SKRIPTA: BUSINESS ENGLISH 2 2017/18

DRUGI SEMESTAR, PRVI KOLOKVIJ

PRESENTATION
General outline

1. Introduction

Welcome your audience

Introduce yourself and the topic

Explain the structure of the presentation

Explain the rules about questions

2. Body

Make 2-3 points. Use signposts to show your audience where you are in your presentation.

3. Conclusion

Summarize

Thank the audience

Invite questions

The aim of my presentation is to introduce our new range of products. In my talk I’d like to show the
advantages of our new marketing strategy. I’d like to give you a brief view of my presentation.
Moving on to my next point. Let me elaborate on that before we go on. I’d like to conclude my
reporting…

TYPES OF GRAPHS:

A pie chart

Displaying the sizes of parts that make up some whole.

A line chart/graph:

Demonstrating trends

A bar chart/graph:

Comparing two or more values.

A table:

A matrix or grid of data arranged in rows and columns.

Presenting a large amount of data in a compressed space.

A diagram:

An explanatory drawing.

Showing arrangement and relations of parts.

Ema Rilović
THE EU
The euro is used in 19 out of 28 EU countries.

The Economic and Monetary Union involves the coordination of economic and fiscal policies, a
common monetary policy and the euro as the common currency.

The euro was launched on 1 January 1999 as a virtual currency for cash-less payments and
accounting purposes. Banknotes and coins were introduced on 1 January 2002.

1 OVERVIEW

The European Union (EU) is a political and economic partnership that represents a unique form of
cooperation among 28 sovereign states. It is the latest stage in a process of European integration
begun after World War II, initially by six Western European countries, to promote peace and
economic development. Its founders hoped that by pooling sovereignty (the sharing of decision-
making powers among states) in certain sectors (primarily economic ones at first), integration would
bring interdependence and make another war in Europe unthinkable. The EU has been built through
a series of binding treaties, and has characteristics of both a supranational entity (in specified areas,
EU institutions hold executive authority) and an intergovernmental organization (in other areas,
cooperation is achieved by consensus of member countries). Over the years, member states have
sought to harmonize laws and adopt common policies on an increasing number of issues. EU
members share a customs union, a single market (in which goods, people, and capital move freely), a
common trade policy, a common agricultural policy, and a common currency (the euro) that is used
by 19 member states (collectively referred to as “the Eurozone”). Twenty-two EU members (and four
non-EU countries) participate in the Schengen area of free movement, which allows individuals to
travel without passport checks. In addition, the EU has taken steps to develop common foreign and
security policies, has sought to build common internal security measures, and remains committed to
enlargement, especially for the Western Balkans.

2 PERSISTENT TENSIONS AMONG MEMBER STATES

The European integration project has long been viewed as a way for participating countries to
magnify their political and economic power (i.e., the whole is greater than the sum of the parts).
European citizens have historically been supportive toward the EU, with many citizens valuing the
freedom to easily travel, work, and live throughout Europe. Nevertheless, tensions have always
existed within the EU between those member states that seek an “ever closer union” through
greater integration and those that prefer to keep the EU on a more intergovernmental footing in
order to protect their national sovereignty. As a result, some EU countries have “opted out” of
certain aspects of integration, including the Eurozone and the Schengen area. In addition, different
histories and geography often influence member states’ policy preferences, for example, ex-Soviet
bloc countries are more wary of EU ties with Russia. Questions have also existed for years on
whether EU “deepening” (i.e., closer integration) is compatible with EU “widening” (i.e., further
enlargement).

3 THE PROBLEMS WITH DECISION-MAKING IN EU INSTITUTIONS

In the 1990s and 2000s, the EU engaged in several efforts to reform its institutions, simplify often
complicated decision-making processes, and thereby allow a bigger EU to function more effectively.
These efforts resulted in the 2009 Lisbon Treaty (which also sought to enhance the EU’s global role
and increase democratic accountability within the EU). Nevertheless, some critics charge that EU

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decision-making processes remain extremely complex, lack transparency, and are still too slow and
complicated. Others note that differences in viewpoint are inevitable among 28 countries and that
decisions thus take time in a largely consensus-based institution.

4 CURRENT CHALLENGES TO THE EU

Various European policymakers and analysts have likened the European integration project to a
bicycle, which must keep going forward to avoid falling over. Currently, however, the EU is facing
several significant internal and external challenges amid a complex political and economic backdrop.
Most imminently, the United Kingdom (UK) will hold a public referendum on June 23, 2016, on
whether to remain in the EU. Should British voters favor a UK exit from the EU (“Brexit”), the move
would be unprecedented in the EU’s history and have significant implications for both the UK and the
EU. Other key issues for the EU include lingering concerns about Greece and the stability of the
Eurozone, managing ongoing migratory pressures, dealing with a resurgent Russia, and combating a
heightened terrorism threat.

