ECONOMICS

UNIT I. WHAT IS ECONOMICS?

Key words and phrases

Economics. Resource. Hypothesis. Generalization. Scarcity. Wants. Land. Labor.

Capital. Productivity. Entrepreneurship. Factors of production. Goods and services.
Technology. Trade-off. Statistics. Bar graph. Line graph. Pie graph. Opportunity cost.
Production possibilities. Economy. Economic model. Values.

TEXT

Economics is the study of how individuals and nations make choices about how to
use scarce resources to fill their needs and wants. A resource is anything that people
can use to make or obtain what they need or want. Economics examines facts in order
to make choices, it can teach people some basic skills for making decisions. Being
able to make reasoned, well-informed decisions is important for every employee,
employer, entrepreneur, saver and investor as well as a citizen. The economic
principles are the same.
The Problem of Scarcity. The need to make choices arises from the fact that
everything that exists is limited; even though some items may appear to be
overabundant supply. At any moment in any country there is a fixed or set amount of
resources available. At the same time people may have different, competing uses for
these resources. It is the basic problem of economics. Scarcity means that people do
not and cannot have enough income, time or resources to satisfy their every desire.
What you can buy is limited by the amount of income you have. In this case your
income is the scarce resource.
The problem of scarcity faces business as well as individuals. Business people must
choose constantly among the possible uses for their resources. Decisions are made
daily about what to produce now, what to produce later, and what to stop producing.
These decisions in turn affect people’s income and their ability to buy. Nations, too,
face the problem of choosing how to spend their scarce resources. How people make
these choices is the subject of economics.
1
 Wants and Needs. How many times have you said that you need something?
How often do you think about what you want? The distinction or difference between
wants and needs is not a clear one. Everyone needs certain basic things – enough
food, clothing and shelter to survive. People think, there are certain basic needs for a
nation, too, such as a strong military defense. Americans also consider a certain
number of years of public education and adequate health care as needs.
Everything other than these basic needs are called “wants” by economists. People
want better and more clothing, bigger places to live, new cars, personal computers,
and the like. Although more and more people have these items, this doesn’t mean that
anyone actually needs them.
For example, people entertained themselves and informed themselves long before the
invention of the radio. But as the wonders of radio were advertised and more people
bought radio, they began to believe they needed one. What began as a luxury, or want,
became to many people a necessity. This cycle of wants and perceived needs is
repeated over and over. In economics, however, there are only a few true needs, such
as food and shelter.

Types of Resources. Traditionally, economists have classified resources into

three types, depending on their economic use: 1. Land, 2. Labor, and 3. Capital.
The term "land" refers to natural resources, not just to surface land. Natural
resources are all the things found in nature - on or in water and the earth - such as
fish, animals, forests and minerals as well as land and water. Among the most
important natural resources in economic terms are land and mineral deposits such as
iron ore. In economics, the location of land is also very important.
"Labor" refers to the work that people do. It includes all kinds of jobs -bus driver,
doctor, teacher, business executive, plumber, assembly-line worker and so on.
Anyone who works is a part of the labor resource. "Capital" is all the property -
machines, buildings, and tools - that people use to make other goods and services.
For example the machines used to make automobiles are capital. The cars

2
 themselves are not considered capital unless they are used, for example, as taxicab.
to produce services. Combining capital with land and labor resources increases the
value of all three resources by increasing their productivity. "Productivity"' is
the ability to produce greater quantities of goods and services in better and faster
ways. A person using a tractor, for example, can plow many more acres a day than a
person using a wooden plow and a team of horses.
A related resource is "entrepreneurship" which refers to individual's ability to start
new business, to introduce new products and techniques, and to improve
management techniques in existing businesses. All changes in business organization
are part of entrepreneurship. It involves initiative, and individual willingness to take
risks and to experiment with new ideas that could lead to profits. Entrepreneurs, or
those who use these entrepreneurial skills, succeed when they produce new products,
improve an existing product or produce it more efficiently, or reorganize a business
to run more smoothly.
Together these resources are called the "factors of production". They are the things
used to produce "goods " and "services'*. Goods are the things that people buy.
Services are the activities for the others for the fee. For example, butchers and bakers
sell goods while doctors, and teachers and auto mechanics sell services. Sometimes
the term goods is used to mean both goods and services because individuals may
produce a good and a service.
Today some economists add another term to the list of resources: technology. The
first use of fire by early people is an example of technology. Any use of land, labor
and capital that produces goods and services more efficiently is technology. For
example, the tractor is a technological advance over the horse-drawn plow.
Today, however, technology usually describes the use of science to develop new
products and new methods for producing and distributing goods and services. In
modern economics land, labor capital and advanced technology are interrelated.
Advanced machinery and new production and distribution methods increase the
productivity of the other resources. For example, without modern drilling machinery
the amount of oil pumped from the ground, would be far less than it is. It would also
3
be impossible to tap the oil resources from the ocean without modern equipment.
Modern technology has many benefits. It creates leisure time, highly skilled workers,
efficient use of resources, lower prices and a high quality of goods and services.
Trade-offs. Scarcity forces people to make choices about how they will use their
resources. Those choices affect not only how people live today, but how-people will
live in the future. It is important to realize that the economic choices people make
involve exchanging one good or service for another. If you choose to buy a cassette
for your videocassette recorder, you are exchanging your money for the right to own
the cassette. Exchanging one thing for the use of another is called a trade-off.
Individuals, businesses and nations are forced to make trade-offs every time they use
their resources in one way and not another, for example, as a student you may be
faced with a decision about going to college or vocational school to increase future
earnings or going to work right after high school. Consider some other possible
trade-offs that individuals, businesses and nations face:
-Saving to satisfy future wants or spending income now;
-Continued automobile pollution or higher car manufacturing costs;
-More defense spending or more aid to education.
People make trade-offs every day. They are a part of making choices, which are
unavoidable of the problem of scarcity.

Vocabulary Review

1. Write the letter of the definition in Column B that correctly defines each
term in Column A

Column A Column B
1. entrepreneur a) insufficient resources to satisfy
wants and needs
2. scarcity b)exchanging one thing for use of another
3. hypothesis c) risk taker in forming and managing
business

4
4. productivity d) ability to produce greater quantities
of goods in better and faster ways
5. trade-off e) prediction at the start of an
investigation.

2. Explain the difference between the terms "wants" and "needs".

UNIT II. TYPES OF ECONOMIC SYSTEMS

Key words and phrases

Economic system. Command economic system . Competition. Market economic

system. Efficiency. Traditional economic system. Profit. Profit incentive. Market.
Economic growth. Mixed economy. Equity. Percent. Standard of living. Mean.
Invisible hand. Laissez-faire. Private property.

TEXT

Ask yourself as you read:

-What are the major differences among the various types of economic
systems?
-What is meant by the term "mixed economy"?
-What is Adam Smith theory of the invisible hand?

Although nations approach the use of their resources differently, every nation is
faced with answering the same four basic questions. These are: What goods and
services and how much of each should be produced? Who should produce them?
How should they be produced? Who should share in their use?
Each society answers the four basic questions according to its view of how best to
satisfy the needs and wants of its people. In other words, the values and goals that a
society sets for itself determine the kind of economic system it will have. Economists
have identified four types of economic systems: traditional; command or controlled;
market or capitalist; and mixed. All these systems are of pure or ideal types. They are

5
economic models, not examples of the real world. Most economic systems are
mixed. Generally, they are identified by the way in which most economic activity in
the nation are organized. The United States, for example, has a mixed economy but is
considered to have a market economic system because it mainly responds to the
market. Yugoslavia also has a mixed economy. However, it is said to have a
command economy because most economic activity there is planned by the
government.
Traditional System. A pure traditional economic system answers the four basic
questions according to the tradition. Things are done " the way they have always have
been done". Economic decisions are based on customs, beliefs -often religious - and
ways of doing things that have been handed down from generation to generation.
Traditional economic systems exist today in parts of Asia, the Middle East, Africa
and Latin America.
For example, the bushmen of the Kalahari Desert of South Africa continue to live
in a traditional economy. They live and travel in groups of 40 or 60 relatives and
friends. The men hunt and trap antelope and other desert animals, which are used for
food and clothing. Their method of hunting is the bow and poisoning arrows. The
women gather plants, roots and berries to add to the food supply.
The group shares whatever food there is. When the food in the area is used up, the
group moves in search of new food supplies.
An individual does not choose his or her role. It is dictated or must be followed, by
what people have done in the past. Each generation answers the basic economic
questions in the same way that each previous generation has answered it - by
tradition.

Command or Controlled System. The traditional economic system is in some

ways similar to a pure command economic system. In a pure command economic
system, the individual has little, if any, influence over how the basic economic
questions are answered. Government controls the factors of production and therefore,

6
makes all decisions about their use. This is why this form of economic system is also
called a controlled economy.
The government may be one person, a small group of leaders, or a group of central
planners in a government agency. These people choose how resources are to be used
at each stage in the production and decide the distribution of goods and services.
They even decide who will do what. The government through a series of regulations
about the kinds and amount of education available to different groups, guides people
into certain jobs.
During the Middle Ages in Europe, the command economy was the major
economic system. The landholder of each manor decided what and how much to
produce, who should produce each good or service, how, and for whom.

Market, or Capitalist, System. The opposite of a pure command economic system

is a pure market economic system or capitalism. In a pure market economic system,
government does not intervene. Individuals own the factors of production and decide
for themselves the answers to the four basic economic questions. These decisions are
made through the free interaction of individuals looking out for their own best
interests in the market. Market in this sense is not a place. Rather it is a freely chosen
activity between the buyers and sellers of goods and services. That is : buyers and
sellers freely choose to do business with those who best satisfy their needs and wants.
The exchange of goods and services may take place in a worldwide market for a good
such as crude oil. Or it may take place in a neighborhood market for the services of
someone to mow loans, deliver papers, or shovel snow. In a pure market economic
system, producers of goods and services decide how to use their resources based
solely on signals from the market.
Government planning has no part in the decisions. Whether people buy a certain
good or service or not indicates to producers the various ways to use or not use their
resources. People are also free in a pure economic system to sell their labor as they
wish. They may take, refuse, or change jobs whenever they choose. This assumes, of
course, that there is a demand for their labor.

7
Mixed Economic System. With the exception of the traditional economic system, it is
doubtful whether these pure or ideal systems have existed: They are useful model for
analyzing existing systems, however. Today, almost all economic systems are what
economists call mixed economies. A mixed economy contains characteristics of a
command economy and a pure market economy. The mix will vary so that any one
economic system leans more toward one pure type than another.
The United States, for example, tends much more toward the market system than
toward the command system. However, individuals reacting to the market do not make
all decisions. Federal, state, and local governments make laws regulating some areas of
business. Among these are, for example, the rates that electric companies may charge.
Thus, economists classify economies according to the pure system that their activities
are closest to. No two economies, even if they share many of the same characteristics,
are exactly the same.

UN I T III. CONSUMPTION AND INCOME

Key words and phrases

Consumer. Disposable income. Discretionary income. Consumerism. Competitive

advertising. Informative advertising. Bait and switch. Comparison shopping. Brand
name. Warranty.

TEXT
All people are consumers and as such play a great role in economics. A consumer is
any person or group that buys or uses goods and services to satisfy personal needs
and wants. As consumers people buy a wide variety of things - food, clothing, dental
and medical care, automobiles, stereos and so on.
A person's role as a consumer depends on his or her ability to buy. This, in turn,
depends on the income available and how much of it a person chooses to spend now
and save for the future. Income can be both disposable and discretionary. Disposable
income is the money income a person has left after all taxes have been paid. People

8
spend their disposable income on many kinds of goods and services. First they buy
the necessities: food, clothing and housing. Once these needs have been taken care of
there may be some money left. This money, which can be spent on extras such as
entertainment, is called discretionary income. The consumer's choice or wants is his
or her guide in spending this money. Obviously, some people have more disposable
and discretionary income and can afford to spend more than others.
Education, occupation, age, sex, and health can all make differences in a person's
earning power and therefore in his or her ability to consume. Where a person lives
can also influence how much he or she earns. City dwellers tend to earn more than
those who live in rural areas. Wages in some regions of the country tend to be higher
than those paid in others. How much a person can spend is also influenced by
inheriting money or property.
Regardless of the size of a person's income, spending that income requires constant
decision making. As a consumer, each person has a series of choices to make.
The first decision a consumer must make is whether to buy an item or not. This may
sound so basic as to be unnecessary to mention. Once you have decided to make a
purchase, at least two scarce resources are involved - income and time. The time you
spend making a decision to buy something cannot be used for anything else. Once
you have decided to spend your money, you need to invest time in obtaining
information about the product you want to buy. Suppose you decided to buy a
bicycle. The time spent visiting stores, checking models and prices is time you
cannot spend doing anything else. It is a cost to you. But it is a cost worth paying.
Making consumer decision involves three steps. They are: 1. Decision to spend
money; 2. Decision on the right purchase; 3. Decision how to use this purchase.
Buying Principles or Strategies. Because of the problems of scarcity and time,
every consumer's goal should be to obtain the most satisfaction from his or her
limited income and time. There are three basic buying principles that can help
consumers achieve this goal. They are: 1. gathering as much information as is worth-
while; 2. using advertising wisely: 3. getting the best deal by comparison shopping.

9
Again suppose you are going to buy a bicycle. Once you have decided that you have
to decide on a brand and a model.

You first have to obtain information about bicycles. You can search it out by
reading advertisements, or spending time testing out friends’ bicycles. You could also
go to different stores and discuss the good and bad points of various makes and
models with salespeople. Actually, as a wise consumer you would do some of each of
these. But remember that information is costly because obtaining it involves your
time. So you are faced with the problem of deciding how much information to obtain.

In this case the buying principle to follow is: obtain as much information as is
worthwhile. Worthwhile is the value of your time and effort spent in gathering
information, which should not be greater than the value received from making the best
choice of product for yourself. You would not for example, go to every store in your
town or city and spend two hours with every salesperson discussing every model. On
the other hand, you would probably want to spend more than two minutes reading
one advertisement about one model. In other words, the less valuable the person
considers his time, the more comparison shopping he should do.

Using Advertising Wisely. Advertising is all around us. Whenever we turn on the
radio we will more than likely to hear a commercial. Wherever we go, we see
advertising on billboards, on posters on buses, and so on. There are two kinds of
advertising: competitive and informative.
Competitive advertising attempts to persuade consumers that the product being
advertised is different from any and superior to any other. Its purpose may be to take
consumers away from the competitors. Or its purpose may be defensive -to keep
competitors from taking away customers. Ads for well-established brand names and
products, such as General Motors and Green Giant, are often of this type. They are
meant to keep the public aware of a company's name and product.
Informative advertising gives information about a product.
In most cases, informative ads benefit consumers. From such ads a consumer can
learn about the existence, price, quality, and special features of products without
10
spending much time or effort. Informative advertising can also be competitive.
Unfortunately, advertising can be misleading. Although most advertisers try to
present their products accurately, some do use deceptive, or false, advertising. Sellers
may misrepresent the quality: features, or, most often, the price of goods.
One of the most widely used methods of deceptive advertising is bait and switch.
The bait is an unrealistically low priced item advertised in the newspaper, on
television or on the radio. When the consumer gets to the store, he or she will find
that item is no longer available. Or the salesperson will point out all the bad features
of the advertised item and how dissatisfied the customer will be with it. The
salesperson then shows higher-priced models and points out their good features. This
is the switch. Instead of being able to buy a I99washer, for example, the customer
finds all the available ones are $300 or more. This is not only deceptive but illegal.
Getting the Best Deal by Comparing Shopping.
Once you have gathered the information and made a decision about the type of
bicycle - or any product you want, you must decide where to buy it. That decision is
affected by the price you will have to pay for the make and model you want. Because
you have limited income, the more cheaply you can buy it, the more income you will
have to spend on other things. In other words, you will be best off as a consumer
when you are able to pay the lowest price for what you want.
In order to find out which store has the lowest prices you can read newspaper
advertisements, make telephone calls, and visit different stores. But, finding out price
information requires the use of time. You probably would not want to visit every store
in your area before deciding where to buy your bicycle. Nevertheless, you will want
to shop around.
This suggests a third buying principle. Whenever you decide to make a purchase, it
is generally worthwhile to get information on the types and prices of products
available from different stores or companies. This is known as comparison-shopping.
Brand-name products is another factor to be taken into consideration.
Even when you apply these three buying principles to actual consumer decision-
making, you may still find that being a wise consumer is not always easy. This is a
11
complex world with many sellers of many products. Some sellers do not always
include complete or reliable information about their products. Others may not repair
or replace the products they sell if those products turn out to be faulty. Some
consumers find that national brand-name products are worth the often higher prices
that have to be paid for them.
A brand-name is a word picture, or logo on a product that helps consumers choose
from similar products of competitors. Brand names are usually sold nationwide and
are backed by major national or even international companies. Food products, which
are sometimes regional brands, may be an exception. Because a major company, such
as Sony or Nabisco manufactures a product, consumers may be reasonably sure that it
will be of the same quality each time they buy it. Occasionally, there may be differ-
ences. However, the wise shopper can often find non-brand name items of equally
high quality and reliability if he or she follows the shopping steps.

