ДЕЛОВОЙ АНГЛИЙСКИЙ ЯЗЫК ПРАКТИКУМ ПО ПЕРЕВОДУ
учебно-методическое пособие по английскому языку (11 класс) на тему

ДЕПАРТАМЕНТ ВНУТРЕННЕЙ И КАДРОВОЙ ПОЛИТИКИ БЕЛГОРОДСКОЙ ОБЛАСТИ

ОГАОУ СПО «Белгородский строительный колледж»

ИНОСТРАННЫЙ ЯЗЫК

ДЕЛОВОЙ АНГЛИЙСКИЙ ЯЗЫК

ПРАКТИКУМ ПО ПЕРЕВОДУ

Составитель: Кованченко А.Н.,

преподаватель иностранного языка

Белгород, 2015

Studying Business English became extremely important in the last few years. Development of private business in Russia, as well as growth of mutual cooperation between Russian and foreign companies in the sphere of business requires particular knowledge of economics, management, law, marketing, etc., and of the above mentioned subjects in English in order to succeed. It means that such course is necessary for the college students, so that they can imagine what information, level of education, skills and what features of character they should possess if they are eager to start and run their own business, or if they want to find an attractive, well-paid job in the company.

The aim of the course is to enlarge the vocabulary of the students especially in the sphere of economics and business, to develop the students' speaking activities, to study the main ideas and definitions of business, to form business correspondence skills, to discuss the ways of making up a business plan, to hold a market research. We deal with the telephone manners, the ways to present the company, describe the product, the trends and results, how to meet people, negotiate, make arrangements, run an advertising campaign, choose the right name and attractive logo for the company, set the price for your product and advertize it. And even if you do not intend to run your own business it will be useful to know something about banks and bank system, for example, as if you are sure to communicate with this institute, or possess the information concerning stock and stock exchange, money and tax systems, composing a letter of application and a resume while looking for a job.

A lot of modern business terminology came from English. Such words as marketing, management, promotion, invoice, franchise, abbreviations CIF, FOB, MBA, and others sometimes are easier to understand knowing their origins and meanings.

We have tried a lot of textbooks, audio and video courses, printed material both Russian and foreign. But only combining different sources of information we've managed to achieve the level of teaching according to the students' interests, needs and knowledge of English and other subjects.

We have accumulated some experience in teaching and studying Business English and would be happy to share it with people interested in it. We hope that both students and teachers will find the information which could be helpful and interesting. Under the title "English for Future Businessmen" you will find texts, exercises, crosswords, useful advice which, we consider, could become a guide in your current and future business projects.

Contents:

1. Sole proprietorship

2. Partnership      

3. Corporation

4. Setting up a Limited Company

5. CROSSWORD

6. Money

7. Taxation and Tax System

8. International Trade

9. Cross-Cultural Contacts

10. Banking

11. Inflation

12. Market Economies

13. The Role of Competition in Business

14. What Is Credit and How Is It Used?

A business may be privately owned in three important forms:

Sole proprietorship      Partnership       Corporation

Sole proprietorship

The simplest form of business organization is the sole trader or sole proprietor: one person provides the capital (the money needed to start the business), has complete control of the business, keeps all the profit (or bears the loss).This person can start or stop his business whenever he likes. It is not necessary to publish the accounts, and there are no special legal requirements except that the name of the business must be registered if it is different from the owner's name. He need not consult a lawyer to form the business. And he can start a business with a small amount of capital and few legal formalities. Proprietor himself decides upon his vacation, working hours, salary, hiring and firing.

But there is some risk involved. The most important risk is that the proprietor has unlimited liability. It means that he is responsible for all his business debts. So if the business fails, he has to declare personal bankruptcy and can lose his personal assets.

It is easy to start this type of business, but it can be difficult to compete with large firms, and difficult to raise money for expansion. Proprietors also cannot get tax benefits, which partnerships or corporations can get.

The sole proprietorship is the most common in American Business. More than 80 percent of all businesses in the United States are sole proprietorships. But they, however, do not do the greatest volume of business. They account for less than 16 percent of all business receipts.

When people open small shops, or work for themselves as plumbers, decorators, and so on, they are usually sole proprietors. These are "one-man businesses" but they can, of course, employ others. The examples of this form of owning business are also service industries such as laundromats, beauty shops, repair shops and restaurants.

Check your understanding of the text

Answer the questions:

1 .What are the three ways that a business may be privately owned?

2. Who owns or controls the sole proprietorship?

3. What does the unlimited liability mean?

4. What are the advantages of this form of ownership?

5. Do sole proprietorships make the most money - that is, do they have the greatest volume of business?

6. List some businesses which are likely to be sole proprietorships.

Select a word to fit each blank space in the sentences:

account for                service                privately

accounts                bankruptcy                legal

1. Sole proprietorships … only a small part of all business transactions.

2. Our bank is not publicly owned; it is …owned.

3. The …industries do not manufacture products.

4. If business fails, the sole trader declares personal … .

5. A sole proprietor need not publish the … and there are no special … requirements.

Answers: 1 - account for; 2 - privately; 3 - service; 4 - bankruptcy; 5 - accounts, legal

Partnership

Business may be also operated as a partnership. A partnership is an association of two or more persons to carry on a business for profit. The people usually agree either in writing or verbally to become partners. But people who run a business together and share the profits are usually considered partners, even if they do not intend to be. When the owners of a partnership have unlimited liability, they are called general partners. If they have limited liability, they are called limited partners. There may be a silent partner as well - a person who is known to the public as a member of the firm but without an authority in management. The reverse of the silent partner is the secret partner - a person who takes part in management but who is not known to the public.

Any business may be operated as a partnership. There are partnerships in professional fields such as medicine, law, accounting, insurance and stock-brokerage. Limited partnerships are a common form of ownership in real estate, oil prospecting, and the mining and quarrying industries, to name a few.

Partnerships are more advantageous than sole proprietorships if one needs multiply sources of capital or diversified management. Like sole proprietorships, they are easy to form, and often receive favored treatment by the government as well as tax benefits. One more advantage is that the partners should not invest the same amount of capital, but they may combine their resources. You can invest less capital than your partner, for example, or even no money at all. But you as a partner can contribute important services or skills, sometimes just a name or a reputation.

All partners have equal rights and obligations in running the business, unless they have agreed on another arrangement. Any disagreement that arises among them is decided by the majority vote. All partners share in the profits of the business, but they do not necessarily share equally. The size of each share is agreed upon when the partnership is set up. It depends on how much money or property each contributes to get the business started, and on the kind and amount of work each partner is to do. All partners are liable for any debts acquired by the business. These debts are normally paid out of funds or property belonging to the business.-If they cannot be paid in this way, any other property of a partner can be taken by the people to whom the debt is owed. A person can lose much money by belonging to a partnership that fails. This is the main disadvantage in case the partners have unlimited liability. Another disadvantage is that the partners may disagree with each other. Complications can also arise with the death of a partner For example, a share of business could come into the hands of a less desirable associate.

No new partner may be taken into the partnership without the consent of all the members. A new agreement must then be made, stating what the new partner must contribute and what will be his share of profits. A person who wishes to leave the business can agree with the other partners on a price for buying him out. When a partner dies, people named to handle his estate have the same rights.

Check your understanding of the text

Answer the questions:

1. What is an important difference between a general partnership and a limited one?

2. What is the difference between silent and secret partners?

3. Name the advantages and disadvantages of 'his form of business ownership.

4. What are some fields in which partnerships are found?

5. In what way do the partners share the profits of the business?

Select a word to fit each blank space in the sentences:

management        benefits                silent

partner                 capital                 associate

diversify                 complications                

1. A … is known to the public as a member of the firm, but has no authority.

2. A secret partner takes part in … .

3. You should form a partnership in case you need multiply sources of … or …

management.

4. Partnerships often receive tax … from the government.

5. … may start with the death of one of the partners. His share of business can come into the hands of a less desirable … .

Answers: 1 – silent partner; 2 – management; 3 – capital, diversity; 4 – benefits; 5 – complications, associate.

Corporation

Corporation is an institution formed by people who obtain a charter giving them certain legal rights and privileges. A corporation can own property, buy and sell, and manufacture products. Business corporations are the most common type of corporation. It is an institution established for the purpose of making profit. In the United States business corporations make up only about 15 percent of all business enterprises but they account for more than 75 per cent of all business assets. Business corporation is operated by individuals whose shares of ownership are represented by stock certificates. People owning stock certificates are called stockholders.

If you want to form a corporation, first of all, you should apply for a Corporate Charter. After you obtain the charter the stockholders, as owners, hold a meeting to organize the corporation. They elect the Board of Directors, adopt by-laws and choose the company's officers. Though the officers of the company supervise daily management, the stockholders always have the final authority. They vote at annual meetings. But there are two varieties of stock, preferred and common. Preferred stock does not extend voting rights in the corporation to stockholders but gives holders the first claim on the company's assets after the debts are paid. Only the common stock gives stockholders voting rights. Corporations reward stockholders for their investments by giving them part of the profits. These payments are called dividends.

The corporate form of ownership has several advantages. The first is its ability to attract financial resources. A second advantage is that if the corporation attracts a large amount of capital, it can make large investments in plants, equipment and research. A third is - that a corporation can offer high salaries and thus attract talented managers. And the main advantage is that the owners - the stockholders - have limited liability. If the corporation fails, they can lose no more than their investments, but not the personal assets.

Business corporations may be public or private. The most common type is the public corporation, which obtains funds by selling ownership shares, called capital stock, to large numbers of investors. A public limited company must put the letters PLC after its name. A PLC has at least two members but not maximum since it can offer its shares for sale to the public and may, therefore, have hundreds of thousands of shareholders, who have one vote for each share they own. Shareholders cannot sell their shares back to the company but they can sell their shares to the people who wish to buy on the Stock Exchange. The price of shares will go up if the PLC is making good profits and will go down if it is not doing so well. The stock in most large corporations is widely distributed, but a person who succeeds in buying 51 per cent of the shares can gain control of a PLC.

Private limited companies, unlike public corporations, have a limited number of owners - at least two, but usually not more than fifty members, who provide the capital which is divided into shares. Some private corporations are large firms. But most are small companies in which all or most stock is held by family members. Shares can be transferred only by the agreement of other shareholders and cannot be offered for sale to the general public. A private limited company has limited liability and this is indicated by the letters LTD after its name.

The business corporation is not the only type of corporation that exists. Educational, religious and charitable institutions are also permitted to incorporate. Usually this type of corporation does not issue stock and is a nonprofit institution. If there is a profit, it is generally reinvested in the institution rather than distributed to private stockholders. Nonprofit corporations, such as the Red Cross, provide community services. They consist of members instead of stockholders and provide no dividends.

