<br />
1.0 1.F<br />
2.C 2.C<br />
3.A 3.E<br />
4.B 4.B<br />
5.F 5.A<br />
6.G 6.D<br />
7.E 7.G<br />
MULTIPLECHOICE<br />
UNITIVTESTBANKANSWERSHEET<br />
l.A 12.0 23.C 34.3<br />
2.A 13.B 24.A 35.1<br />
3.D 14.C 25.A 36.3<br />
4.B 15.8 26.C 37.1<br />
5.C 16.C 27.C 38.3<br />
6.0 17.D 28.2 39.2<br />
7.A 18.D 29.4 40.A<br />
8.B 19.B 30.4 41.C<br />
9.0 20.A 31.2 42.B<br />
10.C 21.A 32.1 43.0<br />
11.C 22.C 331<br />
MATCHING - TRADE MATCHING- TERMS<br />
1.11 1.G<br />
2.E 2.F<br />
3.B 3.H<br />
4.C 4.B<br />
5.A 5.A<br />
9:<br />
8.G 8.0<br />
,.
• I, .,!<br />
ECONOMICS ANDECONOMICDECISIONMAKING<br />
FINALEXAM<br />
DIRECTIONS:Answerthe followingshortanswerquestionson the answersheet<br />
provided.<br />
MATCHING<br />
1. Opportunity cost A. Coststhatremainthesameregardless<br />
of theamountof production<br />
2. Scarcity<br />
B. Thebuyingandsellingof government<br />
3. Coninon stock securities<br />
4. Fixedcosts C. An economicmodelof a marketeconomy<br />
5. Circularflowchart 0. Government financialaidtransferring<br />
moneyfromonesegmentof society<br />
6. Variablecosts to others.<br />
7. Efficiency E. Twelv economicvariablesthatreach<br />
a turningpointshortlybeforethe<br />
8. Open-market operations businesscycledoes<br />
9. Regressive tax F. Greaterexpensesthanincome<br />
10. Progressive tax G. Theproblemof limitedresourcesand<br />
unlimitedwants<br />
11. Transferpayment<br />
H. Fed decisionsthat affect the<br />
12. LeadIngindicators availability andcostof bank<br />
reserves,bankcredit,andmoney<br />
13. Deficit<br />
I. Decisionson government spendingand<br />
14. Fiscalpolicy taxation.<br />
15. Monetarypolicy J. Thecostof thelossof thenextmost<br />
desirablegoodor servicethatcould<br />
havebeenproducedwitha resource<br />
K.Takesan increasing proportion of<br />
incomeas incomefalls<br />
1. Takesan increasing proportion of<br />
incomeas incomerises<br />
M. A stockthathasa variabledividend<br />
andcarriestheprivilegeof voting<br />
N. Coststhatchangeas thelevelof<br />
production changes<br />
0. Methodof increasing productivity<br />
-
Questions1-4arebasedon thefollowing graph:<br />
a)<br />
b)<br />
c)<br />
d)<br />
a) F<br />
b) E<br />
c) C<br />
d) B<br />
3) In which two<br />
production? industriesdo the top five controljust over 70% of.<br />
a CandG<br />
b AandB<br />
c FandG<br />
d) DandF<br />
4) IndustryA probablyhas:<br />
Production ControlledbyFiveLargest<br />
FirmsIn SelectedIndustries<br />
a) littlepricecompetition<br />
b) muchpricecompetition<br />
c) littleadvertising<br />
d) perfectcompetition<br />
•<br />
A<br />
B<br />
D<br />
E<br />
-<br />
U<br />
---,-——-—<br />
-<br />
•<br />
,J<br />
P•rc.nt 102030405060708090i00<br />
1) InwhichIndustrydo thetopfivecompanieshavethegreatestcontrol?<br />
A CEG<br />
2) Inwhichdo thetopfivehavetheleastcontrol?
Questions 5-8arebasedonthefollowing reading:<br />
Economists study. thewayasocietyusesica ce ye<br />
WCS$. suchasland.labo rawmatenats. andmachin<br />
en.toprovidegoodsandservices. Theyplanandconduct<br />
•resewch, thencornpile.and analyzetheresultsinorderto<br />
detem ne th costsandbenefitsofmaking,distributing.<br />
andusingresources inaparticularway...<br />
Someconomists areprimarily theoreticians. Theymay<br />
developtheoriestoexplainthecausesofinflation, for- ample,throughtheuseof mathematical models.Most<br />
economists. howeve1 areconcernedwithpracticai appli<br />
cationsofeconomicpolicyina particulararea,suchas<br />
Ithanc.,labor,agriculture, transportation, energyor<br />
heafth.Economists whoworkforgovernment agenciesas<br />
sasseconomic cond’tions intheLited S’atesandabroad<br />
andpredict theeconomic impactofspecth:changes...<br />
Economists incollegesanduniversities teachthetheo<br />
des.principles, andmethodsofeconomics. . . Theyfre<br />
quenttyareaskedto serveasconsuitarits to business<br />
flrmi.government agencies, andindividuals.<br />
5) Thearticle defines economics asthediscipline that:<br />
a) combines political scienceandmathematics<br />
b analyzes individual wantsandneeds<br />
C) analyzes thewaysocietyusesscarceresources<br />
d) analyzes systemsofgovernment<br />
6) Economists workinthefieldof:<br />
a) agriculture<br />
b) education<br />
c) transportation<br />
d) alloftheabove<br />
7) Economists areconcerned primarily with:<br />
a developing economic theories andmodels<br />
b practical applications ofeconomic theory<br />
c) financial institutions<br />
d) government economic policies andprograms<br />
8) Thearticleindicates thateconomists:<br />
a) havea varietyofemployment possibilities<br />
b) arewellpaid<br />
c) needlittleducation<br />
d) mustworkforbusinesses<br />
9) Thethreetypesofeconomic resources are:<br />
a) human,naturalandcapital<br />
b) producers, consumers andtransporters<br />
c) goods,services andcapital<br />
d) food,shelterandtransportation
10) Anothernamefora coninand<br />
economyis:<br />
a) plannedeconomy<br />
b) traditional economy<br />
c) modified marketeconomy<br />
d) marketeconomy<br />
11) Thedifference betweenthecostofmakingsomething andthepriceatwhich<br />
Itsellsiscalled:<br />
a) competition<br />
b) profit<br />
c) privateproperty<br />
d) realcost<br />
12) Scarcity isa problemfacedby:<br />
a) allsocieties<br />
b) mostsocieties<br />
c) somesocieties<br />
d) onlypoorsocieties<br />
13) Capitalgoodsareusedtoproduce:<br />
a) consumer goodsonly<br />
b) othercapitalgoodsonly<br />
c) capitalservices only<br />
d) othergoodsandservices<br />
14) Themostimportant factorina traditional economyis:<br />
a) price<br />
b) custom<br />
c) demand<br />
d) planning<br />
15) Ina capitalist economy, mosteconomic decisions aremadeby:<br />
a) buyersandsellers<br />
b) government planners<br />
c) customandtradition<br />
ci) religious leaders<br />
16) Opportunity costsare:<br />
a) thesameasrealcosts<br />
b) Indicated ona production possibilities graph<br />
c) nota concernforcomandeconomies<br />
d) foundinonlymarketeconomies
Thegraphbelowplotsthesupplycurveforpowerboatsriggedforwaterskiing.<br />
Usethegraphto answerquestions17-20.<br />
.ss.,0oa<br />
Isooo<br />
$2,0OO<br />
s1,00O<br />
— — a a — — a —<br />
—<br />
—<br />
10 20 30 405040 7050 50<br />
MUMBEROFBOATS(THOUSANDS)<br />
17. At a priceof $2,000howmanyboatscanbe supplied?<br />
a) 10<br />
b) 10,000<br />
c) 20<br />
d) 20,000<br />
18) At a priceof $3,000dueto production costreductions, howmanyboatswill<br />
be supplied?<br />
a) lessthan60,000<br />
b) 60,000<br />
c) morethan60,000<br />
d) cannotbe determined fromtheinformation given<br />
19) At a priceof $5,000becausemanufacturers havelesstimeto makeboats,<br />
howmanyboatswillbe supplied?<br />
a) 75,000<br />
b) morethan75,000<br />
c) lessthan75,000<br />
d) cannotbe determined fromtheinformation given<br />
20) At whatpricewould65,000be supplied?<br />
a) $2,000<br />
b) $3,000<br />
c) $3,500<br />
d) $4,000<br />
21) As thepriceof an itemincreases, theamountdemanded:<br />
a) increases<br />
b) decreases<br />
C) remainsconstant<br />
d) cannotbe predicted<br />
,
22) Thepointat whichproducersupplyand consumerdemandintersectis known<br />
as the:<br />
a) equilibrium price<br />
b) demandprice<br />
c) pointof elasticity<br />
d) supplyprice<br />
23) Themodelof a completely competitive marketis called:<br />
a) perfectcompetition<br />
b) oligopoly<br />
c) monopoly<br />
d) differentiated competition<br />
24) An economicsituationin whicha few sellerscontrolthemarketis known<br />
as:<br />
a) monopoly<br />
b) oligopoly<br />
c) perfectcompetition<br />
d) a factormarket<br />
25) A soleproprietor hasan advantageof having:<br />
a) limitedliability<br />
b) unlimitedlife<br />
c) unlimitedresources<br />
d) directcontrol<br />
26) Partnerships aredifferentfromsoleproprietorships in thatthey:<br />
a) requirelesscapital<br />
b) havelimitedliability<br />
c) areeasierto organize<br />
d) combinethecapitalof twopeople<br />
27) Whichof the followingis an advantagethatcorporations haveoversole<br />
proprietorships?<br />
a) lesstaxes<br />
b) limitedliability<br />
c) formedeasily<br />
d) cansueandbe sued<br />
28) Accordingto thelawof demand,as thepriceof an itemIncreases:<br />
a) morewillbe bought<br />
b) lesswillbe bought<br />
C) demandwillnotchange<br />
d) qualitywillimprove
29) ThedegreetowhichchangesInpricecausechangesin demandis knownas:<br />
a) elasticity of demand<br />
b) a demandschedule<br />
C) substitution<br />
d) elasticity of supply<br />
30) In orderto seehowmuchof a productwillbe suppliedat a givenprice,<br />
onecanlookat a:<br />
a) supplyschedule<br />
b) supplycurve<br />
c) botha andb<br />
d) noneof theabove<br />
31) Whichisnota characteristic of perfectcompetition?<br />
a) manybuyers<br />
b) fewsellers<br />
c) decisionsbasedon price<br />
d) fullknowledgeof marketconditions<br />
32) Thestudyof specificfactorsaffectingan economyis:<br />
a) microeconomics<br />
b) macroeconomics<br />
c) thepriceindex<br />
d) a casestudy<br />
33) GNPmeasures:<br />
a) qualityof life<br />
b) improvements inefficiency<br />
c) goodsthataresold<br />
d) allof theabove<br />
34) A generalriseInpricesis called:<br />
a) inflation<br />
b) stagflation<br />
c) deflation<br />
d) moneyGNP<br />
35) Whenthe Fedcontractsmoneythroughthe saleof governmentbonds,it is<br />
usingwhichof itstools?<br />
a) openmarketoperations<br />
b) thediscountrate<br />
c) reserverequirements<br />
d) pricecontrols
36) AneasymoneypolicywouldresultIftheFed:<br />
a) soldgovernment securities<br />
b) increased reserverequirements<br />
c) printedmorepapermoney<br />
d) loweredthediscount rate<br />
37) Lowering thediscount ratewouldleadto:<br />
- - a) lowerinterest rates<br />
b) highercostsofborrowing<br />
c) recession<br />
d) cheapergovernment bonds<br />
38) Openmarketoperations Involve:<br />
a) reservedeposits<br />
b) thediscount rate<br />
c) government securities<br />
d) alloftheabove<br />
39) Thebranchof economics thatanalyzesinterrelationships amongsectorsof<br />
theeconomyis:<br />
a) supply—side economics<br />
b) microeconomics<br />
c) marcoeconomics<br />
d) Keynesian economics<br />
40) Theprimaryfunction oftheFederalReserveSystemisto:<br />
a) advisethePresident<br />
b) preventa depression<br />
c) stabilize theUnitedStateseconomy<br />
d) noneoftheabove<br />
41) Thegraduated incometaxiswhatkindoftax?<br />
a) sales<br />
b) proportional<br />
c) regressive<br />
d) progressive
Questions 42-45arebasedon thechartbelow.<br />
UrbanConsumer Price Index for<br />
Selected Items: 1984<br />
(1987a 100).<br />
Item CPI<br />
Allitei ’ns 303.3<br />
Food 302.1<br />
Men’sandboys’clothing 187.9<br />
a‘Abmen andgirls’Clothing 159.0<br />
MedicalCare 371.3<br />
rsonaI Care 266.1<br />
Entertainment 247.7<br />
42) Thebaseyearof this‘chartIs:<br />
a) 1984<br />
b) 1967<br />
c) thecurrentyear<br />
d) noneof theabove<br />
43) Whichitemon thislistincreasedin pricemostsince1967?<br />
a) personalcare<br />
b medicalcare<br />
c food<br />
d) clothing<br />
44) WhichItemIncreasedleast?<br />
a) food<br />
b) entertainment<br />
c) Men’sandboys’clothing<br />
d) Women’sandgirls’clothing<br />
45) Whathappenedto theCPIforallitemssince1967?<br />
a) declined<br />
b) doubled<br />
c) tripled<br />
d) quadrupled<br />
46) By raisingtaxes,thegovernment slowsdown:<br />
a) totalspending<br />
b) priceincreases<br />
c) economicactivity<br />
d) allof theabove
47) WhIchisa partofsupply-side economics?<br />
a) lowering taxeson investment<br />
b) increasing government regulations<br />
C) funding moresocialprograms<br />
d) increasing taxesonbusinesses<br />
48) Aneffectofindustrialization isthat:<br />
a) eachcountrycanbeself-sufficient<br />
b) morelandisneededtogrowcrops<br />
c) countries musttradewithoneanother<br />
d) theworldpopulation hasdecreased<br />
49) Industrial societies usuallydonothave:<br />
a) highenergyusage<br />
b) homeworkshops formostindustries<br />
c) largexpenditures forcapitalgoods<br />
d) manyfactories<br />
50) A limiton theamountof goodsthatcan be importedintoa countryis<br />
calleda:<br />
a) quota<br />
b) tariff<br />
c) cartel<br />
d) subsidy<br />
51) Thedifference betweenthemoneyflowingintoandoutofa countryisits:<br />
a) currentaccount<br />
b) capitalaccount<br />
c) balanceofpayments<br />
d) noneof theabove<br />
52) A countrythatcanproducean itemmoreefficiently thananothercountry<br />
hasa:<br />
a) tradesurplus<br />
b) tradedeficit<br />
c) comparative advantage<br />
d) protective tariff<br />
53) Countries sometimes usedumpingasa methodof:<br />
a) protecting newindustries<br />
b) encouraging freetrade<br />
c) drivingcompetitors outofbusiness<br />
d) promoting fullemployment
54) OPECIsanexampleofa:<br />
a) cartel<br />
b) government agency<br />
c) corporation<br />
d) theory<br />
55) Whichofthefollowing wouldnotinhibit(hurt)economic growth?<br />
- - a) subsistence<br />
farming<br />
b) highbirthrate<br />
c) hightechnology<br />
d) fewimports
ESSAYS<br />
Selec threeof thefollowingessaysandanswerIncomplete<br />
essayform.Be sure<br />
to useexampleswherepossible.<br />
1) Nationsmakechoicesby answeringthebasiceconomicquestions:<br />
-<br />
- Whatgoodsandserviceshouldbe produced?<br />
— Howshouldthesegoodsandservicesbe produced?<br />
— Forwhomshouldthesegoodsandservicesbe produced?<br />
a) WhoanswersthebasiceconomicquestionsIn a traditional<br />
economy?In<br />
a commandeconomy?In a marketeconomy?<br />
b) Howdo economists<br />
classifynationswithmixedeconomies?<br />
c) Describethecharacteristics of capitalism, theeconomicsystemfound<br />
in theUnitedStates.<br />
2) The threemajor economicsystemsin the world todayare capitalism,<br />
democratic socialism, andauthoritarian socialism.<br />
a) Whatarethedifferences in thethreeeconomicsystems?<br />
b) Identifythemajorcharacteristics of eachof theeconomicsystems.<br />
3) The three forms of businessorganizationare sole proprietorship,<br />
partnership andcorporation.<br />
-<br />
a) Whatarethebasicdifferences in ownershipof thesethreeformsof<br />
businessorganization<br />
b) Discussonemajoradvantageof soleproprietorship, partnership, and<br />
corporations.<br />
c) Discussonemajordisadvantage of soleproprietorship, partnership and<br />
corporations<br />
4) Taxesplayan importantrolein theUnitedStateseconomy.<br />
a) Identifythetwoimportantrolesof taxesin theUnitedStates.<br />
b) Howdo taxationpoliciesaffectconsumerbuyingbehavior?<br />
c) HowIs theeconomicbehaviorof firmsinfluenced<br />
by taxes?<br />
5) Thebusinesscyclehasfourcharacteristic<br />
phases.<br />
a) Identifyanddescribethefourphasesof thebusinesscycle.<br />
b) Whatarethecausesof thebusinesscycle?<br />
c) Discusstwogovernmentpolicieswhichareusedto controltwophases<br />
of the businesscycle. Identifythe phaseand the policyused to<br />
controlIt.<br />
-
6) Nationsrecognize thatspecialization andtradebenefiteveryone.Compare<br />
andcontrast freetradeandprotectionism.<br />
a) Defineprotectionism andfreetrade.<br />
b) Whatarethemajorarguments ofprotectionists?<br />
c) Whatarethemajorarguments oftheadvocates (supporters) offree<br />
trade? - -<br />
7) Economic indicators helpeconomists tomakepredictions abou thefuture:<br />
a) Listandexplainthepurposeoftwoeconomic indicators.<br />
b) Whatisthedifference betweena recession anda depression?<br />
c) Howdoestheunemployment ratehelpthegovernment tomakeeconomic<br />
decisions?<br />
d) Whydounemployment<br />
ratesvaryfromstatetostateorregiontoregion<br />
intheUnitedStates?