UNIT IV . CREDIT. SOURCES OF LOANS

Key words and phrases

Credit. Flexible expense. Budget. Fixed expense. Principal. Credit bureau. Interest.
Credit check. Installment debt. Credit rating. Consumer durables. Collateral.
Mortgage. Secured loan. Installment charge account. Finance charge. Commercial
bank. Unsecured loan. Savings and loan association. Consigner . Savings banks.
Usury laws. Credit union. Finance company. Consumer finance company. Charge
account. Credit card. Regular charge account. Credit limit. Revolving charge account.
Annual percentage rate.

Ask yourself as you read

-How is making a credit purchase the same as taking out a loan?
-Why do people use credit?

12
TEXT
For the nation as a whole the total amount of money borrowed and lent every year
is enormous. The federal, state and local government of America all borrow each
year. The nation's economy depends on individuals and groups being able to buy
and borrow on credit. Credit is the receiving of money either directly or indirectly to
buy goods and services in the present with promise to pay for them in the future. The
amount owed - the debt - is equal to the principal plus interest. The principal is the
amount originally borrowed. The interest is the amount the borrower must pay for
the use of someone else's money. That someone else may be a bank, credit card
company, store or the like.
Any time you receive credit you are borrowing money and going into debt. The act
of taking out a loan for $100 is the same as buying an item for $100 on credit. In
both cases you have gone into debt for $100. In both cases, someone has extended
your credit - lent you $100. In both cases you pay for the privilege of using the $100
by paying interest for the use of that someone else's $100 of purchasing power.

Installment Debt. One of the most common types of debt IS the installment
debt. The repayment of this type of loan is divided into equal amounts, or install-
ments, over a period of time say 36 months. Many people buy such consumer
durables as automobiles, refrigerators, washers and other appliances on an
installment plan. Consumer durables are manufactured items that people use for long
periods of time before replacing. People can also borrow cash and pay it back in
installments.
The length of the installment period is important in determining the size of the
borrower's monthly payments and the total amount of interest he or she must pay.
The longer the repayment period is, the smaller the monthly payment. However,
there is a trade- off. The longer it takes to repay an installment loan, the greater is the
total interest you pay. The largest form of installment debt in America is the money
people owe on home mortgages. A mortgage is an installment debt owed on real
property - houses, buildings, or land. Most people who owe home mortgages do not

13
consider themselves deeply in debt. They do not think of a home mortgage as similar
to other kinds of debt, but it is. Somebody has provided the homeowner with money
to purchase property. In return, the homeowner must repay the loan with interest in
installments over a number of years.
Sources of Loan. Borrowing money directly by taking out a loan is one of the two
major types of credit. There are many sources for loans: commercial banks, savings
and loan associations, savings banks, credit unions, finance and consumer finance
companies. Each of these sources, however, works in the same way by charging
interest on the money it lends.

Commercial Banks. The first place to go for a loan is a commercial bank. The
main functions of the commercial banks are: to accept deposits; to lend money; and
to transfer funds among banks, individuals and businesses. Commercial banks today
control the largest amount of money and offer the widest range of services.
Originally, commercial banks were the banks of business and commerce or trade. But
beginning in this century, commercial banks began to offer checking, savings, and
loan services to individuals.
Today, about a third of all loans that commercial banks make are for homes, cars,
and other consumer goods. A commercial bank often charges lower rates to
customers with a checking or savings account at that bank.

14
Savings and Loan Associations. A savings and loan association (S&L) like a
commercial bank accepts deposits and lends money. When S&L were first
established in the United States in the mid-19th century , they were called "building
societies”. Members of a society would combine their money over a period of time
and take turns borrowing until each member was able to build a home. Today, there
are over 4,500 S&Ls in the United States, and most savings still come from
individuals and families. Recent changes in federal laws and regulations have greatly
enlarged the activities of S&I s. They may now offer many of the same services
including checking-type accounts and business and consumer loans, as commercial
banks. However, most loans at S&Ls are still used to buy homes. These loans account
for slightly less than half of all home mortgages. S£Ls make only about 7 percent of
all other consumer loans. Rates can vary widely from association to association.

Savings Banks. Savings banks are similar to S&Ls in that most of their business
comes from savings accounts and home loans. Since 1980. savings banks, like
commercial banks have been able to offer services similar to checking accounts.
Savings banks were first set up in the United States in the early 19th century. They
were meant to serve the small savers who were overlooked by the large commercial
banks. Savings banks often include such words as "farmers, seamen's, and dime " in
their name to indicate the group for whom the bank was originally intended. Most of
the savings banks' loans are for home mortgages, although they do make personal and
auto loans. Their interest rates for loans like those of S&Ls are often slightly less
than those for commercial banks.

15
Credit Unions. Union members and employees of many companies often have credit
unions. A credit union is owned and operated by its members to provide savings
accounts and low-interest loans to its members only. In general, credit unions offer
higher interest rates on savings and lower interest rates on loans than the other
institutions. They make mostly personal auto and home improvement loans, though
some larger credit unions offer home mortgages as well. They also offer share drafts,
which are similar to checking accounts at commercial banks.

Finance Companies and Consumer Finance Companies. It is important not to be

confused by the terms "finance company"" and "consumer finance company". A
finance company takes over contracts for installment debts from stores and adds a fee
for collecting the debt. The consumer pays the fee in the form of slightly higher
interest than he or she would pay to the retailer. Retailers use this method to avoid the
risks involved in lending money to the consumer. Finance companies also make loans
directly to consumers.
Consumer companies make loans directly to consumers at high rates of interest.
These rates are often more than 20 percent a year. Consumers who use these
companies are usually unable to borrow from commercial banks or other sources with
lower rates. This inability to obtain lower-price credit may be because of nonpayment
of loans in the past or an uneven employment record. Consumer finance companies
are the largest supplier of installment cash loans for purposes other than buying
consumer durables. People often borrow money from consumer finance companies to
pay off a series of bills. They trade making several payments a month for making just
one. But this may increase interest costs.

Charge Accounts and Credit Cards. The other major type of credit is extended directly
to an individual, without that person's having to borrow first. This credit may be in
the form of charge account or credit card. A charge account allows a customer to buy
goods or services from a particular company and pay for them later. Department
stores, for example, offer their customers three types of charge accounts: regular,
revolving mid installment
16
 A credit card, like a charge account, allows a person to make purchases without
paying cash. The difference is that most credit cards can be used at many kinds of
stores, restaurants, hotels and so on. Many large stores issue their own credit cards.
Some companies, such as American Express, issue credit cards directly to individuals.
Others, like Visa and MasterCard issue cards through banks that can be used to
purchase items in stores and restaurants where such cards are accepted. Bank credit
cards also allow a person to borrow money up to a certain limit. This means that a
person has an access to a money loan at all limes without having to make application
for it. In addition, many oil companies such as Gulf issue their own credit cards for
use at their service stations . Using credit at places you shop regularly is one way to
slip into debt very easily.

Regular Charge Account. A regular charge account, also known as a 30-day charge,
has a credit limit such as $500 or $1000. A credit limit is the maximum amount of
goods or services a person or business can buy on the promise to pay in future. You
and usually any member of your family can charge items up to this limit. At the end
of every 30-day period, the store sends a bill for the entire amount. No interest is
charged, but the entire bill must be paid all that time. If it is not, interest is charged
on that part of the account. Some private credit card companies such as American
Express also expect payment in full at the end of each billing period.

Revolving Charge Account. A revolving charge account allows a person to make

additional purchases from the same store even if he has not paid the previous month's
bill in full. Usually a person must pay a certain portion of his balance each month,
for instance one-fifth of the amount due. Interest is charged on the amount, which is
not paid. In many cases the rate is 1.5 percent per month, or 18.0 percent per year.
But if a person pays everything he owes, no interest is charged. This type of account
also has a credit limit.
For both regular and revolving charge accounts, stores often issue their own charge
cards. These cards are plastic, wallet-size, and imprinted with the customer's name
and charge account number at that particular store. A store charge card is used the
17
same way a credit card from an oil company, bank, or credit card company is used.
However, it can be used only at the store for which it is issued.

Installment Charge Account. Major items such as stereos, televisions and

refrigerators are often purchased through an installment charge account. The items are
purchased and paid for through equal payments spread over a period of time. Part of
the amount paid every month is applied to the interest, and part is applied to the
principal. At the end of the payment period, the borrower owns whatever he or she
has made payments on.

Credit Cards. Today, more than three-fourths of all American families have at|6ne
credit card not issued by an oil company. In fact, more than one-fourth of all
American families have three or more credit cards. The most popular are Visa,
MasterCard. American Express, Diner's Club: Carte Blanche and Charges.

As with all scarce resources, credit issued on a credit card has a cost. Stores that
allow people to use Visa, for example, must pay a certain percentage of credit
purchases, usually 4 percent to the Credit Card Company or bank that issued the
card. This is a fee for the services of the company. Stores include this cost in the
price they charge their customers - credit card and cash customers alike.
In other words, prices are higher than they would be if credit card purchases were not t
accepted. In addition, credit card users are charged monthly interest rate of around 1
or 1.5 percent, or a yearly interest rate that is anywhere from 12 to 20 percent. This
charge is added to the amount owed each month. It is similar to a revolving charge
account at a store. Some credit card companies also charge a yearly fee for owning a
card. This fee, which is often around $20 must be paid even if the card is never used.

Credit Cards - the Great Plastic War. The typical American's wallet already
holds seven credit cards. But companies such as American Express, Citicorp, Bank of
America and Sours are going "head-to-head" in an attempt to get even more
customers to use their cards. Citicorp alone spends from $150 to $200 million a year

18
to promote its cards. The reason for this plastic war is that the credit card business is
extremely profitable.
Credit cards are a bright spot in the banking industry. Banks charge annual interest
rates of 13 percent to 22 percent for unpaid balances on their cards. In addition, they
charge an annual fee that averages $ I8 per card. They also charge merchants a
percentage of even card transaction. American Express charges business 3 percent of
every bill their customers charge to American Express. In addition there is an annual
fee that cardholders must pay American Express. Cardholders pay 35 percent a year
for its basic membership. It is estimated that the company nets $250 -$300 million a
year on its credit-card business, a sizable share of its total profits. No wonder there is
such intense competition to win over consumers.
A major tactic used by competition companies is the promotion of "prestige" cards.
American Express initiated the trend in the 1960’s when it introduced its gold cards,
for which it charges $65 a year. In addition, in an attempt to lure the buying elite, it
now offers a platinum card. This super-prestige card costs £250 a year and features
extras such as travel insurance, travel services and the use of private clubs.
Credit card companies are interested not only in the 'big spenders’. A prime target is
the "baby-boom" generation. Americans in their thirties and forties are the target of
much of the advertising for the new credit-card customers. Some banks are after an
even younger market and are issuing cards to college students.
There is growing concern over the high interest rates charged credit-cards users. With
interest rates generally declining to less than 10 percent by the late 1980’s from the
inflationary rates of the early 1980s the double-digit rates still charged on consumer
have been criticized. Congress has expressed interest in dealing with this issue, but
mounting competition between banks may be the force that prompts them to cut rates
on their own. "The Great Plastic war" may well continue as long as Americans feel
the need for easy access to credit.

UNIT V . BUYING THE NECESSITIES: FOOD AND CLOTHING

19
Key words and phrases

Warehouse. Food store. Convenience store. Generic brand . Net weight. Unit price
Guarantee. Full warranty. Implied warranty. Standard. Grade.

TEXT

Ask yourself as you read the text:

-What are the three buying principles for food shopping?
-Can you compare the trade-offs involved in shopping in supermarkets, food stores,
convenience stores, and food cooperatives?
-Can you explain the trade-offs involved in using trading stamps, cents-off coupons,
and convenience foods?
- How warranties and grades and standards in product labeling can protect
consumers?

-What are the three factors involved in comparing clothing value?

Shopping for Food. Americans consume more than 30 percent of the agricultural of
the world. They can choose from thousands of different food products and buy them
at over 300000 stores. Hundreds of brands offer numerous choices; sliced carrots,
carrots with peas - canned or frozen. In all, American consumers spend over $500
billion a year on food. This represents 16 cents of every dollar consumers spend.

Comparison Shopping. Because the average American family spends so much for
food, comparison shopping is important. But it is important only to a point. It does
not pay a shopper to go far out of his or her way to shop at the store that has only a
few needed items at low prices. Any savings would be out-weighed by the additional
costs of time and transportation. Thus, a consumer should do as much comparison
shopping as is worthwhile to that person.
Reading advertisements is a good, inexpensive way to comparison shop. Food store
ads describe sales and often contain cents-off coupons. Generally, stores set aside
particular days of the week for sales on certain items. One store might have a sale on
20
most every second Thursday of the month. Another store might set aside every
Wednesday for a sale on fruits and vegetables. By reading store ads, you can quickly
become familiar with each store's schedule of sales.
Comparison shopping involves making comparisons among brands and sizes as
well as stores. You need to decide not only where to shop but what to shop for.
Food Stores. There are three major types of stores and each has its own characteris-
tics. Just about anything in the way of meats, fresh vegetables, paper products,
canned goods, and so on, can be bought in a supermarket. Prices are high, however so
it is important to be aware of supermarket sales.

The warehouse food store has only a limited number of brands and items. However,
they are less expensive than if bought in supermarkets. In many of these discount
stores, goods are sold by the case only. Some stores offer only regional-brand items,
but some carry slightly damaged cases of national-brand products. Warehouse food
stores are best for consumers who can buy in large quantities to take advantage of
lower prices.
Convenience Stores. Convenience stores seem to be everywhere. They are usually
open 16 to 24 hours a day and carry a limited selection of items. The price per unit of
almost anything is higher than in a supermarket or discount store. This is because you
are paying the cost of convenience. Wise shopping dictates that only limited,
emergent shopping be done in such stores.

Brand-Name Products. Brand names help consumers determine the quality goods
they wish to purchase. Most of what you will find in food stores are national-brand
items. They are usually the most expensive. Food stores may also earn regional
brands. These are brands found only in certain areas of the country.
Supermarkets often earn their own private, or store, brands for soft drinks and
certain canned and packaged goods. These are usually cheaper than national brand
names. But often the makers of the brand-name products also produce the private
brands, and the quality is similar. Some products are labeled only with the generic
brand. This is a general name of the product, such as "Dishwasher Soap" or
21
"Applesauce", rather than a specific manufacturer's name. Generic-brand items are
usually the least expensive. It can be worth your time to try private-brand and
generic-brand items to see if their quality meets your needs.

Trading Stamps and Coupons. Some supermarkets give trading stamps, such as
S&H Green Stamps, Gold Stamps. Blue Stamps and Plaid Stamps. These stamps
have a cash value of one-tenth of a cent a piece (10 stamps equal one cent). The con-
sumer must paste the stamps in a special book and take or mail the books to a trading
stamp center. There the books are exchanged for goods or money. Trading stamps are
not free. Someone has to pay for them. And that someone is the consumer who buys
at stores that give stamps. The store has to purchase the stamps and in order to keep
their profits as high as possible stores raise the prices of goods. Suppose you refuse
trading stamps or throw them away. Then you are paying extra food costs without
receiving the value of the goods or money you could get by redeeming the stamps.
Many manufacturers give cents-off coupons. To take advantage of them a consumer
has to pay the brand, size and quantity of the coupon. The store then reduces the price
paid by the amount printed on the coupon. The manufacturer, in turn, pays the store.
If you make a habit of using coupons, you can reduce your food bill by as much as 5
percent over a one-year period: But the use of such coupons requires time - the time
to collect and match them to items when shopping. Since time is a scarce resource,
you have to decide if the money you save using coupons is worth the time you spend.

Convenience Foods. In most food stores, you can buy either foods that require
preparation, such as fresh meat and vegetables, or foods that require little or no
preparation, such as complete frozen dinners. The latter are called convenience foods
and usually require no work other than heating. Some nutritionists -experts on food
and health - believe that convenience foods are unhealthy. They believe they contain
too many added chemicals, too much sugar, and too many preservatives. But there is
also an economic issue involved.

22
 The purchase of a convenience food involves a trade-off. Convenience foods are
more expensive to buy than foods that must be prepared. Because of the higher price
you are paying when you buy convenience foods, you are sacrificing the purchase of
other things. However, you are gaining more time for leisure or making extra money
because convenience foods require less work. This is one of the situations in which
the consumer must choose between having more free time or having more money.