In addition, there are governmental corporations which may be established by cities, states, the federal government and special agencies. Some examples of these governmental corporations are state universities, state hospitals, city-owned utilities. They provide certain public welfare functions. Governmental corporations are always nonprofit and usually do not issue stock certificates.

Check your understanding of the text

Answer the questions:

1. Who are the owners of a corporation?

2. List the advantages of the corporate form of ownership.

3. Explain the difference between preferred and common stock.

4. Whom can the shareholders sell their stock to?

5. The business corporation generally issues stock to stockholders. What types of corporation usually do not issue stock?

Select a word to fit each blank space in the sentences:

utilities                charitable                institution

nonprofit                 investments                 financial resources

1. The Red Cross is an international organization for the relief of suffering in times of war or disaster; it is a … organization.

2. Gas, water and electric power companies are … .

3. The University is a … corporation; it is an educational … that reinvests all its money.

4. A corporation has an opportunity to attract … and make … in plants, equipment and research.

Answers: 1. charitable; 2. utilities; 3. nonprofit, institution; 4. financial resources, investments.

After you have studied the main forms of business organization, you can complete the following table. Use the information from the texts.

THE FORMS OF BUSINESS OWNERSHIP

Answers:

Setting Up a Limited Company

John, Matt and Nick started a limited company last year. They named it JMN Ltd, using the capital letters of their names. John, Matt and Nick are all investors and shareholders.

The company's capital - the money it has for buying goods and equipment - is $10,000.

Matt                $1500                 JMN Ltd

John                 $3000         ->        capital: $10,000

Nick                $5500                 shares: 10,000 x $1

John invested $3000, Matt put in $1500, Nick - $5500, so - Nick is the majority shareholder (he owns the most shares). Nick also has a controlling interest (he owns more than 50% of the shares).

The company's capital is divided into 10,000 shares of $1 each. $1 is the nominal value (or the face value) of each share. Matt owns 1500 shares. The nominal value of his shares is $1500.

After a year, the company made $1500 profit. This is divided between the shareholders. The company announced a dividend of 15 cents per share ($1500 profit: 10000 shares).

John received $450 (3000 shares x 15 cents), Matt - $225, and Nick-$825.

NOW CHECK YOURSELF:

Jane                $300                         AJKLtd

Ann                $600              ->              capital: $2000

Kate               $1100                 shares: 2000 x $1

AJK Ltd had $200 profit after the first year.

1. Why did they call the company AJK Ltd?

2. Who is the majority shareholder?

3. What is the face value of Ann's shares?

4. What dividend did they announce after the first year of their work?

5. How much did each of the shareholders receive?

Answers:

1. They must have used the capital letters of their names.

2. Kate.

3. The face value of Ann's shares is $600.

4. The company announced a dividend of 10 cents per share.

5. Jane - $30, Ann - $60, Kate - $110.

CROSSWORD

All the words in this puzzle are connected with different forms of business ownership.

1. The money shareholders invest into a company to buy property and equipment

2. One of the owners of a partnership.

3. Usually people carry on a business to gain it

4. One of the forms of owning business.

5. These kinds of corporation are usually nonprofit

6. To put money into a business or a bank account so that it will make a profit

7. The sole (only) owner of a business.

8. To buy and sell goods.

9. The price written on a share or coin is called ... value.

10. Something belonging to a person or a business which can be sold.

11. A partner who is known to the public, but without authority in management

12. One of the owners of a corporation.

13. Your legal duty to other people.

14. One of the forms of owning business.

15. If a sole proprietor or a partnership fails, the owners will go....

16. You can only buy and sell shares in a... limited company if the other shareholders agree.

17. The part of business.

18. A person you owe money to.

19. The shares in a... limited company can be bought and sold freely.

20. Another name for a business.

21. Income of a shareholder.

22. When a limited company fails, it goes into...

23. A partner which is not known to the public.

24. Money you owe to another person.

25. Shares in a public limited company may be bought and sold at a... exchange.

Answers:

1. capital; 2. partner; 3. profit; 4. partnership; 5. charitable; 6. invest; 7. proprietor; 8. trade;

9. face; 10. asset; 11. silent; 12. shareholder; 13. liability; 14. corporation; 15. bankrupt;

16. private; 17. share; 18. creditor; 19. public; 20. firm; 21. dividend; 22. liquidation; 23. secret; 24. debt; 25. stock.

                                           MONEY

WHAT IS MONEY?

Money is one of the most important inventions of humankind. Without it a complex, modern economy based on the division of labor, and the consequent wide-spread exchange of goods and services, would be impossible.

When you buy a candy bar, you may pay for it with a coin or paper note. The storekeeper knows that you will eat the candy, and that he never will be able to get it back from you. He also knows that he can eat neither the coin nor the note you gave him. Why does he accept the coin or note in trade for candy? It is because the coin is money.

At first sight answering the question what money is seems obvious; the man or woman in the street would agree on coins and bank-notes, but would they accept them from any country? What about cheques? They would probably be less willing to accept them than their own country's coins and notes. What about credit cards and gold? The gold standard belongs to history but even today many rich people in different parts of the world would rather keep some of their wealth in the form of gold than in official, inflation-prone currencies. The attractiveness of gold, from aesthetic point of view, and its resistance to corrosion are two of the properties which led to its use for monetary transactions for thousands of years. In complete contrast, a form of money with virtually no tangible properties whatsoever - electronic money - seems set to gain rapidly in popularity.

All sorts of things have been used as money at different times in different places. It is almost impossible to define money in terms of its physical form or properties since these are so diverse. Therefore any definition must be based on its functions.

FUNCTIONS OF MONEY

Money is anything that people agree to use to pay for goods, services, or debts. Money also measures the value, or worth, of things. The metal in a coin or the paper in a bill has little useful value itself. But people agree to use coins and paper bills as money because money is the most convenient means of payment known.

Because many things, ranging from gold to entries on computer tape, have been used as money, it cannot be defined as some particular object but must instead be defined by the functions it serves - to act as a medium of exchange and a standard of value. The third function of money - as a store of wealth - is something money shares with many other types of objects.

A medium of exchange is simply an item used to make it easy to exchange things. Money is a go-between in trade. A farmer sells his wheat for money. He then uses the money to buy a tractor from a machinery dealer. In both cases, money is the thing spent. Money is accepted and desired only because it may be exchanged for other goods. Without money, there would be little buying and selling.

In a very primitive economy, and in a few isolated cases in a complex economy, people directly barter goods and services. Barter is a system of direct exchange of goods. In ancient times somebody could exchange a sheep, for example, for anything else in the market-place that they considered to be of equal value. Barter, however, was a very unsatisfactory and inefficient system because people's precise needs seldom coincided. It required that one locate someone who wanted the particular good one provided, and just by coincidence happened to have available for exchange a particular good one wanted. In a modern economy with millions of products it would require an extensive search to locate such a person.

People needed a more practical system of exchange, and various money systems developed based on goods which the members of a society recognized as having value. Cattle, grain, teeth, shells, feathers, skulls, salt, elephant tusks, leather, nails, rice, quartz and tobacco have all been used. Precious metals gradually took over because, when made into coins, they were portable, durable, recognizable and divisible into larger and smaller units of value.

The use of money as a medium of exchange allows one to split this barter process into two parts. All one has to do is locate a person who wants one's particular good, receive money in exchange for it, and then locate another person who has available the good one wants and who is sure to take money in payment for it.

Another function of money is to serve as a standard of value. This standard-of-value function is overwhelmingly important because a modern economy requires numerous comparisons of values. Money tells the price of the things. The price of any-thing is the number of money units, such as roubles or dollars, for which it can be sold.

A business firm which does not have all money it needs for its activities must borrow from others. A merchant may borrow to buy a store, to buy goods to sell, or to pay his employees. He promises to repay the debt in future. All debts are expressed in terms of money.

In principle, this standard of value need not be the same as the medium of exchange. In Colonial America, for example, merchants kept their financial records in British pounds, but most of the medium of exchange they received consisted of Spanish coins. Obviously, however, it is convenient to use the same item both as a medium of exchange and as a standard of value, and modern money normally fulfills both roles.

The third function of money is to serve as a store of wealth. This is not a distinctive function of money, but money has certain peculiarities as a store of wealth. People are saving money to spend at some time in the future. If we had a picture of what all the people were doing with their money at any particular time, such as nine o'clock this morning, it would show that most of the money is being held as a store of wealth. Some people hold their money longer than others. On the average, every dollar in circulation is spent once every twenty days.

Unlike other forms of wealth, it has no transactions costs. Someone who decides to hold wealth in, for example, corporate stock has to undergo a certain amount of trouble and cost -first to buy stock and then to sell it again in order to buy another item. All of these costs and inconveniences can be avoided by holding one's wealth in the form of money. Economists term this ease of using money, as opposed to other forms of wealth, as a medium of exchange liquidity.

How well does money fulfill its functions? The medium of exchange function is fulfilled very well. The occasional inconveniences of being unable to cash a check, or to pay a bus fare with a $100 bill, are trivial when looked at in a larger context. Money does not perform well, however, as a standard of value or a store of wealth because the value of money itself is not stable or predictable. For example, someone who currently lends $100 at 15% interest does not know whether the purchasing power received back, both as repayment of principle and as interest, will be more or less than the purchasing power of the $100 lent because of the effect of inflation or deflation. In other words, you are not sure you will be able to buy the same amount of goods or services in a year after you get back both money you lent and the $ 15 interest.

MONEY CLASSIFICATION

It is convenient to classify the numerous moneys that exist into three types. One is full-bodied commodity money - money that has a value as a commodity (gold or silver, for instance) fully equal to its value as money. A coin is a piece of metal, usually disc-shaped, which bears lettering, designs or numbers showing its value. Until the eighteenth and nineteenth centuries coins were given monetary worth based on the exact amount of metal contained in them, but most modern coins are based on face value, the value that governments choose to give them, irrespective of the actual metal content. Coins have been made of gold (Au), silver (Ag), copper (Cu), aluminium (Al), nickel (Ni), lead (Pb), zinc (Zn), plastic, and in China even from pressed tea-leaves. Because coins can be awkward to carry, representative full-bodied money was developed, which consists of paper money that is freely convertible into full-bodied money. Most governments now issue paper money in the form of notes, which are really promises to pay. This money is credit money, or fiat money - money that does not have a value as a commodity equal to its face value and that cannot be exchanged for full-bodied commodity money. Paper money is obviously easier to handle and much more convenient in the modern world. Cheques, bankers' cards, and credit cards are being used increasingly and it is possible to imagine a world where money in the form of coins and paper currency will no longer be used.