<strong>Economics</strong> — Review for Final Exam<br />
1. What is the most basic economic problem?<br />
2. What questions do all economies have to answer?<br />
3. What are the factors of production?<br />
4. Traditional economy — How are economic questions resolved?<br />
5. Command economy — How are economic questions resolved?<br />
6. Market economy — How are economic questions resolved?<br />
7. Profit motive — Capitalism — leads to _____________________<br />
8. What is opportunity cost?<br />
9. What is demand elasticity?<br />
10. Law of supply<br />
11. Law of demand<br />
12. What<br />
13. What<br />
14. What<br />
15.<br />
16.<br />
17.<br />
18.<br />
19.<br />
20.<br />
21.<br />
22.<br />
23.<br />
24.<br />
25.<br />
26.<br />
27.<br />
28.<br />
factors effect consumer choice?<br />
is a proprietorship? Its advantages and disadvantages.<br />
is partnership? Its advantages and di advantages.<br />
What is a pure monopoly?<br />
What does the Dow Jones Industrial Average Measure? What is<br />
not measured?<br />
What is CNP? Real GNP?<br />
What is the Business Cycle?<br />
What happens during a Recession? A Depression?<br />
What factors cause inflation? What effect does inflation iave<br />
on prices, wages, interest rates? Who feels it the most (negative)?<br />
Demand side economics? John Maynard Keynes<br />
What are the functions of money?<br />
What is the multiplier effect?<br />
How does the FED increase the money supply? Decrease it? Why?<br />
Taxes: Progressive — Ex.<br />
Regressive — Ex.<br />
What is a favorable balance of trade? A trade deficit?<br />
What are forms of taxable income?<br />
What are some tax incentives (deductions)?
EC0 OCS REVIEW : .. .<br />
<strong>Bayport</strong>—<strong>Blue</strong> <strong>Point</strong> Iligh <strong>School</strong><br />
1) What are the three factorc cf production?<br />
2) Do oil ic econo systemsface the problem of scarcity?<br />
3) What is opportunitycost?<br />
1) What es prob are faced by all economic systems?<br />
5) What are the characteristicsof a market economy?<br />
6) What is meant by specialization?<br />
7) What is the law of supply and demnn ?<br />
8) How does sup ly and demand affect prices? Wages?<br />
9) What is a pro5ressivetax? Exanpie?<br />
10) What is a reEressivetax? Exa:Die?<br />
U) What is a monopoly? how does it affect prices? Wages?<br />
12) What groups determinethe total cut2ut (GNP) of an economy?<br />
13) What is the ConsumerPrice Index?<br />
) 1i- What factcrscontributeto un mployment?<br />
15) What factors contritut.eto inflation?<br />
i6) MonetaryPolicy — What is a budget deficit? what is an easy money policy?<br />
vhat is a tight money policy?<br />
17) How do banks “create” money in an economy?<br />
18) What are the functionsof money?<br />
19) During what periods does the Federal Reserve System try to increasemoney<br />
supply? Decrease money Supply?<br />
20) What is the Business yc1e?<br />
21) What are the basic “economicstabilizers?’ When are they used?<br />
22) When should increased taxation take place?<br />
23) What is the difference between ‘Iricome per Capita” and “Real Income per<br />
224) Tariffs; What are benefits? Problems?<br />
25) Corporations: Advantages?
ISt4b<br />
<strong>Economics</strong> Final Exam June, 1989<br />
PART I — Directions<br />
: Select the answer that best completes the<br />
question. Place your answer<br />
answer sheet<br />
on the separate<br />
— 60 points<br />
1. Economic growth is -an important goal because:<br />
(A) more jobs, goods, and services will be needed in the future.<br />
(B) prices have stabilized.<br />
(C) the population is likely to decline.<br />
(D) more people are working than ever before.<br />
2. Capitalism is based on:<br />
(A) government regulation of business.<br />
(B) trusts and monopolies.<br />
(C) private ownership of property.<br />
(D) central planning.<br />
3. A washing machine used in a laundry business is classified as:<br />
(A) an intangible good. (C) a capital good.<br />
(B) a natural resource. (D) a consumer good.<br />
4. The combination of the two banks, Chase National and the Bank of<br />
Manhattan, to form Chase Manhattan is an example of:<br />
(A) horizontal merger. (C) a conglomerate.<br />
(B) a service cooperative. (D) a monopoly.<br />
5. Economic institutions:<br />
(A) use resources to satisfy the wants and needs of consumers.<br />
(B) are profit—seeking enterprises.<br />
(C) are formed through merger.<br />
(DO are subject to special taxes.<br />
6. Business organizations:<br />
(A) do not seek profits.<br />
(B) have similar ownership structures.<br />
(C) do not include retail operations.<br />
(D) serve as a link between scarce resources and consumer<br />
satisfaction.<br />
7. All of the following are characteristics of capitalism except:<br />
(A) private property. (C) voluntary exchange.<br />
(B) profit motive. (D) government ownership.
<strong>Economics</strong> Final Exam — June, 1989 Page 2<br />
8. The level of government that has the largest budget and spends<br />
the most money is:<br />
(A) the federal government.<br />
(B) state government.<br />
(C) local government.<br />
(D) state and local governments combined.<br />
9. The purchase of an expensive luxury car is an example of:<br />
(A) inelastic demand.<br />
(B) unit elasticity.<br />
(C) elastic demand.<br />
(D) paradoxical demand.<br />
10. The productivity of a labor force is not directly influenced by:<br />
(A) education and training. (C) health.<br />
(B) motivation. (D) number of workers.<br />
11. Under business cycle theory, a period of recession will be followed<br />
by a period of:<br />
(A) prosperity. (C) deflation.<br />
(B) inflation. (D) expansion.<br />
12. Which of the following statements best describes the concept of<br />
“full employment”?<br />
(A) It does not mean zero unemployment.<br />
(B) It relates most directly to seasonal unemployment.<br />
(C) It is difficult to attain in times of war.<br />
(D) Although the economy may be growing, the factors of production<br />
are not being used efficiently.<br />
13. The largest category of spending for state and local government<br />
combined is:<br />
(A) fire protection. (C) education.<br />
(B) health and hospitals. CD) parks and recreation.<br />
14. An example of a technological monopoly is:<br />
(A) the only laundromat in a city.<br />
(B) a patent.<br />
(C) a city water system.<br />
(D) the United States Post Office.
<strong>Economics</strong> Final Exam — June, 1989 Page 3<br />
15. The three basic questions which all economies must decide upon<br />
are:<br />
(A) where, how, and when to produce.<br />
(B) what, how, and when to produce.<br />
(C) what, how,and for whom to produce.<br />
(D) what, why, and how to produce.<br />
16. When the factors of production are used in more efficient<br />
combinations, one would expect:<br />
(A) output t decrease and production costs to decrease.<br />
(B) output to increase and production costs to decrease.<br />
(C) output to increase but no change in production costs.<br />
(D) no change in output but lower production costs.<br />
17. Which of the following statements is true about the Consumer<br />
Price Index?<br />
(A) It uses a different market basket of goods each year.<br />
(B) It can increase only from year to year.<br />
(C) It has a base year with a value of 100.<br />
(D) It reports on changes in 400 wholesale commodities that<br />
businesses use in the nation’s 20 largest cities.<br />
18. Which of the following is not included in Gross National Product?<br />
(A) Inventories (C) Goods sold for a second time<br />
(B) Private investment (D) Exported goods<br />
19. Legal tender is:<br />
(A) a debt certificate. (C) an investment.<br />
(B) a security. (D) a form of money.<br />
20. The three parts of a financial system are businesses:<br />
(A) government, and banks.<br />
(B) households, and financial institutions.<br />
(C) households, and government.<br />
(D) banks, and savings and loan institutions.<br />
21. If real GNP declines for three consecutive quarters, the<br />
economy:<br />
(A) is expanding. (C) is in a recession.<br />
(B) experiences inflation. (D) avoids the business cycle.<br />
22. Taxes affect:<br />
(A) the quality of government services.<br />
(B) economic productivity.<br />
(C) the allocation of resources.<br />
(D) all of the above.
<strong>Economics</strong> Final Exam — June, 198,9 Page 4<br />
23. The key to trade between nations is:<br />
(A) specialization and comparative advantage.<br />
(B) to limit Imports and increase exports.<br />
(C) self—sufficiency and absolute advantage.<br />
(D) maintaining a strong dollar.<br />
24. A “run on the bank” refers to:<br />
(A) severe competition among borrowers seeking loans.<br />
(B) government action to close a bank.<br />
(C) a rush by an increase in the money supply.<br />
(D) a rush by depositors to withdraw funds.<br />
25. The federal reserve may try to reduce inflation by:<br />
(A) lowering the discount rate.<br />
(B) lowering the reserve requirement.<br />
(C) purchasing government securities.<br />
(D) selling government securitites.<br />
26. When the federal reserve increases the discount rate, it<br />
hopes to:<br />
(A) stimulate government spending.<br />
(B) stimulate bank borrowing.<br />
(C) discourage bank borrowing.<br />
(D) discourage government spending.<br />
27. When the federal reserve followed a tight money policy in<br />
the early 1980’s to combat inflation:<br />
(A) home construction and auto industries were hurt because<br />
the cost of borrowing went up.<br />
(B) the impact was the same throughout the entire economy.<br />
(C) the computer and defense Industries complained that they<br />
were “singled out” to bear the burden of fighting inflation.<br />
(D) interest rates decreased to a record low post—World War II<br />
level of five percent.<br />
28. A mixed economy may be defined as one:<br />
(A) controlled by a monopoly.<br />
(B) influenced by custom and tradition.<br />
(C) with no government regulation or control.<br />
(D) In which there is both free enterprise and government<br />
involvement.<br />
29. Which of the following is the usual first step in labor—management<br />
negotiations?<br />
(A) Fact—finding (C) Mediation<br />
(B) Presidential influence (D) Collective bargaining
<strong>Economics</strong> Final Exam — June, 1989 Page 5<br />
30. During the Great Depression:<br />
(A) the unemployment rate reached 25 percent.<br />
(B) the NLRB was abolished.<br />
(C) the AFL and the ClO merged.<br />
(D) many piecesof anti—union legislation were passed.<br />
31. The money supply in the United States consists of:<br />
(A) mainly coins and currency.<br />
(B) deposits more than coins and currency.<br />
(C) about 50 percent demand deposits and 50 percent coins<br />
and currency.<br />
(D) checking and savings accounts.<br />
32. Reaganomics includes an emphasis on:<br />
(A) avoiding budget deficits.<br />
(B) deregulation.<br />
(C) increasing both taxes and the role of government.<br />
(D) automatic stabilizers.<br />
33. In Keynes’ view, the major problem during the Great Depression<br />
was:<br />
(A) inadequate demand.<br />
(B) spending on investment was too great.<br />
(C) government deficits.<br />
(D) stock market fluctuations.<br />
34. Which of the following statements best describe supply—side<br />
economic policies?<br />
(A) Increasing levels of government spending generate demand.<br />
(B) They became popular during the 1930’s.<br />
(C) Their goals are restoring economic growth.<br />
(D) They strengthen the automatic stabilizers.<br />
35. Where there is a shortage, prices:<br />
(A) fall. (C) remain stable.<br />
(B) rise. (D) fall, then rise.<br />
36. Events concerning OPEC in the 1980’s suggest that:<br />
(A) power to control prices by a strong monopoly is temporary.<br />
(B) huge amounts of capital can solve many social problems and<br />
transform a poor country rapidly.<br />
(C) oil is no longer essential to world industry.<br />
(D) free market forces of supply and demand are too weak to<br />
resist the monopoly power of a cartel.