Clothing Choices. Many people could buy a few very durable, sturdy and even
good-looking pieces of clothing that would last much longer than their owners might
want to keep them. By purchasing such clothing consumers could reduce their
clothing budget considerably. These clothes would protect them from the cold, sun,
wind and so on. However, the clothes would not serve another purpose - variety.
Variety is just one factor involved in clothing choice. Custom, attitude about one's
self, and values are other factors that cannot be judged statistically.
It was only by custom that for centuries men in European and American countries
wore pants while women wore skirts. Clothing that appeals to and makes people
more attractive is one of the strongest influences on what people buy. People's
behavior is also determined by the values they hold important. In this sense the
clothing that a person buys makes a statement about his or hers values. For example,
it may not be important to you to have special clothes to wear for a date - while it may
be important to someone else. An individual's values are linked to the larger value
system - family, friends and culture.

Comparing Clothing Value. Comparison shopping is an important part of buying

wisely. But comparing value in clothing does not mean simply purchasing an item
from the store that offers the best price. Clothing value depends on at least three other
factors: style, durability and cost of care.
You may be able to buy the minimum amount of clothing that you need at very low
cost. However, you will generally give up style to do it. Wearing clothes that are
stylish - up to date - is usually expensive because you need to buy new clothes each
year. In other words, wearing current styles costs more than wearing what are called
23
classic styles. These are the more basic clothing designs and colors that do not change
much through the years. Again, you are faced with a trade-off. Should you buy stylish
clothes each year to keep up with fashion and have less money to spend on other
things? Or should you buy less stylish clothes that you can wear from year to year
and have more money?
Durability is the ability of an item to last. The longer a piece of clothing - or any
item - lasts, the more durable it is. A consumer would not really be comparing similar
value if he or she automatically bought the less expensive coat, dress or shirt. In the
long run, it might be more expensive. For example, an inexpensive but poorly made
pair of pants might have to be replaced after one season. A slightly more expensive
but more durable pair might last for several seasons. In comparison shopping for
clothing, you should try to determine how long an item will last and how long you
will need it. Then you should compare it to price.
Finally, the cost of care is another factor in deciding value. Two shirts or blouses
may cost the same, but one may need dry cleaning. This is an expensive alternative to
hand or machine washing. When deciding on the best choice in a clothing purchase,
or any purchase that is meant to last, you must consider maintenance costs.

Clothing Sales. Clothing sales are numerous throughout the year and it is easy to
become a bargain fanatic. This is someone who buys sale items just because they are
on sale. He or she may not really need or even want the items. Before going
shopping, you should make a list of the clothing that you have and decide what you
are lacking or want to replace. The Checklist for Determining Clothing Needs can
help you to evaluate your needs. Take your list with you when you go shopping. It
will help you to keep your spending within limits. Remember, too that finding the
best deal involves using your time. Only you can decide how valuable that is.
There are several things to remember about clothing sales. Generally, a clothing sale
is one in which a store owner is trying to get rid of goods that he or she could not sell
during the regular selling season. That means in many cases you are buying clothes

24
that you will not be able to wear until the following year. You might also be buying
items that may not be in style in a year.

Vocabulary Review:
For each of the following vocabulary terms write a sentence using the term: grade,
unit price, warehouse food store, guarantee, net weight.

UNIT VI. BUYING THE NECESSITIES

Key words and phrases

Condominium. Lease. Real estate tax. Equity. Security deposit. Decreasing from
insurance. Depreciate. Straight life insurance. Closing costs points. Excise tax.
Insurance. Premiums.

TEXT

Ask yourself as you read:

-What are economic advantages and disadvantages of different types of housing?
-What are the trade-offs involved in owning and renting housing?
The average American family spends nearly one-third of its annual income on
housing In the United States there are more than 100 million housing units, of which
about two-thirds are owned by the people living in them. The rest are rented. A
family or an individual is not just buying or renting a place to live. They are also
paying for the pleasure or satisfaction gained by living in a place called "home"'. The
amount of satisfaction depends on main things. Among them are the size of the
dwelling, the neighborhoods, the quality of construction and furnishings, and how
well it suits the family's or individual s needs.
There are several types of housing available in the United States for single people,
for families, and for different age groups. These include single-family homes, town
houses, condominiums, cooperatives and mobile homes.
Single-Family House. The single-family house is one that is separated from
25
neighboring homes and has some land around it. This type of housing usually is the
most expensive type to buy and maintain. The single-family house perhaps is also the
type of housing that most Americans hope to own. It is part of the American dream,
and more than in any other country it is a symbol of success and happiness.

Town Houses. A town house is a house of two or more floors with a front and back-
yard but with common sideways. The advantage of a town house is its economy of
construction. Its style saves on the amount of land, insulation, windows, foundation,
roof and walls needed, which makes it less expensive to buy and maintain.
Unfortunately noise often carries through the common walls.

Condominiums. Some town houses are condominiums. A condominium is a single

unit in an apartment building or in a series of own houses that is owned separately.
Common areas such as hallways, recreational facilities, and the land on which the
building is built are owned in common by the owners of the single units. Owners pay
a monthly maintenance fee for upkeep of these common areas. Ownership rights in a
condominium are similar to those in a single-family house, with some exceptions.
Owners are free to make any changes they wish within their own units. However, the
need for repairs to common areas is usually determined by a majority vote of the
owners of the units. The owners form an association to deal with such issues.
Condominiums first became popular in resort areas as second homes. Now they are
also popular among younger, single people, small families, and senior citizens who
want to invest in real estate rather than pay rent.

Cooperatives. Owners of the cooperative apartments, on the other hand, own equal
shares in the company that owns the apartment building and the land on which the
building stands. They do not own their apartments but hold leases on their
apartments. A lease is a long-term agreement describing the terms under which the
property is being rented. All operating costs such as real estate taxes and
maintenance are divided equally among the owners. Real estate taxes are those paid
on land and building. A major problem with cooperative apartments is that

26
 individual members must obtain approval from the co-op before remodeling, renting
or selling their units.

Mobile Homes. Mobile homes are a popular form of low-cost housing in the
United States. One reason for this is the favorable tax treatment they receive. In
some states, mobile homes are taxed as motor vehicles rather than as real estate.
Another reason for their popularity is that they are often the least expensive to buy
and maintain. However, owners of mobile homes face problems that owners of other
kinds of housing do not. The purchase of a mobile home does not always guarantee a
space in a mobile home park in the area where the owners may want to live. Mobile
homes are also more likely to suffer damage during storms than the other types of
housing. Third, mobile homes, like automobiles and boats depreciate - decline in
value overtime - as the mobile homes or the fixtures that are part of them wear out or
become outdated in style.
The Decision to Buy Versus Rent. No matter the type of housing a family or
individual decides to live in there is a decision that must be made - to buy or rent.
Today many people rent apartments, town houses, or houses even though they can
afford to buy. Here there are advantages and disadvantages - both economic and
psychological - of owning and renting.

Owning
Advantages. Ownership provides a family or individual with:
-freedom of use. Owners can remodel whenever or however they chose;
-the pride of ownership. People tend to take better care of things they own;
-greater privacy;
-a good investment that in the past has risen in value as much as, to more than, the
general rise in prices;
-significant income tax benefits;
-creation of equity, the amount of money invested in the property minus the debt-
mortgage payments-still owed;
-a good credit rating if mortgage payments are made on time;

27
- property to use as collateral for other loans.

Disadvantages:
-less mobility, especially in years when interest rates on mortgages are high and it is
difficult to sell housing;
- less feeling of being able to sell one property to move to another because the present
is too small, too big and so on;
- necessity of a large outlay of money for a down payment maintenance costs, real
estate taxes, and possible depression;
- less money for their purchases because of high monthly mortgage payments;
- possibility- of overextending a family's debt load to make home improvements.

Renting: Advantages :

- greater mobility. A renter does not have to worry about trying to sell property
quickly if he or she must move;
-a feeling of freedom to choose another place to live if dissatisfied with current rental
unit;
-having to pay only a small security deposit rather than a large outlay of money for
down payment. A security deposit is money the renter gives to the owner to hold in
case the rent is not paid or the apartment is damaged;
- no maintenance costs, real estate taxes, or depreciation;
- a good credit rating if rent is paid in time;
- more money for other purchases because monthly rental payments are often less
than monthly mortgage payments;
- no temptation to overspend on home improvements.

Disadvantages:

- no freedom of use. Renters may not remodel or even paint without permission of
the owner;

- no return on rental money .A renter will never own the property regardless of how
much rent he or she pays or over how long a period of time;

28
- little in the way of tax benefits;

- lack of privacy;

- little feeling of responsibility for seeing that the property is well taken care of;

- no property for use as collateral;

- need to wait for maintenance work at the convenience of the owner.

UNIT VII. SAVING AND INVESTING

Key words and phrases

Saving. Interest. Passbook savings account. Statement savings account. NOW

account. Money market account .Maturity. Certificate of deposit (CD). Simple
interest. Compound interest. Stock. Stockholder. Dividend. Bond. Tax-exempt bond .
Savings bond . Treasury bill .Treasury note. Treasury bond. Common stock .
Corporation. Preferred stock. Over-the-counter market. Capital gain. Capital lose.
Mutual fund. Money market fund . Individual Retirement Account (IRA).

TEXT
Ask yourself as you read:

-What is the purpose of saving income?

-What are the trade-offs in different types of savings plans?

Any saving that you do now may be only for purchases that require more money
than you usually have at one time. When you are self-supporting and-have more
responsibilities, you will probably save for other reasons. For example, you may
save to have a source of money in case of the emergencies, such as losing your job.
and for your retirement. Most Americans who save do so for these reasons. Saving
evens out a person's ability to spend throughout his or her lifetime.

29
 The saving of any individual benefits the economy as a whole. This saving
provides money for others to invest or spend. Additional savings also allow
businesses to expand, which provides income for consumers. Extra income makes a
higher standard of living possible.
Generally, when people think of saving, they think of putting their money in a
savings bank or a similar institution where that money will earn interest. The
payment people receive when they lend money - allow someone else to use their
money - is also called '"interest". A person receives interest on his or her savings
account or similar savings plan for as long as there is money in the account.

Where to Put Your Savings. There are many places and ways to invest your
savings. The most common places are commercial banks, savings and loan
associations, savings banks and credit unions. Before depositing your money, you
should investigate the different types of commercial institutions in your area and ser-
vices they offer. Each institution usually has several types of savings plans, each
paying a different interest rate. In comparison shopping for the best savings plan for
you, you need to consider the trade-offs. Some savings plans allow you immediate
access to your money, but pay a low rate of interest. Others pay higher interest and
allow immediate use of money but require a large minimum balance.

Savings Accounts. Passbook savings accounts are also called regular savings
accounts. With a passbook savings account, the depositor receives a booklet in which
deposits, withdrawals and interest are recorded. A customer must present the
passbook each time one of these transactions, or business operations takes place. A
statement savings account is basically the same type of account. However, instead of
a passbook that must be presented for each transaction, the depositor receives a
monthly statement showing all transactions. The chief appeal of these accounts is that
they offer easy availability of funds. You can usually withdraw money at any time
without paying a penalty that is, forfeiting any money. But there is a trade-off. The

30
interest paid on these accounts is low compared to the interest on their savings plans.
Savings accounts are called share accounts at credit unions.
A NOW account combines the benefits of both checking and savings account.
NOW stands for Negotiable Order of Withdrawal. By using a NOW account you
earn interest on any unused money in your account. Although a NOW account
allows you the convenience of writing checks, it is not the best way to save. Until
1986, the interest rate for NOW accounts was set by law at 5%. After that time, the
federal government no longer regulated the interest that could be paid on accounts.
Banks and other institutions now are free to pay whatever rates they think will attract
customers and still allow them to make a profit. NOW accounts, however, still pay
low interest compared to that for other savings plans. This will be the trade-off
between a depositor's being able to have his or her funds quickly without paying a
penalty and still earn interest. Because of the low interest rate, it may be wise to keep
as little money as possible in a NOW account. Since January 1983, banks and
savings institutions have offered Super NOW accounts paying high rates of interest.
However, at most banks the account must be at least $2,500, although the minimum
balance can vary from institution to institution.
Money market deposit accounts (MMDAs) are another type of account paying high
rates of interest and allowing immediate access to money. The trade-off is that these
accounts also have a $1,000 to $2,500 minimum balance requirement. Customers can
usually make withdrawals from a money market account in person at any time, but
are allowed to write only three checks a month against the account.

Time Deposits. The term time deposits refers to a wide variety of savings plans that
require a saver to leave his or her money on deposit for a certain period of time. The
period of time is called the maturity, and may vary from 7 days to 8 years or more.
Time deposits are often called certificates of deposit (CDs) or savings certificates.
They state the amount of the deposit, the maturity, and the rate of interest being
paid. The amount of deposit and interest rates vary widely. Some CDs, particularly
those paying higher interest, require a minimum deposit. The minimum may be as
31
small as $250 or as large as $100,000. CDs at credit unions are called share
certificates . Time deposits offer higher interest rates than passbook or statement
savings accounts. The longer the maturity is, the higher the interest rate that is paid.
For example, a CD with a short-term maturity of 90 days pays less interest than a CD
with a two-year maturity. But there is a trade-off for this higher interest rate and that
trade-off is the longer maturity period. Savers who decide to cash a time deposit
before maturity pay a penalty.
Financial institutions also offer a number of special CDs. One example is the Small
Savers Certificates. Their rates are tied to the current interest rates the federal
government pays on certain types of borrowing that it does. Most savings institutions
in the United States are insured by one of several federal agencies. This means that
each depositor's money is insured up. to $ 100,000. If an insured bank or other
institution fails, each depositor will be paid the full amount of his or her savings up to
$ 100,000. Keep in mind that different institutions may offer different rates on the
same type of savings. Or they may use different methods for figuring interest. Some
savings institutions are not insured, or they carry private insurance. Those who put
their money in these institutions run a higher risk of losing their funds if the
institution fails.

Reviewing Economic Principles

1. Write a sentence defining the following economics terms: a. Interest, b.
passbook savings account, c. statement savings account, d. NOW account, e.
money market deposit account, f. maturity, g. certificate of deposit.
2. What is the purpose of saving money?

UNIT VIII. INVESTING: TAKING RISKS WITH YOUR

SAVINGS
Ask yourself as you read:

32
-What are stocks and bonds?

-What are the major ways of investing?

People usually distinguish between saving and investing. People have savings
plans because they want a sure, fixed rate of interest. However, if people are willing
to take a chance on earning a higher rate of return, there are various ways they can
invest their money; such as stocks and bonds. It is usually impossible, however, to get
a higher rate or return without taking some risk. Of course, the very nature of risk
implies that such investment may yield a lower rate of interest, too.

Stocks. Stock, or shares of stock, entitles the buyer to a certain part of the future
profits and assets of the corporation selling the stock. The person, buying the stock,
therefore, becomes a part owner of that corporation.
By issuing stock, a company obtains funds for use in expanding its business
and. it hopes, in making a large profit.
Stockholders — owners of stock — make money from stock, in two ways. One is
through dividends, the money return a stockholder receives on the money he or she
invested in the company.
The corporation may declare a dividend at one or more times during a year.
However, dividends are paid only when the company makes a profit. The other
way people make money on stock is by selling it for more than they paid for it.
Some people buy stock just to speculate. That is, they buy stock hoping that the
price will increase greatly so they can sell at a profit. They do not buy it for the
dividends.

Bonds. Instead of buying stock, people with money to invest can buy bonds. A bond
is a certificate issued by a company or government in exchange for borrowed money.
It promises to pay a stated rate of interest over a stated period of time, and then to
repay the borrowed amount in full at the end of that time. In other words, a bondholder
lends money for a period of time to a company or government and is paid interest on

33
that money. At the end of the period, the full amount of borrowed money is repaid.
The period of time is called bond’s maturity.
Unlike buying stock, buying a bond does not make a bondholder part owner of the
company or government that issued the bond. The bond becomes part of the debt
of the corporation or government, and the bondholder becomes a creditor.
Local and state governments also sell tax-exempt bonds. This means that the interest
on this type of bond, unlike bonds issued by companies, is not taxed by the federal
government. Interest that you earn on bonds issued by your own city or state is also
exempt from city or state income taxes. Tax-exempt bonds are good investments for
wealthier people who would otherwise pay high taxes on interest earned from
investments.
The most common type of bond issued by the federal government is the United
States savings bond. Savings bonds are sold for less than their stated value. When
redeemed at maturity, they are worth their purchase price plus interest. If a
bondholder does not cash in a bond at maturity, it will continue to earn interest.
However the rate may not be as high as for some CDs. The low price of savings
bonds—as little as $25.00—is attractive to people with limited money to invest. In
addition, the interest is exempt from state and local income taxes. You also put off
paying federal income tax on the interest until the bonds are cashed in. The interest on
savings accounts, on the other hand, is taxed each year. The Treasure Department also
sells several types of larger investments. Treasure bills mature in anywhere from three
months to one year. The minimum amount of investment for Treasure bills is
$10,000. Treasury notes have maturity dates of two to the years, and Treasury bonds
mature in ten or more years. Notes, bonds and bills are sold minimums of $ 1,000 or
$5,000. The interest on all three is exempt from state and local income taxes, but not
from federal income tax.
Stock and Bond Markets. If you decide to buy stocks or bonds, you will have to
use a broker. A broker is a person who acts as a go-between for buyers and sellers.
There are thousands of brokerage firms throughout the country that buy and sell daily
for ordinary investors.