One might ask why people are willing to exchange valuable goods and services for pieces of paper called $10 bills. The answer is that these pieces of paper are valuable because we know that other people are willing to take them in exchange for their goods. The same is ultimately true of gold - it is considered valuable because we know that other people treat it as valuable.

HISTORY

Much dispute exists about the origin of money and its role in primitive society. One school of thought argues that in primitive societies money was used not for everyday trade but only for certain ceremonial and public transfers, such as tribute, bride-price, and blood-money. Particular moneys could be used only for particular purposes, or for payments to certain social classes, such as gold and silver for aristocrats, and copper for common people.

One of the most important improvements over the simplest forms of early barter was the tendency to select one or two items in preference to others so that the preferred items became partly accepted because of their qualities in acting as media of exchange. Commodities were chosen as preferred barter items for a number of reasons - some because they were conveniently and easily stored, some because they had high value densities and were easily portable, and some because they were durable. These commodities, being widely desired, would be easy to exchange for others, and therefore they came to be accepted as money.

Many societies had laws requiring compensation in some form for crimes of violence, instead of the Old Testament approach of ‘an eye for an eye’. The word to 'pay' is derived from the Latin pacare meaning originally to pacify or make peace with - through the appropriate unit of value customarily acceptable to both sides. A similarly wide-spread custom was payment for brides in order to compensate the head of the family for the loss of a daughter's services. Rulers have since very ancient times imposed taxes on or exacted tribute from their subjects. Religious obligations might also entail payment of tribute or sacrifices of some kind. Thus in many societies there was a requirement for a means of payment for blood-money, bride-money, tax or tribute and this gave a great impetus to the spread of money.

PRIMITIVE FORMS OF MONEY

Manillas were ornamental metallic objects worn as jewelry in West Africa and used as money as recently as 1949. They were an ostentatious form of ornamentation, their value in that role being a prime reason for their acceptability as money.

Wampum's use as money in North America undoubtedly came about as extension of its desirability for ornamentation. Precious metals have had ornamental uses throughout history, and that could be one reason why they were adopted for use as money in many ancient societies and civilizations.

In Fijian society, gifts of whales' teeth were (and in certain cases still are) a significant feature of certain ceremonies. One of their uses was a bride-money, with a symbolic meaning similar to that of an engagement ring in Western society.

The religious use of cattle for sacrifices probably preceded their adoption for more general monetary purposes. For sacrifice quality - 'without spot or blemish' - was important, but for monetary purposes quantity was of more significance since cattle, like coins, can be counted.

The Kirgizhes of the Russian steppes used horses as their main monetary unit, with sheep as a subsidiary unit. Small change was given in lambskins.

THE INVENTION OF BANKING AND COINAGE

The invention of banking preceded that of coinage. Banking originated in ancient Mesopotamia where the royal palaces and temples provided secure places for the safe-keeping of grain and other commodities. In Egypt too, the centralization of harvests in state warehouses also led to the development of a system of banking.

Many primitive forms of money were counted just like coins. Cowrie shells, obtained from some islands in the I Indian Ocean, were a very widely used primitive form of money - in fact they were still in use in some parts of the  world (such as Nigeria) within living memory. So important a role did the cowrie play as money in ancient China that its pictograph was adopted in their written language for 'money'. Thus it is not surprising that among the earliest countable metallic money or ‘coins’ were 'cowries' made of bronze or copper, in China.

The use of toll-coins developed in the West. The ancient Greeks used iron nails as coins, while Julius Caesar regarded the fact that the ancient Britons used sword blades as coins as a sign of their backwardness.

As economies developed, money was used more and more for ordinary trade aid tended to consist of metals, although cowrie shells were used for a long time in Africa. Coinage was probably invented in ancient China and reinvented (ca 700 B.C.) by the Lydians in what is now Turkey. Paper currency was also invented in China, at least as early as the 11 th century. Ancient Babylon had a highly developed monetary system with banks and credit, as did ancient Greece and Rome. For reasons not well understood, in early medieval Europe the money economy went into a decline and barter reemerged. During the 9th century, however, the European economy started to become monetized again.

NOTEWORTHY POINTS REGARDING THE ORIGINS OF MONEY

• Money did not have a single origin but developed independently in many different parts of the world.

• Many factors contributed to its development, and if evidence of what anthropologists have learned about primitive money is anything to go by, economic factors were not the most important.

• Money performs a variety of functions, and the functions performed by the earliest types were probably fairly restricted initially, and would not necessarily have been the same in all societies.

• Money is fungible: there is a tendency for older forms to take on new roles and for new forms to be developed which take on old roles.

MODERN MONEY SYSTEM

The control of money is one of the rights and responsibilities of national governments. The government selects the money unit. Then it defines the money unit as a certain weight of metal of specified fineness. It decides which money has the power of legal tender. Legal tender is money which can be offered and accepted for the payment of debts. The government then issues coins and paper money. It holds the metal which the paper currency represents, and regulates the banks in which people have deposits.

A country's monetary system is on a basis of monetarism if one metal, such as gold, is selected as the basic money. Bimetallism exists when two metals, such as gold and silver, are used as standard money. Most countries have experimented with bimetallism at one time or another. It was in effect in the United States from the late 1700's to 1873. But the value of one metal in terms of another varies in the open market. Sometimes the market ratio differs from that set up by the government. Then people begin to hoard the more valuable coins, leaving the less valuable metal in circulation. In reality the country is using only one metal.

Countries which define their money units in terms of gold, and which comply with certain requirements, are said to be on gold standard. The first requirement of the gold standard is to give the monetary unit a definite weight and fitness of gold. That is, it must sell or exchange gold for all other kinds of money, when presented. It also must buy gold at a fixed price.

Most governments own their nations' monetary gold stock. Gold is needed as reserves for central banks, and as means of international payments when other forms of money are not acceptable. The monetary system in most countries today is based on the gold standard.

Most countries base their monetary systems on the decimal system. For example, the German mark is divided into 100 pfennigs. Great Britain is the outstanding example of a country whose money is not based on the decimal system. The pound sterling, the British monetary unit, is divided into 20 shillings, each of which is divided into 12 pence.

      Taxation and Tax System

Taxation is the process by which the people pay the expenses of carrying on the government. Taxation is as old as government. Even the earliest and simplest societies needed some method of maintaining order and providing for justice, and those services could not be provided without cost.

Many kinds of taxes have been used and are being used throughout the world. The main taxes can be divided into those paid on income and capital, called "direct" taxes and those paid when money is spent, called "indirect" taxes. Income tax, in effect, redistributes wealth from the rich toward the poor (via social programs). It is a fairly simple tax to collect, as many employers pay the tax directly for the employees, deducting it from the salary before it is paid. However, it is generally a progressive tax: more is paid as income rises. This may become a drawback if there is no incentive to work harder because people may feel that they earn relatively less and pay more tax. If the rates of a tax should be lower when applied to a larger sum, the tax would be called regressive.

A tax is called proportional if the rate of taxation remains the same, whether it is applied to a small sum or a very large one. The amount of tax paid is proportional to the sum to which the tax is applied, because the rate is a constant flat rate. The tax on houses and farms is an example of a proportional tax because the rate is the same whether the house or farm is large or small.

Indirect taxes are paid on goods and services. The taxes are paid by the shops or manufactures, but then passed on to the consumers in the form of higher prices. In the United Kingdom, for example, the Value Added Tax or VAT is the most important indirect tax. The advantage of this tax is that it is directly in line with inflation. If the prices rise, so does the tax. However, the burden of this tax falls more heavily on the less well off.

Taxes also may be identified according to the base on which they are applied. For example, the property tax is levied on both land and buildings (real estate), and personal property. The inheritance tax is placed on the value of property a person inherits. The estate tax is placed on an estate before it is divided among the heirs. Sales tax, levied on sales, may apply either to all kinds of sales or only to certain kinds. If sales taxes are placed on luxury goods they are called luxury taxes and generally represent a high rate of taxation.

Excise taxes are those placed on a specific commodity, or thing, by the government. Tobacco and liquor taxes are excise taxes. Customs duties or tariffs are taxes placed on the importation of goods from outside the country. A license tax is one placed on the right to do something, as for example, to sell liquor, tobacco; to get married; to own a dog; to go hunting or fishing.

Countries vary in the balance of their taxation: some rely more on income taxes, while others gain a larger proportion from indirect taxation. However, a balance is generally thought to be the fairest system. There are some other principles of taxation. Everyone agrees that the tax system should be simple. Both those who pay the taxes and those who collect them should be able to understand the tax laws. The system should be stable so that the taxpayer knew in advance that he must pау the tax to be able to save money for it. And it should be possible to expand the tax system to collect more money hi periods of emergency, when the government must spend more money and to reduce the amount of taxes in normal times, when government expenditures are at minimum. This is called the principle of elasticity.

The government оf a country needs to raise taxes in order to provide goods and services that will be shared by consumers. Defense spending is one of the main items in this category. Governments maintain armed forces and spend money on such costly items as aircraft carriers and tanks. Law enforcement is another priority for the government. In addition, other services such as health and education would only be affordable to the rich if the government did not provide them.

Another part of governmental spending is allocated to caring for those who do not have an income. The very poor, the unemployed, and dependent children are provided for out of taxation.

The countries with the lowest tax in the world are: Bahrain, Brunei, Kuwait, and Qatar (where there is no tax at all). The highest taxation rate is in Norway. Some people pay more than 100% of their taxable income. The highest recorded personal tax demand is one for $ 336 million on the estate of Howard Hughes.

Department                        Public                        Social                        Agriculture

Expenses                        Works                        Security

                                                                                Medicare

Roads and                Where Your Tax Money Goes                Police                

Highways                                                                        Fire

Buildings                        Education                Defense                Charity

        International Trade

Importing and exporting ire two aspects of foreign trade: a country spends money on goods it imports and gains money through its exports. Valuable though foreign trade is for keeping domestic prices down by creating competition at home and providing large markets abroad, governments may have to put restrictions on it, which they usually do by subjecting imports to customs duties or by restricting some types of exports.

To get an idea of how much trade takes place, we can count the total value of exports by all countries or the total value of imports. They must be exactly the same. And to count both imports and exports would be to count j every transaction twice.

World trade has expanded very rapidly since 1950, at an average annual rate of 8 percent and reached the level of 1054 billion pounds in 1985.

Different goods arc being internationally traded: primary commodities (agricultural commodities, minerals, fuels) and manufactured or processed commodities (chemicals, steel, cart, etc.). The share of manufactures and of fuels in world trade rose sharply during the last decades.  