<strong>Economics</strong> Final Exam — June, 1989 Page 6<br />
37. Which of the following do Mexico and Brazil have in common?<br />
(A) Low birth rates and high per capita GNP.<br />
(B) Oil reserves that are adequate for economic development,<br />
removing the need to borrow from other countries.<br />
(C) Membership in OPEC.<br />
(D) External debt that is too large when compared to GNP.<br />
38. Countries with the world’s highest birth rates:<br />
(A) are located only in Asia and the Middle East.<br />
(B) are in areas where children are considered essential for<br />
farming, and security in old age.<br />
(C) are in regions with high per capita incomes.<br />
(D) have achieved zero—population growth.<br />
39. The greatest danger of monopolies is that they:<br />
(A) are expansionary.<br />
(B) sometimes lead to political power.<br />
(C) may waste and misallocate resources.<br />
(D) do not allowconsumers to benefit from competition.<br />
40. A public utility is an example of a:<br />
(A) government monopoly. (C) natural monopoly.<br />
(B) technological monopoly. (D) geographic monopoly.<br />
41. Assume that your class is attempting to grow corn for the class<br />
picnic in June. You have one large flower pot, some seeds, and<br />
some fertilizer. If you add one more seed you may get one more<br />
plant and perhaps two additional ears of corn. When you add<br />
the second seed you may get one more plant and two more ears of<br />
corn. As you add more and more seeds, however, you will not<br />
continue to get more and more ears of corn because the plants<br />
will crowd each other out in the flower pot. This would be an<br />
example in economics of<br />
(A) the law of demand.<br />
(B) the law of supply.<br />
(C) diminsishing marginal productivity.<br />
(D) diminishing marginal utility.<br />
42. If the United<br />
Soviet Union,<br />
: except<br />
States arranged a very large grain sale to the<br />
this could probably cause all of the following<br />
(A) an increase in the total demand for American grain.<br />
(B) an increase in the market price of grain.<br />
(C) an increase in farm income.<br />
(D) an increase in the availability of grain inthe U.S. market.
<strong>Economics</strong> Final Exam — June, 1989 Page 7<br />
43. If the legal minimum wage was raised from $5 to $15 an hour:<br />
(A) the quantity demanded of labor would fall.<br />
(B) the quantity supplied of labor would rise.<br />
(C) there would be many more unemployed teenagers.<br />
(D) all of these.<br />
44. Monopolistic competition is a market structure in which all<br />
of the following characteristics exist except:<br />
(A) much product differentiation and some price control.<br />
(B) many firms producing products for the market.<br />
(C) no freedom for firms to enter or leave the market.<br />
(D) reasonably complete market information.<br />
45. Factors which influence the interest rate on loans include all<br />
of the following except:<br />
(A) the length of time for the loan to be repaid.<br />
(B) the risk of making the loan.<br />
(C) the rate of inflation and cost of making the loan.<br />
(D) the length of time the bank has been in business.<br />
46. Macroeconomics and microeconomics are different in that:<br />
(A) macroeconomics examines the economy’ as a whole while<br />
microeconoinics examines specific units in the economy.<br />
(B) macroeconomics examines specific units in the economy<br />
while microeconomics examines the economy as a whole.<br />
(C) macroeconomics measures things like the price of a good<br />
and its quantity demanded while inicroeconomics considers<br />
things like GNP or unemployment.<br />
(D) inicroeconomics studies inflation and wholesale price levels<br />
while macroeconomics studies taxes.<br />
47. If you bought the common stock of a corporation:<br />
(A) you would be a part owner of the corporation.<br />
(B) the corporation would pay you a guaranteed interest rate<br />
on the shares of stock you own.<br />
(C) you could earn profits from the sale of your stock if the<br />
market price of the stock went higher than the price which<br />
you paid.<br />
(D) both (A) and (C).<br />
48. The most frequently used means of financing a corporation include<br />
all of the following except :<br />
(A) issuing corporate stock.<br />
(B) issuing corporate bonds.<br />
(C) borrowing from banks.<br />
(D) asking stockholders for additional investments.
<strong>Economics</strong> Final Exam — June, 1989 Page 8<br />
49. Of the following, the one that is not a determinant of demand<br />
is:<br />
(A) the amount of income consumers have available to spend.<br />
(B) the attitude which consumers have about a product.<br />
(C) the prices of either substitutes or complements.<br />
(D) the number of substitutes and complements which exist for<br />
the good which you are considering.<br />
50. Natural resources used in the production process, such as iron<br />
ore or timber, would be included as a factor of production under<br />
the category of:<br />
(A) materials and labor (C) capital and marketing<br />
(B) land (D) rent<br />
51. If supply increases while the demand curve remains the same:<br />
(A) the market price will fall.<br />
(B) the quantity exchanged will rise.<br />
(C) both (A) and (B).<br />
(D) none of these.<br />
52. Laissez faire describes the belief that government should:<br />
(A) make industries compete fairly.<br />
(B) not own the means of production.<br />
(C) not interfere in economic affairs.<br />
(D) regulate business to some degree.<br />
53. The circular flow of economic activity shows that:<br />
(A) businesses manufacture products for the productive<br />
resources markets.<br />
(B) businesses spend their revenues in the consumer products<br />
markets.<br />
(C) individuals earn their incomes in the productive resources<br />
markets.<br />
(D) individuaLs buy products in the productive resources markets.<br />
54. Adam Smith’s concept of the invisible hand means that people<br />
will do the greatest good for the whole society by:<br />
(A) pursuing their own self—interest.<br />
(B) always trying to do what is best for others.<br />
(C) always doing what the government says is right.<br />
(D) trying to look out for themselves and others.<br />
55. No matter what type of economic system individuals live under:<br />
(A) the economic incentives they face have little effect on the<br />
way they behave.<br />
(B) the economic incentives they face are the guiding force<br />
behind their choices and behavior.<br />
(C) economic incentives are important only for some people.<br />
(D) economic incentives are really unimportant for the choices<br />
and behavior of producers.
<strong>Economics</strong> Final Exam June, 1989 Page -9<br />
56. The major difference between communist and socialist economies<br />
is that:<br />
(A) under communism almost all the means of production are<br />
owned by government, while under socialism only the basic<br />
industries are the property of the state.<br />
(B) under socialism almost all the means of production are<br />
owned by government, while under communism only the basic<br />
industries are the property of the state.<br />
(C) there is more private property under communism than under<br />
socialism.<br />
(D) there are more public goods provided under socialism than<br />
under communism.<br />
57. When a government sets some limit on the quantity of a good<br />
that can be imported into the country, it is creating:<br />
.(A) a flexible exchange rate.<br />
(B) a tariff.<br />
(C) a quota.<br />
(D) a gold standard.<br />
58. The major arguments in favor of trade restrictions include all<br />
of the following : except<br />
(A) they protect our national security and our infant industries.<br />
(B) they help the U.S. keep a diversified economy.<br />
(C) they protect U.S. workers from competition by cheap foreign<br />
labor.<br />
(D) they make foreign goods cheaper to U.S. consumers.<br />
59. The low level of Income in less—developed countries has an adverse<br />
effect on advanced countries because:<br />
(A) opportunity cost exists in that if the buying power of a<br />
less—developed country were greater, there would be a<br />
larger market to produce for.<br />
(B) failure to repay loans can create instability.<br />
(C) foreign aid to LDCs could be used to solve the domestic<br />
problems of the advanced country.<br />
(D) all of these.<br />
60. In a market economy, the question of what to produce is decided<br />
mostly by:<br />
(A) consumers voting in the marketplace with their dollars.<br />
(B) central planning by government.<br />
(C) the cost of resources.<br />
(D) all of these.
<strong>Economics</strong> Final Exam — June, 1989 Page 10<br />
PART II — ESSAY QUESTIONS<br />
Answer 2 essays from Part II. Be as complete as you can be in your<br />
answers. Make sure you answer all the parts of each question. 40 points<br />
The Mästér Plan:<br />
<strong>Blue</strong>printfor Brookhaven<br />
fràffià Wdter,<br />
development<br />
commercial and residential<br />
all assessed in town proposal<br />
(A) Explain why towns on Long Island need guidance and direction<br />
in planning their economic future. 10 points.<br />
(B) Explain at least 3 major economic problems facing Long Island<br />
and give at least one solution for each of these problems. 10 points.
<strong>Economics</strong> Final Exam — June, 1989<br />
Page 11<br />
(2) Below is a presentation of a portion of a stock market report<br />
between October 16th — January 15th.<br />
(A)<br />
(B)<br />
(C)<br />
THE NEW YORK<br />
STOCKEXCHANGE<br />
TRANSACTIONSFOR:<br />
WEDNESDAY JANUARY 13, 1982<br />
Div P-I ($d ) Hi Lo<br />
Net<br />
Oo thg<br />
RWGen 20 171 23¼ fl¾ 22k- ¼<br />
Fkor .80 9130927’i26 ,—1½ 26/<br />
FooteC 2.20 8 9 27’ 27 + 27 ¼<br />
FordM 1.20.... 1768 183/i 18½ 1111+ ½<br />
Fo MK 2.248 63 3P. 33½ 35¾—I<br />
FMK pf 1.80 .... 1 57½ 57½ 37½—2<br />
FtDear 1.32.... 11 9½ 9¼ 9¾— l<br />
The Dow Jones Averagesjf<br />
Lo LoM.L DECEMBER J J<br />
30 I 3 00 07 4 f 1<br />
Why is the stock market a symptom of our nations economic health?<br />
5 pts.<br />
What is the function of stocks for a corporation? 5 pts.<br />
What is the Business Cycle? And explain what typically occurs<br />
to the stock market in each phase. 10 pts.
<strong>Economics</strong> Final Exam — June, 1989 Page 12<br />
I<br />
(3) Examine the way that a typical corporation functions.<br />
I<br />
(A) What are the advantages of a corporation? 5 pts.<br />
(B) What are the disadvantages of a corporation? 5 pts.<br />
(C) Compare a corporation to business structure, to a<br />
partnership and a job proprietorship (giving advantages<br />
and disadvantages in your comparisons.) 10 pts.<br />
TheChainof Commandina TypicalCorporation
<strong>Economics</strong> Final Exam — June, 1989 Page 13<br />
/ I 1<br />
Threciedby Directedbythe 1<br />
Command FreeMarket<br />
Key — S.U.=USSR PRC—Peoples Republic of China<br />
S=Sweden J—Japan US=United States<br />
(4) (A) Explain what the differences are between a command and<br />
a market economies. 8 pts.<br />
(B) How do these 2 systems try to solve the economic needs<br />
of its people. 7 pts.<br />
(C) Make a political statement concerning how politics affects<br />
economic goals. Use the above chart in your explanation.<br />
5 pts.<br />
-J
<strong>Economics</strong> Final Exam — June, 1989 Page 14<br />
0<br />
Howa FederalDollarIs Spent<br />
GRAPHA<br />
(5) (A) What are sources of income for the federal government?<br />
Why do we run a deficit in the U.S. Budget Process? 5 pts.<br />
(B) What are the major ways used to reduce the federal deficit?<br />
5 pts.<br />
(C) Based upon the graph above explain why we spend the<br />
approximate amounts in each of 3 of the areas. 10 pts.