34
 Stocks are bought and sold on stock markets The largest is the New York Stock
Exchange (NYSE) in New York City. The second largest is the American Stock
Exchange (AMEX), also in New York. The stocks listed on these two exchanges
account for over 90 percent of the market value of all stocks listed on exchanges in
the United States. In addition to the New York and American exchanges, there are
supplemental stock exchanges and regional exchanges. For example, there is the
Midwest Stock Exchange in Chicago. Another large exchange is a national exchange,
the National Association of Securities Dealers Automated Quotations (NASDAQ)
National Market. Stocks must be listed to be sold on all of these exchanges. That
means that a corporation offering stocks for sale must prove to the exchange that it is
in good financial condition and engaged in legal business. Most of the companies
traded on stock exchanges are among the larger corporations.
Stocks can also be sold on the over-the-counter market. Unlike stock exchanges,
there is no actual place where over-the-counter stocks are traded. Brokerage firms hold
quantities of shares of stock that they buy and sell for investors. The stocks of
smaller, lesser-known companies are traded in this way. For example, assume that
XYZ Corporation is a small company that sells computers. If you wanted to buy
stock in it, you would check the stock market listings in your local newspaper. In the
table of over-the-counter stocks, you would find XYZ Corporation, the number of
shares of stock sold the day before, and the price at which shares were bought and
sold that day. You would then call a broker and tell him or her to buy so many shares.
Usually stocks are sold in amounts of 100 shares. Some brokers will handle smaller
amounts. The largest volume of over-the-counter transactions occurs through
NASDAQ, which publishes price lists for various types of stock.
The New York Stock Exchange Bond Market and the American Exchange Bond
Market are the two largest exchanges. Bonds are also sold over-the-counter. United
States government bonds are sold this way.
Capital Gains and Losses. Suppose a person buys stock at $20 a share and sells it
for $30. That profit of $10 per share is called a capital gain. The person has had an
increase in his or her capital, or wealth, of $ 10 a share. Of course, the value of stock

35
may also fall. If a person decides to sell stock at a lower price than he or she paid for
it, that person suffers a capital loss. Money may be made or lost on bonds in much
the same way. Capital gains and losses are important. They tell you how wise your
investment was, which may be useful information for future investing.
Mutual Funds: an Easy Way to Invest. One of the easiest ways to invest in stocks
and bonds is to participate in a mutual fund. A mutual fund is an investment company
that pools the money of many individuals to buy stocks or bonds or other
investments. By putting savings into a mutual fund, an individual usually is able to
purchase a little bit of a large number of stocks or bonds. Ordinarily, this would be
difficult because most people have limited savings.
Mutual funds have several other important advantages for investors with only a
small amount of money. One is that the risk of losing money from a poor investment
is decreased. Most mutual funds hold a variety of stocks or bonds. Losses in one area
are likely to be made up by gains in another. You do not have to try to outguess
investors yourself. Professionals with experience in the stock or bond market make
decisions about how to invest the fund's money. In addition, various mutual funds
buy different types of investments. This allows you to choose the fund that best meets
your needs. Some funds invest in stocks that are likely to increase rapidly in value,
some in stocks and bonds that pay high dividends and interest and some in tax-
exempt bonds.

One type of mutual fund, called a money market fund, uses investors' money to
make short-term loans to businesses and banks. Most money market funds allow
investors to write checks against their money in the fund. Any check, however, must
be above some minimum amount, usually $500. Of course, in writing a check against
your account the total value of your account is reduced. You then earn money only on
the amount left in your account. As you read earlier in the chapter banks, savings and
loan associations, and savings banks now offer a similar service, called money
market accounts. A major advantage of these accounts is that they are insured against
loss by the federal government. Mutual funds and money market funds are not
insured.
36
Regulating Securities and Exchanges. The securities market is heavily regulated
today, both at the state and federal levels. The Securities and Exchange Commission
(SEC), created by the Securities Exchange Act of 1934, is responsible for
administering all federal securities laws. It has regulatory authority over brokerage
firms, stock exchanges, and most businesses that issue stock. It investigates any
dealings between or among corporations, such as mergers, that affect the value of
stocks.

The Securities Act of 1933 was passed to avoid another stock market crash like that
of 1929. The act requires that all essential information concerning the issuing of
stocks or bonds be made available to the investors. This is done through a registration
statement filled with the federal government. A briefer description called a
prospectus must be given to each potential buyer. It lists the amount offered, the
price, and the use that the company plans to make of the money raised by the stock or
bonds. Mutual funds must also distribute a prospectus describing the fund and the way
in which the money will be invested.
Today states also have securities laws. These are designed mostly to prevent
schemes that would take advantage of small investors.

Reviewing Economic Principles

I. Define these terms: a. stock, b. dividends, c. bond, d. tax-exempt bond, e.

savings bond, f. treasury bill, g. treasury note, h. corporation, i. over-the-counter
stock, j. capital gain, k. mutual fund. 1. money market.

2. Why would some people prefer to save their money in a savings plan rather than
invest it in stocks and bonds?
3. What are the advantages and disadvantages of mutual funds?
4. What is the job of the Securities and Exchange Commission?

37
UNIT IX. SUPPLY AND DEMAND
Key words and phrases

Voluntary exchange. Price elasticity of demand. Law of demand. Elastic demand.

Supply. Demand schedule. Law of supply. Utility. Supply schedule. Demand curve.
Supply curve. Law of diminishing marginal unity. Equilibrium price. Real income.
Income effect on demand. Surplus. Substitution effect. Shortage.

TEXT

Ask yourself as you read:

-How is voluntary exchange the basis of a market economy?
-What three factors affect price and quantity demanded?

A market is the freely chosen action between buyers and sellers of goods and
sellers. A market for a particular item can be local, national, and international. In a
market economy, individuals decide for themselves the answers to the four basic
economic questions through the interaction of individuals looking out for their own
best interests.
The Market and Voluntary Exchange. The basis of activity in a market economy
is this principle of voluntary exchange. A buyer and a seller exercise their economic
freedoms by working out on their own the terms of an exchange. For example, the
seller of a videocassette sets a price based on the market, and the buyer, through the
act of buying, agrees to the product and the price. By definition, the two parties to a
voluntary exchange are freely choosing to engage in that transaction, or business
deal. Once the exchange has been made, both must feel they are better off— happier
and richer.
It is through the principle of voluntary exchange that supply and demand enter into
the activity of a market economy. Remember, that supply and demand are models of
how buyers and sellers operate in the marketplace. They are a way of explaining

38
cause and effect in relation to price. Other factors also influence what people will buy
and what people produce.

The Law of Demand. The law of demand states the following: As the price of a
good or service falls, a larger quantity will be bought. As the price of a good or
service rises, a smaller quantity will be bought. Demand means the quantity that will
be purchased at all possible prices. It includes willingness and the ability to pay. A
person may say he or she wants a slice of pizza. However, until that person is both
willing and able to buy it, no demand for pizza has been created by that person.
According to the law of demand quantity demanded and price move in opposite
directions. As price goes up, quantity demanded goes down. As price goes down
quantity demanded goes up. There is an inverse, or opposite, relationship between
demand and price. There are several factors that affect how much people will buy of
any item at a particular price. These are diminishing marginal utility, real income, and
possible substitutes.

Diminishing Marginal Utility. Almost everything that people like, desire, use,
think they would like to use, and so on, gives satisfaction. The term economists use
for satisfaction is utility. Utility is defined as the power that a good or service has to
satisfy a want. People decide what to buy and how much they are willing and actually
able to pay based on utility. That is, in deciding to make a purchase, they decide the
amount of satisfaction, or use, they think they will get from a good or service.
Consider the utility that can be derived from eating slices of pizza.
At $ 1.00 a slice, how many slices will you buy? Assuming that you have money and
like pizza, you will buy at least one. Will you buy a second? a third? a fourth? That
depends on the additional utility, or satisfaction, you expect to receive from buying
and eating another slice. You will have a higher level of total, or overall, satisfaction
from eating more slices of pizza. But, most likely, the satisfaction you receive from
each additional slice will be less than for each previous slice. This example explains
the law of diminishing marginal utility. Your total satisfaction will rise with each unit

39
bought. But the amount of additional satisfaction, or marginal utility, will diminish,
or lessen, with each additional unit until you find you are full.
At some point, you will stop buying additional slices. At that point, the satisfaction
that you receive from eating pizza is less than the value you place on the $1.00 that
you must pay for a slice. People stop buying an item when one event occurs—when
the value that they place on additional satisfaction from the next unit of the same
item becomes less than the price they must pay for it. Assume that at a price of $ 1.00
per slice you have had enough pizza after buying three slices. Thus, the value you
place on additional satisfaction from a fourth slice would be less than $1.00.
According to what will give you the most satisfaction, you will save or spend the
$1.00 on something else.
But what if the price drops? Suppose the owner of the pizza parlor decided to have
a special and sell pizza at $.75. Unless three slices were all you could eat, you would
probably buy at least one additional slice. If you look at the law of diminishing
marginal utility again, the reason becomes clear. People will buy an item to the point
where the value they place on the satisfaction from the last unit bought is equal to the
price.
At that point people stop buying. If the price falls again, the lower price will attract
people to buy more. This is true even though the satisfaction or utility from each
additional unit is less. People will continue to buy to the point again where the
satisfaction they receive falls below the price they must pay. This proves part of the
law of demand. As the price of an item that people want decreases, they will
generally buy more.

Monopolistic Competition
Ask yourself as you read:
- Why is monopolistic competition common in the United States?
- What are some examples of monopolistic competition?
In monopolistic competition, a large number of sellers offer similar but slightly
different products. Obvious examples are such brand-name items as toothpaste,

40
cosmetics, and designer clothes. Many industries in the United States are
characterized by monopolistic competition. This type of industry has:
I. numerous sellers. There are so many sellers of the good or service that no one seller
or no small group dominates the market.
2. relatively easy entry. Though not as easy as in perfect competition, entry is still
easier than in other types of markets. One drawback is the high cost of advertising.
3. differentiated products. Each seller sells a slightly different product to attract
customers.
4. nonprime competition. Businesses compete by product differentiation and
advertising.
5. some control over price. Each firm has some control over the price it charges.
Because of customer loyalty and product differentiation, competitors can charge a
little more for their product and not lose all their customers.
Comparisons with Oligopolies and Pure Monopolies. Many of the
characteristics of monopolistic competition are the same as those of an oligopoly. The
major differences, however, are in the number of sellers of a product and in the
product. In an oligopoly, a few companies dominate an industry, and control over
price is independent. The products may or may not be similar. In monopolistic
competition, there are main firms and no real interdependence. There is some slight
difference among products.
As you read earlier in this chapter, there are so many buyers and sellers in a
perfectly competitive industry that no one has any control over price. Everyone must
take the price as determined by the interaction of total demand and total supply. In
monopolistic competition, however, each competitor has some control over the price
of its product. A monopolistic competitor does not have as much control over price
as a pure monopolist. This is because other monopolistic competitors are selling
almost, but not quite, the same product. The quantity demanded of a good or service
will drop if the price is raised and there are cheaper substitutes available. In other
words, if one monopolistic competitor raises the price too much most customers
will buy another brand, or substitute, of the same good.

41
Neighborhood Businesses. Neighborhood Businesses such as cleaners and
drugstores are also involved in monopolistic competition. Each business within the
neighborhood has an identity of its own. This is true even though the differences
between its good or service and those of its competitors may be small. This is
product differentiation again. Nonetheless, each seller is a partial monopolist because
he or she has some control over price.
Competitive Advertising. Competitive Advertising is especially important in
monopolistic competition. This is advertising that attempts to persuade consumers
that the product being advertised is different from, and superior to any other.
Businesses also compete by gaining shelf space - space on store shelves for which
companies compete in "displaying their products and attracting buyers “. A cosmetics
company, for example, may produce several lines of cosmetics. Each is aimed at a
different market segment, or section. By having three lines, the company competes in
three areas with competitors. The differences in products attract different customers
and add to the profits of the company.

Government Policies toward Competition

Ask yourself as you read:
- How has the federal government tried to encourage competition in American
business?
- What are the major antitrust laws in the United States?

Historically, one of the goals of government in the United States has been to
encourage competition in the economy. Through the years, federal and state
governments have passed laws and established regulatory agencies in an attempt to
force monopolies to act more competitively. Known as antitrust legislation, these laws
act to prevent new monopolies from forming and to break up those that already exist.
Trust is another name for monopoly. One reason that many economists and legislators
oppose monopolies and noncompetitive situations in general is that they normally
result in higher prices for consumers.

42
 You should be familiar with interlocking directorate and merger. An interlocking
directorate occurs when the majority of members of the boards of directors of
competing corporations are the same. In effect, there is only one management for both
companies. Because the same people control both companies, it is easy for them to
make sure that the two companies do not compete with one another.
A merger occurs when one corporation buys more than half of the stock in another
corporation. When the two corporations are in the same business, this is called a
horizontal merger. The buying out of an oil company by another oil company is an
example of a horizontal merger because they produce the same product. When a
business that is buying from or selling to another business merges with that business,
a vertical merger takes place. For example, if a shoe manufacturer buys retail stores
that are selling its shoes, a vertical merger takes place. Some corporations have
become big by buying out other corporations dealing in totally unrelated activities.
These expanded corporations are called conglomerates. The buying out of unrelated
businesses is termed conglomerate merger. An oil company for example, will buy oil
and other energy companies to diversify and to raise total profits. There are other
types of conglomerate merger also.
The Clayton Act forbids mergers when they tend to lessen competition
substantially. However, the Clayton Act does not state what the term substantially
means. As a result, it is up to the government to make a subjective decision as to
whether the merging of two corporations would substantially lessen competition.
This provision has been used to block horizontal mergers in which large corporations
attempt to buy smaller corporations in the same industry
Regulatory Agencies. Besides the use of antitrust laws to create a competitive
atmosphere, the government uses direct regulation of business pricing and product
quality. The overseeing of these regulations is done by government regulatory
agencies. These exist not only at the federal level but also at the state level and even
local levels. Table 10-3 shows some major federal regulatory agencies. Main states
have similar agencies.

43
 In spite of the fact that the aim of most government regulations is to promote
efficiency and competition, recent evidence indicates something quite different.
Many regulations, as a by-product of their goals to protect consumers and companies
within industries from unfair practices, have actually decreased the amount of
competition in the economy. The Interstate Commerce Commission (ICC), for
example, has raised the prices that consumers pay for the shipment of goods by
preventing entry into the trucking industry and restricting price competition. For
many years the Federal Communications Commission (FCC), in an effort to help
UHF stations, in effect prevented the entry of competitive pay-TV, cable, and satellite
systems into the television market. Different researchers have also shown that while
the Civil Aeronautics Board (CAB) regulated airfares, these fares were 20 to 50
percent higher than they would have been if competition had been allowed to set
prices. The Federal Trade Commission has often prosecuted businesses because of
complaints by businesses that are having difficulty competing in a particular industry.
The Occupational Safety and Health Administration (OSHA) has been accused of
creating thousands of regulations that have had little benefit but have been costly to
enforce.
Because of findings such as these; the 1980s have been called the era of
deregulation. This refers to a gradual reduction in government control over business
activity. This does not mean there should or will be no government regulations, it just
means there will be less ones than existed in the 1960s and 1970s. For example, the
CAB no longer controls airfares or route selection by the nation's airlines.
Additionally, the FCC is now allowing almost open competition in the cable and
direct-satellite television transmission fields. The regulations in the banking industry
have been slowly decreased, allowing consumers to obtain competitive interest rates
on savings for the first time in many years.

Reviewing Economic Principles

1. Define the following economic terms: a. interlocking directorate, b. merger,
c. conglomerates, d. deregulation.

44
2. What is the purpose of each of the following: a. antitrust legislation?
b. regulatory agencies?

3. Why is it difficult to enforce part of the Clayton Act?

4. Critical Thinking. Making Predictions: Based on recent studies, how effective
do you think regulations about business practices will be in the future?

Summary of Important Principles

-Perfect competition has four conditions that result in businesses’ having no control
over price; a large market; similar product; easy entry and easily obtainable
information.
-On the supply side, perfect competition requires a large number of suppliers of a
similar product. On the demand side, perfect competition requires a large number of
informed buyers who know exactly what the market price is for the good or service.
The market price is the equilibrium price and is reached when the total supply and the
total demand are allowed to interact.
-Pure monopoly has three conditions that result in a business's having almost
complete control over the market price: a single seller, no adequate substitutes, and
no entry.