A lot of companies are involved in the international trade. Large firms have their own import and export departments, but both large and small firms deal with clearing and forwarding agents who handle all the details of transporting cargo.  

Terms of Contract

The costs of transporting goods from one country to another are large. There are the cost of packing the goods, freight - the charge made by shipping companies for transport, duty or tax and insurance to name but a few. In international trade a seller will charge different prices according to the services he provides to the buyer. If the buyer collects the goods from the seller's address, the price will be much lower than if the seller delivers to the buyer's address.

Before an importer and exporter sign a contract, they must decide who is going to pay what. Incoterms are a set of international rules published by the International Chamber of Commerce in Paris for the interpretation of the most commonly used terms in foreign trade. The aim is to avoid disagreements resulting from differences in trading practices in various countries by describing clearly the duties of the seller and the buyer.

The terms are grouped in four separate categories:

E terms: the seller makes the goods available to the buyer at the seller's premises and that is all. Ex Works (EXW) means that the buyer bears the full cost and risk involved in transporting the goods to their destination.

F terms: the seller has to deliver the goods to the carrier appointed by the buyer. The main carriage is paid by the buyer. FCA or FRC (Free Carrier) means that the seller fulfills his obligation when the goods (cleared for export) are handed over to the carrier named by the purchaser. In the case of railroad transport, delivery is completed when the goods have been loaded. For sea transport, delivery is complete when the seller has taken the goods to the transport terminal. If the terms of the contract are FOR (Free on Rail), then the seller will only pay for the goods to be transported to a named railway station. FOB (Free on Board) means all costs up to loading the goods on board a ship.

С terms: the seller pays for carriage, but does not accept liability for loss or damage after shipment and dispatch. CIF (Cost, Insurance and Freight) usually means that the seller will pay until the goods have been delivered to a port in the buyer's country, including arrangements and payment for marine insurance for any risks during the transit to the named port of destination. CFR or C&F(Cost and Freight) price includes all costs except insurance up to the port of destination.

D terms: the seller bears all the costs and risks in shipping goods to the country of destination. The examples of this group are: DAF (Delivered at Frontier) - the seller's obligations are fulfilled when the goods have arrived at the frontier; DDU (Delivered Duty Unpaid); DDP (Delivered Duty Paid) - in this case the buyers do not have to pay anything more for transport and insurance; it represents the seller's maximum obligation as if all the expenses are incurred by him until the goods arrive at the destination.

Methods of Payment in International Trade

In international trade buyers and sellers may be thousands of kilometers apart, may not know each other's reputation, goods may take months to arrive, and there are problems caused by different legal systems and currencies. There are methods of payment which help to overcome these problems of time, distance and mistrust.

Open Account Trading

The exporter, when he receives an order, sends the goods and the invoice to the importer. When he receives the goods, the importer pays the exporter by transferring money to the exporter's bank account. An exporter will only do business in this way with longstanding and trustworthy customers. An exporter is unlikely to offer open account trading to a new customer. If the importer simply does not pay, there is little the exporter can do about it without going to a lot of trouble and inconvenience. Of course, he would have to take legal action, but in foreign country it is likely to be both expensive and time-consuming. However, this is a cheap and simple payment system for companies that have a good trading relationship.

Bills Exchange

Bills of exchange have been in use for hundreds of years. They enable the importer to receive and possibly sell the goods before he has to pay for them. They allow the exporter to be paid for the goods as soon as he has sent them to the importer. There are three parties to a bill. The drawer – the company that prepares the bill and is owed money, that is the seller of the goods. His signature is on the bill. The drawee – the company to whom the bill is sent and who will pay, that is, the buyer of the goods. He accepts the bill by signing it Banks also accept bills on behalf of their customers. The payee – the company to whom payment is made. Usually the same as drawer.

If the company does not want to wait the number of days mentioned in the bill, it can sell the bill at a discount to a specialized bank. It will receive slightly less than the full amount immediately, and the bank will keep the bill until it is time to be paid in full, or sell it to another bank.

Documentary Collections

In this system of payment the documents proving ownership of the goods are given to the importer when he pays the Bill of Exchange. This is called Documents against Payment. Alternatively, the documents are handed over when the importer accepts the Bill of Exchange, that is he agrees to pay after particular number of days. This is called Documents against Acceptance. The exporter uses a bank in the importer's country to make these arrangements.

Documentary Credits

Bills of Exchange are not entirely safe from the exporter's point of view because it is possible for the importer to refuse to pay. Because of this, the Documentary Credit system has developed. In this system, a bank guarantees to pay the exporter if the importer does not pay. In this type of transactions, Bill of Exchange are drawn on a bank.

Documentary Credits (or Letters of Credit) are a very important method of payment in international trade. They are normally irrevocable which means that they cannot be changed or canceled without the agreement of all parties. There are four of them:

• the buyer or importer,

• the importer's bank (the issuing bank),

• the seller or exporter,

• the exporter's bank (the advising or confirming bank).

At first, the importer and exporter must negotiate and agree on a sales contract. Then the importer begins the Documentary Credit process by asking his bank to open a Documentary Credit in favor of the exporter. By agreeing to open the credit, the importer's bank guarantees to pay the exporter if the importer cannot or will not pay.

Next, the importer's bank (the issuing bank) sends details of the Documentary Credit to the exporter's bank. It may either simply pass on the details to the exporter, in which case it is an advising bank, or add its own guarantee to the credit, in which case it is a confirming bank. If the credit is confirmed, the transaction is very safe for the exporter, because two banks have promised to pay.

The next stage is for the exporter to prepare the documents which are named in the Documentary Credit, for example:

- Bill of Lading – a document signed by a ship's Master to say that he has received the cargo listed in the above document on board of his vessel for this voyage;

- Consular Invoice – a document which is certified in the exporting country by the consulate of the country of destination;

- Certificate of Insurance.

After dispatching the goods, the exporter takes the documents to his bank, which checks them and if they are in order the confirming bank pays the exporter, or accepts a Bill of Exchange.

The confirming bank sends the documents to the importer's bank, the issuing bank which checks them and sends the money to the confirming bank. The importer must pay his bank in order to get the documents. Without them the importer cannot collect the goods.

The final stage is for the importer to use the documents, which prove his ownership of the goods, to collect the goods when they arrive in port.

Invisible Trade

We can see things that are visible, so in visible things cannot be seen. Exporting cars from England or importing tea from China is known as visible trade. It is easy to record.

A comparison of total visible exports and total visible imports – the difference between the amount the country spends on imports and the amount it receives for export – gives us the Balance of Trade for a particular country. The Balance of Trade is favorable for the country if there is a surplus – that means that the volume of exports exceeds the volume of goods imported. If imports are higher than exports, The Balance of Trade would be unfavorable, there would be a deficit.

But there are many things which cause debts between countries, which are difficult to record. These are called invisible trade.

As well as trade in tangible goods, there is also buying and selling of the financial and shipping services needed for international trade. This trade, which is in services, not tangible goods, is known as invisible trade. There are four main areas of this kind of trade:

Banking: money paid to the banks by foreign companies for banking services;

Insurance: money paid to insurance companies by foreign companies;

Shipping: money paid for shipping services is an important source of invisible earnings for countries with large shipping fleets, such as Norway and Greece;

Tourism: the money spent by tourists counts as an export for country where the money is spent. A lot of tourists go on holiday abroad. They are staying in a hotel, purchasing meals, hiring a car. The money they are spending is invisible because they are buying services, rather than goods.

Exchange Rates

Importers and exporters rarely use the same currency, so when goods are imported or exported, money has to be changed from one currency to another.

There are two ways of doing this. The exporter can be paid in the importer’s currency, then change it on the international currency market. Or he can ask to be paid in his own currency. Then the importer will have to sell his currency and purchase the exporter’s. Their banks will usually buy and sell the currencies for them.

The amount paid in one currency for another is known as exchange rate. Exchange rates can change from day to day with currencies becoming weaker or stronger.

The international currency market is operated by international banks and exchange brokers, using telephones, telex and cables. They can quote buying and selling rates for all foreign currencies, both for immediate purchase and sale, and for a future date.

Containers

Using containers is the simple way of transporting goods. While traveling by train and ship, the goods will not be disturbed before they reach their buyer. The container may be simply lifted from one form of transport to another. Goods need very little packing before going into а container. Things that would usually take two days to pack can be put into a container in only an hour. There are not many breakages either, so all the goods will arrive safely.

Special containers are built to fit the airplane. Some airplane containers are collapsible. When they are empty, they fold up to save space. There are specially built containers to carry goods at very low temperatures. More and more companies are buying their own containers, designed for their goods.

Choose the words and expressions to complete the sentences.

exporting                         freight                importing

destination                        DDP                       Bill of Lading

Letter of Credit                 G&F  

1. Buying goods from another country is … them.

2. Selling goods outside the seller's country is … them.

3. The charge made for carrying goods from one country to another is the … charge.

4. If the buyers pay the … price, they do not have to pay anything more for transport and insurance.

5. If the price is … ,the buyers must arrange insurance themselves.

6. The shipmaster signs … to say that he has received the cargo on board of his vessel.

7. A document by which a buyer undertakes to pay a seller through a bank if the seller delivers the goods according to the terms of contract, it may be documentary or irrevocable and is called … .

8. The goods are cleared through Customs on reaching their … .

Answers:

1. importing; 2. exporting; 3. freight; 4. DDP; 5. C&F; 6. Bill of Loading; 7. Letter of Credit; 8. destination.

Cross-Cultural Contacts

If you are doing business abroad, it is useful to know about local customs and traditions before you start. Mistakes can be embarrassing and, in some cases, expensive. Now you have a chance to test your knowledge of social and cultural customs around the world. Suggest what went wrong in these cases.

1. A soap powder advertisement had a picture of dirty clothes on the left, a box of soap in the middle and clean clothes on the right. The soap was not sold well in the Middle East.

2. Several European and American firms could not sell their products in Dubai when they ran their advertising campaign in Arabic.

3. In Saudi Arabia, newspaper adverts for an airline showed an attractive hostess serving champagne to happy passengers. A lot of clients cancelled their flight reservations.

4. A businessman from Europe presented some cutlery to his Latin American customer, a bottle of wine to the client from Saudi Arabia and a clock to his Chinese partner. They refused to sign a contract after that.