5 RISE OF ANTI-EU OR “EUROSKEPTIC” POLITICAL PARTIES

Over the last several years, many EU countries have seen a rise in support for populist, nationalist,
anti-establishment political parties. These parties are often termed “euroskeptic” because many
have also been fueled by worries that too much national sovereignty has been given over to Brussels.
Although not a completely new in the EU, the recent rise in support for such parties largely began in
response to Europe’s economic stagnation, austerity measures, and the Eurozone crisis. For some
voters, how the Eurozone crisis was handled renewed old worries about the EU’s “democratic
deficit”—a sense that ordinary citizens have little say in decisions taken in faraway Brussels.
Increasingly, however, heightened fears about immigration and the large migrant and refugee flows
appear to make populist and/or euroskeptic parties stronger, especially those that harbor anti-
immigrant sentiments. When the free movement of goods and people was established inside the EU,
it was appreciated because it brought greater job opportunities and cheaper access to goods and
services. On the other hand, it also flooded local markets in the west with cheap foreign labor from
the east, which, in those countries, resulted in euroskepticism and people resenting greater
integration. Fears about globalization and a loss of European identity have also been factors in the
growth in support for such parties.

Sovereign state an independent country

Sovereignty the power of a country to control its own government
Integration the joining together of several countries
Treaty a formal agreement between states
Policy the basic principles by which a government or company is guided
Single market a group of countries where trade barriers are eliminated
Common currency a currency used by more than one country, single currency
Enlargement the growth of the EU when new members join
Harmonize laws cooperation between governments to make laws more uniform and coherent
arrangements among countries in which the parties:
Customs union (1) agree to allow free trade on products within the area, and (2) agree to a
common external tariff on imports from the rest of the world
Euroskeptic a person who is opposed to closer links with the European Union

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 1. A common market and a common currency have made of Europe a world-competitive
economic zone.
2. He is a Eurosceptic and is strongly critical of the European Union enlargement.
3. International treaties are usually negotiated by diplomats and then signed by national
politicians.
4. Some views occasionally seen as euroskeptic include perceptions of the EU being
undemocratic or too bureaucratic.
5. The European Economic Community eliminates trade barriers and creates a European single
market.
6. The European Union enlargement is gradually opening labour markets and offering extended
opportunities to recruit from abroad.
7. The European Union is a customs union and therefore sets a common external tariff.
8. When talking about international relations, the word “nation” can refer to a country or
sovereign state.

Advantages and disadvantages of the EU

ADVANTAGES DISADVANTAGES

Countries that would like to join the EU in the future:

▪ Island
▪ Countries of the Western Balkans:
• Albania
• Montenegro applied for membership
• Serbia

• Bosnia and Herzegovina

some way off yet
• Kosovo
▪ Ukraine: a large, poor country wrecked by instability and corruption.
▪ Georgia: aspires to EU membership but there is no real prospect of this in the short- or even
medium term.

Create a single market Unify their coal and steel markets

Economically unviable War would be materially impossible
Expressed a wish to enter the EU Applied to join
Banned Britain from joining Vetoed Britain’s application
The yearly increase in a country’s income Annual GDP growth
To make larger To enlarge

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 Launch A currency
Economic Benefit
Accession Process
Voting Rights

The story of the European Union begins in 1951, with the formation of the European Coal and Steel
Community. France, Italy, West Germany and the three Benelux countries agreed to unify their coal
and steel markets. The idea being that economic interdependence would make a return to war [...]
materially impossible. The GDP of the six members rose steadily as the effects of the community
rules on industrial production and trade began to kick in.

Six years later, in 1957, the six countries signed the Treaty of Rome creating the European Economic
Community. In 1961, the UK along with Ireland and Denmark applied to join, but France's President,
Charles de Gaulle vetoed Britain's application. It wasn't until 1973 that the EEC enlarged to take in
the three countries.

The single European currency, the Euro, was launched in 1999 with notes and coins entering
circulation in 2002.

In the twelve countries that joined in 2004 and 2007, the accession process has brought real
benefits. According to the European Commission, between 2000 and 2008 the process contributed
an average 1.75 percentage points to annual GDP growth in these countries. The Commission also
says that enlargement has brought economic benefit to existing EU members as new export markets
opened up.

Today's EU contains 27 member states, ranging in size from Germany down to Malta. Under current
rules, in the European council, where heads of government meet to take decisions, voting rights are
awarded roughly in proportion to a country's population, although smaller countries tend to do
better, proportionately, than larger ones.

The future of the EU enlargement is uncertain. Three countries: Croatia, Macedonia and Turkey have
had their application to join the Union officially accepted. Yet, many argue that the EU needs more
time to digest its recent eastward extensions before it embarks on further serious enlargements. Of
the three official candidates, only Croatia looks likely to join in the near future ... Negotiations with
Macedonia are being blocked by Greece, which has concern about the former Yugoslav republic’s
name. Turkey’s movement towards accession has stalled owing to concerns among senior European
leaders over whether it belongs in the EU at all.