-In a pure monopoly, a monopolist controls the supply available and, therefore, the
market price. However, the law of demand still operates and. as the price of a good or
service rises, consumers will buy less.
- The profit incentive works on potential competitors to find a way to break down a
monopoly.
-An oligopoly is dominated by a few sellers and may have substantial binders to
entry identical or slightly different products, and nonprime competition. These factors
result in limited control over price.
-A corporation's annual report summarizes in words and financial data
the facts about a company's revenues, costs, and profits.

45
 - Monopolistic competition has numerous sellers, limited entry differentiated
products, and nonprime competition that results in some price control.
-In monopolistic competition, a business does not have complete control over price
because other monopolistic competitors are selling almost, but not quite, the same
product. The quantity demanded of a good or service will drop if the price is raised
and there are cheaper substitutes available.
- Perfect competition has a large market: pure monopoly; a single seller; oligopoly; a
market dominated by a few sellers; monopolistic competition; numerous sellers.
Perfect competition has easy entry into the market: pure monopoly, no entry;
oligopoly, substantial barriers to entry: monopolistic competition, relatively easy
entry. In perfect competition, the product is similar: in a pure monopoly there are no
substitutes; in an oligopoly products are identical or slightly different: in
monopolistic competition, there are differentiated products. The conditions of perfect
competition result in no control over price; pure monopoly, complete control of
market price: oligopoly limited control over price: monopolistic competition, some
control overprice.
- The Federal government has passed laws and established regulatory agencies to
force monopolies to act more competitively, to prevent new monopolies, and to break
up those that exist. Recent evidence suggests that such regulations have had an
opposite effect .

UNIT X. MONEY AND BANKING

Key words and phrases

Money. Medium of exchange. Barter. Double coincidence of wants. Unit of

accounting. Store of value. Commodity money. Representative money. Fiat money.
Legal tender. Monetary standard. Checking account. Demand deposit. Near monies.
Electronic funds transfer. Overdraft checking. Endorse. Blank endorsement.
Restrictive endorsement. Special endorsement.

46
TEXT

Ask yourself as you read:

-What is money?

-Why is using money preferable to bartering?

Though most Americans think of money as bills, coins, and checks, in other
economies money might be shells, gold, or even goods such as sheep.
Economists identify money by the presence or absence of certain functions.
Any thing is considered money that is used as a medium of exchange, a unit of
accounting, and a store of value.

Medium of Exchange. To say that money is a medium of exchange simply means

that a seller will accept it in exchange for a good or service. Most people are paid for
their work in money which they then can use to buy whatever they need or want.
Without money people would have to barter - exchange goods and services for other
goods and services.
Suppose you worked in a grocery store and were paid in groceries because money
did not exist. To get whatever else you needed, such as clothes and housing, you
would have to find people who have the goods or could perform the services that you
want. In addition, those people would have to want the exact goods or services — in
this case, groceries — that you have. Barter requires what economists call a double
coincidence of wants. Each party to a transaction must want exactly what the other
person has to offer. This situation is rare. As a result, people in societies that barter
for goods spend great amounts of time and effort making trades with one another.
They waste much of their own potential for making goods or services in bartering for
what they cannot make. Bartering can only work in small societies with fairly simple
economic systems.
Unit of Accounting. Money is the yardstick that allows people to compare the
values of goods and services in relation to one another. Money that is a measure of
47
value functions in this way as a unit of accounting. Each nation uses a basic unit to
measure the value of goods, as it uses the foot or meter to measure distance. In the
United States, this basis unit of value is the dollar. In Germany it is the mark; in
France, the franc. An item for sale is marked with a price that indicates its value in
terms of that unit — $50, $5.00, and so on.
Using money as the single unit of accounting provides a simple and convenient way
to compare the values of various items. By using money-prices as a factor in
comparing goods, people can determine whether one item is a better buy than
another. A single unit of accounting also allows people to keep accurate financial
records — records of debts owed, income saved and so on. Business men and women
can better calculate their profits and losses over the years by using a single money
unit of accounting.
Store of Value. Money also serves as a store of value. In other words, you can sell
something, such as your labor, and store the purchasing power that results from the
sale in the form of money for later use. People usually receive their money income
once a week, once every two weeks, or once a month. However, they usually spend
their income at different times during a pay period. To be able to buy things between
paydays, a person can store some of his or her income in cash and some in a checking
account. It is important to note that in periods of rapid and unpredictable inflation,
money is less able to act as a store of value.

Types and Characteristics of Money

Ask yourself as you read:

-What are the most important types of money?

- What is the most common type of money used today?

Anything that people are willing to accept in exchange for goods can serve as
money At various times in history cattle, salt, animal hides (skin), gems and
tobacco have been used as mediums of exchange. Each of these items has certain

48
characteristics that make it better or worse than others for use of money. Cattle, for
example, are difficult to transport,

Characteristics of Money

Durable: The material that is used as money, must be able to withstand the wear
and tear of being passed from person to person. Paper money lasts on the average
of only one year, but old bills can be easily replaced. Coins, on the other hand last
for years.

Portable: People need a medium of exchange that they can carry around easily so
they can buy things whenever and wherever they want. Though paper money is not
very durable, it is very portable. People can easily carry large sums of paper money.

Divisible: It must be possible to divide money into small parts so that purchases of
any price can be made. Carrying large amounts of coins and small bills is not handy
but these make it possible to make purchases of any amount.
Stable in value: Money must be stable in value. Its value cannot change rapidly or its
usefulness as a store of value will decrease.
Scarce: Whatever used as money must be scarce. That is what gives it value.

Accepted: Whatever is used as money must be accepted as a medium of exchange by

those who use it. They must be willing to accept it in payment for debts and to pass it
on to others. In the United States, that acceptance is based on the knowledge that
others will continue to accept paper money, coins, and checks in exchange for desired
goods and services.
Mediums of exchange such as cattle and gems are considered commodity money.
That is, they have a value as a commodity, or good, aside from their value as money.
Cattle are used for food and transportation. Germs are used for jewelry. Salt, for
another example, was used as a seasoning as well as money.
Representative money, though not in itself valuable for nonmoney uses, CAN be
exchanged for some valuable item. Money of this sort is said lo be backed by—
exchangeable for—some commodity, such as gold or silver. Like commodity

49
money, the amount of representative money in circulation, or in use by people, is
limited. This is because it is linked to some scarce good, such as gold. At one time,
the United States government issued representative money in the form of silver and
gold certificates. In addition, private banks accepted deposits of gold or silver and
issued paper money, called bank notes. These were a promise to convert the note
into coin or bullion on demand. These banks were supposed to keep enough gold or
reserve -on hand- to redeem their bank notes.
Today all United States money is fiat money. Its face value occurs through gov-
ernment fiat, or order. It is in this way declared legal tender. This means that by law
the money must be accepted for payment of public and private debts. In reality fiat
money is accepted because we all have faith that others will accept this money from
us when we use it to buy things.
There are some major characteristics that to some degree all items used as money
must have. Almost any item that meets most of these criteria can be and probably has
been used as money. However, precious metals, particularly gold and silver, are
especially well-suited as mediums of exchange and have often been used as such
throughout history. It is only in more recent times that paper money has been used as
a medium of exchange

Reviewing Economic Principles:

1. What is the difference between commodity and representative money?
2. What is the difference between commodity and fiat money?
3. What type of money does the United States use?
4. What is legal tender?

History of American Money and Banking

Ask yourself as you read:

- When did Congress gain the sole power to mint coins?

- When was the First Bank of the United States founded?

50
 During the colonial period, the English colonies were for the most part forbidden to
print or mint their own money. Bartering was common. Colonists used various goods
in place of coins and paper money. In Massachusetts Bay for a time, colonists used
Native American wampum—beads made from shells and strung on thread-—as a
medium of exchange. In the Virginia Colony tobacco became commodity money.
Though scarce, some European gold and silver coins also circulated in the colonies.
The Spanish doubloon, later called the dollar by colonists, was one of the more
common. It could be cut into equal parts, such as halves, quarters, and eighths.
Because Spanish dollars could actually be cut into eight pieces, they came to be
called "pieces of eight."

The Revolutionary war brought even more confusion to this already haphazard
system. To help pay for the war, the Continental Congress issued bills of credit,
called Continentals, that could be used to pay debts. So many of these notes were
issued that people often refused to accept them. The money became so worthless that
the phrase "not worth a Continental" came to mean something of little value. After
the war, establishing a reliable medium of exchange became a major concern of the
new nation. The Constitution, ratified in 1788, gave Congress the sole power to mint
coins. Private banks were still allowed to print bank notes representing gold and silver
on deposit.
Types of Money in the United States
Ask yourself as you read:
- What types of money are in use today?
- What are federal reserve notes?
- What are demand deposits?
Money in use today consists of more than just currency. It also includes money
deposited in checking and savings accounts in banks and savings institutions plus
certain other investments.

51
Currency

All United States coins in use today are token coins. That is, the value of the metal
in each coin is less than its exchange value. A quarter, for example, consists of a
mixture of copper and nickel. If you melted down a quarter— which is illegal—the
value of the resulting metal would be less than 25 cents. All coins are made by the
Bureau of the Mint, which is part of the Treasury Department. The government
produces coins in six denominations: l c., c.,10c.,25c.,50c. and $1. Of the currency in
circulation in the United States today, about 9 percent is in coins.

Most of the nation's currency is in the form of Federal Reserve notes. These notes
are issued by the Federal Reserve Banks. All Federal Reserve notes are printed by
the Bureau of Printing and Engraving, also part of the Treasury Department. They
are issued in denominations of $1. $5, $10. S20, $50. and $100. Bills of higher
denominations were once issued, but have since been recalled by the Federal
Reserve.

The Treasury Department has also issued United States notes in $100
denominations only. These bills have the words United States Note printed across
the top and can be distinguished from Federal Reserve Notes by the red Treasury
seal on the right side of the note's face. These make up less than 1 percent of the
paper money in circulation. Both Federal Reserve notes and United States notes are
fiat money or legal tender.

Checks. A checking account is money deposited in a bank that a person can

withdraw at any time by writing a check. The bank must pay the amount of the
check when it is presented for payment, that is, on demand. For this reason, such
accounts are called demand deposits. In the United States, most purchases and debts
are paid with checks that are written on checking accounts. Checking-account and
checking-type-account balances are considered a form of money. They serve all the
functions of money. They are a medium of exchange and provide a convenient unit
of accounting and store of value.

52
 Until the 1970s, only commercial banks could legally offer checking accounts.
Since then, regulatory changes and new laws have altered the concept of demand
deposits and increased the types of accounts that offer check-writing privileges.
Beginning in 1974 savings and loan associations, savings banks, and commercial
banks in a few northeastern states were allowed by the federal government to offer
checking-type accounts that paid interest. Permission for the service was extended to
similar banking institutions nationwide on December 31, 1980. Credit unions can
also offer checking-type accounts called share drafts.

Near Monies. There are numerous other assets that are almost but not exactly like
money. These are called near monies. Their values are stated in terms of money, and
they have high liquidity in comparison to other investments, such as stocks. That is,
near monies can be turned into currency or into a means of payment such as a check
relatively easily and without the risk of loss of value. For example, if you have a
bank savings account you can not write a check on it. But you can go to the bank and
withdraw some or all of your funds. You can then redeposit it - in your checking
account or take it in cash to buy what you want.

Time deposits are near monies as are savings-account balances. Both pay interest,
and neither can be withdrawn by check. They require that a depositor notify the
financial institution within a certain period of time, often 10 days, before
withdrawing any money. However, with savings accounts, this practice is usually
waived .

The Money Supply. How much money is there in the United States today? That
question is not so easy to answer. First, the money supply must be defined and agreed
upon. Currently, two basic definitions are used, although there are others. The first is
called Ml and the second M2. Both definitions include all the paper bills and coins in
circulation. The difference lies in what checking-type accounts are included.

Ml, the narrowest definition of the money supply, consists of monies that can be
spent immediately and against which checks can be written. It includes currency,

53
traveler's checks, demand deposits and other checking-type deposits in commercial
banks, savings institutions, and credit unions. A broader definition of the money
supply, M2, includes all of Ml, plus such near monies as overnight repurchase
agreements and Euro dollars, money market mutual fund balances, money market
deposit accounts and savings in small time deposits.

Service Description

Checking accounts: A checking account offers a safe and convenient way to

transfer money from one person to another. If a check is lost or stolen, a stop-
payment order can be placed on it for a small fee and the customer will not lose his or
her money. Canceled checks returned with the monthly bank statement are also proof
that bills have been paid.
Interest on checking : Both NOW and Super NOW accounts combine the benefits
of checking and savings accounts. They offer check-writing privileges and interest on
any unused money in the account. NOW accounts, however, offer a low rate of
interest compared to other savings plans. Super NOW accounts pay higher rates of
interest, but typically require a minimum balance of at least $2,500 in order to pay
that high rate of interest.

Automatic deposit and payment: Many financial institutions now allow their
customers to have their paychecks automatically deposited by their employer. Social
Security checks may also be deposited automatically. Some institutions also offer
automatic payment of major recurring bills, such as mortgage payments or utility
bills. Often these services are tied in with an EFT system, which allows a customer
to pay bills or transfer bills over the phone.

Storage of valuables: A bank usually sets aside a part of its vault space to store
valuables such as stock certificates, real estate deeds, and jewelry for an annual fee.
A safe deposit box is kept under dual lock and key. Both the customer's key and the
bank's key must be used at the same time to open the box.

54
Banking Services. Banks and savings institutions today offer a wide variety of
services. In general, the types of services are the same across the country. But the
exact conditions of the services vary from state to state according to each state’s
banking laws.
In choosing a bank or savings institution for a checking-type account, you should
consider the service charges. Service charges on checking accounts vary from bank
to bank and with the type of account. You may be charged from $.25 to $.50 for each
check you write. Or you may be charged fiat fee of $4 to $6 per month if your
account balance for the month drops below a minimum amount. The minimum
ranges from $100 to $500. Some institutions offer "free checking"—no per check fee
or monthly fee — providing the balance in the account remains above a minimum. If
it drops below this minimum, a service charge is collected.
Electronic Banking. One of the most important changes in banking began in the
late 1970s with the introduction of the computer. With it came electronic funds
transfer (EFT), a system of putting onto computers all the various banking functions
that in the past had to be handled on paper.
One of the most common features of EFT is automated teller machines (ATMs).
These units let consumers do their banking without the help of a teller. ATMs receive
deposits, give out funds from checking or savings accounts, transfer funds from one
account to another, verify balances, and accept payments. To use an ATM, the
customer inserts an encoded plastic card into the machine and enters a personal
identification number on a keyboard. This is to make sure that the person is
authorized to use that card. Most ATMs are available 24 hours a day.
Point-of-sale terminals are a less common but growing part of EFT. Such systems
allow the consumer to make purchases through direct transfer of funds to a
merchant. This is done through terminals located at checkout counters in the
merchant's store. The customer's card is inserted into the terminal to verify that there
is enough money in the customer's account. The amount of the purchase is then
subtracted from the customer's account and transferred to the merchant's.

55
 A few banks have authorized customers with home computers to use them for
banking transactions. If problems with security can be solved, many people may
one day bank by computer from home.

Although EFT can save time, trouble, and costs in making transactions, it does have
some drawbacks. The possibility of tampering and lack of privacy is increased
because all records are stored in a computer. A person on a computer terminal could
call up and read or even alter the account files of a bank customer in any city if he or
she knew how to get around the safeguards built into the system. Another problem for
customers—but a benefit for banking institutions—is the loss of "float," or the time
between when you write a check and when the sum of the check is deducted from
your account.
In response to these and other concerns, the Electronic Funds Transfer Act of 1978
describes the rights and responsibilities of participants in EFT systems. For example,
EFT customers are responsible for only $50 in losses if someone illegally uses their
card, if they report the card missing within two days. If they wait more than two
days, they could be responsible for as much as $500. Users are also protected against
computer foul -ups. If the balance appearing on a person's statement or given out by
an automatic or human teller is less than the customer believes it to be, the bank must
investigate and straighten out the problem within a certain period of time.
Reviewing Economic Principles
1. Define the following economic terms: a. electronic funds transfer, b. Overdraft
checking.
2. In choosing a banking institution for a checking-type account what is one
factor to consider?

3. What are three uses of the electronic funds transfer system?

3. Critical Thinking: Expressing Opinions. Write a paragraph explaining what
you think is the main drawback to EFT.

56
UNIT XI. THE FEDERAL RESERVE SYSTEM AND MONETARY
POLICY

Key words and phrases:

Monetary policy. Check clearing. Loose- money policy. Tight-money policy. Prime
rate. Fractional reserve banking. Open-market operations. Reserve requirement.