5. Business is not going well on Fridays in Moslem countries.

6. An airline company called itself Emu, after the Australian bird. But Australians did not want to use the airline.

7. An American manufacturer launched his product in Japan packed in boxes of four, but then had to change the pack size.

8. A company had problems when it tried to introduce instant coffee to the French market.

9. American car manufactures did not succeed in selling General Motor's "Nova* in Spain.

10. A toothpaste manufacturer could not sell his product well in parts of South East Asia.

Now you may check your knowledge of international customs reading the reasons for the above problems.

1. The advertisers forgot that in that part of the world, people usually read from right to left.

2. 90% of the population came from India, Pakistan, Iran. So Arabic was the wrong language.

3. Unveiled women do not mix with men in Saudi Arabia and alcohol is illegal.

4. You must not give cutlery in Latin America because it suggests that you I want to cut off the relationship. You must not give food or drink in Saudi Arabia because it suggests you think your hosts are not offering you enough to eat or drink. You must not give a clock in China because the Chinese word for "clock" is similar to the word for “funeral".

5. Offices are usually closed on Fridays in Moslem countries for religious reasons.

6. The emu cannot fly.

7. In Japanese the word for “four” sounds like the word for "death". Things are not sold well packed in fours. ]

8. Making "real" coffee was an important part of the French way of life.

9. "Nova" means "it does not work" in Spanish.

10. The people in this area do not want white teeth. They think darkly-stained teeth are beautiful and they try to blacken them.

                Banking

What Is a Bank?

A bank is a business. But unlike some businesses, banks do not manufacture products or extract natural resources from the earth. Banks sell services - financial services such as car loans, home mortgage loans, business loans, checking accounts, and credit card services.

Some people go to the bank in search of a safe place to keep their money. Others go to the bank seeking money for loans to buy houses and cars, start businesses, expand farms, or do any of the other things that require borrowing money.

Where do banks get the money to lend? They get it from the people who open saving and other types of accounts. Banks act as go-betweens for people who save and people who need to borrow. If savers did not put their money in banks, the banks would have little or no money to lend.

Your savings are combined with everyone else's savings to form a big pool of money. The bank uses that pool of money to make loans. The money does not belong to the bank's president, board of directors, or stockholders. It belongs to the depositors. That's why bankers have a special obligation not to take big risks when they make loans.

How Did Banking Begin?

No one knows who started the world's first bank, but it is safe to say that banking has its roots in the early trading civilization of the Mediterranean. Without trade there would have been little need to establish banks, and without banks there would have been far less money to finance trading ventures.

Imagine for a moment that you are a merchant in ancient Greece or Phoenicia. You make your living by sailing to distant ports with boatloads of olive oil and spices. You do not grow the olives and spices yourself; you buy them from growers or other merchants. If all goes well, you will be paid for your cargo when you reach your destination, but before you set sail you must have money to outfit your ship.

You find it by seeking out people who have money sitting idle. They agree to put up the money for your cargo and supplies in exchange for a share of your profits when you return from your voyage... if you return.

The people with the idle money are among the world's first lenders and you are among the world's first borrowers. You complain that they are demanding too large a share of your profits. They reply that your voyage is perilous and they run a risk of losing their entire investment. Lenders and borrowers have carried on this debate ever since.

Today, most people who want to borrow money go to banks rather than to wealthy individuals. But the basic concepts 6tborrowing and lending have not really changed People do not let you have their money for nothing.

It is risky to lend money. There is no guarantee that a lender will get the money back, even if the borrower is an old friend. So why lend money? Why take the risk? Because lending presents an opportunity to make even more money. People will often take a financial risk if they believe there is a good chance making more money.

For example, if a bank lends $50,000 to a borrower, the bank is not satisfied to just get its $50,000 back. In order to make a profit, the bank charges interest on the loan.

Interest is the price borrowers pay for using someone else’s money. If a loan seems risky, the lender will charge more interest to offset the risk. (If you take a bigger chance, you want a bigger payoff.)

Of course, the opportunity to earn lots of interest won’t mean much if a borrower fails to repay a loan. That is why banks often refuse to make loans that seem too risky.

Banks also use interest to attract savers. After all, people who have extra money do hot have to put it in the bank. They have lots of choices:    

■ They can bury it in. the backyard or stuff it in a mattress. But if they do that the money will just sit there. It won't increase in value. It won't earn interest.

■ They can buy land or invest in real estate. But real estate can tie up an investor's money because buildings and land can take a long time to sell if the market is weak. And there is always the risk of real estate dropping in value.

■ They can invest in the stock market. But if the stock market drops, investors can lose their money.

■ They can buy gold or invest in collectibles, but gold and collectibles fluctuate in value. Who knows what the value will be when it is time to sell? (In 1980, gold sold for $800 an ounce. By 1983, the price had sunk below $400.)

Or they can put their money in a bank.

Not only will the money be safe, it will also earn interest. In addition, many types of bank accounts offer depositors the added advantage of being able to get at their money quickly.

Who Owns a Bank?

The owners are the shareholders. At the outset they provide the necessary capital. All banks are organized on the joint stock principle and are registered public companies.

The Chairman and the Board of Directors are elected by the ordinary shareholders at the Annual General Meeting and are responsible for the efficient management of the bank. The Board is concerned with the overall policy of the bank and the major decisions which put that policy into effect.

The Board will appoint a Managing Director who is directly responsible to them and a member of the Board. They will also appoint the most senior executives who in turn appoint the rest of die staff who will be responsible in different capacities for the day to day running of the bank.

At the end of each business year the Directors recommend and die Annual General Meeting decides how much of the profit should be distributed to the shareholders as dividend, and how much should be retained to the business. A bank publishes its Report and Accounts and sends it to every shareholder, from which they can easily determine the total profits the bank has earned and how much is available for distribution.

Types of Banks     

Not all the banks arc exactly the same, there are commercial banks, saving banks, saving and loan associations, cooperative banks, and credit unions. They now offer manу of the same services, but once upon a time they were very different from one another.

Commercial banks originally concentrated on meeting the needs of business and industry. They served as places where a business could safely deposit its funds or borrow money when necessary. Many commercial banks also made loans and offered accounts to individual customers, but they put most of their effort into serving business (commercial) customers.

Saving banks, saving and loan associations, cooperative banks, and credit unions are classified as thrift institutions or "thrifts" rather than banks. Originally, they concentrated on serving people whose banking needs were ignored or unmet by commercial banks.

The first saving banks were founded in early 1800s in the USA to give blue-collar workers, clerks, and domestic workers a secure place to save for a “rainy day”. Saving banks were usually started by public-spirited citizens who wanted to encourage the “thrift habit” among people who did not earn much money.

        Saving and loan associations and cooperative banks were first established during the 1800s to help factory workers and other wage earners become homeowners. They accepted saving deposits and used the money to make loans to homebuyers. Most of the loans went to people who did not make enough money to be welcome at traditional banks.

Credit Unions began as a 19th century solution to the emergency needs of people who were unable to borrow money from traditional lenders. Before the opening of credit unions, ordinary citizens had no place to turn when they faced unexpected home repairs, medical expenses, or other emergencies. Credit unions were started by people who shared a common bond such as working in the same factory, belonging to the same house of worship, or farming in the same community. Members pooled their savings and used the money to make small loans to one another.

Although there are still differences between banks and thrifts, they now offer many of the same banking services to their customers. Most commercial banks now compete to make car loans, many thrifts have begun to make commercial loans, and some credit unions make loans to homebuyers.

How Do I Choose a bank?    

For starters you should shop around to find out which banks offer the most competitive services. Some banks charge a monthly fee if your account falls below a certain level, and sometimes that fee can be higher than the interest your account earns. You do not want that. These are other things you might want to consider:

■ Does your bank pay its depositors a competitive interest rate?

■ Is the bank in a convenient location and are its business hours convenient for you?

■ Is your deposit insured by the government?

■ Is the bank a good corporate citizen? Does it invest in your neighborhood?

At last, but certainly not least, does your bank provide courteous and efficient service? Before you open an account, ask a few people if they are happy with their bank. All banks are not the same. It is up to you to do some comparison shopping before you open an account.

What Types of Accounts Do Banks Offer?

People use banks for different purposes. Some have extra money to save; others need to borrow. Some need to keep their household finances in order; others need to meet a business payroll. Banks help their customers meet those needs by offering a variety of accounts.

Saving accounts are for people who want to keep their money in a safe place and earn interest at the same time. You do sot need a lot of money to open a saving account, and you can withdraw your money at

anytime.

Checking accounts or current accounts offer safety and convenience. You keep your money in a checking account and write a check when you want to pay а bill or transfer some of your money to someone else. If your checkbook is lost or stolen, all you need to do is close your account and open a new one so that nobody can use your old checks. (When cash is lost or stolen, you rarely see it again. It's gone.)

Certificates of deposits are savings deposits that require customers to keep a certain amount of money in the bank for a fixed period of time (example: $ 1,000 for a year). As a rule, the rate of interest your money earns is higher if you agree to keep your money on deposit for a longer period of time. That is because banks can plan on using your money for a longer period of time.

Finally, banks do not always call their accounts by the same names. Often, they choose distinctive names in hope of attracting customers. But sometimes there can be a real difference between one bank's accounts and another's, so shop around.

What Happens to Your Money after You Deposit it in Your Bank Account?

What happens to a ten-dollar bill after you deposit it in your savings account? Does the bank teller take it to a vault and put it into a separate compartment or cubbyhole marked with your name and account number? No.

The bank begins by adding ten dollars to the amount that is already in your account (your existing balance). Your ten-dollar deposit and your new balance are then recorded in your bankbook and in the bank's computer system. The ten-dollar bill you deposit is mixed in with all the other cash your bank receives that day.

When you and other customers deposit money in a bank, the bank puts most of it to work. Part of the money is set aside and held in reserve, but much of the rest is loaned to people who need to borrow money in order to buy houses and cars, start or expand businesses, buy farm equipment or plant crops, or do any of the other things that require people to borrow money.

Of course banks do not lend money just to provide a service. They do it to make money. Hoe is how it works.

When you keep your savings in a bank, the bank pays you extra money, which is called interest. The interest is added to your account on a regular basis – usually once a month or once every three months.

Let's say a bank pays its depositors five percent a year interest on their savings. In simple terms, that means if you keep $100 in your saving account the bank will add five dollars to your account balance during the course of the year.

But there is another side to interest. When someone borrows money from a bank, the bank charges interest, and it changes borrowers a higher rate than it pays savers. For example, it might pay savers 5 percent and charge borrowers 10 percent. The difference, 10 percent minus 5 percent, goes to the bank. Charging interest on loans is one of the main ways for a bank to make money.

The rate of interest a bank charges borrowers largely depends on two things:

■ How much money people want to borrow, and              

■ How much money banks have available to lend.