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RETAIL TRADE: DISTRIBUTION CHANNELS

The distribution channel, or the chain of distribution, is the chain of businesses or intermediaries
through which a good or service passes until it reaches the end consumer. This channel can be very
long, so that many intermediaries stand between the manufacturer and consumer, or it can be very
short. Although many producers and intermediaries try to find different channels to reach their
customers in order to increase sales, sometimes distribution chains become so complex that
distribution management is very difficult. In addition, the longer the distribution channel, the less
profit a product manufacturer might get from the sale.

Distribution channels are divided into direct and indirect forms. In the direct channel, the consumer
can buy the good directly from the manufacturer. However, very few producers today sell their
goods directly to the consumer or business user. Direct channels are considered shorter than indirect
ones.

In an indirect channel, the consumer buys goods from an intermediary or a middleman, e.g. a
wholesaler, distributor, agent, broker or retailer. Channels with a single intermediary are quite
common, e.g. a sales agent or broker for industrial goods, or a retailer for consumer goods, an
authorized dealer in the automobile industry, or a franchise in car-hire and fast-food businesses.
There are also longer channels where further intermediaries are added, for example in the exports of
goods. Long channels often raise the price of the product because each intermediary wants to make
a profit.

Products and services reach end consumers in different types of retail outlets, such as kiosks,
department stores, chain stores, etc. There have always been types of retail outlets that are more
popular than others. Recent trends in retailing show that a growing number of people today prefer to
buy online or use mail-order firms rather than go to a shop. This has encouraged some brick-and-
mortar businesses, which only exist in the physical form, to turn into click-and-mortar shops, which
combine traditional sales in the shop with online sales.

Direct channel A distribution channel with no intermediary.

Brick-and-mortar shop A business which exists only in the physical form.
A business which combines online sales with traditional sales in physical
Click-and-mortar shop
shops.
Companies which offer their products through catalogues or websites so
Mail-order firms consumers can buy them by telephone or order them by mail or on the
internet.
The chain of businesses or intermediaries through which a good or service
Distribution channel
passes until it reaches the end consumer.

A consumer The end user of goods or services, whose needs are satisfied by producers.
An intermediary who stocks goods in big quantities from various suppliers
A wholesaler
and delivers them to retailers when ordered.
The general term for agents, brokers, dealers, merchants, wholesalers and
An intermediary
retailers who stand between the producer and consumer.
A manufacturer A person or organization that produces a good.
A retailer A merchant such as a shopkeeper who sells to the final customer.

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In wholesale trade goods are bought in bulk from various manufacturers. This bulk is then broken
down into smaller quantities which are then passed on to the retailer. A wholesaler is an
intermediary distributor.

In retail trade goods are bought in small quantities from the wholesaler or another intermediary. A
retailer is also an intermediary distributor, who sells goods in even smaller quantities to the final
consumer.

RETAILERS WHOLESALERS

- are closer to end consumers - sometimes finish goods by packing and

- buy/store small quantities branding
- charge higher prices - provide a cost-saving delivery service for
- offer a variety of goods from different retailers
producers - buy/store large quantities
- charge lower prices
- buy in bulk

///read RB, p. 43, 44///

Consumer: - spending, - choices, - behavior, - confidence, - market

Consumer choices Consumer behavior

Consumer expectations Consumer confidence
Financial crisis Great recession
Sales Price reduction
Income Earnings
Spending Consumption

The comparison of sales revenue generated in a certain period to revenue

Comparable sales results
generated in a similar period in the past.
Quarter sales Three months of a fiscal year.
High streets The primary business street of towns or cities, especially in the UK
A specially built area containing a lot of different shops; usually includes
Shopping centre
restaurants and a convenient parking area.
Slump (or recession) A period of substantial decline.
The amount of final consumption expenditure made by resident households
to meet their everyday needs, such as: food, clothing, housing (rent),
Household spending
energy, transport, durable goods (notably, cars), health costs, leisure, and
other services.
Consumer A person who purchases goods and services for personal use.
Consumption The use of goods and services by households.
The measurement for the speed a company sells the products or inventory it
Product turnover
has on hand.

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 1. How do retailers measure success?
- Comparable sales results, number of shopper visits, earnings...
2. What financial reason is mentioned for middle class consumers not spending more?
- Financial crisis, household income, household spending…
3. Other than the financial crisis, what are the reasons for consumers’ changed behavior?
- Financial crisis, technology, experiential spending…
4. How are retailers trying to survive? Is this a good way?
- Price reductions; no
5. Why are brands suffering?
- Less brand loyalty, research on social media…

New trends in retail: What has changed?