TEXT
You may have read or heard a news report in which a business executive or public
official complained that money is "too tight". Or you may have run across a story
about an economist warning that money is "too loose". In these cases the terms
"tight" and "loose" are referring to the monetary policy of the Federal Reserve
System. Monetary policy involves changing the rate of growth of the supply of
money to affect the amount of credit and therefore, business activity in the economy.

Credit, like any good or service, is subject to the laws of supply and demand. Also
like any good or service, credit has a cost. The cost of credit is the interest that must
be paid to borrow it. As the cost of credit increases, the quantity demanded decreases.
On the other hand, if the cost of borrowing drops, the quantity of credit demanded
rises.
If a country has a loose money policy, credit is inexpensive to borrow and
abundant. People will usually be willing to borrow more. Consumers will take out
loans to buy new cars and homes and other desired items . Businesses will borrow to
expand or start new plants and hire more workers. These workers will have more
money income to spend, which, in turn, will stimulate further production. If, on the
other hand, a country has a tight money policy, credit is expensive to borrow and in
short supply. Consumers may not buy as many new cars and homes. Business
executives may postpone or cancel plans for expansion. Workers unemployed
because of the slowdown will have less money income to spend. As a result,
businesses may cut back even more on production. A contraction of the economy
and possibly a recession may follow.

57
If this is the case, why would any nation want a tight money policy? The answer is
inflation. If money becomes too plentiful too quickly, the result could be inflation.
Prices would increase and the purchasing power of the dollar would decrease
dramatically.
The goal of monetary policy is to strike a balance between tight and loose money.
As you will read later in this chapter, it is the Fed's responsibility to ensure that
money and credit are plentiful enough to allow expansion of the economy. However
the Fed cannot let the money supply become so plentiful that rapid inflation results.

Fractional Reserve Banking. Before you understand how the Fed regulates the
money supply you need lo understand the basis of the United States banking system
and the way money is created. The banking system is based on what is called
fractional reserve banking. Under this system, only a fraction of the deposits in a
bank are kept on hand, or in reserve, in the form of cash or deposits. The rest are lent
to borrowers or otherwise invested, for example, in Treasury bills.
Since 1913, the Fed has set specific reserve requirements for many banks. They
must hold a certain percentage of their total deposits either as cash in their own
vaults or as deposits in their district Federal Reserve bank. Currently, reserve
requirements can be varied from between 3 percent and 14 percent for demand
deposits — checking-type accounts — and between 0 percent and 9 percent for time
deposits such as Certificates of Deposit (CDs).

Money Expansion. Currency makes up only a small part of the money supply. A
much larger portion consists of bank deposits owned by the general public. Because
banks are not required to keep 100 percent of their deposits in reserve, they can use
their deposits to create what is in effect new money.
Suppose you sell a federal government bond back to the Federal Reserve and
receive $1,000. This is $1,000 in "new" money because the Federal Reserve simply
creates it by writing you a check on itself. You deposit the $1,000 in a bank. If a 10
percent reserve requirement is in effect, $100 of that money must be held in reserve.
However, the bank is free to lend the remaining $900.
58
 Suppose another customer asks the same bank for a $900 loan. The bank creates
$900 of money simply by transferring the $900 to the customer's checking account.
The bank must keep in reserve 10 percent of this new deposit — $90, but now it can
lend the remaining $810. This $810 is in turn treated as a new deposit. Ninety
percent of it — $729 — can again be lent. The original $1,000 has become $3,439.
So it goes— each new deposit gives the bank new funds to continue lending.
Of course, a bank is not likely to continue lending and receiving back the same
money. Its customers will most likely withdraw money and spend it or deposit it in
another bank. However, this does not stop the creation of money. As the money
finds its way into a second, third, and fourth bank, and so on, each bank can use the
nonrequired reserve portion of the money to make more loans.

How the Money Supply Increases. Round 1: Suppose you are digging in your
backyard and discover $1,000. Now suppose that after you check with the police and
are allowed to keep the money, you take this money to your bank (Bank A) and
deposit it in your checking account. Assume that your bank is required by the Federal
Reserve to keep 20 percent of its total deposits on reserve. Thai means that your bank
must hold $200 of your deposit on reserve. That means that your bank now has $800
of excess reserves which is not earning interest.
Round 2: Bank A decides to loan out $800 in order to earn interest. John Jones has
just applied to the bank for an $800 loan. Bank A finds him creditworthy and
therefore credits his account with $800. (If he doesn't have an account with the bank,
it will have him open one.) Mr. Jones borrowed the money in order to buy a
machine for his business from Jackson’s Machine Supply Company. Jackson's has its
account at Bank B., which will credit $800 to Jackson's account balance. Bank B's
reserves increase by $800. Of this amount, $160 (20 percent of $800) are required
reserves, and the remaining $640 are excess reserves.
Round 3: To earn profits, Bank B loans out its excess reserves to Ms. Wang, who
wants to borrow $640. She, in turn, buys something from Mr. Dias, who does his
banking at Bank C. He deposits the money from Ms. Wang. Bank C now has $640 in

59
new deposits, of which $128 are required reserves. Bank C now loans out $512 of
excess reserves to Mrs. Fontana who buys something from Mrs. Powers, and so on.
The end result is that a deposit of $1,000 in new money that was outside of the
banking system has caused the money supply to increase to $5,000. This is called the
multiple expansion of the money supply.
Reviewing Economic Principles

I.a. Explain the differences between a loose-money and a tight-money policy.

b. Why is the goal of monetary policy to strike a balance between the two?
2. What is fractional reserve banking? reserve requirements?
4. Why do banks need to keep money in reserve?

Organization of the Federal Reserve System

Ask yourself as you read:

-What is the Federal Reserve System?

-What kinds of banks are in the Federal Reserve System?

As its name states, the Fed is a system or network, of banks. Power is not
concentrated in a single central bank but is shared by a governing board and 12
district banks. The Fed is made up of the Board of Governors assisted by the
Federal Advisory Council, the Federal Open Market Committee, 12 Federal
Reserve banks, and about 5,600 member banks.

Board of Governors. The Board of Governors directs the operations of the Federal
Reserve System. It establishes policies regarding such things as reserve requirements
and discount rates. The board also supervises the 12 district Federal Reserve banks
and regulates certain activities of member banks and all other depositors, institutions.

Organization of the Federal Reserve System. Federal Advisory Council - 12

members ; Board of Governors - 7 members; Federal Open Market Committee -12

60
members; Federal Reserve Banks( 12 banks, 25 branches); Members Banks( 5,600
members)
The board is made up of seven full-time members appointed by the President of
the United States with the approval of the Senate. The President chooses one
member as a chairperson. Each member of the board serves for 14 years. The terms
are arranged so that an opening occurs even two years. Members cannot be
reappointed, and their decisions are not subject to the approval of the President or
Congress. Their length of term, manner of selection, and independence in working
frees members from political pressures. Members do not have to fear that their
sometimes unpopular decisions will cause them to lose their jobs at election time.
The Board of Governors is assisted by the Federal Advisory Council (FAC).It
consists of 12 members elected by the directors of each Federal Reserve bank. It
meets at least four times each year and reports to the Board of Governors on
general business conditions in the nation.

Federal Open Market Committee. The Federal Open Market Committee (FOMC)
meets approximately 13 times a year to decide the course of action that the Fed
should take to control the money supply. This committee is made up of the members
of the Board of Governors plus the presidents or vice-presidents of five of the federal
Reserve banks. Of these five, one is always from the Federal Reserve bank in New
York City. The other four rotate periodically from the other district banks for one-
year terms.
Federal Reserve Banks. Each of the 12 Federal Reserve banks is set up as a
corporation owned by its member banks. A nine-person board of directors made up of
bankers and businesspeople supervises each Federal Reserve bank. Each one carries
out for its member banks in its district the functions of the Federal reserve System.
There are also 25 Federal Reserve branch banks. These smaller banks act as branch
offices and aid the district banks in earning out their duties.
Member Banks. All national banks—those chartered by the federal government—
are required to become members of the Federal Reserve System. Banks chartered by
the states may join if they choose. Currently, member banks include all of the
61
approximately 4,600 national banks and about 1,000 of the 10,000 or so state banks.
To become a member bank, a national or state bank buys stock in its district's Federal
Reserve bank.
In the past, only member banks were required to meet regulations, such as those
setting specific reserve requirements. Nonmember banks operated under less strict
state laws but were not allowed to use such Fed services as its check-clearing
facilities and its computerized funds transfer system. In 1990 Congress did away
with most of the distinctions between member and nonmember banks. Now all
institutions that accept deposits must keep reserves in their district Federal Reserve
bank. Federal Reserve services are also available to all depository institutions—
member or nonmember—for a fee. The only real advantage of membership now is
that member banks, as stockholders in their district bank, are able to vote for six of
its nine board members. Member banks also receive dividends on their stock in the
district bank
Reviewing Economic Principles
I. In separate paragraphs, summarize the duties of each of these: a) Board of
Governors, b) Federal Open Market Committee.
2.Critical Thinking: Comparing and Contrasting.
- What is the advantage to Federal Reserve membership today?
- How does this differ from the past?

Functions of the Reserve Bank

Ask yourself as you read:
- What are the major responsibilities of the Federal Reserve?
-Why is it important for the Federal Reserve to determine the amount of money in
circulation?

The Federal Reserve has a number of functions. Among them are clearing checks,
acting as the federal government's fiscal agent, supervising member banks, holding

62
and setting reserve requirements, supplying paper currency and regulating the
money supply. The most important function of the Fed is regulating the money
supply.

The Federal Reserve also sets standards for certain types of consumer legislation,
mainly truth-in-lending legislation. By law. sellers of goods and services must make
some kinds of information available to people who buy on credit. This information
includes the amount of interest and size of the monthly payment to be made. It is the
Federal Reserve that decides what type of credit information must be supplied.

Tools for Regulating the Money Supply

Ask yourself as you read:
-How does the Federal Reserve increase the money supply? lower it?
-What tool does the Federal Reserve most often use to regulate the money supply?

The Fed has as its goal maintaining enough money to keep the money supply
growing steadily and the economy running smoothly without inflation. To
accomplish this, it has three major tools: 1. reserve requirements, , the discount rate,
and 3. open-market operations.

63
Changing Reserve Requirements. The Federal Reserve can choose to control the
money supply by changing the reserve requirements of member banks. Suppose a
bank has $1 million in deposits and the reserve requirement is 10 percent. The bank
must keep at least $100,000 in reserves. If the Fed wanted to increase the money
supply, it could lower the reserve requirement to 5 percent, for example. The bank
would then need to keep only $50,000 in reserve. It could lend out the other $50,000.
This $50,000 would expand the money supply many times over as it was lent and
redeposited. Of course, it would not be just one bank but every bank that could now
lend its newly freed reserves. The money supply would expand dramatically. This
could help to pull the economy out of a recession. Suppose instead that the Fed
wanted to decrease the money supply, or at least slow down its rate of growth. It
could do this by increasing the reserve requirement from 10 percent to 15 percent.
The bank in the example above would then need to keep $150,000 on reserve—
$50,000 more than before. To build up its reserves to meet the new requirement, the
bank has several possibilities. It can call in some loans, sell off securities or other
investments that it owns, or borrow from another bank or the Federal Reserve.
Obviously, because all banks would have to increase their reserves, this action by the
Fed would greatly decrease the amount of money in the economy. This could be used
to help slow the economy if it were expanding too rapidly.
Even small changes in the reserve requirement can have major effects on the money
supply. As a result, some believe that this tool is not precise enough to make frequent
small adjustments to the money supply. In recent years, changing the reserve
requirement has not been used often to regulate the money supply.
Changing the Discount Rate. Sometimes a depositor, institution will find itself
without enough reserves to meet its reserve requirement. This may happen if
customers unexpectedly borrow a great deal of money or if depositors suddenly
withdraw large amounts. The bank must borrow what it needs to meet the reserve
requirements, at least temporarily. One of the ways it can do this is to ask its district
Federal Reserve bank for a loan. The district bank, like any other bank, will charge
interest. The rate of interest charged by the Fed is called the discount rate.

64
 A bank, like a consumer, follows the law of demand. At higher discount rates, a
bank may decide to borrow less reserves from the Fed or none at all. It could meet its
reserve requirement by borrowing from another bank. This money would then be
taken out of circulation and would not be available for lending to individuals or
businesses. If a bank does decide to borrow at a high discount rate, it will need to
pass its increased costs on to customers in the form of higher interest rates on loans.
For example, it might raise its prime rate —the rate it charges its best business
customers. "These high rates, by discouraging borrowing, will also keep down the
growth of the money supply. On the other hand, if the discount rate is low, even a
bank with sufficient reserves might borrow money. This will raise the bank's reserves
and increase its ability to make loans. Thus, a reduction in the discount rate also
affects the total money supply.

Open – Market Operations. Buying and selling United States securities, called
open-market operations, is the tool most often used by the Fed. This affects the
money supply by changing depositor’s institution reserves or by putting money into
or taking it out of circulation. The term open market comes from the fact that the
trading of these securities is done in the open market, that is, through regular dealers
in securities. An open market is one that is open to almost all private businesses and
one that the government does not omit of control.

When the government buys securities such as Treasury bills, it pumps new money
into the economy. Suppose you sell a $10,000 Treasury bill to the Federal Reserve
and receive that amount of money in the form of a Federal Reserve check. This is
"new" money because the Fed created it simply by writing the check on itself. When
you deposit the $10,000 in a bank, that bank will keep part in reserves and lend the
rest. The process of money creation is begun.

When the Fed wants to decrease the money supply, it sells securities on the open
market. This takes money out of the economy. Suppose you decide to buy a
Treasury bill and to use cash for the transaction. Turning the cash over to the Fed
removes the money from circulation.

65
 Of course, most open-market transactions are not carried out by individuals using
cash. Most are made by financial institutions and large investors such as mutual
funds. If a bank purchases Treasury securities from the Fed, the purchase amount will
be deducted from the bank's reserve account. The bank then has less money to lend,
and the money supply eventually will be smaller. If a bank sells its government
securities, the Fed will credit the money to the bank's reserve account. The bank can
then make additional loans, and the money supply will grow.

How the FED Makes Money-Supply Decisions. As you read earlier in the chapter,
the Federal Open Market Committee (FOMC) meets periodically to decide on how
best to control the money supply through open-market operations. At the beginning
of each meeting, staff economists present data about what has happened to the
money supply in the past, what current credit conditions are like, and what is likely
to happen to the economy in the future. Statistics on unemployment, retail sales,
gross national products, and so on, are presented. The information is discussed, and
at the end of the meeting the committee votes on a course of action. The FOMC's
decision summarizes current economic conditions and outlines the Fed's long-term
goals for its monetary policy. To help meet these goals, the FOMC also sets
objectives for the rate of growth of the money supply or the cost of credit for the
next month or so.

66
LAW

UNIT XII. SOURCES OF LAW IN ENGLAND AND WALES

Key words and phrases

Common law. Equity. Statute. Decision. Statutory. Prevail. Legislation. Provision.

Source. Case law. Minor. Precedent. Binding (on). By-laws/bylaws. Convicted.
Crime. Defendant. Delegated legislation. Grievous bodily harm (GBH). House of
Commons. House of Lords. Malice aforethought. Mandatory. Offence. Offender.
Proceeding. Prosecutor. Record. Sentence. Draft (v.,n.) Set out(v.).

TEXT

Ask yourself as you read

- What are the historical sources that have shaped the legal system of the United
Kingdom?
- What are the formal sources of law in the UK?
- What are the basic characteristics of any law?
- What does much of the UK’s law derive from?
One of the great fascinations of the law is that it reflects history, politics, economics
and changing social values. Politicians come and go; public concerns fluctuate with
remarkable speed; theories of behavior developed by sociologists and criminologists find
favor then fade; moral values differ from individual to individual, but the law is the formal
code by which society chooses to regulate its behavior. For example, the Public Order
Act 1986 strengthened the provisions on crimes of racial hatred in response to public
concern about the increase in such incidents.
In the civil law, liberalization of the divorce laws and the abortion laws illustrates that
the law is a formal regulatory code and does not necessarily coincide with individual views

67
about morality or the stability of social structures. More immediately, our laws come
from two sources: legislation and the common law.
Much of our law derives from specific legislation - Acts of Parliament proposed,
debated, and amended in the Houses of Commons and Lords and finally accorded
Royal Assent by the Sovereign. During the 1990s there has been much new legislation
in the field of criminal law, some of it motivated by a wish to make long-term
improvements to the quality of justice, some motivated by short-term political
expediency. For example, the Criminal Justice Act 1991 severely restricted the extent
to which offenders' records could be taken into account when sentencing, and this had
to be abandoned very soon after. This is not to say that the 1991 Act was without
merit; this Act also introduced a structured approach to sentencing which has proved
largely successful.
Acts of Parliament are increasingly supplemented by rules made by Statutory
Instrument ('Regulations' or ' Orders'). Thus, an Act may lay down legal principles,
but give authority to a particular government minister to make rules having the force
of law, on secondary matters such as procedure or dates of implementation. For
example, the Children Act 1989 set out the 'welfare of the child', and other principles,
the orders which соurts can make, and so on, but left many details to be filled in by
statutory 30 instruments. Thus, procedure, the court in which proceedings should
start, fees payable and many other matters are regulated by a host of Orders and
Regulations, which are amended and updated from time to time. These Regulations
are drafted by government departments and become law by being laid before
Parliament for the requisite period. They may be subject to 35 'positive' or 'negative'
resolution; either Parliament must specifically approve them before they become law,
or they become law in the absence of any objection. The latter is the more common
method, although it has attracted some criticism and more matters are controlled by
Statutory Instrument and are not subject to full Parliamentary scrutiny.
Local authorities may also be given powers to make by-laws applying in their own
areas only. For example, local authorities can enforce regulations requiring citizens to
keep public places clean and hygienic.