If a bank has plenty of money to lend and the demand to borrow money is not particularly strong, interest rate will tend to be low in order to attract customers. But when banks have a smaller amount of money to lend and the demand to borrow is fairly strong, interest rates will rise. In other words, interest is the price people pay when they borrow money;

When it comes to paying interest on saving deposits, one bank usually pays much the same rate as another. The rate that one bank pays needs to be just high enough to attract depositors. If a bank is offering a much better (higher) rate than most other banks, try to find out why. And remember the old adage: if something sounds too good to be true, it probably is.    

What Happens When Someone Applies for a Loan?

                        When you take out a loan to buy a car, you pay interest. When you take out a loan to pay for the college, you pay interest. A mortgage, a long-term loan to buy a house, works the same way.

You should never borrow money unless you are reasonably certain you can pay it back. Two bad things happen when you fail to pay back a loan. First, the bank will repossess, or take back, whatever it is that you bought with the loan. Second, you will have a bad credit rating. You will have a hard time borrowing money in the future because you have a record of not paying back what you borrow.

There is no such thing as "easy payments". Paying back a loan is never easy. Many families in western countries pay 20 percent to 40 percent or more of their income just for interest. On the other hand, most people have to buy some things on credit. Very few people can afford to buy a house or a new car with cash. People often borrow for large purchases. If they waited until they had enough cash, they probably would never own a home or a new car of their own. Credit is needed, but so is a little common sense.

Your first step is to decide on a bank. It is a good idea to shop around for a bank that offers the best deal, including the best (lowest) interest rate.

Compound interest does some amazing things to a small amount of money. Suppose you put $ 100 in the bank and leave it there. See what happens at different interest rates. At 4 percent, it takes nearly 20 years for your money to double. But look what happens at 8 percent. At this rate, it takes less than ten years for your money to double. At 12 percent, it takes less than five years for your money to double. After 20 years at 16 percent your $ 100 has become $ 964,63.

What if you borrowed the $ 100 at 16 percent interest? After five years, you would have to pay back $ 210,03. If you waited ten years, you would have to pay back $ 441,14. And after 20years, your bill would be 1946,08!

Most people do not borrow money this way. They pay back a little at a time, which helps to cut down on the effect of compound interest. Still, it is important to be aware of the effect of high interest rates. Knowing about interest rates is very important when you buy a home. Home mortgages can last up to 30 years. Suppose you want a house worth $ 90,000. Perhaps you would pay $ 20,000 a down payment. Then you would take out a mortgage for $ 70,000 at 10 percent for 30 years. By the time you finished paying off your mortgage, you would have given the bank more than $ 200,000.

While applying for a loan in addition to routine personal information such as your name, address, telephone number, a loan application also asks for information on how much money you earn, how long you have worked at your current job, and how much money you already owe on credit card bills and other debts.

To be a borrower you must be a customer of the bank because the money will be lent to you through a bank account. There are two ways in which you may borrow. The first, and easy, is to spend more money than you have in your current account – to overdraw. The second, and the normal way of borrowing larger amounts or for a long period of time is the loan.

If a manager permits an overdraft on current account he is likely to set a limit to the size of the overdraft and may stipulate a date by which the account is back in credit. Businesses whose payments and receipts are often irregular will frequently need to use overdraft facilities and they are often granted to private customers as well, particularly when the manager knows that regular payments are made directly into the account.

If a loan is granted, it will be a fixed sum immediately available for a fixed period of time.

People in the bank's loan department evaluate your application and try to decide if you are a "good risk". Before they lend you money they want to be as certain as possible that you will be able to pay them back. Do you make enough money to keep up with your loan payments? Have you always paid your debts on time or do you have a history of falling behind on your bills? To answer these questions, lenders rely heavily on credit bureaus and credit reports. In the case of a business the manager may well want to see well prepared, relevant documents such as profit and loss accounts and balance sheets for the most recent years. He would also ask about the expected return from the use of the money and want to see some figures upon which you have based your calculations.

Inflation

When the costs of a favorite product goes up, people often blame inflation. But, is it inflation when the football club increases ticket price by a dollar? Is it inflation if the electric bill jumps by 15 percent? In each case, the answer is no.

What is inflation?

A rise in the cost of one or two or even three items is not inflation. Inflation is a rise in the overall level of prices. The cost of living, which is the price of most goods and services, has to be going up, not just the cost of one thing. Likewise, deflation is not just a drop in gas prices. It is a drop in the overall cost of goods and services.

What affects prices?

Seasonal supply can affect prices. Strawberries are in greater supply in June than in December. For this reason, the price is lower in June and higher in December. Demand can also affect prices. A successful ball team can charge more for tickets than a losing team.

Which prices rise with inflation?

To have inflation, almost all the prices have to go up. There is no inflation if half the prices go up and half the prices go down by the same amount. You have inflation if the cost of food is going up and the cost of entertainment is going up and the cost of heating your home is going up.

Naturally, most people do not like inflation. However, small increases in inflation of about 3 or 4 percent a year do not hurt too much. A little inflation is often a sing of a healthy, growing economy. Deflation, on the other hand, seems good. But in almost every case, deflation comes only where there is no growth and unemployment is high.

While a little inflation may be all right, too much inflation clearly is not. High inflation can destroy the value of your earnings. Runaway, or very high, inflation can destroy the economy of a nation.

What is the Consumer Price Index?

The most popular measure of inflation is the Consumer Price Index. The Consumer Price Index (CPI) measures how the cost of goods and services changes. The CPI measures changes in the cost of such things as food, clothing, housing, medicine and transportation. The change is stated as a percent. If the CPI shows 10 percent yearly increase, you will need 1100 rubles to buy what 1000 rubles bought a year before.

What are the two kinds of inflation?

There are two basic kinds of inflation. One is called demand-pull, or buyer's inflation. The other is called cost-push, or seller's inflation.

What is demand-pull inflation?

Demand-pull inflation occurs when demand goes up faster than supply. This causes an inflationary gap. The only way to fill the gap is to raise prices. People who scalp, or sell illegally, tickets at sporting events or pop concerts know this very well. Millions of people would like to see the Super Bowl in person. But no stadium has that much seating. There is a huge demand with a limited supply of tickets. That is why $60 tickets are scalped for $500 or more. This is the way demand-pull works.

What is cost-push inflation?

Cost-push inflation is a different story. In this case, inflation comes from supply. The cost of making a product or providing a service goes up. If auto workers get a raise, the price of cars goes up. The demand for cars does not cause the price increase. The demand stays more or less the same. However, the labor costs of making cars has gone up, so the price of cars has to go up. This is the way cost-push inflation works.

Every wage increase does not cause cost-push inflation. If a worker gets a 10 percent raise for being 10 percent more productive, there is no inflation. But if the worker gets a 10 percent raise for doing the same thing, there is inflation. Assume that a worker who produces 100 units an hour gets a 10% raise. If the worker now produces 110 units an hour, there is no inflation. The raise is balanced by increased production. If production stays at 100 units an hour, there is a cost-push inflation.

Labor leaders often argue that workers need more pay to keep up with the cost of living. However, each round of increased wages means another round of increased prices. This is called a price-wage spiral. Prices go up. Then wages go up. So prices go up again, and so forth. That is one reason why inflation occurs almost every year.

Who is hurt by inflation?

Retired people living on pensions are hurt by inflation because they have fixed incomes. Their income does not rise with inflation. Government workers are hurt because their salaries do not keep up with inflation. People who keep their money in saving accounts at a bank are hurt. Their balances increase, but the buying power of the money decreases. What good is to earn 5.5 percent interest from a bank if the inflation rate is 15 percent? The only thing to do is to put your money where it will earn interest at least equal to the rate of inflation.

Are the banks hurt by inflation?

Banks are in the business of lending money. Banks charge interest for this service. The rate of this interest must be higher than the rate of inflation. Otherwise, the bank will lose money. Suppose the inflation rate is 2.5 percent and the bank charges 7.5 percent interest. In this case, the bank makes a 5 percent profit on loans.

Today, banks often use adjustable interest rates. When inflation goes up, the banks' interest rate also goes up. This protects the banks against inflation.

Who is helped by inflation?

Inflation does not hurt everyone equally. Inflation raises the value of land and homes. Owners benefit when their property values increase faster than the overall rate of inflation. Renters are not so lucky. They do not own what is increasing in value. In general, low-income people, who often rent, are hurt more by inflation than high-income people, who often own property.

People who owe money are sometimes helped by inflation. Suppose you borrow 1,000,000 rubles at 10 percent interest, and inflation shoots up to 15 percent. Inflation makes the ruble you are paying back worth less than the ruble you borrowed. In this case, the 5 percent loss for the bank is your" 5 percent gain.

Some young workers can also benefit from inflation. They are just beginning to climb up the salary or wage scale. They are more likely to get promotions or change jobs than older, more settled workers. As a result, their salaries or wages are more likely to keep pace with rising inflation. Compared to some older workers, young workers are getting richer. They are moving up while others are standing still. Inflation is not always bad for everyone. It hurts everyone in some way, but it can help certain people.

Market Economies

            The market economy is the result of millions of buying and selling decisions made by millions of individuals. No one runs the economy. It runs itself.                                                                                    

What Is a Market?                                                                                                                                                                                

Why do we call this kind of economy a market economy? Traditionally, a market is a place where people buy and sell things. An example is a farmers' market, where you can buy vegetables directly from farmers. But for economists, the word "market" means something slightly different. It refers to the actions of buying and selling, not just to the place where things are bought and sold. A market can exist even if the buyers and sellers never meet – for example, a mail-order business.

A market is made up of people and actions.

The people in a market are all the buyers and sellers of a product or service. The action of a market is buying and selling, that is, exchanging a product or

service for money.

A grocery store is a market. So is a shoe repair shop, a movie theater, or a

gas station. So are kids selling cookies at a bake sale. In each of these markets, buyers exchange money for a product or service.

The Beginning of Market Economies

The idea of a market economy started about 200 years ago, during the Industrial Revolution in 18th century in England. This was the time when goods began to be made in factories with large machines powered by steam or water, instead of being made by hand.

As individual inventors, industrialists, and entrepreneurs became wealthy, they also became more powerful in government. They were not satisfied with an economic system that was designed to benefit the nobles, kings, and landowners. They wanted an economic system that would benefit them.

Economic decisions in a Market Economy

Economic decisions in a pure market economy are made by buyers and sellers in the marketplace. Land and capital goods – factories, tools, etc. – are privately owned.

A market economy depends on a specialized industrialized society in which:

■ Most individuals cannot meet their own material needs.

■ People must work because they need money.

■ People meet most of their material needs by buying goods and services with money.