- Consumer behaviour
• pantry-loading trips declining, online or quick trips are increasing
• time-starvation has given rise to prepared food and grab-and-go options
- Technology disrupts the industry
- Discounters are challenging traditional grocery stores bringing more than just discounted
prices

What is needed?

- innovative, customer centric shopping experiences

- current store layouts don't meet the demands of the
• customers: new layout: customer-centric features
• multi-channel and convenient shopping
• click-and-collect areas (in-store and via drive-thru)
• fast collection
• restaurant
• specialty food court
• pre-packed meal kits
• health food restaurants
• touch screen
• engagement
• grab-and-go

Explain the difference between these types of businesses: brick-and-mortar, click-and-mortar, click-
and-collect?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

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What are the 3 main reasons behind changing consumer behaviour?

1. The 2008 recession

2. Technology
3. People want to spend more on experiences than on material things

INTERNATIONAL TRADE

///read MK, p. 132, 133///

///read RB, p. 50, 51///

Comparative advantage

David Ricardo set out the idea known as comparative advantage that underpins much of the
argument for freer trade. It is not about countries being able to produce more cheaply or efficiently
than others (i.e., absolute advantage). You can have a comparative advantage in making something
even if you are less efficient than your trade partner. When a country allocates resources to produce
more of one good there is what economists call an "opportunity cost" in terms of how much less of
something else you can make. You have a comparative advantage in making a product if the
opportunity cost is less than it is in another country. If two countries trade on this basis,
concentrating on goods where they have a comparative advantage they can both end up better off.

Absolute advantage:

• Produce at a lower cost than any COMPETITOR

• Using fewer INPUTS and/or more efficient PROCESSES
• Undercut competitor’s PRICES and earn higher PROFITS

Comparative advantage:

• Specialization based on areas of comparative ADVANTAGE

• A country with the lowest OPPORTUNITY cost should specialize in the area where it is most
PRODUCTIVE

Free trade means imports and exports of goods and services without any government restrictions.
Protectionism means restricting imports by way of trade barriers such as tariffs and quotas.
Trade barriers are government policies or regulations that restrict international trade.
A tariff is a tax charged on imports.
A quota is a maximum quantity of goods of a specific kind that can be imported into a country.
Absolute advantage means a country’s ability to produce particular goods more efficiently (using
fewer resources and at lower costs) than some other countries.
Comparative advantage means a country’s ability to produce goods at a lower cost than any other
country.
An infant industry is one that is in an early stage of development and which cannot survive
competition from foreign companies.
A strategic industry is particularly important to a country’s economy.
A declining industry is an industry which experiences negative growth, or remains stagnant due to
decline in demand of one or more of its products.

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Free trade
1. Current challenges: e.g.,
• UK leaving the EU
• USA may quit various trade agreements (e.g., NAFTA)
• WTO: proposed new trade benefit to imports

2. Economic theories supporting free trade

• Comparative advantage: production of a good at lower opportunity cost than another
country, all countries could benefit
• New trade theory: economies of scale -> lower costs of production -> specialization
trade is better

3. The impact of protectionism

• Gains: domestic product sell more on the home market
• Losses: consumers, businesses pay more for goods

Losses resulting from protectionism add up to more than the total gains

4. Trade policy after WW2

Gradual lowering of trade barriers = liberalization of trade rules

• 1948 – 1955: GATT;

• 1955 – present: WTO

5. The case against free trade: losers within countries

Consequences e.g., unemployment benefit for those who lost jobs

• Insufficient
• People losing the dignity of work

Conclusion: The future of further trade liberalisation looks uncertain.

1. Which economic theories support free trade? 2

2. Is free trade always beneficial? Explain. No, some people are losing jobs, they will bring the whole
country down.
3. What kind of impact does protectionism have on a country’s economy? 3
4. What characterized trade policy after WWII? 4

Domestic market Home market

Abundant Plentiful
Liberalisation of rules Relaxing of rules
Open market A market without barriers
Trade barriers Trade restrictions

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 Visible trade – TANGIBLE GOODS

Invisible trade – INTANGIBLE GOODS

Balance of trade – ONLY GOODS

Balance of payments – ALL THE IMPORTS AND ALL THE EXPORTS

Visible trade (GB) or Trade in goods.

merchandise trade (US)
Invisible imports and exports Trade in services (banking, insurance, tourism, and so on).
Barter or counter-trade Direct exchange of goods, without the use of money.
The difference between what a country receives and pays for its exports
Balance of trade
and imports of goods.
The difference between a country's total earnings from exports and its
Balance of payments
total expenditure on imports.
The (impossible) situation in which a country is completely self-sufficient
Autarky
and has no foreign trade.
(1) A positive balance of trade or payments.
Surplus
(2) An excess: a quantity that is larger than is needed
(1) A negative balance of trade or payments.
Deficit (2) An amount of money that is smaller than is needed (e.g. when
spending exceeds revenues)
Dumping Selling goods abroad at (or below) cost price.
Protectionism Imposing trade barriers in order to restrict imports.
Taxes charged on imports. They raise the price to customers and make
Tariffs
them less attractive.
Quota Quantitative limits on the import of particular products or commodities.
Benefit given by the government to producers usually as cash payments
Subsidy
or tax reduction to help them sell at a lower price.
A trade penalty imposed by one nation on one or more other nations
Trade sanction
usually for political reasons.
When a country produces and protects goods that cost more than those
Import substitution
made abroad.