Economic<br />
-‘Regents NAME:F JA1. EXAPf—A<br />
Multiple Choice — Write the letter of the best answer in the<br />
space provided<br />
1. The fundamental economic problem facing all societies is<br />
a. limited income c. scarcity of resourceE<br />
b. inflation d. conspicuous consumption<br />
2. The three basic questions that all economies have to<br />
answer include all of the following except:<br />
a. what to produce c. for whom to produce<br />
b. when to produce d. how to produce<br />
3. Economists<br />
a. describe how people will feel about an economic decision<br />
b. predict how people will change their behavior when things<br />
such as price change<br />
c. do not allow these personal opinions and beliefs to<br />
influence their work<br />
d. analyze wflether the result of an economic decision was<br />
good or bad<br />
4. The factors of production are:<br />
a. productive resources<br />
b. land, labor, and capital<br />
c. required in manufacturing<br />
d. all of the above<br />
5. In a traditional economy, social and economic roles are:<br />
a. well—defined<br />
b. changing constantly<br />
c. organized by a complex bureaucracy<br />
d. based on individual freedom<br />
6. The answers to the basic economic questions in a command<br />
economy are based on:<br />
a. consumer demand<br />
b. little or no government involvement<br />
c. the goals of the state<br />
d. habit and custom<br />
7. The profit motive:<br />
a. leads to lover prices, better quality, and greater<br />
variety<br />
b. leads to better quality and higher prices<br />
c. leads to less efficiency<br />
d. •hould not be associated ‘with capitalism<br />
8. Which of the following is not an advantage of partnerships?<br />
a. they are relatively simple to establish and manage<br />
b. they provide opportunity for specialization in management<br />
c. they can be used to raise capital through the sale of<br />
stocks and bonds<br />
d. they often are more efficient than are proprietorships
<strong>Economics</strong> — 11 Regents<br />
9. The opportunity cost of a college education:<br />
a. would equal the amount of tuition<br />
b. would be the same for all students<br />
c. is what is sacrificed in order to go to college<br />
d. involves time, but not money<br />
. 10 An economic market is:<br />
a. a place where business exchanges are made face—to—<br />
face between tuyers and sellers<br />
b.<br />
c.<br />
d.<br />
an arrangement that brings<br />
a special kind of shopping<br />
a regulatory body<br />
buyers<br />
mall<br />
and sellers together<br />
11. Which of the following is not a determinant of demand<br />
elastici ty?<br />
a. durability of the product<br />
b. income required to buy the product<br />
c. availability of substitutes<br />
d. urgency of need<br />
. 12 An increase in demand due to a change in consumer taste<br />
is illustrated by:<br />
a.<br />
b.<br />
a worker receiving a 50 percent pay increase<br />
a reduction In the price of tennis racquets, which<br />
results in an increase in the number of tennis balls<br />
sold<br />
c. a surplus<br />
emphasize<br />
of synthetic fabrics<br />
denims and cotton<br />
due to styles that<br />
d. a barely noticeable rise in the level of prices’<br />
13. All consumer decisions are affected by these two scarce<br />
resources<br />
a. energy and effort<br />
b. oil and gas reserves<br />
c. time and income<br />
d. power and persuasion<br />
. 14 If the price of a product is low, suppliers will offer:<br />
a.<br />
b.<br />
greater<br />
smaller<br />
quantities<br />
quantities<br />
for<br />
for<br />
sale<br />
sale<br />
c.<br />
d.<br />
greater quantities,<br />
the same quantities<br />
unless demand increases<br />
. 15 If the quantity supplied changes little in response to a<br />
price change,<br />
a. Inelastic<br />
supply is:<br />
c. elastic<br />
b. unit elastic d. fixed<br />
16 . In contrast<br />
corporations<br />
to sale proprietorships<br />
have the disadvantage<br />
and<br />
of<br />
partnerships,<br />
a. higher taxes<br />
b.<br />
c.<br />
d.<br />
greater liability.<br />
more difficulty in raising capital’<br />
uncertain future if the owners die<br />
C
<strong>Economics</strong> — 11 Regents Page 3<br />
. 17 One<br />
a.<br />
consequence<br />
the income<br />
of the 1986 tax<br />
tax becomes less<br />
reform is that:<br />
progressive and more<br />
proportional<br />
b. the burden of taxes shifts from businesses to<br />
c.<br />
d.<br />
individuals<br />
low—income ind1v dualb<br />
the tax system will<br />
social and economic<br />
will<br />
be used<br />
goals<br />
pay higher taxes<br />
as a tool to promote<br />
18. Today, property taxes:<br />
a. are not subject to criticism<br />
b. stimulate spending for home improvement<br />
c. are criticized because an individual’s income may not<br />
be related to the value of his or her property<br />
d. are not levied on real estate<br />
19. The size of the federal debt as a percentage of the gross<br />
national product:<br />
a. has increased steadily since 1945<br />
b. has decreased since 1981<br />
c. is not an important comparison<br />
d. is less now than it was in 1945<br />
20. A characteristic of a pure monopoly is<br />
a. numerous sellers<br />
b. substitute good or service<br />
c. easy entry<br />
d. almost complete control of market price<br />
21. The reasons banks fail include:<br />
a. too many loans concentrated in a weak industry<br />
b. poor management<br />
c. a weak economy<br />
d. all of the above<br />
22. Today, money deposited in banks:<br />
a. is insured to $100,000 by the FDIC<br />
b. seldom is returned to the community in the form of loans<br />
c. is insured in federally chartered banks, but is not<br />
insured in state chartered banks<br />
d. seldom earms interest for the depositor —<br />
23. Because of inflation, modern money is not:<br />
a. stable in value c. divisible<br />
b. portable). d. durablej<br />
24. Which of the following is consistent with an easy money<br />
policy?<br />
a. high interest rates;<br />
b. discouraging consumers from using credit—’-c.<br />
encouraging business to borrow money by lowering interest<br />
rates<br />
d. the price of money is increased
<strong>Economics</strong> — 11 Regents Page 4<br />
. 25 The U.S. money supply can be expanded by:<br />
a. activities of private, commercial banks operating<br />
under a fractional reserve system<br />
b. only by an act of Congress<br />
c. relying on the FED to print new Reserve Notes, but not<br />
relying on banks’ excess reserves<br />
d. an order from the President to the Treasury Department<br />
. 26 When prices rise too fast and the economy<br />
inflation, the FED would probably:<br />
is suffering from<br />
a. lower the discount rate<br />
b.<br />
c.<br />
d.<br />
buy government securities<br />
“close” the discount window<br />
lover the reserve requirement<br />
27. The Dow Jones Industrial Average is:<br />
a. an index of price changes of 500 representative stocks<br />
b. the sum of closing prices of 30 selected stocks<br />
c. an average of leading stocks reported daily by the AMEX<br />
d. also known as the Standard and Poor’s Index<br />
28. A fund set up to collect income and disburse payments for<br />
retirement, old age, or disability is called a:<br />
a. REIT c. future<br />
b. money market d. pension fund<br />
. 29 Gross National Product includes:<br />
a. secondhand sales<br />
b.<br />
c.<br />
d.<br />
underground economy sales<br />
government spending for weapons<br />
intermediate products<br />
30. Economic growth is important because:<br />
a. it can generate more jobs in the United States and in<br />
developing countries<br />
b. it helps the Free World meet the challenge of communism<br />
c. it brings about a higher standard of living<br />
d. all choices are correct<br />
31. The American economy has a history of:<br />
a. instability and irregular ups and downs<br />
b. no growth -<br />
c. recessions that endure for long periods<br />
d. steady, continuous growth and prosperity<br />
32. Which of the following occurs during a recession?<br />
a. durable goods industries, such as home construction<br />
and autos, suffer more than non—durable industries,<br />
such as food, medical care, and fuel<br />
B. the social cost of instability á generally slight<br />
c. unemployment decreases<br />
d. people have less income to spend, and factories begin<br />
to hire more workers
<strong>Economics</strong> — 11 Regents Page 5<br />
33. John N. Keywes believed that<br />
a. the marketplace was self regulating<br />
b. government can avoid recessions by a combination of<br />
deficit spending and regulation of taxes and the money<br />
supply<br />
c. government<br />
nient<br />
ld shou not be involved in reducing unemploy—<br />
d. depressions cannot be avoided<br />
. 34 Inflation caused<br />
of manufacturing<br />
by labor groups<br />
inputs is:<br />
and others driving up prices<br />
a.<br />
b.<br />
government<br />
cost—push<br />
deficits<br />
c. and—pull d€r<br />
d. an increase in the money supply<br />
35. The effects of inflation include all of the following except:<br />
a. inflation favors creditors over debtors<br />
b. the value of the dollar declines<br />
c. high—risk investments seem attractive<br />
d. higher interest rates that change consumer spending<br />
habits<br />
_____ 36. Which of the following feel the impact of inflation the most?<br />
a. Doctors and lawyers<br />
b. workers belonging to labor unions<br />
c. retail businesses<br />
d. retired people living on fixed incomes<br />
37. The three most important economic goals are full employment,:<br />
a. a constant GNP, and control of prices<br />
b. an increasing money supply, and price controls<br />
c. wage and price controls, and a growing GNP<br />
d. economic growth, and price stability<br />
38. Demand—side economics is most consistent with:<br />
a. Reaganomics<br />
b. Keynesian economics<br />
c. attempts to control inflation<br />
d. efforts to reduce the size of the federal government<br />
39<br />
. Which of the following statements is true about the 1980’s?<br />
a. World trade has declined..-X<br />
b. the United States is exporting more and importing lessj<br />
c. the level of Western nations’ tariffs has increased<br />
greatly<br />
d. the United States trade deficit has grown to record<br />
heights
<strong>Economics</strong> — 11 Regents Page 6<br />
40. Which statement is true about the Japanese automobile<br />
industry?<br />
a. it became number one in the world in 1981<br />
b. it has lover labor costs than the United States<br />
c. it was asked to restrict exports voluntarily to the<br />
United States<br />
d. all choices are correct<br />
. 41 Which of<br />
deficit?<br />
the following would accompany a large U.S. trade<br />
a.<br />
b.<br />
c.<br />
d.<br />
a balance of payments surplus<br />
exports are greater than imports<br />
strength of dollar remains same<br />
unemployment in export industries<br />
42. Why are Communist countries today prime examples of command<br />
economies?<br />
a. they practice pure communism<br />
b. there are no social classes;<br />
c. they rely on extensive government planning to direct<br />
their economies<br />
d. they do not have private property or profit incentives<br />
. 43 To be useful as money, an<br />
a. durable and divisible<br />
item should be<br />
b. scarce and portable<br />
c. accepted and stable in value<br />
d. all of the above<br />
44. When inflation is 10% per year and your salary increase is<br />
7 percent per y.ear<br />
a. you have lost purchasing power<br />
b. you have gained purchasing power<br />
c. your purchasing power has stayed the same<br />
d. you cannot answer without more information<br />
. 45 The increased use of robots in manufacturing can lead to<br />
trade—offs between the attainment of which two economic goals?<br />
a. equity and efficiency<br />
b. efficiency and economic growth<br />
c. equity and full employment<br />
d. efficiency and full employment<br />
46<br />
. What is the “multiplier effect”?<br />
a. the magnified impact on savings due to a change in<br />
taxation<br />
b. the rate at which a dollar circulates through the economy<br />
C. the magnified impact on national income of an initial<br />
increase or decrease in spending<br />
d. the bank deposit turnover rate
<strong>Economics</strong> — 11 Regents Page 7<br />
47. What happens when the Fed raises the reserve ratio?<br />
a. excess reserves increase<br />
b. there is a decrease in credit availability<br />
c. there is an increase in credit availability<br />
d. the discount rate falls<br />
. 48 Which of the following factors does not cause economic<br />
growth?<br />
a.<br />
b.<br />
c.<br />
improved technology<br />
a decrease in the labor—force participation<br />
an increase in the quality of human capital<br />
rate<br />
d. an increase in productive land in cultivation-’<br />
49 . What is the largest single source of revenue for state<br />
govrnments<br />
?<br />
a. sales taxes<br />
b. property taxes<br />
c. grants—in—aid<br />
d. public utility income<br />
50. What is a “favorable balance of trade”?<br />
a. when merchandise exports are greater than merchandise<br />
imports<br />
b. when merchandise imports are greater than merchandise<br />
exports<br />
c. when long—term capital accounts exceed short—term<br />
capital accounts<br />
d. when gold movements into a country are greater than<br />
gold outflows<br />
i)sing the data contained in the chart on the following page,<br />
choose the answer that best completes each statement or<br />
answers each question. Fill in the space under the letter<br />
of that item.<br />
51. In the graph, association members are shown to be:<br />
a. union members<br />
b. non—union members<br />
c. in the civilian labor force<br />
d. not in the civilian labor force<br />
52. The number of union members is approximately:<br />
a. 98 million<br />
b. 20.9 3illion<br />
c. 22.6 million<br />
d. 226.5 million<br />
53<br />
. Workers not in the civilian labor force make up what percent<br />
of the total population?<br />
a. 76.72<br />
b. 53%<br />
c. 47Z<br />
d. 36.1%
<strong>Economics</strong> — 11 Regents Page 8<br />
. 54 Businesses are interested in using robots on assembly lines<br />
primarily to:<br />
a. reduce labor costs<br />
b. slow down production<br />
c. eliminate unions<br />
d. provide jobs in other areas.<br />
55. The two principal concerns of economists who urge protec—<br />
tionist trade policies are:<br />
a. unemployment and inflation<br />
b. trade deficits and high interest rates<br />
c. high interest rates and inflation<br />
d. unemployment and trade deficits<br />
56. For tax purposes the net income realized from the sale of<br />
an asset is classified as:<br />
a. earned income<br />
b. income—in—kind<br />
c. capital gains<br />
d. transfer payments<br />
57. The growth of “big government” today can be seen in the<br />
increase in<br />
a. business expenditures<br />
b. federal expenditures<br />
c. state government expenditures<br />
d. local expenditures<br />
. 58 In order to examine real changes in ON? overtime, it is<br />
necessary to compute the:<br />
a. constituent dollar ON?<br />
b. current dollar GNP<br />
c. constant GNP<br />
d. yearly GNP<br />
59. If the government were to levy a tax of one dollar on<br />
every pair of pants sold, which of the following would<br />
most likely result?<br />
a. suppliers would sell more and charge a higher price<br />
b. consumers would pay a higher price for pants and<br />
probably buy a smaller quantity<br />
c. consumers would pay a higher price and as a result<br />
suppliers vould make large profits<br />
d. suppliers vou]d increase the quantity sold in order<br />
to make up for the taxes paid to the government<br />
60<br />
. Which one of the following would usually reduce consumer<br />
spend ing:<br />
a. a decline in consumer incomes<br />
B. a reduction in personal income tax ra,tes<br />
C. an expectation that prices will soon rise<br />
d. Increased government payments to individuals
<strong>Economics</strong> — 11 Regents Page 9<br />
Answer 2 out of 4 Essay Questions<br />
1. A major economic issue facing America today is a huge deficit.<br />
Using the information given concerning our deficit answer the<br />
following questions.<br />
(A) What is the relationship between balanced budget and<br />
deficit spending.<br />
include: Federal taxes and spending (overview)<br />
Personal income taxes<br />
Defense and social spending programs<br />
Interest rates<br />
() Wt2at steps have Americans (Gov’t.) taken to help resolve<br />
this problem.
<strong>Economics</strong> 11 Regents Page 10<br />
2. Your term paper in class made you compare 2 countries and their<br />
economies.<br />
(A) Restate in one paragraph the reasons for major economic<br />
discrepancies between have — and have—not countries.<br />
(Give at least 3 reasons)<br />
(B) Using the comparison chart between U.S. and the U.S.S.R.,<br />
tell us how the economic and political organization of<br />
each country has led to the given economic difference<br />
between the two countries.