■ Buyers and sellers compete in the marketplace, each working for his or her own best interests.

The Flow of Money in a Market Economy

A market economy is really made up of two markets: a resource market and a product market. In each of these two markets, something is exchanged between producers and individuals.

In the resource market, the resources that producers need (labor, land, capital goods) are exchanged for money (wages, rent, interest, and profits). Individuals provide resources to producers. Producers in turn provide money to individuals. Producers pay:

■ wages in exchange for labor,

■ rent in exchange for land,

■ interest on borrowed money,

■ profits (or dividends) to individuals who invest money (such as in stocks) and thus become part-owners of the business.

In the product market, products and services are exchanged for money. Producers provide products and services to individuals. Individuals in turn provide money to producers in payment for the products and services

The resource and product markets are related.

■ Businesses use the resources (land, labor, and capital goods) that they buy from individuals to produce goods and services which they then sell to individuals.

■ Businesses use the money they receive in payment for these goods and services to pay individuals wages, rent, interest, and profits.

■ Individuals use the money they earn in wage, rent, interest, and profits to buy more goods and services.

Advantages and Disadvantages of a Market Economy

A market economy has a number of advantages:

■ Large number of people are involved in making economic decisions.

■ Individuals are free to decide on and work for their own best interests.

■ Producers are free to produce what they wish in the way they wish.

■ Individuals are encouraged to develop new ideas and technologies. This helps to create a wide variety of goods and services.

■ The economy is flexible and able to change to meet people's needs.

■ People are free to choose what type of work they wish to do.

■ Consumers are free to buy goods and services they choose. A market economy also has a number of disadvantages:

■ Individuals who are unable to work (those who are too young, too old, or too ill) have no way of meeting their own needs.

■ There is no guarantee that individuals will succeed in their business or work. Those who fail may suffer harsh consequences.

■ The needs of a society as a whole are often overlooked. If individuals work only for their own interests the goods of a society may suffer. Air and water pollution are the examples.

■ The economy is subject to ups and downs called business cycles. The down parts of the cycle hurt every one.

■ The market economy exploits labor.

               The Role of Competition in Business

Competition has been defined as the rivalry between two or more businesses seeking she same customers or markets. Two producers all want to meet as much of the customers' demand as they can. In many ways the demand for a product is like a huge pie. Each producer wants as big a slice of that pie as is possible. Of course, the greater their share, the smaller will be the share left for others.

Perfect Competition means that no one, buyer or seller, is able to control the price of a product. Prices are determined by competition in the marketplace. Perfect competition exists if:

■ Many producers are producing (or selling) the same product or service.

■ The products and services made by each producer are exactly the same.

■ Each producer is responsible for only a small portion of the total amount of the product offered for sale.

■ Many buyers want to buy the product or service.

■ All producers and buyers are free to make their own independent decisions about prices.

■ It is easy for anyone to enter or leave the market – that is, to begin producing the product or service.

■ There are no government restrictions or regulations in this market.

Some people believe that perfect competition is the ideal way for markets to operate. They believe that perfect competition is the ideal market structure. But perfect competition does not exist in the real world. The opposite of pure competition is a monopoly – that is control of a product or service by one producer or supplier. One producer has total control of the supply and the price of a certain item. In a monopoly:

■ Only one producer manufactures a certain product.

■ The producer controls the price of the product.

■ No other similar product or service is available for consumers to use as a substitute.

■ It is difficult or impossible for other companies to begin producing the same product.

        Even in monopoly, however, the law of demand influences prices. If prices are too high, consumers will buy (demand) less.

        Only a few industries are pure monopolies. Most are a combination of competition and monopoly, and fall into two major categories:

■ Monopolistic competition, and

■ Oligopoly.

Monopolistic Competition

Producers often create competition based on something besides price. They may change their products slightly in ways they hope will appeal to consumers. They may also charge a somewhat higher price based on the product's different features. In these ways, producers try to increase both sales and profits. Labels such as ‘'Taste the difference", "New and improved", "Gets clothes cleaner", "Our brand has more raisins" are designed to convince customers to buy a certain brand. This practice is called product differentiation. Product differentiation is the difference between competing products which may be real or imagined.

Sometimes there is no real difference between two products. Consumers are led to believe there is a difference through advertising.

Sometimes the difference is real but minor. By certain loyalty among customers to a certain brand name, a producer can charge a higher price for a product, even if the product is virtually the same as another producer's product.

Such non-price competition creates monopolistic competition. It has some of the same features as pure competition:

■ Many producers are producing (or selling) a product or service.

■ Each producer is responsible for only a small portion of the total amount of production in the industry.

■ Many buyers want to buy the product or service.

■ All producers and buyers are well informed about the product.

■ All producers and buyers are free to make their own independent decisions about prices.

■ It is easy for anyone to enter or leave the market.

■ There are few government restrictions or regulations in this market.

However, in monopolistic competition, all products are not exactly the same. Each producers product or service is different – or consumers believe it is different – from competing products or services.

Producers have more control over the price of their products in a monopolistic competition than in the pure competition. However, the law of demand also influences prices. If prices are too high, consumers will buy another product even if they believe it is not quite as good.

Oligopoly

Many industries are donimated by a few large producers. The automobile industry is a good example. This type of market structure is called an oligopoly – control by a few producers or suppliers. In an oligopoly:

■ Only a few producers make a product.

■ Each producer is responsible for a large portion of the total amount of production in the industry.

■ Each producer has more control over prices because fewer producers are competing.

■ It is difficult for new producers to enter the market because start-up costs are high or specialized knowledge is required.

When only a few producers control a particular industry, the actions of any one producer have a powerful effect on prices in the entire industry.

In some oligopolies, each producer sets its prices independently. This practice often results in an unstable market. Each producer is unsure of what the others will do. If one lowers prices, the others may feel that they have to do the same, whether they can afford to or not.

For example, if Ford cuts the prices of its cars, General Motors and Chrysler will also either have to cut their prices or lose sales. Such actions can result in a price war. Price wars are good for consumers. However, if prices drop too low and a producer loses too much money, the producer may go out of business. Some producers in oligopolies have made secret arrangements with each other to fix prices at a certain level rather than compete. Price-fixing, also called collusion, is illegal because it interferes with free competition. Producers who engage in price-fixing can be fined and sent to jail.

Often the smaller producers in an oligopoly will follow the pricing actions of the largest producer. The largest producer then becomes the price leader.

Most oligopolies prefer non-price competition. They use the same kinds of non-price competition that monopolistic competitors do. They advertise special features of their products or offer special services in order to attract consumers. In this way, each producer can attract a share of the market without risking the instability of price competition.

In a real sense, competition is a battle between winners and losers. The successful companies gain customers, sell products and have a chance to make profits. Losing companies suffer losses and sometimes are left bankrupt. That is why competition in business is tough and constant. The result of business failure can be loss of money and cam-age to personal pride. Many business executives would agree with a famous football coach, the late Vince Lombardi, who is supposed to have said, "Winning is not everything – it is the only thing."

But it is not only the business people who are the winners and losers in the game of competition. Consumers also win and lose because of competition. They win, or gain advantages, because competition gives consumers the following:

■ Wider choices of goods.

■ Improved quality of goods.

■ Greater supplies of goods.

■ Wider choices in the price of goods. Competition usually drives prices down.

■  Improved repair and maintenance services where such services are required.

These advantages provide part of the basis for the consumers’ demand in a market economy. Competition affects the supply and demand in a free enterprise system. However, competition can also present some disadvantages and opportunity cost problems. The possible disadvantages of competition are listed below. Can you think of the opportunity cost problems involved in each case?

■ Overinvestment by competing firms. Each company in an industry buys roughly the same kind of machinery and buildings. This can result in a capacity to produce that is greater than any possible demand.

■ Overproduction by competing firms who may make more goods than are needed to meet demand. This happens when rich company seeks to capture a large part of the market. Overproduction can reduce prices for consumers. But it also often means heavy losses for producers.

■ "Price wars" that benefit the consumers but hurt producers who cannot recover costs of production.

■ Reduction in quality as competing companies seek to cut costs.

■ False advertising and other improper business practices by companies seeking an advantage over competitors.

Competition is an important part of the free enterprise system. Yet it can have harmful effects for producers and consumers in some cases. There are several government agencies that seek to reduce or eliminate these harmful effects. They are designed to protect consumers and to encourage competition in the marketplace.

In spite of some disadvantages, competition is a very important part of any economic system. The advantages far outweigh the disadvantages. Consumers not only accept the idea of competition, but they also demand it. They like the many choices that exist in a competitive system. If service is bad or prices are high in one supermarket, consumers will start shopping in a competing supermarket. The local gas station cannot raise the price of gasoline much higher than the price being charged at the nearby competing gasoline outlets, in a sense, consumers vote with their money for the goods and services they like best. Competition assures customers of a better chance to get more goods at a better price than would be possible without competition.

It is only in certain areas that customers seem to accept the idea of monopoly rather than competition. These are the areas of public utilities such as electric service, water supply, telephone service, and mass transportation. Competition in these areas might be more expensive and wasteful and might lead to higher costs to consumers. The reason is that these industries involve very high freed costs for equipment and labor. If there were several telephone companies competing for the same customers, they would each have to spend billions of dollars. Each company would need its own expensive equipment and workers. Suppose half of the houses in a street bought water from one company and the rest of the homes bought water from another company. There would be two sets of water pipes underground. Many extra expenses and other duplications of effort would arise from this. Monopoly control might well be the best way to provide these services. But is it fair to give complete control to a single company? What is to prevent that company from raisins its prices at will? What guarantees are there that the company will meet requirements for service and safety? After all, if you are not happy with your electric company, what can you do about the problem? There usually is no competing electric company that will provide you with the needed service.

In many parts of the world, the problem is met by government ownership of such essential services as water, gas, and electricity supplies and telephone service and mass transportation. Or a single company is given a monopoly control of an essential service in a specific area. However, that control is subject to strict government control and regulation. This includes the setting of terms for providing service. It also includes the fixing of rates to be charged.

What Is Credit and How Is It Used?

In today's world we buy goods and services with cash or credit. Cash involves the exchange of money for goods and services. Credit involves the promise to pay at some future dale. Those who extend credit usually charge an amount of money, called interest, for this service. The main advantage of credit is that it makes it possible to buy more than would be possible, if only cash were used. That is why credit has been popular since ancient times. Today it is an important part of economic life. People make use of many types of credit. These include the following:

• Credit cards

• Charge accounts

• Bank loans

• Mortgages on property

• Public borrowings through notes and bonds.