68
 Unlike many other countries, English law has not been fully codified into statute,
and many important provisions do not appear in any written law, but remain based,
wholly or partly, in the common law - established custom as adopted and developed
by judges over the years. For the details of this kind of law, it is necessary to refer to
reported judgments.
The most important example of a common law offence is murder: the constituents
of 'malice aforethought' and an intention unlawfully to kill or cause grievous bodily
harm derive from what judges have said in the past, not from any Act of Parliament
which says that murder is a crime. Statute has, though, intervened to impose a
mandatory life sentence for those convicted of murder, and, more recently, to abolish
the old common law rule that death must occur within a year and a day to constitute
murder.
In the interests of fostering certainty, the principle of legal precedent promotes
consistency in decision-making. Thus, largely, higher courts should follow their own
earlier decisions, and decisions made in higher courts are binding on lower courts:
what the House of Lords says is binding on the Court of Appeal; what the Court of
Appeal says applies in all lower courts.
The principle of precedent applies to both civil and criminal cases, and to the
implementation of both common law and statute-based law.
Magistrates' courts and the Crown Court are not bound by their own earlier
decisions, but they are bound by the decisions of the higher courts. The tradition is to
name criminal cases in the style 'R v Smith', where R stands for Regina, all cases still
strictly being brought by the prosecutor on behalf of the sovereign; and Smith being
the name of the defendant; or, for short, the case may be referred to simply as
'Smith".
Reports published in the official law reports, the All England Law Reports and the
Weekly Law Reports may well be mentioned. Although English legislation tends to
be drafted in a fairly detailed way by comparison with that of other European countries,
and certainly with European Community (EC) legislation, the draftsmen cannot always
contemplate every conceivable situation, and are not always as precise in their wording as

69
might be desirable. Gaps, inconsistencies and ambiguities are dealt with by 'judicial
interpretation' in individual cases. Sometimes such interpretations reveal gaping holes in
the law - tax lawyers are adept at seeking out such loopholes. Sometimes a court will
refer to the official reports of debate in the Parliament to clarify the legislators' intention in
passing a particular piece of legislation, in an endeavor to interpret it in the right spirit.
Interpretations of this kind are, like anything else, subject to the rule of precedent.
Some judges have been said to be rather too imaginative in the use of this power, to the
extent that they make law in usurpation of the prerogative of Parliament.
Finally, the courts of England and Wales are subject to EC law, which takes 85
priority over all domestic law. The Community makes laws by means of Directives
(which must then be implemented in each member state by domestic legislation),
Regulations (which are directly binding on the member states) and Decisions, which
concern particular matters and are addressed only to the individual Member State
concerned. Most of the EC's legislative activities do 90 not affect the criminal courts,
but environmental protection is an increasingly important exception.
For example, and this is by no means an isolated example, Regulations which came into
force in September 1996 implemented a directive on hazardous waste and created certain
new criminal offences. Text books have no formal place in making and interpreting the law,
but advocates in court often refer to certain established works when seeking to persuade
the judge of a particular point of view. Arguments on doubtful points of law are fairly
rare in the magistrates' courts, but leading books are often referred to explain the relevant
law, even though it may not be in doubt. This is particularly100 likely in a case which is
relatively unusual for magistrates.
( English for Legal Purposes. )

UNIT XIII. THE LEGAL PROFESSION

Key words and phrases

Inns of Court. The Bar Council. Crown Court. The Law Society. Solicitor. Barrister.
Legal practitioner. Plead(v.). Trial. The Supreme Court. Inferior courts. Law Degree.

70
Legal Practice Course. Novice. Judge. Courtroom. Wig. Gown. To present the case.
To express arguments on the client’s behalf. To collect and collate all relevant
evidence. Witness. Statement. “Rights of Audience”. Judges’ bench. On the client’s
behalf. Magistrate.

Ask yourself as you read.

- What are the main branches of the legal profession in the UK?
- What is the difference between barristers and solicitors?
- What is the difference between a lawyer, a public prosecutor and a judge?
- What basic responsibilities and duties do professionals have?

The legal profession in the United Kingdom is divided into two branches, barristers
and solicitors. The former are legal practitioners, who have been admitted to plead at
the bar and who are engaged in conducting the trial or argument of causes; they have
exclusive right of audience in the Supreme Court. The latter assemble the materials
necessary for presentation in court and settle cases out of court. They may also
practice in most inferior courts, such as county courts and certain proceedings of the
Crown Court.
Each have their own controlling bodies - the Bar Council and the Law Society
respectively - and an intending lawyer must decide, at a relatively early stage in legal
training, whether to practice as a solicitor or a barrister, because apart from the initial
period of legal education (usually a law degree course) the two branches are mutually
exclusive in terms of personnel and training, although rather less so in terms of their
work. The controlling bodies exercise strict codes of professional ethics and standards
of practice: this is one of the ways in which the exclusivity of the profession, and its
claim to produce high standards of work, are maintained. Both bodies act as
disciplinary agencies to deal with any alleged breach of these codes, and for serious
breaches a member of either branch of the legal profession may be "struck off.
This exclusivity is further promoted by the impact of training and socialization. All
lawyers undergo extensive periods of education, both through formal academic learning

71
and through practical training in legal work. In the case of solicitors, this practical
training takes the form of a two-year period, after obtaining a law degree and
completing the one-year Legal Practice Course, in a training contract with a firm of
practitioners. For intending barristers, the period of training is rather more
complicated and less financially secure, but possibly more intensive because of the
immersion of the novice in the traditions and practices of the Bar.
Apart from undertaking various examinations in the law, the prospective barrister
must also join one of the four Inns of Court, where the life of the barrister is learned.
The various rules and institutions of the Bar serve to socialize the novice into the
established ways of that branch of the profession, where customs, traditions and
etiquette play so great a part. Barristers' professional, and often much of their social life
involves an exclusive and somewhat socially isolated experience, where the company
in which they move comprises, very often, other barristers and judges who are
members of the same Inn.
For many people, the image of the typical lawyer and his work is that presented in
the formal 30 setting of the courtroom. Here, it is traditionally the barrister, in wig
and gown, who presents the case and expresses the arguments on the client's behalf;
the solicitor's task is to deal directly with the client, to ensure that the barrister chosen
is properly and fully instructed, to collect and collate all relevant evidence (such as
witnesses, statements, letters, photographs and so on) and to ensure that all relevant
persons are present in court on the day of the trial.
This image of lawyers and their work is, however, somewhat misleading: the
traditional division of functions in the courtroom has gradually been broken down.
Although only barristers have full 'rights of audience' (that is, the right to address the
judges' bench directly on the client's behalf) in all courts, solicitors have full rights of
audience, too, in magistrates' and county courts, and in some Crown courts.

UNIT XIV. THE STRUCTURE OF THE COURTS

Key words and phrases: Accustomed to. To handle cases. Legally binding.
Term of office. Speedy trial. Testimony. Appeals/appellate court. Sheer number. To

72
hear disputes. To nullify. To halt actions. Unbiased. Plaintiff. To rest on smth. To
fall. Sole obligation. To declare void. Trial court. Prosecution. To operate alongside.
In the last resort. Justice. Appellate proceedings. Evidence. Defendant.

TEXT. The US Court System

Ask yourself as you read
- What have always held American’s attention?
- What types of courts are there in America?
- What do the Americans’ claims for justice rest on?

Issues of crime and justice have always held Americans' attention. Americans are
accustomed to bringing their claims for justice to the courts. There are few countries
where so many people treat the law as part of their everyday lives. Local, state, and
federal courts handle approximately 12 million cases a year. The sheer number of
Americans employed in the legal profession is overwhelming: there is one lawyer for
every 440 Americans, whereas in Japan there is one lawyer for every 10,000 people.
Americans' claims for justice rest on the provisions of the US Constitution. Most of the
rights and freedoms that Americans enjoy are guaranteed in the first ten amendments or
"Bill of Rights" of the Constitution.
The Constitution, written in 1787, established a separate judicial branch of
government which operates independently alongside the executive and legislative
branches. Within the judicial branch, authority is divided between state and federal
(national) courts. At the head of the judicial branch is the Supreme Court, the final
interpreter of the Constitution, which consists of nine justices and has jurisdiction over
all other courts in the nation.
The Constitution recognizes that the states have certain rights and authorities beyond the
power of the federal government. States have the power to establish their own systems of
criminal and civil laws, with the result that each state has its own laws, prisons, police
forces and state courts. The separate system of federal courts, which operate alongside
the state courts, handles cases which arise under the US Constitution or under any law or

73
treaty, as well as any controversy to which the federal government is itself a party. Federal
courts also hear disputes involving governments or citizens of different states.
All federal judges are appointed for life. A case which falls within federal
jurisdiction is heard before a 20 federal district judge. An appeal may be made to the
Circuit Court of Appeals and, possibly, in the last resort, to the highest court in the land:
the US Supreme Court. The Supreme Court hears cases in which someone claims that
a lower court ruling is unjust or in which someone claims that Constitutional law has
been violated. Its decisions are final and become legally binding.
Not all Americans are satisfied with all Supreme Court decisions. Many Americans
believe that the court often "takes the side of the criminals" in declaring the proceedings
invalid because an accused person's rights have been violated. Others argue, however, that
protecting the innocent is the real intent of these rulings, and that it is better to have a few
criminals go free than to have one innocent person be jailed. Although the Supreme
Court does not have the power to make laws, it does have the power to examine actions
of the legislative, executive and administrative institutions of the government and
decide whether they are constitutional. It is in this function that the Supreme Court
has the potential to influence decisively the political, social, and economic life of the
country by giving new protection and freedom to the minorities, for example, or by
nullifying certain laws of the Congress, or even declaring actions of American
presidents unconstitutional.
Presidents have often criticized the Supreme Court, although the criticism comes more
frequently today from ba 35 associations, law schools and court observers in the press. The
two judicial systems, federal and state, form layers o courts that check each other and are
checked in turn by the law profession and the law schools that study the decision; and create
an informed opinion. Congress also reviews the laws to be enforced and can change the laws
and the number of Supreme Court judges. The president nominates the Supreme Court
appointee, while the Senate examines to determine whether he or she is qualified. Similarly the
governors, the state legislatures, and the people select the state judges. Once approved, a
justice remains on the Supreme Court for life. The Supreme Court justices have no obligation
to follow the political policies of the president or Congress. Their sole obligation is to uphold

74
the laws of the Constitution. However, the Supreme Court, by choosing the cases it wishes to
review, sets the tone of the judicial system.
Despite official statements to the contrary, politics always play a role in a president's
selection of a Supreme Court justice. On average, a president can expect to appoint two
new Supreme Court justices during one term of office. Presidents are likely to appoint
justices whose views are similar to their own, with the hope that they can extend some of their
power through the judicial branch. For example, President Reagan's appointments to the
Supreme Court wherein judges with a decidedly conservative view of constitutional law.
One should remember that the appropriate level oil political awareness is difficult for the
Court to achieve. Judges must be politically sensitive but not too advanced or too reactionary
- a fine line to straddle.
The Supreme Court consists of a chief justice and eight associate justices, and the
responsibility and power of these people are extraordinary. Supreme Court decisions can affect
the lives of all Americans and change society significantly. In the past, Supreme Court rulings
have halted actions by American presidents, have declared unconstitutional, and therefore
void, laws passed by the Congress, have freed people from prison and have given new
protection and freedom, to black Americans and other minorities.
There are many federal courts in the system which has the Supreme Court as its head. In
addition, each state within the US has established a system of courts, including a state
supreme court, to deal with civil, criminal and appeals proceedings. There are also county
and city courts. There are separate military courts for members of the armed forces and other
specialized courts to handle matters ranging from tax questions to immigration violations.
In the US, a person accused of a crime is considered to be innocent until he or she is proven
guilty. The Constitution requires that any accused person must have every opportunity to
demonstrate his or her innocence in a speedy an public trial, and to be judged innocent or
guilty on the basis of evidence presented to a group of unbiased citizens, call' a jury. A person
who has been judged guilty must still be treated justly and fairly, as prescribed by law. A
person unjustly or cheated by another or by a government official must have a place where he
or she can win justice. That pi to an American, is a court.

75
 There are two types of courts in the US: trial and appeals. Trial courts listen to testimony,
consider evidence, and decide the facts in disputed situations. In any trial there are two parties
to each case. In a civil trial, the parry initiating the leg" action is called the plaintiff. In a
criminal trial, the government (state or federal) initiates the case and serves as D prosecutor.
In both civil and criminal trials, the party responding to the plaintiff or prosecution, as the
case may be. called the defendant Once a trial court has made a decision, the losing party
may be able to appeal the decision to an appellate, or appeals, courting an appeals court,
one party presents arguments asking the court to change the decision of the trial court. The
odd party presents arguments supporting the decision of the trial court There are no juries or
witnesses, and no evidence a presented. Only lawyers appear before the judges to make
legal arguments.
Not everyone who loses a trial can appeal. Usually, an appeal is possible only when there is a
claim that the trial court has committed an error of law. An error of law occurs when the
judge makes a mistake as to the laws applicable in the| case.

UNIT XV. LAW AND BUSINESS

Here are some words used in relation to the field of business. Match them with the
definitions/explanations:
1.Consumer. 2. Investor. 3. Assets. 4. Retail. 5. Shareholder. 6. Equity. 7. Stock.
8. Securities. 9. Auction. 10. Shares. 11. Brand. 12. Merger. 13. Executive. 14. Loan.
15. Trademark .

A. public sale of goods or property, in which parties (bidders) make competing

offers (bids) and the item is sold to the person who offers the highest price.
B. a senior manager in a company responsible for making decisions and ensuring
that they are carried out.
C. equal parts into which a corporation's capital stock is divided, representing the
holder's ownership interest in the corporation.
D. version of a product made by one particular manufacturer, which carries the

76
company's trade name .
E. a person who owns one or more of a company's shares .
F. the sale of goods to the ultimate consumer (usually in small amounts), as opposed
to the sale for further distribution.
G. sum of money lent (at interest) to an individual or a company.
H. a natural person who buys goods or services for personal, family or household
use, with no intention of resale .
I. the joining together of two separate companies, organizations, etc, so that they
become one.
J. the capital or principal fund raised by a corporation through subscribers'
contributions or the sale of shares.
K. another word for a share in a publicly traded company.
L. shares, stocks or any other instrument relating to finances which evidences the
holder's ownership rights in a firm.
M. the total property of a natural or legal person (which could, if necessary, be sold
to pay debts)
N. a name or symbol (usually registered and protected by law) that a manufacturer
always uses on a product or range of products.
O. a person who spends money (on securities or some other property) with an
expectation of earning a profit.

TEXT
Legal Problems Showing a Way to Do Business
Ask yourself as you read
- What was the value of global Internet sales for individual customers in the year 2000?
- What is the expected volume of e-commerce between companies by 2003(in billion $)?
- What are “cybersquatters”? What is their relationship to registered trademark owners?
- Do electronic signatures have the same validity as written signatures?
- Who is “Yahoo”? Why did France sue them at the end of 2000?
- Why did General Motors recover $100m from Volkswagen?

77
- Why did PepsiCo sue their former marketing executive?