<strong>Economics</strong> — 1].Regents<br />
I..<br />
Page 11<br />
3. The issues listed below are some concerns that are often cited by<br />
people who want to limit economic growth. Read the list. Then<br />
follow the directions.<br />
nuclear accidents<br />
destruction of wilderness F<br />
contamination of water supply<br />
explosions at chemical plants<br />
oss of farmland due to<br />
urbanization<br />
.-“erosionand overiise of farm soils<br />
contamination from pesticides<br />
Aepletion of the ozone layer<br />
damage to hearing from excessive<br />
noise<br />
accumultion of carbon dioxide in<br />
atmosphere<br />
cluttering space with debris<br />
.-crowding in urban areas<br />
problems of disposing of radioactive<br />
wastes<br />
problems of disposing of solid wastes<br />
toxic pollutants in air<br />
damage from use of chemical fertilizers<br />
destruction of tropical rain forests<br />
damage to ocean environment<br />
’<br />
depletion ot fish in waterways<br />
depletion of supplies of minerals<br />
and other natural resources<br />
scarcity of water<br />
chemicals in the food chain<br />
From this list, choose five issues that you consider to be important.<br />
List them below. Then describe the problem and offer a solution for<br />
each problem.<br />
1.<br />
2.<br />
3.<br />
4.<br />
5.<br />
Lct’ r( .-. ilc’ &/ L’<br />
. Problem .f./1/4( ,•<br />
?) 1?<br />
(.<br />
lPoss solution:<br />
-’<br />
Problem:<br />
Problem:<br />
_c<br />
t<br />
,: c<br />
Possible solution:_________________________________________________<br />
Problem:<br />
Possible solution:___________________________________________________<br />
Problem:<br />
Possible solution:_________________________________________________<br />
--<br />
-<br />
-.<br />
-<br />
.--,<br />
—
<strong>Economics</strong> — 11 Regents Page 12<br />
FEDERAL BUDGET<br />
Suppose the U.S. Congress was faced with the decision to allocate<br />
OOL) ,OOO ,OoO $l.<br />
for new programs. Now would you recommend the money<br />
be spent?<br />
5<br />
)(2)<br />
(1) Food stamps for poor<br />
vResearch on cure for<br />
Americans<br />
cancer<br />
/0 (3) Food for<br />
Development $(4)<br />
qq( ) Research<br />
poor in India or Africa.<br />
of nuclear power by the federal<br />
and development for mass transit<br />
government<br />
r( 6) Mousing for low—income families<br />
‘ (7)<br />
f (8)<br />
4(9)<br />
‘Low, or no cost, loans for needy college students<br />
Grants to local governments for educational needs<br />
Subsidies to U.S. farmers<br />
(10) r3own Yo idea<br />
Rank the above items in order according to your priorities, i.e.<br />
which program would you rate the highest, the lowest priority, etc.?<br />
Substantiate your reasons for each number in light of America’s<br />
economy today.<br />
RANK PROGRAM O.<br />
kiighest Priority 1. _____________________ 1. _________________<br />
2. _____________________<br />
3. _____________________<br />
4. _____________________<br />
z.<br />
s.<br />
4.<br />
5. 5.<br />
6. ____________________<br />
6.<br />
7. 7.<br />
8. _____________________<br />
8.<br />
9. 9.<br />
10. 10.<br />
SUBSTANTiATION
ESSAY<br />
5.’<br />
COMPARATIVECONOMIES:<br />
THEUNITEDSTATESAND THESOVIETUNION<br />
THECMLIAN LABORFORCE<br />
AS A PERCENTAGEOF TOTAL<br />
U.S.POPULATION<br />
TOTAL .S. POPULATION<br />
million<br />
D<br />
LANDAREA<br />
(square miles)<br />
UnitedStates 3.6 mu.<br />
Soviet Union 8.6ml !.<br />
POPULATION<br />
Vriited States 230ml!.<br />
Sc •jet Union 268ml!.<br />
URBANIZATION<br />
(%living SD cities)<br />
United States 73%<br />
Soviet Union 65%<br />
On<br />
(barrels per day)<br />
UnitedStates 837 . mu<br />
Soviet Union 12.18ml! .<br />
STEEL<br />
(in metric tons)<br />
UnitedStates 100.8ml! .<br />
Soviet Union 148 mil .<br />
C1ttan Labor Fot<br />
— :1<br />
AUTOS<br />
UnitedStates 6.4 ml!.<br />
Soviet Union 1.3ml!.<br />
COMPUTERS<br />
(value of)<br />
UnitedStates $38.2 . bi!<br />
Soviet Union $92 bil .<br />
FARMWORKERS<br />
(%of workforce)<br />
UnitedStates 3%<br />
SovietUnion 24%<br />
MEAT PRODUCED<br />
PER PERSON<br />
UnitedStates 256 lb.<br />
SovietUnion 126 lb.<br />
GRAIN PRODUCED<br />
PER PERSON<br />
UnitedStates 2552lb.<br />
SovietUnion 1571lb.<br />
PopIe not in civilian labor force<br />
D Associationmemberships—<br />
[: union memberships<br />
a Non-unson<br />
PERCENTAGEOF<br />
CIVILIANLABORFORCE<br />
PERCENTAGEOF<br />
TOTALPOPULATION<br />
2.4 - 11<br />
Association<br />
Memberships<br />
20.9 9.8<br />
Union<br />
Memberships<br />
76.7 36.1<br />
Non-union<br />
Workers<br />
100.0 47.0<br />
I
RB<br />
1E: NA<br />
IU?<br />
Answer 2 of 5 Questions<br />
ECONOMICS B<br />
1. Explain why you agree or disagree with the following statement;<br />
If workers didn’t lose their job, there would be no unemployment.<br />
Give clear economic reasonings for your answer.<br />
2. Explain the different uses of money in our society. Include the<br />
types of money we have and the reasons for its exchange.<br />
3. How would you increase productivity in our society? Why is<br />
productivity the key to a country’s economic success?<br />
4. Explain the difference between government expenditures for goods<br />
and services and government transfer payments. Explain how each<br />
of these two types of government spending illustrate an important<br />
role of government in a market economy.<br />
5. When consumers began eating less beef because of their concern<br />
about good health, the beef industry began producing fewer<br />
traditional cuts of meat. Instead, it introduced new, leaner<br />
products. Define profit and explain how this event illustrates<br />
its role in a market economy.
NAME:_____________________<br />
Page 2<br />
Multiple Choice: Write the letter of the best answer in the space<br />
provided.<br />
1. Scarcity:<br />
a. applies only to poor individuals<br />
b. applies to individuals everywhere<br />
c. could be eliminated if we all worked harder<br />
d. does not apply to businesses<br />
2. Rudy receives a gift of $20, which he then spends on a<br />
new shirt. Rudy’s expenditure:<br />
a. illustrates scarcity and choice<br />
b. illustrates scarcity but not choice<br />
c. illustrates choice but not scarcity<br />
d. does not illustrate scarcity or choice because the<br />
S20 was a gift<br />
3. Instead of buying a ticket to a popular concert, Sam waits<br />
in line all night in order to obtain one of the tickets<br />
given away at the box office. Sam<br />
a. does not bear an opportunity cost because the ticket<br />
was free<br />
b. bears an opportunity cost, which is the price he would<br />
otherwise have paid for the ticket<br />
c. bears an opportunity- cost, which is what he would<br />
otherwise have done with his time<br />
d. does not bear an opportunity cost because he only<br />
gave up sleeping<br />
4. In economics, the word marginal means:<br />
a. money<br />
b. tolerable<br />
c. poor<br />
d. additional<br />
5. Regular unleaded gas costs 90 cents a gallon, and premium<br />
unleaded costs $3.per gallon. If Mary chooses the premium<br />
over the regular gas, her marginal cost per gallon is:<br />
a. 10 cents<br />
b. $1<br />
c. $1.90<br />
d. $2.00<br />
6. A business decision to produce high—top shoes illustrates<br />
which of the three basic economic decisions:<br />
a. what to produce<br />
b. what price to charge<br />
c. how to produce<br />
d. how much money to spend
<strong>Economics</strong> B Page 3<br />
7. The choice by automobile companies to use more aluminum<br />
and less steel when producing cars illustrates which of<br />
the following basic economic decisions:<br />
a. what to produce s<br />
b. for whom to produce<br />
c. how much profit to make<br />
d. how to produce<br />
8. A command economy:<br />
a. does not have to decide for whom to produce<br />
b. results when resources are owned by the government<br />
c. results when resources are owned by corporations<br />
d. does not have to cope with scarcity<br />
9. In order to guide individuals when they make the basic<br />
economic decisions, a market economy relies mostly on:<br />
a. the government<br />
b. the banking system<br />
c. prices<br />
d. television and newspapers<br />
. 10 When producers seek their self—interest in a market economy,<br />
they usually:<br />
a. don’t produce what consumers ‘want<br />
b. harm consumers and waste scarce resources<br />
c.<br />
d.<br />
produce what consumers value<br />
don’t consider the costs and<br />
most<br />
benefits of their decisions<br />
. 11 In a market economy, for whom<br />
a. in resource markets<br />
to produce is decided:<br />
b. in the goods and services markets<br />
c. by businesses<br />
d. by the government<br />
12. A higher tax on alcoholic beverages could reduce highway<br />
fatalities among young drivers primarily because of:<br />
a. the price effect<br />
b. a change in people’s preferences<br />
c. a change in people’s incomes<br />
d. a change in people’s expectations<br />
13. When the price of milk is $1 per quart, Harriet buys four<br />
quarts per week. Harriet’s purchase of four quarts of milk<br />
per week:<br />
a. shows that Harriet does not like milk<br />
b. shows Harriet’s demand for milk<br />
c. does not show Harriet’s demand for milk<br />
d. shows that consumers often ignore opportunity cost<br />
14<br />
. If the price of gasoline increases, consumers<br />
a. will buy less gasoline because they will no longer use<br />
It to satisfy lover—valued uses<br />
b. will buy the same amount as before because gasoline has<br />
no substitutes<br />
C. will buy less gasoline because their preferences change<br />
d. will buy the same amount as before and spend less<br />
money on other goods and services
<strong>Economics</strong> B Page 4<br />
15. If the price of a good increases, the demand for a<br />
substitute good viii.<br />
a. increase<br />
b. decrease<br />
c. remain unchanged<br />
d. increase or decrease<br />
Assume that Victor, Marilyn, end Dave are the only three consumers<br />
in the market and that their demands are given by the demand<br />
schedules below. Use this information to answer questions lb and<br />
17 below.<br />
Chocolate Chip Cookies per Week<br />
Price Victor’s Demand Marilyn’s Demand Dave’s Demand<br />
$ .50 8 20 30<br />
1.00 6 1 28<br />
1.50 4 16 26<br />
2.00 2 ? 24<br />
2.50 0 6 20<br />
. 16 At a price of $1.50 per cookie,<br />
in the market per week is<br />
a. 58 cookies<br />
the total quantity demanded<br />
b. 54 cookies<br />
c. 46 cookies<br />
d. 26 cookies<br />
17. If the total quantity demanded in the market is 36 cookies<br />
per week at a price of $2, then the quantity that Marilyn<br />
wants to buy at that price is<br />
a. 10 cookies per week<br />
b. 8 cookies per week<br />
c. 5 cookies per week<br />
d. 3 cookies per week<br />
18. Which of the following explains the shift of the demand<br />
curve from Old Demand to New Demand shown at the right?<br />
a.<br />
b.<br />
consumers’ incomes have decreased<br />
the price of a complementary good<br />
decreased<br />
has<br />
P<br />
Old Demand<br />
c. the price of the product has increased<br />
d. consumers’ preferences<br />
favor of the product<br />
have changed in New<br />
.Demand<br />
. 19 In economics, supply<br />
a. the amount of an<br />
produce<br />
refers to<br />
item consumers want suppliers to<br />
b. the amount of an item suppliers will produce at a<br />
c.<br />
d.<br />
given price<br />
the maximum quantity of an item that can be produced<br />
with available resources<br />
the various quantities of an item that a producer is<br />
willing to sell at different possible prices
<strong>Economics</strong> B Page 5<br />
. 20 The price effect, as it applies to supply, refers to the<br />
fact that<br />
a. consumers want more items supplied at lower prices<br />
b. producers usually provide more of an item at lower<br />
c.<br />
d.<br />
prices and less at higher prices<br />
a lower price of a product causes a supplier to<br />
produce more of it<br />
producers usually provide more of an item at higher<br />
prices and less at lower prices<br />
21. Which of the following is not one of the determinants of<br />
supply?<br />
a. weather<br />
b. the price of resources<br />
c. consumers’ demands<br />
d. technological change<br />
22. The graph at the right presents a supply curve of chocolate.<br />
Which of the following explains the shift of the supply<br />
curve from Old Supply to New Supply? P New /<br />
a. a higher price of chocolate Suppl f<br />
b. a decrease in consumers’ incomes<br />
c.<br />
d.<br />
a higher price of cocoa, which<br />
used to produce chocolate<br />
good weather<br />
is<br />
Old<br />
SUPP<br />
)<br />
. 23 An<br />
a.<br />
equilibrium price is important<br />
it balances demand and supply<br />
because<br />
and eliminates scarcity<br />
b. it allows consumers to buy the same amount that<br />
suppliers want to sell<br />
C.<br />
d.<br />
it causes a<br />
it balances<br />
surplus<br />
consumers’ sçending with their incomes<br />
. 24 If the government<br />
the likely result<br />
establishes<br />
will be<br />
a price floor for a product,<br />
a. a surplus<br />
b. decreased<br />
product<br />
of the product<br />
production and increased consumption of the<br />
c. reduced income<br />
d. a shortage of<br />
for<br />
the<br />
suppliers<br />
product<br />
25<br />
. A shortage of a product means that<br />
a. there is not enough of it to satisfy everyone fully,<br />
regardless of the price<br />
b. the price of the product is higher than people are<br />
willing to pay<br />
c. at the existing price producers do not want to sell<br />
all that consumers want to buy<br />
d. the product’s price is too high
<strong>Economics</strong> B Page 6<br />
. 26 A surplus of a product means that<br />
a. consumers have more of the product than they want<br />