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!!! 5 trade barriers (a government’s policies to restrict international trade) !!!

Import substitution, subsidy, tariffs, quotas, trade sanction

Why do countries practice protectionism?

1. To protect INFANT industries

• so they can grow, develop ECONOMIES of scale and become globally COMPETITIVE.
2. To protect DECLINING industries
• so their decline is slower to protect JOBS in those sectors.
3. To protect STRATEGIC industries
• because they are ESSENTIAL to the country, e.g., AGRICULTURE – food security.
4. To protect non-renewable RESOURCES
• e.g., Middle Eastern countries limit OIL output.
5. To deter UNFAIR competition
• e.g., to stop other countries using DUMPING prices in the home market.
6. To help the ENVIROMENT by not letting harmful products enter the country.
7. For POLITICAL reasons.

///read RB, p. 54///

How do subsidies affect countries’ economies?

- Effect on third world countries:

Low volume of export from developing countries

Displacing the locally grown product

Not allowing trade between poor countries

Violating the comparative cost principle

- Effect on EU countries:

Jobs created/kept in agriculture

Winners large refiners, not EU farmers => taxpayers’ money to help private businesses

Trade barriers impose, set, remove

Domestic production protect, regulate, plan
International trade stimulate, deal with, encourage

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 !!! Which is the odd one out? !!!

- Absolute advantage, barriers, comparative advantage, free trade

- Autarky, counter-trade, invisible trade, visible trade
- Balance, deficit, dumping, surplus
- Banking, insurance, merchandise, tourism
- Comparative advantage, protectionism, quotas, tariffs
- Non-tariff barriers, import substitution, quotas, taxes
- Liberalize, protect, subsidize, substitute

TRUE/FALSE

1. Developing countries are better at producing sugar than European countries. T

2. The EU is the world's second-biggest sugar exporter because it has the best climatic
conditions for growing cane sugar. F
3. The European Union's agricultural subsidies help poor farmers to reduce the cost of
producing sugar and thus becoming more competitive exporters of sugar. T
4. Subsidizing European sugar producers is absurd because the cost of producing sugar in the
EU is more than six-times higher than in Brazil, for example. T
5. African countries are the most efficient sugar producers in the world. T
6. Hundreds of millions of dollars are lost globally due to the European Union's Common
Agricultural Policy (CAP). T
7. Ethiopia is particularly affected because the sums of money lost equal the sums it spends on
HIV/AIDS programmes. T
8. France, Spain and Italy are among the most influential European sugar refiners. F

THE BUSINESS CYCLE

Downturn A decline in economic activity.

Upturn An increase in economic activity.
Expectations Beliefs about what will happen in the future.
Consumption Purchasing and using goods and services.
The difference between the funds a country receives and those it
Balance of payments
pays for all international transactions.
The total market value of all the goods and services produced in a
Gross Domestic Product (GDP)
country during a given period
The willingness and ability of consumers to purchase goods and
Demand
services.
Supply The willingness and ability of businesses to offer goods and services.
Save To put money aside to spend in the future.
Decline A negative growth
A boom A long period of expansion
A recession A downturn that lasts more than six months.
A depression / a slump A recession that lasts for a year or two.
If supply exceeds demand, prices should fall, and encourage people
A trough / bottom out
to start buying again. Eventually the economy will reach _________.

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///read MK, p. 114,115///
1-GDP, 2-upturn, 3-downturn, 4-consumption, 5-expectation, 6-balance of payments, 7-save, 8-demand, 9-
supply

What fluctuates during a business cycle?

What tends to rise during an upturn?
What happens during a downturn?
What causes of business cycles are mentioned in the text? (2)
What do people do when economic times are good?
When does an upturn end?
What do people tend to do then?
What is investment linked to?
When do people invest?
How does a downturn end?

SYNONIMS OPPOSITES

Boost Stimulate Boom Depression

Depression Slump Demand Supply
Expand Grow Exogenous Endogenous
Output Production Contract Expand
Decrease Reduce
Peak Trough
Excess Surplus
Save Spend
Expenditure Spending
Recovery Upturn

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INTERNAL OR ENDOGENOUS THEORIES

- These theories hold that business cycles are caused by human behavior/decisions,
consumption decisions.
- People spend, and borrow money when they feel secure.
- When there is a high demand interest rates rise.
- When interest rates rise demand for loans decreases.
- People tend to spend less when they feel unsafe.
- A downturn begins when the economy hits the peak, people start spending less.
- Companies only invest while demand increases.