Law has rarely been so important to managers, yet so in flux. Courts and legislatures are
struggling to keep up with advances in technology, especially the transformation of
the internet from a vehicle for communication among scientists and academics to an
engine of global commerce. According to Forrester Research, internet retail sales were
$20bn in 2000 and are expected to climb to $130 bn by 2004. The Christian Science
Monitor has reported that commerce between businesses conducted over the internet is
even larger: $176 bn in 1999 and estimated to increase to $l,300 bn by 2003.
A company's most important assets are now often its intangible intellectual property. The
market capitalization of Microsoft is based not on its bricks but on its ability to use copyright
law to prevent others from duplicating its software. Amazon.com's strategy of creating a
strong brand and a loyal customer base depends on using trademark law to prevent others
from using its name and on laws protecting trade secrets to prevent former employees
from using or selling its customer lists. Patents, once primarily a concern of pharmaceutical,
chemical and manufacturing companies, now protect computer software and even
business processes.
The recording industry and other entertainment companies are aggressively defending
their right under copyright law to prevent unauthorized distribution of music and video on
the internet. For example, MP3.com, a US company, had created a database containing
hundreds of thousands of copyrighted songs, which users of its internet services could access.
In September, Judge Jed Rakoff, sitting in a district court in New York, ordered MP3.com to
pay royalties to the owners of the copyrighted music. Rakoff said some companies on the
internet had "a misconception that, because their technology is somewhat novel, they
are somehow immune from the ordinary application of laws of the United States,
including copyright law." On the contrary, Rakoff declared, "the law's domain knows
no such limits." As of mid-November, MP3.com had paid more than $ 150m to settle
copyright claims by the five major record labels.
Napster, which makes it possible for millions of users to play and record music that other
users have copied onto their computer hard drives, is defending copyright infringement

78
lawsuits by the Recording Industry Association of America, major recording studios
and artists (including such otherwise anti-establishment artists as Metallica). Napster claims
that its service is not liable for music its users might have pirated because the service has
substantial non-infringing uses, such as legally distributing the work of new and
unknown artists who are not represented by traditional record companies. Yet, most people
use Napster not to access legal copies of the work of unknown artists but to make
unauthorized copies of copyrighted songs. Perhaps recognizing its legal vulnerability,
Napster agreed in November to give an Equity stake to Bertelsmann in exchange for
permission to use copyrighted music.
Process patents. US federal appeals in court surprised many in 1998 when it embraced
the patentability of business processes and courts and legislatures are wrestling with the
appropriate scope of these patents. Critics claim the US Patent and Trademark Office has
been too ready to grant patents for processes that are not novel and worthy of protection. In
addition, the completion of the Human Genome Project and the prospect of patents for
human genes raise serious public policy questions about what information should belong to
every member of the human race and what should be proprietary.
One area that has become more settled is the application of trademark law to internet
domain names. Because a domain name is given to whomever registers it first, holders of
registered trademarks had to deal with so-called "cyber squatters," who would register
names (such as McDonalds.com and Panavision.com) then offer to sell them to the
trademark holders. The US Congress responded by passing laws barring the use of marks
that would tarnish or dilute a famous trademark and prohibiting would-be
cybersquatters from registering domain names in bad faith. Disputes are increasingly
being resolved not by the courts but through arbitration by the World Intellectual Property
Organization. Companies are aggressively going after former employees suspected of
stealing trade secrets. General Motors recovered $100m from Volkswagen plus a
promise to buy $5 bn of GM parts after a former executive took pricing information with
him when he was hired by Volkswagen. Pepsico went further when it sued a former
marketing executive who went to Quaker Oats to work on the marketing of Gatorade and
Snapple drinks. There was no evidence that the executive had taken any written materials

79
with him, or had disclosed any trade secrets to his new employer. Nevertheless, an appeals
court barred him from working for Quaker Oats for six months, after concluding that, given
his assignment to work on directly competitive products, it was inevitable that he would use
or disclose Pepsico trade secrets. A number of other courts in the US have embraced this
doctrine of inevitable disclosure.
In the US Justice Department's suit against Microsoft, the parties sharply disagree
about the proper role of competition law and judicial intervention when the technology
is constantly changing and network effects and high switching costs cause consumers to
gravitate to one standard for maximum interoperability. The convergence of
communications, media and computers makes it increasingly difficult for regulators to
define the relevant market and to assess the anti-competitive effects of mergers involving
major industry players such as Time-Warner and America Online. The European Union
is wrestling with the proper forum for lawsuits by consumers against people selling goods
and services on the internet. Should consumers be able to sue in their own country, or be
required to sue in the country where the seller has its principal place of business?
Courts in the US have held that the mere presence of a website accessible in a particular
state does not confer personal jurisdiction over the site owner, but are divided over just
what activity is enough to give a state's residents the right to haul an out-of-state seller into
local courts. Both the US and EU have adopted laws on electronic commerce. A US law
that went into effect in October gives electronic signatures the same validity as written
signatures. This will enable consumers to obtain insurance and loans online. Companies
continue to search for cheap yet reliable ways to authenticate digital signatures. The US
Securities and Exchange Commission (SEC) was one of the first agencies to embrace the
internet and its use in selling securities and distributing information to investors. The
technology enables companies to hold shareholder meetings online and to give
individuals access to the analyst conference calls that routinely follow a company's
announcement to quarterly earnings. In September 2000, in an effort to give
individuals, especially day traders (who quickly move in and out of stocks), access to the
same information available to analysts and institutional investors, the SEC adopted
regulations that prohibit companies from selectively disclosing private information to

80
analysts and favored investors but not to the public. Executives fear the new rules will
subject them to liability if they have one-on-one conversations with analysts and warn this
will reduce the quality of information available to the market. The global reach of the
internet makes it increasingly difficult for countries to regulate information flows across
their national borders. For example, France sued Yahoo!, the web search engine and portal,
for giving French citizens access to auctions of Nazi paraphernalia clearly prohibited by
French law. After court-appointed experts concluded it was feasible to block access to the
offending sites for 90 percent of French surfers, the French court ordered Yahoo! to
implement a filtering system proposed by the experts within 90 days of its November 20
ruling, or face fines of FFr100,000 for each day it exceeded the deadline.
Germany has been unable to keep Germans from accessing neo-Nazi sites. Unlike
pamphlets or books, which can be intercepted by customs at the border, websites are
difficult to block. Similarly, efforts by the US Congress to protect children from
pornography on the internet have been derailed because of the technological difficulty
of keeping pornography from children without infringing adults' freedom of speech.
Managers and law. Companies that have designed their processes around the
opportunities of network technology and the web are seeing great benefits, despite the host
of legal uncertainties and debates brought about by the internet-centered technology .
While legislators are struggling to catch up with the new technologies, savvy
managers know legal risks must come into business decisions in the same way as
other risks., and realize they should take advantage of the great potential to create
value offered by network technology and the web.
Industry's green intent put to the test. The Human Rights Act, enshrining the right to
family life into law, is having a profound effect on companies' relationships with
environmental and planning laws, leading to a more genuine engagement between
manufacturers and the people they affect.
Courts may decide that public authorities have a duty to act to protect local residents from
pollution by third parties. But the act does not give a legal carte blanche to green protest
groups who continue to fight for the greening of business.

81
The right to family life is not an absolute one - it can be breached legitimately in the interests
of the country's economic well-being, for example. A case taken to Strasbourg over
aircraft noise at Heathrow airport failed after the European Court ruled that the government
had struck a reasonable balance between the competing interests of residents and those of
the country as whole.
Businesses are facing all kinds of challenges arising from the act, particularly in the
controversial area of planning applications and controls. Rather than risk a legal fight and
changes to the rule book, "companies need to have an eye on the human rights angle when
they are promoting projects," as Michael Redman of Clifford Chance, the law firm, puts
it.
Lawyers also stress that the courts' interpretation of human rights law tends to evolve. The
1986 Heathrow noise case may have been decided differently had it come to court this year.
A new brief to voice suspicions. The relationship between solicitor and client,
centered round the principle of confidentiality is currently changing under the impact of the
European Union's second money-laundering directive. According to the relevant
legislation, almost all solicitors may have to ask clients to produce passports, bank
statements and other documentation to prove who they are and where their money comes
from, with the obligation to report any suspicions they may have to the National
Criminal Intelligence Service.
The implementation of the EU's second money-laundering directive is meant to
demonstrate the UK government's determination to plug loopholes in financial crime
legislation. One perceived loophole is the use of professional advisers such as lawyers and
accountants by criminals trying to get illegal funds into the legitimate system. A high
price to pay if one falls foul of equal rights legislation.
A vast amount of litigation over discrimination cases is going on in the City, although
most of it remains unseen by the public, because these cases are normally settled before they
come to a tribunal. This litigation can be very expensive for erring employers. In
contrast to the £50,000 ceiling on tribunal awards for unfair dismissal, there is no limit on
awards for discrimination because of race, gender or disability. Seven-figure claims by
City employees are becoming more and more common.

82
 Even companies outside the square mile can be landed with six- or seven-figure payouts
and acres of bad publicity, when their employment practices come under media scrutiny.
The managing director of a British oil company taken over by Norwegians won a record
£2m for racial discrimination last year. The tribunal decided that he had been dismissed
because of his nationality after the company had decided to move Norwegians in key
positions, irrespective of the talents of the British.
Lawyers warn that there are forms of discrimination to which employers may be less
alert, compared with the long-established bans on national, sexual and racial prejudice. One
of these is age discrimination, covered only by a voluntary code in the UK, as a new
European directive on equal rights at work does not require age discrimination to be
banned before 2006. But age limits may still be challenged on the grounds that they
constitute sexual or racial discrimination.
If, for example, people over 35 may not apply for a job that specifies minimum
experience or qualifications, this could be regarded as a case of indirect sexual
discrimination against women because they are more likely to have taken a career break
for childcare.
Another area where the la w is evolving rapidly is discrimination on the grounds of sexual
orientation or religion, which is to be banned in EU countries by 2003, to comply with the
European directive on equal rights. But the Human Rights Act - which includes the right
to respect for private and family life - could allow successful challenges before that
deadline.
What is the best tactic if the employer gets a claim? It may seem easy to have a strategy
of fighting the cases one is likely to succeed and folding those that will probably be lost.
But one can only settle cases for a reasonable sum. Employees are quite often looking for
sums out of all proportion to what a court would award, simply because they assume that
an employer would never fight the case. Paying the price of discrimination can cost a
company enormous amounts.

83
UNIT XVI. THE EUROPEAN UNION AND COMPANY LAWS OF
MEMBER STATES
Ke
y words and phrases

Measure. A directive. Standards for areas of company law. To amend. To comply.

Foreseeable future. Implementation. Domestic. To alter. Two-tier system of law.
Direct effect. Cross-frontier entity. The European Economic Interest Grouping. To
enhance. Liability.

TEXT
There are a number of measures of the European Union aimed at the harmonization
of the company laws of the Member States. In general this programme consists of a
series of directives issued under Article 58 of the European Treaty. These prescribe
common standards for areas of company law which require Member States to amend
their law, if necessary, to comply with them. The need to implement these directives
has produced several changes to U.K. Company law and is likely to go on doing so
for the foreseeable future. Implementation by primary legislation creates no domestic
problems but the more recent tendency to implement directives by means of
delegated legislation under section 2(2) of the European Communities Act 1972 is
subject to the difficulty that such measures may only alter a statute in so far as it is
necessary for the implementation of the directive. This can lead to problems as to
whether the changes go further than was needed and the difficulties of adapting the
changes into the existing law, which may apply to a wider spectrum of companies than
those covered by the directive, thus creating a two-tier system of law.
A further consequence of the existence of these directives arises when either they
have not been implemented by the due date or the implementing legislation does not
properly comply with the terms of the directive. The European Court has held that in
such cases the directives have vertical direct effect, that is to say that as between the
Member State and an individual or company their provisions must be given
precedence over the national law. Although this is said not to apply as between two

84
companies and/or individuals (so-called horizontal direct effect), that court has stated
that in applying national law, whether passed before or after the date for
implementing the directive, the national court must interpret its law as far as possible
in the light of the wording and purpose of the directive in order to achieve the result
required by the directive. It has even, in another area of the law, allowed a claim for
damages against a Member State for non-implementation of a directive.
Two further E.U. inspired developments are not, however, part of the harmonization
programme as such. They are both aimed at establishing cross-frontier entities which
may operate throughout the Community, and therefore will not have a purely national
existence. These are the European Economic Interest Grouping, (in existence since
July 1989) and the proposed European Company.
The European Economic Interest Grouping (EEIG) was created by an EC
regulation ... document which has direct legislative effect and which intention is to
allow the creation of a separate entity for cross-border co-operation between
businesses in different Member States. These may or may a companies and are formed
by contract and registered with the registrar of companies. This contract must include
the objects of the EEIG - since making profits in its mm right is not allowed, these
must require the EEK enhance the activities of its members, e.g. by joint research or
development. The members of the EEIG will have unlimited liability for its debts, no
public investment if allowed and the maximum number of employees is limited to
500. An EEIG can be formed in any Member State and is subject to some aspects of
the nations some aspects of the national law in which it is registered, e.g. as to the use
of name, certain winding-up rules, etc. U.K. law must equally recognize an EEIG
registered in another Member State.
Proposed Statute for a European Company. There is a proposal for a regulation
establishing 11 cross-border entity to be known as a European Company. This is not a
new idea, being originally suggested in 1970, but interest in it has been revived with
the Union. In essence it will be formed by the merger of two more public companies
of different EU nationality or conversion of a public company having a subsidiary in
another Member State, and would be subject to a new range of EU company law,

85
although it would still remain subject to national law in certain key areas. The
relevant national law would be that of the country in which it was registered. There are
different views as to the need of such a transnational company and as to the
contentious issue of employee participation. If this proposal is implemented,
however, it will provide a parallel but not identical system of company law to UK
domestic company law, available in practice to all companies.

Learn the meaning of the following words and phrases:

flotation: a process by which a public company can, by an issue of securities (shares
or debentures), raise capital from the public; the term may refer to the initial issue of
shares, by which a private company becomes a public company, listed on the Stock
Exchange
the Stock Exchange / securities exchange: a marketplace or facility for the
organized purchase and sale of securities, esp. stocks/shares
insider dealing / insider trading: the use of material, nonpublic information in
trading the shares of a company by a corporate insider or other person who owes a
fiduciary duty to the company
fiduciary duty/position: the FD arises from the directors' quasi-trustee position with
regard to the company's assets. This duty is owed by all directors, even non-executive
directors.
charge: 1. an encumbrance, lien or claim 2. price, cost or expense 3. a formal
accusation of a crime as a preliminary step to prosecution
receivership: one of several formal options for the survival of an insolvent business,
by which a receiver takes control of the assets subject to the charge and pays off the
debenture holders, afterwards returning surplus proceeds or unrealized assets to the
company, which may carry on or go into liquidation. Sometimes the receiver assumes
control of the company while negotiating the sale of part or the whole of the business
unfair prejudice: undue (dishonest/inequitable) damage or detriment to one's legal
rights or claims

86
insolvency: 1. excess of liabilities over assets 2. inability to pay debts in the ordinary
course of business - Also termed failure to meet obligations
insolvent: (ref. to a debtor) being unable to pay debts in the ordinary course of
business
paralegal: a person who assists a lawyer in duties related to the practice of law but
who is not a licensed attorney - Also termed legal assistant; legal analyst
accountancy: the theory and practice of keeping and inspecting accounts.
accounting: 1. The act or a system of establishing or settling financial accounts, esp.
the process of recording transactions in the financial records of a business and using
these to produce periodical financial records - Also termed financial accounting 2.
(in commercial law) an equitable proceeding for a complete settlement of all
partnership affairs, usu. In connection with a winding up.
brief: a written statement setting out the legal contentions of a party in litigation, esp.
on appeal; a document prepared by counsel as the basis for arguing a case.

87
REFERENCES
1. English for Legal Purposes. Parts I,II. Bucharest : Cavalliotti Publishers.
British Council.2002.
2. Miller, R. Economics. New York: Scribner. 2004
3. The Economist. 2011
4. The Financial Times. 2011

CONTENTS
ECONOMICS..........................................................................................................................................1
UNIT I. WHAT IS ECONOMICS?....................................................................................................1
UNIT II. TYPES OF ECONOMIC SYSTEMS...............................................................................5
UN I T III. CONSUMPTION AND INCOME...................................................................................8
UNIT IV . CREDIT. SOURCES OF LOANS.................................................................................12
UNIT V . BUYING THE NECESSITIES: FOOD AND CLOTHING.........................................19
UNIT VI. BUYING THE NECESSITIES.....................................................................................24
UNIT VII. SAVING AND INVESTING........................................................................................28
UNIT VIII. INVESTING: TAKING RISKS WITH YOUR SAVINGS.........................................32
UNIT IX. SUPPLY AND DEMAND...........................................................................................37
UNIT X. MONEY AND BANKING...........................................................................................46
UNIT XI. THE FEDERAL RESERVE SYSTEM AND MONETARY POLICY..........................56
LAW...................................................................................................................................................66
UNIT XII. SOURCES OF LAW IN ENGLAND AND WALES...................................................66
UNIT XIII. THE LEGAL PROFESSION.........................................................................................69
UNIT XIV. THE STRUCTURE OF THE COURTS........................................................................71
UNIT XV. LAW AND BUSINESS................................................................................................75
UNIT XVI. THE EUROPEAN UNION AND COMPANY LAWS OF MEMBER STATES........83
REFERENCES...................................................................................................................................87
CONTENTS.......................................................................................................................................87

88