b. at the current price, consumers do not want to buy<br />
c.<br />
d.<br />
all that producers want to sell<br />
the product’s price is below its equilibrium<br />
the produvt has no equilibrium price<br />
level<br />
. 27 When prices ration goods<br />
a. they also provide an<br />
and services<br />
and services,<br />
incentive to produce those goods<br />
b. they usually do not influence decisions to produce<br />
those goods and services<br />
c. they<br />
what<br />
do not determine how<br />
and how to produce<br />
a market economy decides<br />
d. they guarantee that all suppliers will receive a profit<br />
28. When the government plays a role in determining what is or<br />
is not produced in our economy, it usually<br />
a. does so by issuing orders to businesses and workers<br />
b. ignores markets<br />
c. tries to work through markets by influencing demand<br />
and supply<br />
d. does not buy goods and services to influence production<br />
. 29 Total government purchases of goods and services in our<br />
economy<br />
a.<br />
b.<br />
is the total<br />
accounts for<br />
of all purchases<br />
about 80 percent<br />
by the<br />
of all<br />
tederal government<br />
such purchases in<br />
c.<br />
d.<br />
our economy<br />
is the total<br />
is the total<br />
of all transfer payments<br />
of state, local, and federal government<br />
expenditures for goods and services<br />
. 30 If an income tax takes a bigger proportion of income from<br />
a richer person<br />
a. a flat—rate<br />
than<br />
tax<br />
a poorer person, then that tax is<br />
b. a proportional tax<br />
c.<br />
d.<br />
a regressive<br />
a progressive<br />
tax<br />
tax<br />
31. Which of the following is not a method by which the govern<br />
ment might intervene when external costs are harmful?<br />
a. the government can pass a law<br />
b. the government can pass a tax<br />
c. the government can create private property rights<br />
d. the government can reduce or eliminate a tax<br />
32<br />
. In resource markets, the following are the demanders or<br />
consumers:<br />
a. businesses<br />
b. resource owners<br />
c. government<br />
d. Individuals
<strong>Economics</strong> B Page 7<br />
. 33 Gail has a lawn mowing business and can mow 2 lawns per<br />
hour. Customers pay on average $3 to have a lawn moved.<br />
From this information we know that the value of Gall’s<br />
labor is<br />
a.<br />
b.<br />
c.<br />
.<br />
$1.50 per<br />
3.U0 per<br />
$6.0u per<br />
$7.5u per<br />
hour<br />
hour<br />
hour<br />
hour<br />
34. Which of the tollowing would not affect the value of one’s<br />
labor?<br />
a. the physical productivity of one’s work<br />
b. the amount of money one wants to earn<br />
c. the price consumers will pay tor what one produces<br />
d. the amount of skills one possesses<br />
35. The<br />
a.<br />
b.<br />
C.<br />
law of diminishing returns occurs<br />
when too few workers are employed by a business<br />
whenever wages increase<br />
when the addition of more workers crowds the resources<br />
of a business<br />
d. when customers reduce their demand for a product<br />
Questions 36 through 38 are based on the table at the right<br />
which shows labor productivity at a bakery.<br />
_____ . 36 If the bakery has already employed 2<br />
workers, the marginal productivity of<br />
an additional (third) worker is<br />
a. 4 cakes per day<br />
b. 6 cakes per day<br />
c. 18 cakes per day<br />
d. 20 cakes per day<br />
Number of<br />
workers<br />
__________<br />
0<br />
1<br />
2<br />
3<br />
Total number oi<br />
cakes<br />
baked per day<br />
0<br />
8<br />
14<br />
18<br />
4 20<br />
. 37 If consumers will pay $10 per<br />
third worker’s daily labor is<br />
cake, then the value of a<br />
a.<br />
b.<br />
c.<br />
d.<br />
$40 per day<br />
$60 per day<br />
$180 per day<br />
$200 per day<br />
38. Consumers will pay $10 per cake, and the bakery must pay each<br />
worker a daily wage of $45. As a result, the baker will want<br />
to hire a maximum of<br />
a. 1 worker<br />
b. 2 workers<br />
c. 3 workers<br />
d. 4 workers
<strong>Economics</strong> B Page 8<br />
39. Employers in a given labor market usually<br />
wages to obtain more workers because<br />
a. of the law of diminishing returns<br />
b. the law requires it<br />
must pay higher<br />
c. workers seldom have<br />
that are valuable<br />
a1tern tive uses of their time<br />
d. the opportunity<br />
tiigher for most<br />
cost of providing<br />
workers<br />
additional hours is<br />
. 40 Which of the following is not true about the going wage?<br />
a.<br />
b.<br />
c.<br />
the going wage can be the equilibrium wage<br />
if workers ask for a wage in excess of the going wage,<br />
they will probably not find employment<br />
an employer will have to pay the going wage in order<br />
to obtain workers<br />
d. the going wage might not<br />
particular labor market<br />
be the one prevailing in a<br />
. 41 Suppose the civilian labor force is composed of 94 million<br />
employed workers and 6 million unemployed workers. In<br />
this case, the<br />
a. 2 percent<br />
b. 4 percent<br />
unemployment rate would be<br />
C.<br />
d.<br />
6 percent<br />
8 percent<br />
. 42 Suppose there are many jobs available, but many workers are<br />
unemployed because they do not have the skills required by<br />
those jobs. The unemployment of these workers illustrates<br />
a. seasonal unemployment<br />
b. frictional unemployment<br />
c. weak—demand unemployment<br />
0. structural unemployment<br />
43. Which of the following describes the economic meaning of<br />
investment?<br />
a. Harold puts lOO into a savings account at a bank<br />
b. Apple Computer produces 10 computers and sells them<br />
to a publishing company<br />
c. Mr. Thriftwell purchases some stock for his daughter’s<br />
future college education<br />
d. Ms. Coldfinger buys $1,000 of gold<br />
. 44 Which of the following would not be likely<br />
demand is less than aggregate supply?<br />
if aggregate<br />
a.<br />
b.<br />
falling prices<br />
declining employment<br />
c.<br />
d.<br />
increasing<br />
decreasing<br />
production<br />
wages<br />
45<br />
. Gross national product is the sum of the prices<br />
a. of all sales<br />
b. of all intermediate products<br />
c. of all final goods and services<br />
d. of all goods and services purchased by consumers
<strong>Economics</strong> B Page 9<br />
. 46 increases in real GNP measure<br />
a. the rate of inflation<br />
b.<br />
C.<br />
the amount<br />
the growth<br />
of saving<br />
of a nation’s production and income<br />
47. If people use barter exchange instead of money exchange,<br />
then<br />
a. buyers arid sellers will be able to locate one another<br />
more easily<br />
b. there can be only one price, instead of many possible<br />
prices, for each item<br />
c. buyers and sellers will have more difficulty exchanging<br />
with one another<br />
d. scarcity will be eliminated because money is the root<br />
of all evil<br />
48. When a buyer writes a check to pay for a product and the<br />
seller deposits the check in the bank<br />
a. barter exchange occurs<br />
b. coin and currency are transferred from the buyer’s<br />
checking account to the seller’s checking account<br />
c. bank numbers are transferred from the buyers checking<br />
account to the seller’s checking account<br />
d. nothing is transferred from the buyer’s checking<br />
account to the seller’s checking account because the<br />
check is money<br />
49. When someone deposits currency in a checking account at a<br />
bank, the bank<br />
a. usually keeps only a fraction of the deposit on reserve<br />
and lends the rest<br />
b. usually keeps all of the money on reserve<br />
c. usually lends all of the money instead of keeping it in<br />
idle reserves that do not provide the bank with interest<br />
income<br />
d. uses the money to buy gold, which it often keeps in<br />
its vault<br />
. 50 If during a given year the federal government<br />
and receives $500 of tax revenues, then<br />
a. there is a federal deficit equal to $600<br />
b. the national debt will rise by $500<br />
spends $600<br />
c.<br />
d.<br />
there is a federal surplus equal to<br />
the national debt will rise by $100<br />
$100<br />
- 51. Supply—side economists generally<br />
a. favor higher marginal tax rates<br />
b. ignore incentives to produce goods and services<br />
c. focus on methods to alter aggregate demand in order<br />
indirectly to change aggregate supply<br />
d. emphasize the importance of tax rates in directly<br />
influencing the willingness of individuals to produce<br />
goods and services
<strong>Economics</strong> B<br />
Page 10<br />
_52. When two people trade existing goods with one another<br />
a. the gain of one person is the loss of the other<br />
b. both people gain<br />
c. both people lose<br />
d. nothing is gained because new goods are not produced<br />
33 . If a nation’s balance of trade is in deficit, then<br />
a. it is importing more goods than it is exporting<br />
b. it is importing more goods and services than it is<br />
exporting<br />
c. it is exporting more goods than it is importing<br />
d. it is exporting more goods and services than it is<br />
importing<br />
54. The balance of payments<br />
a. is in deficit when a nation borrows abroad<br />
b. must always balance because foreign borrowing and lending<br />
will compensate for a deficit or surplus in the nation’s<br />
current account balance<br />
c. is in surplus when a nation borrows abroad<br />
d. excludes imports and exports of services<br />
55. Tariffs, import quotas, and other measures that protect<br />
particular U.S. industries, will probably<br />
a. raise the nation’s level of employment<br />
b. raise empl.oywentin protected industries and reduce<br />
employment in other industries<br />
c. harm every worker in our nation<br />
d. promote greater specialization according to comparative<br />
advantage<br />
56. The economy of the Soviet Union<br />
a. does not have to decide what goods and services to produce<br />
* b. is characterized by private ownership of resources<br />
c. minimizes the influence of government planners<br />
d. emphasizes the collective ownership of resources<br />
57. Which of the following best describes the Soviet and U.S.<br />
economies?<br />
a. Consumers determine what to produce in both economies<br />
b. in both economies, for whom to produce is determined by<br />
individuals’ abilities to satisfy consumers’ wants<br />
c. Planners determine what the Soviet economy will produce,<br />
while consumers greatly influence what the U.S. economy<br />
will produce<br />
d. Soviet producers are free to determine how to produce<br />
their products, but U.S. businesses must usually follow<br />
the comrnandsof government<br />
58<br />
. In the soviet economy, the most imp.ortantpurpose of prices<br />
of consumer goods is<br />
a. to ration among consumers the quantities of goods<br />
determined by state planners<br />
b. to provide an incentive to produce<br />
c. to allow enterprises to earn profits<br />
d. to show producers what goods consumers want most
<strong>Economics</strong> B Page 1].<br />
. 59 In the Soviet Union<br />
a.<br />
b.<br />
there is no consumer freedom<br />
workers must work wherever the<br />
to work<br />
government tells them<br />
c.<br />
d.<br />
wage rates are equal for<br />
workers have considerable<br />
all jobs<br />
freedom to change jobs<br />
60. In most cases, wage rates in the Soviet Union are determined<br />
by<br />
a. consumers’ demands<br />
b. elections<br />
C. government planners<br />
d. workers
eco.44&c3- ia .Fss*.. EXA’1<br />
PMTX<br />
I. V hich ould hetheonehcstav of increasingtheamountof goodsandservicesthenation canproduee<br />
A. K.tisee er ine incomesothat e all havemoremoneyto spend.<br />
B. I I., e Ilie iR ci iiuieut t;ike o cr1hetries.<br />
C. Passlas to pie enI orLers from going on strike.<br />
I). Providebettermaehiner and moreeducationfor workers.<br />
2. I a compan\ is theonly makerof bricks in the country, it is:<br />
A. :\ eoillpchliir.<br />
H. : monopuI<br />
C. :tn . olniopol<br />
D. .\ meiropolis<br />
3. I a hich tarifl ‘crc pLieedon steelshippedinto the United States:<br />
A. The priceof steel¼ould n.<br />
B. l’oren!nersould bus moreioods from the United States.<br />
C. :\iit ri .tfl iescrvc ui iron ore sou1d last longer.<br />
Ii. The price of steelsuuld u up.<br />
4. Mr. .lonesha satedonie mone and usedit to buy sharesof stock in a brick manulacturin cornpan’..<br />
lie jnJ .)IheN ho ha c boughtsLoekon the company. In electingcompanydirectors. the hise one<br />
ole br eadi shareol stuck the n. 1 hecompanyis a:<br />
A. Partnership.<br />
B. Proprietorship.<br />
C. (..urpuration.<br />
D. (ooperaii c.<br />
5. The valueof the Lnited Statesdollar dependsupon:<br />
A. lI nu h itild andsil er the itivernment owns.<br />
B. I lu much it costs to nianulaeture iiione<br />
C. What is happeningto priceson the stock market.<br />
1). Hos muchyou canbuy ith a dollar.<br />
6. II Ihe amount of mi)ne circulating in the United States is greatly increased,at a tirne hcn there is<br />
full empIo ment. t hat øuld bemost Iikel to happen?<br />
A. The pricesof mansL’Oods and sersiceswould rise.<br />
B. Ve ouId all hebetteroil becausee could buy more.<br />
C. The interestrateson loansould immediately increase.<br />
D. Businesseswouldtr to slos do n production.<br />
7. The bestmeasureul economicgrowth in acountry isthechangein:<br />
A. The amountof moneyin circulation.<br />
B. The numberef automobilesproduced.<br />
C. Thesue of the nationaldebt.<br />
D. The amount of goodsandservicesproduced.<br />
8. Grasslandis a eountr in %hichthere is scr liule governmentownershipof farms andbusinesses.People<br />
ma train Forjobs andstart businessesasbestthey can.The governmentdoesnot usuallycontrol<br />