EXTERNAL OR EXOGENOUS THEORIES

- These theories hold that business cycles are caused by outside events – activities outside
the economy.
- Schumpeter believes that business cycle is caused by mayor technological inventions.
- Creative destruction means that radical innovations destroy established companies or
industries.

KEYNESIANISM V. MONETARISM

///read MK, p. 117///

Which economic theory proposes the use of both fiscal and monetary policies?
Which suggests using only one? Which one?
Explain: “constant, non-inflationary growth in the money supply.”
Who advocates this?
Explain: Keynesianist governmental intervention will “make the next swing in the business cycle even greater.”
Whose opinion is this?

CLASSICAL ECONOMIC THEORY

- In the long run, excess savings cause interest rates to fall and investment to increase again.
- The economy is self-regulating.

KEYNESIANISM
- Governmental intervention in the economy is necessary to counteract the business cycle.
- Market forces could produce a durable equilibrium with high unemployment, fewer goods,
reduced rates of income and investment.

MONETARISM
- Governments shouldn’t interfere with the economy by using fiscal policy. Their only job
should be to ensure a constant non-inflationary growth in the money supply.
- Substantially increasing the money supply will only lead to inflation.

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Keynesianism v. Monetarism

Keynes advocated government intervention in the economy and the use of (policies on public
spending and taxation) and (policies on money supply and interest rates) to diminish the effects of
(downturns longer than 6 months) and periods of high employment. → Advocated government
intervention in the economy and the use of fiscal and monetary measures to diminish the effects of
recessions and periods of high employment.

Argued against the traditional view that free markets would automatically provide (employment of
around 96%-100% of the working age population) as long as workers reduced their wage demands.
→ Argued against the traditional view that free markets would automatically provide full
employment as long as workers reduced their wage demands.

Monetarists argued that Keynesian policies lead to (rising prices and decreasing purchasing power).
→ Monetarists argued that Keynesian policies lead to inflation.

Equilibrium A state of balance; supply = demand

Fiscal policy Government actions concerning taxation and public expenditure
Government or central bank actions concerning the rate of growth of the
Monetary policy
money in circulation
Money supply The total amount of money available in an economy at a particular time
The economic theory that government monetary and fiscal policy should
Keynesianism
stimulate business activity and increase employment in a recession

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GRAPH DESCRIPTION

GO UP GO DOWN
grow decline
rise slash
boost plummet
jump slump STAY THE SAME CHANGE
rally bring down stagnate fluctuate
soar fall level out/off vary
rocket plunge
increase decrease
raise drop

*bolded words – sudden movement

TRANSITIVE WORDS – verbs that have to be followed by an object.

INTRANSITIVE WORDS – verbs that cannot be followed by an object.

TRANSITIVE INTRANSITIVE BOTH

- Boost - Grow - Increase

- Slash - Jump - Decrease
- Bring down - Rocket
- Raise - Rally
- Soar
- Decline
- Fall
- Drop
- Plummet
- Slump
- Plunge
- Stagnate
- Level out/off
- Fluctuate
- Vary

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 Sales begin to rise in 2003.

The sales figures jumped in 2004.

The sales stagnated in 2005.

The sales decreased in 2006 and 2007.

The sales plunged in 2008.

The government raised the price of fuel by 2%, it now costs $1.02, instead of $1. Prices fluctuate all
year. It was very difficult to make plans in a situation when we couldn’t know what to expect. The
government's decision to decrease sales taxes boosted the economy. The new expansionary fiscal
policy decreased / brought down unemployment figures in the country. Due to the efficient
management of the company, we increased sales by 25% this year. Unemployment jumped from
200,000 to 600,000 in 3 months due to the closure of several factories in the country. The higher
income that resulted from the suddenly increased sales slashed the company's deficit by half. The
economy stagnated for five years. The GDP growth was around 1% and there was a high
unemployment.

The Sun RISES every morning. RAISE your hand if you agree. The problem AROSE from the lack of
quality control. Last year we RAISED 2 m in capital. The cash flow crisis AROSE because the company
did not receive payment from its debtors. Retail prices ROSE by 7% last year. The Fed will probably
RAISE interest rates by 0.5%. The mistakes that have ARISEN this week are due to a lack of
communication between the staff and the management.

NOUNS

VERB NOUN VERB NOUN

grow a growth fall a fall
rise rose decline a decline
increase an increase slump a slump
boost a boost plunge a plunge
jump a jump decrease a decrease
improve an improvement drop a drop
stagnate a stagnation fluctuate fluctuation
peak peak bottom out a trough

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Ema Rilović
Rice production decreased in 2002. → There was a decrease in rice production in 2002.