and ages. Grasslandis:<br />
A. Communistic.<br />
B. Capitalistic.<br />
C. <strong>Social</strong>istic.<br />
D. Cooperative.
9. lho’.e ho belic e that peupleshould he taxed accordingto their ability to pay oiikl he nlt st likely to<br />
.4. .\ncxeiseta .<br />
B. A generalsaks tJ\.<br />
C. AprogressRI. ifl ..oiflc tax.<br />
0. Aresident :il prt pert tab ..<br />
10. 1heniatulreason h Amciicaniariner usetractor—drawnfarm machineryinsteadof h rsess that<br />
A. 1racLor ljsi lon e it hanhorses<br />
8. .1r;icttii ‘ie utiouciiutpul pci dollar.<br />
C’. Tractors usu ll ‘o laster than hrses.<br />
I). Ilorses usuall cannot ork a holeday.<br />
11. Rud.LiiJ is a e,tiflt r in shieli the euvernmentowns all the industriesand the . a. P1 d:Lt and<br />
iC’ ale set k tle ’_’ ccililcilt lie gti ernmcnt provideseducation,child caic .iiid ned i. .!<br />
ull the people Bushhindis a:<br />
.4. Market ceont m<br />
B. \1j cd CL<br />
( (. .iiiiiiiaiid CL LIii\<br />
0. Tradit ioiial ec ii<br />
12. •n iinp4)rtant cited t mpe t it ii ii in ur economyis that:<br />
.4. It ‘u;iranice\ that all %orkcrs ihl hasejobs.<br />
H. It lcl psI. . LTp j) iee d ‘ a<br />
C. It ents hu iuss I rorn producing too man ’ goods.<br />
0. Ii prc enI iis. dcressi<br />
13. more e’ a’e prI)eessltig plants ale built and put into operation, more fertihiier ma h eJ rod..<br />
a h .produci I that happens. (en tlt,cr ill he:<br />
A. k untedmore.<br />
B. More expensi e.<br />
C. Lessexpensi e.<br />
0. Y antedkss<br />
14. Ii ‘e cre imparting nmn t of our t ransI tor radios from Japan,an increasein the tanil ott all transistor<br />
radiosimported into the Inited Statesprobably would:<br />
A. Make noditlereinx to usbccau e c could get transistor radiosfrom other countries<br />
B. Increasethe total number oljohs in the economy.<br />
C.<br />
0.<br />
Make uspa more Iontransistor radios.<br />
Make tran isIor radios more important to us,becausewe would probably haveto get along without<br />
them.<br />
15. According to the 1a of supply and demand,” if twice asmany headsof leuuce were ngro<br />
becauseof good eather asweregrown last year:<br />
A. The priceof lettuceould go up this )ear.<br />
B.’ The supplyof lettucewould sla the samethis year.<br />
t. I Icedeii,. iid br lettuceouId go ii do this year.<br />
D. The price of lettuce would go do n this year.<br />
lb. WhenCommunistChina buildsa canal entirety withhandlabor,wecanprobably assumeih;ut:<br />
A. Capital is relativel)scarcethere.<br />
B. Canalsbuilt by handarebetter.<br />
C. Labor is relativelyscarcethere.<br />
I). They havean abundanceof natural resources.<br />
4<br />
this sear
17. I lott much a orkcr e.Iri is dependsniostl on:<br />
A. Vthetherür not heheIøn s to a union.<br />
B. Thesuppl ol anddemandbr his skibk.<br />
( . I at .u;ii ieul<br />
ti .it cs.<br />
I). The kind of Ii riii br tt h di hettorks.<br />
1$. ‘ indand is a countr in hiçh the oernnien! owns major industries,such a raiIroad and dect rc<br />
potter COII ipJnIcS. I’rit ate elti/ens ott ii other industriessuch as farms and shoe laclories. People arc<br />
p.uidaccoidiii i Ii.ttt .‘.iinI .1 ioh ilic h.ite, hut the governmenthelpsthe poor :tlltI ‘eneiaIIt<br />
metlie;iIcareantI iti sehttolii \ineland is:<br />
A. SCi .itisti .<br />
l. (. lIIIIIILIII ‘I IL<br />
(. ( .I1tI Ih .I .<br />
I). I .tscist IC<br />
19. I It. I rc L1t . !.t e ct.e.Ise in ..‘‘ erIli flent spendingfor national defense tuld pr h:ihk he<br />
A. \l ucli nc;iipIt tilelit III IhiIldcIeIi e iiitltist ries.<br />
B. Ii..r ’.t cd iiJuLIItfl ut l)llJeteilsL itiids.<br />
( . \ Ii it L1.iII CLOlitililiL h 1)111iii tic 11.11till.<br />
I). ¼itincreaseiii prices tt itli iii the Ii ItRiil.<br />
20. liitl.ii nm call he tteli iictt as period iii:<br />
A. 1iit.reasin IT1Lli) jilt lileilt<br />
IL st,tirLat e ttt IiltIlc<br />
C. Rislil prices.<br />
I). I aihn haiih’.<br />
21. Ii tte ttantcd it t nd tul tthetlier an Increase in wagesover a period of time representedan actual in<br />
itJ. irds. C shouldItitib at tthat hashappenedto:<br />
creasein lit sia<br />
A. ( rossnat RIILII pr duct.<br />
B. ( onsunict pilecs.<br />
(. Ilic stuck market.<br />
I.). (,t.it ernnlent spendIn 2.<br />
22. “Scarcit i .n econtiiuic prtihleni:<br />
i. I:’ en bor ttealtIi Lintilies in the Lnitcd States.<br />
B. ( )iil Iii 1i(Iitl Liiiiilit.s III Ilie ( liiILLl Stales.<br />
C. I or Illitit idti.ils .111(1 t:imilies. hut not br novernmentsor nations.<br />
U. t.JIil%It)I people liii Iit e iii uiiideidct cit i1ied countries.<br />
23. Most ol the mone that .meriean businesses receiveby selling their productsor servicesis paid as:<br />
A. Proluisto the ott ncrsol the businesses.<br />
B. Vt.iCs an(lsal.iriesto ees. emplo<br />
C. Kent to property<br />
D. Intereston debts.<br />
ott ners.<br />
24. hidi mineof the kmllottin is likel to eiusc morepeopleto beout of work’<br />
A. A decreasein taSes.<br />
B. An increasein consumerspendin<br />
(. \<br />
.<br />
decreasein businessspendinj’.<br />
I). An increase in tocrnmcnt . spcndin<br />
5
25. Local governmentsspendmostof the moneythey take in for:<br />
A. Fire and policeprotection.<br />
B. .Streets and highttavs.<br />
C. l’a rks and recrealion.<br />
D. Education<br />
26. Which of the Following is the most important difference betweenthe economicsystemoFthe United<br />
Stalesand theeconon1itsysiem olSoviet Russia?<br />
A. Wagesandsalariesare much moreequalin Russiathan they are in the United States.<br />
B. The governmenthasnothing to do with theeconomyin the United States.<br />
C. Most ol the Factories.larnis. andequipmentareownedby the governmentin Russia.<br />
1). Uheeconom ol Russiahasaltta s grown moreslowly than the econom ot the United States.<br />
27. Economicdeniand ” for a product refersto how muchof the product:<br />
A. The peopleare willing andableto buy at eachprice.<br />
B. The got ernmcni orders it) hemade.<br />
C. Is availablebr sale.<br />
U. The peoples%ani.hether they can bu) it or not.<br />
2. In a capitalist economics stem,suchasthe United Stales,who hasthe most iniluencein deciding%hat<br />
sill heproduced.’<br />
A. Labor unions.<br />
B. The lderal overnmenl.<br />
C. Consumers.<br />
U. Businessmen.<br />
29. Oer a lon periodol time a cuuntr increasedits production olgoods and scr iCesper person. lliis was<br />
probablydue to:<br />
A. Au Increaseitt its population.<br />
B. tariffs tthi h kept out goodsfrom other nations.<br />
C. Consersatiofl 0 Fits flat ural resources.<br />
U. Increasedoutput per worker.<br />
30. Thereare manydili rent economicsystemsin the world. Which is the problem ihe all havein common?<br />
A. Peoidettant morethan can heproduced.<br />
B. Rigbusinessesaretoo potterlul.<br />
C’. Labor unionsaretoo potterlul.<br />
U. Farmersare producingtoo much.<br />
31. The bestmeaningof “gross national product” is:<br />
A. What the pusate firms of a country produceduring oneyear.<br />
B. Everythingboughtand sold Furmoneyin a country during oneyear.<br />
C. What a country producesthe mostof during oneyear.<br />
D. The total of everythingproducedin a country during oneyear.<br />
.32. A worker joins a union and lets the uniondeal with his employer about pa) andjob conditions.This is<br />
the ideaol:<br />
A. Collective bargaining.<br />
B. The openshop.<br />
C. Right-to-work laws.<br />
D. The closedshop.<br />
6
33. Onepossiblecauseof inflationisthat:<br />
A. Morepeopleareoutof workthanbefore.<br />
B. Peoplearetryingto spendmoneyfasterthangoodsandse iccs arebeingproduced.<br />
C. Man) goodsandseivicesarebeingproduced,butpeoplearenotbuyingthem.<br />
D. Thedollarbuysmoregoodsandservicesthanatanyothertime.<br />
34. If practicallyall our orker have jobsandour industriesarcoperatingat lull capacity,but wewantto<br />
increase(heproductionof houses,whatmustwedo?<br />
A. Decreasetheproductionof someothergoods.<br />
B. Putmoremoneyintocirculation.<br />
C. Getpeopleinterestedin sellingtheirhouses.<br />
D. Importbuildingmaterialfromforeigncountries.<br />
35. Thelonglinesof consumerswailingoutsidemanystoresin Russiatell usthat manyconsumergoods<br />
thereareprobably:<br />
A. Pricedtoolo .<br />
B. Ingreatsuppl<br />
).<br />
C. Not indemand.<br />
D. Pricedtoohigh.<br />
36. Anothercompanyhasstartedto makethesamekindof bricks,at aboutthesamecostandin thesame<br />
area,asMr. Jones’company.Mr. Jones’companywill probably:<br />
A. Hiremoreworkers.<br />
B. Raisethepriceof its bricks.<br />
C. Makemoreprofit.<br />
D. Sellfewerbricks.<br />
37. Duringa timeof full employment,if a citiien wanted slowdownrisingpricesin ihc UnitedStales.<br />
heshouldaskthegovernment to:<br />
A. Raisetaxes.<br />
B. Increaseinvestment.<br />
C. Makeloans.<br />
D. Increasespending.<br />
38. Whatistherewardof thosewhotaketheinvestment risksin anenterprise?<br />
A. Salaries.<br />
‘B. Wages.<br />
C. Profits.<br />
D. Rents.<br />
39. Oneof thereasonsagovernmentmightreducetaxesisto:<br />
A. Slowdowntherateof inflation.<br />
B. Slowdowntherapidrisein interestrates.<br />
C. Helpfinancespaceexplorationandtripsto themoon.<br />
0. Increaseconsumerspendingandstimulatetheeconomy.<br />
40. lo a marketeconomysuchastheUnitedStates,mostgoodsandservicesarcproducedby:<br />
A. Consumercooperatives.<br />
$. Profit-makingbusinesses.<br />
C. Government industries.<br />
D. Nonprofitcorporations.<br />
7
ia . Fe iM. EXA’l<br />
p*r I. Which would betheonebestwayof increasingtheamountof goodsandservicesthe nationcanproduce?<br />
A. Raiseever nne incomesothat weall havemore moneyto spend.<br />
B. I Ia c theg ernilielit take over the factories.<br />
C. PassIa s to prevent.workersfrom goingon strike.<br />
I.). Providebettermachineryand moreeducationfor workers.<br />
L If a companyis theonl maker of bricks in thecountry, it is:<br />
A. A competitor.<br />
B. A monopok.<br />
C. An oligopol).<br />
a A metropolis.<br />
3. Ifa hightarifi erc placedon steelshippedinto the United States:<br />
A. The priceof steelwould go do n.<br />
B. Foreignersould buy moregoodsfrom the United States.<br />
C. American reservesof iron ore would last longer.<br />
D. Thepriceof steelwouldgo up.<br />
4. Mr. Joneshassated somemoneyand usedit to buy sharesof stock in a brick manufacturingcompany.<br />
He and othersho havebought stock own the company. In electingcompanydirectors, they haveone<br />
vote for eachshareof stock they own. The companyis a:<br />
A. Partnership.<br />
B. Proprietorship.<br />
C. Corporation.<br />
D. Cooperative.<br />
S. The valueof the United Statesdollar dependsupon:<br />
A. Ib muchgold andsilver the governmentowns.<br />
B. Ilo muchit coststo manufacturemoney.<br />
C. What is happeningto priceson thestock market.<br />
D. Ho muchyou can buy with a dollar.<br />
6. If the amount of moneycirculating in the United States is greatly increased,at a time when there is<br />
full emplo ment.hat ould bemost likely to happen?<br />
A. The pricesof mansgoodsand serviceswould rise.<br />
B. We wouldall hebetteroff becausewecould buy more.<br />
C’. The interestrateson loanswould immediatelyincrease.<br />
D. Businesseswouldtry to slowdown production.<br />
7. The bestmeasureof economicgrowth in acountry isthechangein:<br />
A. The amountof moneyin circulation.<br />
B. The numberof automobilesproduced.<br />
C. Thesizeof thenationaldebt.<br />
D. Theamountof goodsandservicesproduced.<br />
1. Grasslandis a country in whichthereis verylittle governmentownershipof farms andbusinesses. People<br />
maytrain 11rjobsandstart businesses asbesttheycan.Thegovernmentdoesnotusuallyntrol prices<br />
andwages.Grasslandis:<br />
A. Communistic.<br />
B. Capitalistic.<br />
C. <strong>Social</strong>istic.<br />
D. Cooperative.
Unit Test — <strong>Economics</strong> — Chapters 1—2—4<br />
1. Bushland is a country in which the government owns all<br />
the industries and the farms. Production and wages are<br />
set by the government. The government provides education,<br />
child care an.dmedical care for all the people. Bushland<br />
is a:<br />
1. market economy<br />
2. mixed economy<br />
3. command economy<br />
4. traditional economy<br />
2. According to the “law of supply and demand”, if twice as<br />
many heads of lettuce were grown this year because of good<br />
weather as were grown last year:<br />
1. the price of lettuce would go up this year<br />
2. the supply of lettuce stays the same this year<br />
3. the demand of lettuce would go down this year<br />
4. the price of lettuce would go down this year<br />
3. When Communist China builds a canal entirely with hand<br />
labor, we can probably assume that:<br />
1. capital is relatively scarce there<br />
2. canals built by hand are better<br />
3. labor is relatively scarce there<br />
4. they have an abundance of natural resources<br />
4. An important effect of competition in our economy is that:<br />
1. it guarantees that all workers will have jobs<br />
2. it helps keep prices down<br />
3. it prevents business from producing too many goods<br />
4. it prevents depressions<br />
5. Which would be the one best way of increasing the amount of<br />
goods and services the nation can produce?<br />
1. raise everyone’s income so that we all have more money<br />
to spend<br />
2. have the government take over the factories<br />
3. pass laws to prevent workers from going on strike<br />
4. provide better machinery and more education for workers<br />
6. Grassland is a country in which there is very little govern<br />
ment ownership of farms and businesses. People may train<br />
for jobs and start businesses as best they can. The govern<br />
ment does not usually control prices and wages. Grassland is:<br />
1. communistic<br />
2. capitalistic<br />
3. socialistic<br />
4. cooperative
<strong>Economics</strong> — Chapters 1—2—4 Page 2<br />
7. Vineland is a country in which the government owns major<br />
industries, such as railroads and electric power companies.<br />
Private citizens own other industries such as farms and<br />
shoe factories. People are paid according to how good a<br />
job they have, but the government helps the poor and<br />
generally pays for medical care and schooling. Vineland<br />
is:<br />
1. socialistic<br />
2. communistic<br />
3. capitalistic<br />
4. fascistic<br />
8. “Scarcity” is an economic problem:<br />
1. even for wealthy families in the United States<br />
2. only for poor families in the United States<br />
3. for individuals and families, but not for governments<br />
or nations<br />
4. only for people who live in underdeveloped countries<br />
9. Which of the following is the most important differences<br />
between the economic system of the United States and the<br />
economic system of Soviet Russia?<br />
1. Wages and salaries are much more equal in Russia than<br />
they are in the U.S.<br />
2. The government has nothing to do with the economy in<br />
the U.S.<br />
3. Most of the factories, farms, and equipment are owned<br />
by the government in Russia<br />
4. The economy of Russia has always grown more slowly<br />
than the economy of the U.S.<br />
10. in a capitalist economic system, such as the U.S., who has<br />
the most influence in deciding what will be produced?<br />
1. Labor unions<br />
2. The federal government<br />
3. Consumers<br />
4. Business people<br />
11. There are many different economic systems in the world.<br />
Which is the problem they all have in common?<br />
1. People want more than can be produced<br />
2. Big businesses are too powerful<br />
3. Labor unions are too powerful<br />
4. Farmers are producing too much
<strong>Economics</strong> — Chapters 1—2—4 Page 3<br />
12. What is the reward of those who take the investment risks<br />
in an enterprise?<br />
1. Salaries<br />
2. Wages<br />
3. Profits<br />
4. Rents<br />
13. In a market economy such as the U.S., most goods and services<br />
are produced by:<br />
1. consumer cooperatives<br />
2. profit—making businesses<br />
3. government industries<br />
4. nonprofit corporations<br />
14. Every economic system must make choices. Which of the<br />
following choices do all economic systems face?<br />
1. To balance the government’s budget by reducing spending<br />
2. To save money and thus reduce the national debt<br />
3. To dispense with the production of luxuries<br />
4. To make the best use of scarce resources<br />
15. When a nation’s human and material resources are being fully<br />
and efficiently used, more of any one product<br />
1. cannot be produced<br />
2. can be produced only if there is a general decrease in<br />
prices<br />
3. can be produced only if there is less production of some<br />
other products<br />
4. Cannot be produced unless private enterprise rather than<br />
government does so<br />
16. Newspaper headline: “SCHOOL REFERENDUM DEFEATED.” In many<br />
recent votes on school budgets, citizens have defeated<br />
school tax proposals and forced schools to eliminate extra<br />
curricular activities because of a lack of funds. What, if<br />
any, are the opportunity costs of such decisions?<br />
1. Whatever benefits there might have been from the extra<br />
curricular activities<br />
2. Since less money will be spent there are no opportunity<br />
costs<br />
3. The costs of what taxpayers will now buy with what they<br />
saved<br />
4. The opportunity to use school facilities fully
<strong>Economics</strong> — Chapters 1—2—4 Page 4<br />
17. The best definition of profit is:<br />
1. total assets minus total liabilities<br />
2. total revenues minus total costs<br />
3. total sales minus all taxes<br />
4. total sales minus wages<br />
18. Most of the money that American businesses receive by<br />
selling their products or services is paid as:<br />
1. profits to the owners of the businesses<br />
2. wages and salaries to employees<br />
3. rent to property owners<br />
4. interest on debts<br />
19. “Economic demand” for a product refers to how much of<br />
the product<br />
1. the people are willing and able to buy at each price<br />
2. the people want, whether they can buy it or not<br />
3. the government orders to be made<br />
4. is available for sale<br />
20. Initially, the price system in a market economy reacts to<br />
a shortage of a product by:<br />
1. raising the price and producer profits<br />
2. lowering the price and producer profits<br />
3. raising the price, but lowering producer profits<br />
4. lowering the price, but increasing producer profits<br />
21. Which is most characteristic of a command economy?<br />
1. Resources are allocated by government direction<br />
2. A variety of economic incentives encourage business<br />
growth<br />
3. There is a high rate of unemployment<br />
4. Prices are set by consumers<br />
22. “The uncontrolled extraction of our raw materials will<br />
absolutely insure that our posterity will once again turn<br />
to the horse and plow.” The person making this statement<br />
would most likely agree that<br />
1. production should be dependent only upon the demand<br />
of the market<br />
2. scarcity can best be minimized by a laissez—faire<br />
policy; government intervention is undesirable<br />
3. conservation of our resources is essential if future<br />
generations are to enjoy continued prosperity<br />
4. scarcity cannot be totally eliminated, so the problem<br />
should be handled by those for whom it is most severe
<strong>Economics</strong> — Chapters 1—2—4 Page 5<br />
23. The basic economic problem which has faced mankind through<br />
history is how to:<br />
1. encourage trade while currency decreases in value<br />
2. maintain capitalism while achieving social democracy<br />
3. check the spread of communism without world conflict<br />
4. fulfill unlimited wants in the face of limited resources<br />
24. In the U.S., a “mixed economy” means that the Government<br />
1. owns business enterprises but permits operation by<br />
private management<br />
2. places agriculture under strict regulation but leaves<br />
industry to private management<br />
3. makes redistribution of income a major objective of<br />
taxation<br />
4. affects the economy through regulations and spending<br />
but leaves most of industry to private management<br />
25. Which is the most valid statement concerning the problem<br />
of balancing human wants with limited resources?<br />
1. It exists only in societies with a free enterprise<br />
economy<br />
2. It has been solved in nations with strong governmental<br />
controls over economic activity<br />
3. It has become less of a problem with the advancements in<br />
technology<br />
4. It exists in all societies, no matter what the economic<br />
system<br />
26. A basic difference between capitalism and socialism is in<br />
their beliefs about the<br />
1. need for a written constitution<br />
2. sovereign powers of nations<br />
3. ownership of the means of production and distribution<br />
4. importance of self—interest in foreign affairs<br />
27. Which is a fundamental characteristic of a free market<br />
economy?<br />
1. Traditional methods of production are used<br />
2. Governmental economic plans are followed to meet<br />
market demands<br />
3. Consumer market tastes are shaped by product advertising<br />
4. prices are determined by the forces of supply and demand
<strong>Economics</strong> — Chapters 1—2—4 Page 6<br />
28. The supply of and demand for a certain product remain the<br />
same; the price rises. The most likely explanation Is<br />
that, for this product<br />
1. perfect competition in the market exists<br />
2. the manufacturer controls a significant part of the<br />
market<br />
3. consumers are willing to pay more<br />
4. the law of comparative costs is in operation<br />
29. You read the following headline: “ORANGE GROWERS FOR I<br />
MONOPOLY.” How will the new orange monopoly most likely<br />
differ from a highly competititve orange growing industry?<br />
1. Profits in the orange industry will now be certain<br />
2. The orange growers will increase their use of capital<br />
goods<br />
3. The orange monopoly will hire more workers and increase<br />
output<br />
4. There will be less incentive for the orange monopoly to<br />
be efficient<br />
30. A rise in the price of which product would be likely to<br />
increase the demand for butter?<br />
1. Margarine<br />
2. Butter<br />
3. Cheese<br />
4. Bread<br />
31. If U.S. farm output remains the same how will several years<br />
of bad weather in Europe and the Soviet Union affect American<br />
food prices?<br />
1. Raise them<br />
2. Decrease them<br />
3. Make no change<br />
4. Cannot be determined<br />
32. Assuming that the supply of a product remains constant as<br />
the demand for it increases, its price will normally<br />
1. fall<br />
2. rise<br />
3. stay the same<br />
4. either rise or fall<br />
a
<strong>Economics</strong> — Chapters 1—2—4 Page 7<br />
33. “Americans are mixed—up people. Everyone knows that base<br />
ball is far less necessary than food and steel. Yet they<br />
pay ball players a lot more than farmers and steel workers.”<br />
Why?<br />
1. The employers of the ball players are monopolists<br />
2. Ball players are really entertainers rather than producers<br />
3. There are fewer professional ball players than farmers or<br />
steelworkers<br />
4. Good ball players are scarce compared to the demand for<br />
their services<br />
34. How much a worker earns depends mostly on:<br />
1. Whether or not he/she belongs to a union<br />
2. The supply of and demand for his/her skills<br />
3. Laws regulating wages<br />
4. The kind of firm for which he/she works<br />
35. Over a long period of time a country increased its production<br />
of goods and services per person. This was probably due to:<br />
1. An increase in its population<br />
2. Tariffs which kept out goods from other nations<br />
3. Conservation of its natural resources<br />
4. Increased output per worker<br />
36. If a company is the only maker of bricks in the country, it is:<br />
1. a competitor<br />
2. a monopoly<br />
3. an oligopoly<br />
4. a metropolis<br />
37. The long lines of consumers waiting outside many stores in<br />
Russia tell us that many consumer goods there are probably<br />
1.. priced too low<br />
(rin 2J’ great supply<br />
3. not in demand<br />
4. priced too high
NAI4E:___________________________<br />
Test: Chapter 7 — Business and Labor<br />
PART I — Multiple Choice<br />
1. The right to join a union and elect representatives to negotiate<br />
with the employer is referred to as<br />
(a) a closed shop<br />
(b) the seniority system<br />
(c) collective bargaining<br />
(d) right to work legislation<br />
2. Common stocks, limited liability, and unlimited life are charact<br />
eristic of<br />
(a) proprietorships<br />
(b) corpOrations<br />
(c) partnerships<br />
(d) cartels<br />
3. In a market economy, high wages depend largely upon<br />
(a) minimum wage laws<br />
(b) actions of government<br />
(c) high output per worker<br />
(d) socially responsible business leaders<br />
4. Which statement concerning business enterprise in the U.S. is<br />
an opinion?<br />
(a) the corporation is an important form of business organization<br />
(b) some companies control all phases of production from the<br />
acquisition of raw materials to the final sale of the product<br />
(c) monopolies tend to eliminate the need for price competition<br />
(d) large—scale producers in an industry offer better personal<br />
services than do small scale producers<br />
5. Unemployment insurance, public service jobs, welfare payments, and<br />
tax rebates all might logically be a part of<br />
(a) recent contract demands of labor unions<br />
(b) an anti—inflation plan sponsored by Congress<br />
(c) a government program to help deal with recession<br />
(d) a proposal by industry to decrease government involvement<br />
in the economy<br />
6. One advantage of a corporation over other forms of business<br />
organization in the U.S. economy is that a corporation can<br />
(a) acquire large amounts of capital<br />
(b) operate as a monopoly<br />
(c) operate without being taxed<br />
(d) prevent strikes
Test: Chapter — Business and Labor Page 2<br />
7. “In our economic system, specialization in industry serves an<br />
important function.” The best argument to support this state<br />
ment is that specialization<br />
(a) utilizes all the available labor supply<br />
(b) promotes individual pride in accomplishment<br />
(c) encourages efficient production through division of labor<br />
(d) causes the cost of production to rise in the long run<br />
8. Which best accounts for the fact that in the U.S. in 1947, blue—<br />
collar workers outnumbered white—collar workers, whereas by 1985<br />
white—collar workers outnumbered blue—collar workers?<br />
(a) white collar workers received higher wages than blue—<br />
collar workers<br />
(b) the increase in the number of college graduates led to<br />
an increase in the need for white—collar workers<br />
(c) many jobs have been reclassified from blue—collar to white—<br />
collar status<br />
(d) technological advances have increased the need for white—<br />
collar workers<br />
9. Concerning the trend in wage scales in the U.S., it is most<br />
nearly accurate to state that wages are<br />
(a) decreasing as a result of automation<br />
(b) decreasing as a result of the increase in the labor supply<br />
(c) increasing as a result of greater productivity per worker<br />
(d) increasing as a resuslt of restrictions on immigration<br />
10. Mr. Jones has saved some money and used it to buy shares of<br />
stock in a rich manufacturing company. He and others who have<br />
bought stock own the company. In electing company directors,<br />
they have one vote for each share of stock they own. The company<br />
is a<br />
(a) partnership<br />
(b) proprietorship<br />
(c) corporation<br />
(d) cooperative<br />
11. What is the reward of those who take the investment risks in an<br />
enterprise?<br />
(a) salaries<br />
(b) wages<br />
(c) profits<br />
(d) rents
Test: Chapter — Business and Labor Page 3<br />
12. On which issue would a steelworkers’ union and a large steel<br />
corporation most probably agree?<br />
(a) the extent of automation in the production of steel<br />
(b) the salaries paid to unskilled steelworkers<br />
(c) the necessity for limits on steel imports<br />
(d) the length of the workday in the steel plants<br />
13. During the last ten years, one major change in the labor force<br />
in the U.S. has been the<br />
(a) increase in the number of women who work outside the home<br />
(b) increase in job opportunities for unskilled workers<br />
(c) decrease in the number of people employed by service industries<br />
(d) decrease in the number of college graduates entering the job<br />
market<br />
14. During the 20th century, labor unions in the U.S. were most<br />
strengthened by legislation which guaranteed workers<br />
(a) the right to boycott<br />
(b) the right to bargain collectively<br />
(c) adequate retirement pensions<br />
(d) a share of company profits<br />
15. A recent major problem of labor in the U.S. has been<br />
(a) recognition of the principle that unions are lawful<br />
(b) existence of a hard core of unemployed unskilled workers<br />
(c) government intervention on the side of management in labor<br />
disputes<br />
(d) competition from the influx of European refugees for<br />
available jobs<br />
16. In the U.S. most labor—management agreements are reached through<br />
the<br />
(a) service of the National Labor Relations Board<br />
(b) process of collective bargaining<br />
(c) use of strikes and lockouts<br />
(d) efforts of arbitrators<br />
17. Which situation represented a victory for the labor union move—<br />
nient in the U.S.?<br />
(a) unions gained the right to bargain with management<br />
(b) the closed shop was outlawed<br />
(c) right—to—work laws were used in labor disputes<br />
18. Members of labor unions often find that the benefits of wage<br />
increases are offset by<br />
(a) a loss of seniority rights<br />
(b) an increase in union dues<br />
(c) an increase in working hours<br />
(d) a rise in prices
Test: Chapter — Business and Labor Page 4<br />
19. If we were importing most of our transistor radios from Japan,<br />
an increase in the tariff on all transistor radios imported<br />
into the U.S. would probably<br />
(a) make no difference to us because we could get transistor<br />
radios from other countries<br />
(b) increase the total number of jobs in the economy<br />
(c) make us pay more for transistor radios<br />
(d) make transistor radios more important to us, because we<br />
would probably have to get along without them<br />
20. “Unions in the U.S. must put themselves in the forefront of a<br />
national effort to re—tool their workers for the jobs of the<br />
future.” The author of this statement would most likely<br />
encourage labor unions to<br />
(a) become international rather than national groups<br />
(b) continue to stress salaries and benefits as their main<br />
concerns<br />
(c) seek to provide their members with training to develop<br />
new marketable skills<br />
(d) insist that businesses transfer unskilled jobs to their<br />
factories in foreign countries
Test: Chapter 7 — Business and Labor Page 5<br />
PART II — MATCHING<br />
1. process of negotiating a labor— a. union<br />
management contract<br />
b. strike<br />
2. process in which a neutral third<br />
party offers specific terms to c. collective bargaining<br />
settle a contract dispute<br />
d. fringe benefits<br />
3. money paid by a non—union member to<br />
a union for services rendered e. arbitration<br />
4. extras the worker receives from f. mediation<br />
management e.g., vacation, sick<br />
leave g. seniority<br />
5. a court order, sometimes used to h. agency fee<br />
stop a strike<br />
1. injunction<br />
6. a work stoppage<br />
j. right to work laws<br />
7. a collective of workers seeking to<br />
improve pay, fringe benefits, etc.<br />
8. process where a neutral third party<br />
listens to arguments in a labor—<br />
management dispute and suggests a<br />
solution<br />
9. in certain states, you cannot be<br />
forced to join a union<br />
10. amount of time in service by a<br />
worker for a given company
Test: Chapter 7 — Business and Labor Page 6<br />
PART III — MATCHING<br />
1. a certificate representing partial<br />
ownership of a corporation<br />
2. an association of two or more people<br />
in order to run a business<br />
3. the efficiency with which goods and<br />
services are produced<br />
4. a form of business organization in<br />
which goods and services are produced<br />
5. a payment to a stockholder<br />
6. a certificate promising to pay the<br />
investor money on a certain date<br />
7. an individually owned business<br />
8. a process by which mechanical or<br />
electronic devices take the place of<br />
human services<br />
a. automation<br />
b. common stock<br />
c. productivity<br />
d. proprietorship<br />
e. partnership<br />
f. corporation<br />
g.. corporate bond<br />
h. dividend
Test: Chapter 7 — Business and Labor Page 7<br />
PART IV — ESSAY: Select one of the following<br />
1. Labor union membership has declined in the United States over<br />
the past 30 years. Discuss why you think this has happened.<br />
Use the followirtg factors as a guide in your answer.<br />
—Government policies<br />
—The changing nature of our economy<br />
—Women in the workforce<br />
—Competition from foreign markets/nations<br />
—Immigration to the United States<br />
—New technology<br />
—Labor union management<br />
2. Describe the basic differences in ownership of the three basic<br />
forms of business organization.<br />
—Proprietorship<br />
—Partnership<br />
—Corporation<br />
Discuss one major advantage and one major disadvantage of each<br />
of the above.
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