Rice production stagnated in 2003. → The chart shows a stagnation in rice production in 2003.

Rice production increased in 2004. → We see an increase in rice production in 2004.

Rice production decreased in 2005. → There was a decrease in rice production in 2005.

Rice production plunged in 2006. → 2006. brought a plunge in rice production.

ADJECTIVES AND AVERBS

SIZE SPEED
ADJECTIVES ADVERBS ADJECTIVES ADVERBS
big a lot quick quickly
significant significantly sharp sharply
substantial substantially dramatic dramatically
massive massively sudden suddenly
small a little / a bit slow slowly
slight slightly steady steadily
insignificant insignificantly moderate moderately

1. There was a CONSIDERABLE fall in oil prices last week.

2. The demand for the older model of the phone decreased SLIGHTLY when the newer model
was launched.
3. There was a SUBSTANTIAL upturn in exchange rates.
4. The government decreased taxes MODERATELY.
5. They reported a DRAMATIC downturn in the price of shares last year when the CEO was
fired.
6. We managed to raise our profits RAPIDLY when we increased our advertising budget.

Rice production decreased moderately in 2002. → There was a moderate decrease in rice production
in 2002.

Prices fell considerably. → There was a considerable fall in prices.

Sales grew steadily in 2004. → There was a steady growth in 2004.

Sales plummet dramatically in 2005. → There was a dramatic drop of sales in 2004.

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Ema Rilović
PREPOSITIONS

1. A growth of 20% in sales.

N + of + (%, number) + in (topic of the graph)

2. Sales grew by 20%.

V + by + (%, number)

3. Sales grew from $8m to $15m. (Sales are now $15m.)

V + from + (number) + to + (number)

4. Sales are currently standing at 15m.

Sales peaked at 25m.

Sales bottomed out at 4m.

Current position on a graph: at.

1. Last year sales fell from $3m to $1.5m.

2. This year in our town there was a growth of 20% in marriages.
3. The employment ratio in the country reached a trough at 30% last year.
4. The competition’s advertising spending has fluctuated between €5m and €5.75m this year.
5. Our market share plummeted by 20% when a new company broke into the market. Currently
we control 15% of the market and we are making enormous losses.
6. Our market share plummeted to 20% from 45%, which is a 25% drop.

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Ema Rilović
Talking about graphs in a presentation

TAN: Now, I'd like to refer to the first graph - as you can see this is a bar graph measuring net sales
over the first ten months of the year.
You'll notice that sales rose steadily in the first few months, then there was a marked increase in
April. They peaked in May at around 3.2 million, and levelled off, then there was a dramatic drop in
the following month, followed by a significant increase in August, and this trend has continued up
until the present.
JOHN: What was the reason for the sudden drop in July?
TAN: This was mainly due to a drop off in air conditioner sales - so it's a seasonal effect.
DENISE: Could it be a consequence of the negative effect of the interest rate rise?
TAN: Possibly. Now, if I could draw your attention to this next diagram. This is a line graph of sales -
the blue line represents air conditioner sales, the red line shows heaters. As you'll note, air
conditioner sales dropped steadily from January to July, bottoming out then, while heater sales
experienced a sharp increase from March to June, then dropped markedly from June to July, then
declined through to September, with a pronounced drop in October.
JOHN: Does this explain the fluctuation in total sales?
TAN: Largely - if we look at this pie diagram, you can see that air conditioners and heaters together
represent more than half of our total sales - but they vary seasonally, while other appliances are
fairly steady through the year.

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Ema Rilović
CENTRAL BANKING & TOOLS OF MACROECONOMIC POLICY

1. The first one is actually to implement monetary policy. There are roughly three* ways to do
it. First setting interest rate ceilings and floors which means limiting, upwards or
downwards, the fluctuations of the interest rate.
2. The second way to implement monetary policy is simply printing money or destroying it -
coins, banknotes. The third one, which is a bit more modern, is those open market
operations, which are simply buying and selling government bonds to and from commercial
banks. So that was the first main task of a central bank. The second one is exchange rate
supervision.
3. Third main task, yes, commercial banking supervision. I would say – make sure that the
commercial banks have enough liquidities, for instance, to avoid any bank run. (...)
4. The fourth main task of the central bank would be to act as lender of last resort in case,
actually, one of these commercial banks goes bankrupt and the investors, the people putting
money in the bank, have to get back their money.

* Mangano doesn’t mention the fourth way of implementing monetary policy: changing reserve
requirements.
What is a bank run?

What is the political business cycle?

Printing money, or destroying it controlling the amount of banknotes in circulation

Setting interest rate ceilings and establishing maximum and minimum lending rates, thereby controlling
floors the credit system
ensuring that banks have a sufficient liquidity ratio to allow customers
Commercial banking supervision
to withdraw their deposits when they want
intervening on foreign exchange markets, buying or selling large
Exchange rate supervision
amounts of the national currency, to prevent major fluctuations
Act as lender of last resort lending money to a commercial bank in danger of going bankrupt
selling government bonds to commercial banks or buying them back, in
Open-market operations order to alter the amount of credit the banks can offer (and thereby
alter the money supply)

How can monetary policy help the economy?

The ultimate goal of all macro policy is to stabilize the economy at its full-employment potential.
Monetary policy contributes to the goal by increasing or decreasing the money supply as economic
conditions require.

Expansionary policy

When the economy is in recession, it produces less than its full-employment potential. Monetary
policy may then be used to stimulate the economy to increase the rate of output and aggregate
demand. If the Fed lowers reserve requirements, drops the discount rate, prints more money or buys
more bonds, it will increase bank lending capacity. The banks in turn will try to use that expanded
capacity and make more loans. By offering lower interest rates or easier approvals, the banks can
encourage people to borrow and spend more money.

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Ema Rilović
Restrictive policy

Monetary policy may also be used to cool an overheating economy. Excessive aggregate demand
may put too much pressure on the economy's production capacities. As market participants bid
against each other for increasingly scarce goods, prices will start rising. The resulting inflation will
redistribute real incomes (perhaps unfairly) and may disrupt investment and consumption plans. The
goal of monetary policy in this situation is to reduce aggregate demand. To do this, the Fed can
reduce the money supply by (1) raising reserve requirements, (2) increasing the discount rate, or (3)
selling bonds in the open market. All of these actions will reduce bank lending capacity. The
competition for this reduced pool of funds will drive up interest rates. The combination of higher
interest rates and lessened loan availability will curtail investment consumption and even
government spending. This was the intent of the Fed's money restraint in 1994. The Fed was worried
that the US economy was growing so fast that it would overshoot the full-employment goal. To avert
those inflationary pressures, it reduced money-supply growth and raised interest rates.

The total amount that different sectors of the economy spend in a given
Aggregate demand period.
A situation in which all available labor resources are being used in the
most economically efficient way. It is the highest amount of skilled and
Full employment unskilled labor that could be employed within an economy at any given
time.

Output An amount produced or manufactured during a certain time

Open market An economic system with no barriers to free market activity.
Minimum amount of cash or cash-equivalents (a percentage of deposits)
Reserve requirement that banks and other depository institutions are required by law to keep
on hand, and which may not be used for lending or investing.
The interest rate charged to commercial banks and other depository
Discount rate institutions for loans received from a central bank’s discount window.
Lending capacity A bank’s ability to fund loans
Securities representing the debt of the company or government issuing it.
Bonds

Money supply The amount of liquid assets (usually cash) circulating in the economy.

!!! What does monetary policy control? !!!

The money supply.

!!! List the 4 tools of monetary policy. !!!

1. Reserve requirements
2. Discount rate
3. Printing or destroying money
4. Open market operations

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Ema Rilović
Fiscal policy = a government policy on taxes and public spending.

Monetary policy = the central bank’s policy on controlling the money supply.

Macroeconomic policy can be:

Expansionary (loose) – increases the total supply of money in the economy, used to combat
unemployment in a recession.

Restrictive (tight) – decreases the total money supply in order to combat inflation.

MONETARY
PROBLEM GOAL MEASURES
POLICY

increasing money
stimulate
supply:
economy:
-lowering reserve
raise
requirement
aggregate
- economy in -dropping discount
demand:
recession: rates
EXPANSIONARY ↓
below its -buying more bonds
(LOOSE) to increase
full-employment ↓
borrowing &
potential -lower interest rates
spending
in banks
↓
→ PEOPLE WILL
to encourage
BORROW &
output
SPEND
to reduce aggregate demand →
reduce money supply:
cool economy: -raise reserve requirement
Overheating economy: to lessen loan - increase discount rates
RESTRICTIVE too much pressure on availability → lower - sell bonds
(TIGHT) production capacity, investments ↓
rising prices → to reduce - fewer loans available →
aggregate demand higher interest rates → LESS
INVESTMENT,
MORE SAVINGS

Fiscal policy

Reducing taxes and increasing government spending have the same effect – greater spending in the
economy. The difference is that when you reduce taxes, the extra spending is done by individuals.
Governments will do this if they want to reduce unemployment – the extra spending will increase
demand for products which firms will meet by hiring more workers. This is called a(n) expansionary
fiscal policy. A problem is that inflation might increase as a result. If the government wishes to
reduce inflation it might increase taxes or reduce spending – a(n) restrictive fiscal policy. There will
be less spending, and firms will make less profit.

///read RB, p. 73, 74///

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Ema Rilović