CREDIT CARDS

Credit cards are used every day by millions of people. These cards are offered by banks, gasoline companies, stores, credit companies, and others. Holders of a credit card can use it only in places that accept that particular card.

Credit cards are made of plastic, and each card has its own identification number. When an item is bought, the seller makes an imprint of that number on a paper form. The sum involved and the names of the cardholder and the seller are also imprinted or written on the form. The completed form is then signed by the cardholder, who receives a copy. Other copies are kept by the seller. The seller later presents a copy of the form to the credit card company and receives payment. A percentage fee of a few percent is paid by the seller to the credit company for its service.

A sales record is collected on computers by the credit card company. This company sends a monthly bill to each cardholder. Interest is charged, if the cardholder does not pay the bill within a stated period of time. Some credit card companies also have a small yearly charge for cardholders.

Convenience and money safety are two reasons for the wide use of credit cards. The cardholder is protected in the event the card is lost or stolen. The cardholder must notify the company promptly of such loss. He or she is not held liable for the misuse of the lost card above a certain amount, usually $50. Along with the advantages there are also some disadvantages in using credit cards. Easy use of credit cards can encourage the buying of items that are not really needed. In addition, cardholders often give little thought to how payments will be made in the future. Failure to pay on time can lead to high interest costs and can result in heavy debt.

CHARGE ACCOUNTS

Charge accounts are forms of credit that some businesses extend to customers. A receipt is signed for the purchase, and the customer is billed for purchases at the end of the month. A charge account's main advantage is its convenience. Many businesses that allow charge accounts also accept credit cards.

BANK LOANS

Borrowing money at interest from banks is an important form of credit. Commercial loans are taken by business people and usually involve fairly large sums. Personal loans are taken by individuals for personal reasons and usually are for small sums. Interest charges on all loans vary from month to month. Naturally borrowers try to get loans when the interest cost will be lowest. Many banks charge lower rates of interest to their best customers.

MORTGAGES ON PROPERTY

Buyers of land and property make use of mortgage loans for credit. A mortgage is a legal claim against property by a lender. Failure by the borrower to repay the loan and interest on time allows the lender to claim the property.

Mortgage credit is widely used in the buying of homes, apartment houses, and commercial buildings. Mortgages make it possible for buyers to buy property they could not buy for cash. For instance, suppose, a family wants to buy a $50,000 home but has only $15,000 in cash. They might be able to borrow the $35,000 more than is needed to purchase the home. Thus the seller of the house receives $50,000. The buyer of the home makes a $15,000 first payment called a down payment. The remaining $35,000 is covered by a loan called a mortgage loan. The interest rate and time period of the loan are covered by the mortgage terms. Monthly payments of interest and part of the principal are made to the lender who holds the mortgage. The principal is the sum of the borrowed money on which interest is paid. Failure to make payments means loss of the home to the mortgage holder. The mortgage holder can then sell it to recover an amount equal to the outstanding debt. The borrower can get back only what is left from that sale price after the money owed has been subtracted.

PUBLIC BORROWINGS THROUGH NOTES AND BONDS

A public borrowing is one that invites the general public to lend money as an investment. In return they are given interest-bearing notes or bonds. These are promises to pay back the loans, with interest, at stated periods of time. Notes are usually for shorter periods of time than bonds. Some of the main types of bonds include the following:

CORPORATE BONDS. These bonds are issued by companies seeking loans. They carry less risk than many other types of investment. Bondholders must be paid before profits or dividends are paid. Bondholders also have a first claim against the assets of the business, if it suffers bankruptcy.

DEBENTURE BONDS. These bonds are not backed by the assets of the company. Their only backing is the earning power of the company. This makes them riskier than ordinary corporate bonds.

MORTGAGE BONDS. These are bonds with a claim against specific business property for nonpayment.

MUNICIPAL BQNDS. These bonds are issued by municipal governments, which are local governments such as those of towns and cities. Those bonds are usually issued to raise money for long-term projects like roads, sewers, or bridges. Many municipal bonds are exempt from, that is, free from, taxes. This makes them profitable for investors who otherwise by law are supposed to pay high taxes on income.

Bonds are also issued by state and national government agencies. The national government borrows vast sums to cover its budget deficits. State bonds are often exempt from federal taxes, but national bonds are subject to taxes.

THE GOVERNMENT AND CREDIT

Government policies can greatly affect credit and its costs. This is seen in the indirect way that government borrowing affects interest rates. Heavy government borrowing results in rising interest rates. This happens because commercial borrowers must compete against the government for investor loans. In addition, most commercial notes and bonds carry higher interest rates than government bonds. They do because government bonds are considered safer and often have tax-free advantages. These advantages make government bonds attractive to investors. This, in turn, forces commercial borrowers to offer to pay higher interest rates in order to attract investors willing to lend money.

When the debts of the government fall due, many of them are "paid" by new borrowings, often at higher rates of interest. Borrowing by government agencies can add to the danger of price increases called inflation. The more the government borrows, the more it increases the costs of the borrowing and adds to the exchange instruments in circulation. Notes and bonds can often be transferred or used as payments by their holders. This makes them serve as a medium of exchange and adds to the money supply.

The government also affects credit by its policies in setting discount rates. The discount rate is the interest rate that the Central Bank charges member banks that borrow from it. Today in Russia it is 21 percent. If the member bank finds itself short of money to extend new loans, it can borrow from the Central Bank. In this way the bank can raise fresh money for lending purposes. By its discount policies the Central Bank has helped make money and credit available as they are needed.                      

Business Word Families

Find the odd one in each of these groups of the basic business words:

Answers:

1. market; 2. deteriorate; 3. climb;  4. office; 5. calculate; 6. manager; 7. dog; 8. clerk; 9. staff; 10. action; 11. bank; 12. employer; 13. action; 14. discuss; 15. product.

Business Qualities

The adjectives listed below describe some of the positive qualities of good managers. Change each adjective into its opposite by adding un-, in-, im-, ir-,

or dis- and fill in the form:

tidy

cooperative

sensitive

skilled

responsible

honest

predictable

intelligent

organized

rational

patient

creative

efficient

decisive

friendly

sincere

accurate

supportive

conventional

consistent

obedient

practical

diplomatic

experienced

systematic

articulate

convincing

committed

reliable

assertive

tolerant

communicative

Answers:

un-: tidy, systematic, cooperative, communicative, supportive, assertive, skilled, intelligent, creative, reliable, committed, conventional, convincing, predictable, friendly, diplomatic;

in-: decisive, sincere, sensitive, articulate, consistent, accurate, efficient, tolerant, experienced;

im-: practical, patient;

ir-: responsible, rational;

dis-: honest, organized, obedient.

Un- is by far the most common negative prefix; in- is the second most common; im- usually precedes a word beginning with a "p"; ir- usually precedes a word beginning with an "r".

What Kinds of Decisions Are Made by Consumers?

Production in free market economic system is based upon supply and demand. It is the demand of the consumers that largely determines what will be produced. But how do consumers decide what they want? What decisions are involved in the development of consumer demand? Let us examine some of the areas in which consumers have to make decisions. They include decisions about the following:

■ Whether to buy now or wait until later.

■ Whether to spend money or save it. This also involves the question of whether to put future needs before present wants and needs.

■ Whether to rent or buy such things as housing, machinery, and other high-cost items.

■ Whether to use cash or credit in making purchases.

■ How much to rely upon trade names of companies when making purchases.

■ Whether to follow the demands of fashion and style, even when the cost is high.

■ How much to consider the effects that a purchase may have upon health and the environment.

Several of the decisions involve opportunity costs. This means that the consumer must weigh the advantages of a decision against its possible economic disadvantages in the future. These opportunity costs are included in the discussion of the decisions.

Buy Now or Later

Consumers try to decide when is the best time to buy. They do this because prices do not remain constant, or at one point. If goods are bought today, there is a chance that the price might fall in the near future. The chance to get a better price will have been lost because of the early purchase. But there is also the chance that the price might rise in the near future. In that case the purchase made today may turn out to have been a wise move. The question of when to buy is an important decision for the consumer. It is also a decision involving opportunity cost.

Spend or Save

There are many things that consumers want and need. But they must also consider their future wants and needs. Money that is spent today will not be available in the future. If that money is saved, not only will it be on hand in the future. It can also earn more money if it is put into a bank or is invested.

There is a saying that "a penny saved is a penny earned," but sometimes saving can be overdone. The result can be miserliness that reduces the joy of life. We need to spend and we need to save. How to balance spending and saving is another of the important decisions consumers must make. Consumers trying to achieve that balance have to make opportunity cost decisions.

Rent or Buy

Consumers need many things, but some items can be rented rather than bought. This is most often true of high-cost, or "big ticket," goods. Housing is one example of this. Let us examine the issue in terms of housing for a family of four that has a total income of $30,000 a year before taxes.

Suppose this family had a chance to buy a $70,000, three-bedroom house. They can use their total savings of $20,000 for a cash down payment. Suppose the remaining $50,000 would have to be paid over a 25-year period at 10% interest on the mortgage.

Such a purchase might help the family achieve its dream of owning their own home. But it would strip the family of nearly its entire savings. It would also mean monthly payments of abut $455 for interest and principal costs. There would also be payments to be made for taxes, water, gas, electricity, heating fuel, and general maintenance. These might add another $450 a month to the cost of owning the home. Is it worthwhile to fulfill the desire for a home by reducing family financial security in the future? This is an opportunity cost decision the family must make.

A three-bedroom apartment, though much smaller than the house, might cost only $700 a month with no cash down payment. An apartment would seem to be cheaper for the family, but there are other things to consider. These involve other opportunity cost decisions. For one thing, the payments made if the home is bought would include taxes and interest on the mortgage. These payments will bring a tax allowance on federal tax payments. This might be about $200 a month. In addition, the home owners possess equity in their property. This means they own the value of the home over and above the mortgage held against it. Suppose they sell the house five years after they bought it. By this time the value of the house has risen to $85,000. After paying off the $47,000 still remaining on the mortgage and deducting the original down payment of $20,000, the owners have an actual money profit of $18,000. They can keep this profit, though they have to pay taxes on it unless they buy another home equal to, or higher than the value of the home sold.

Because of the steady rise in real estate values in past years, home owners hope to make a gain in equity in the future. This hope for profit, together with the greater comfort of most homes, is a big reason for home buying. But there are also some good reasons for renting a home. It is often less expensive than buying a house. Also, those renting have fewer responsibilities for repair and upkeep of the property. The landlord is responsible for upkeep and maintenance, which can often be expensive and time-consuming.

The question of whether to buy or rent also arises among business owners who need to make use of factories, stores, and offices. Buying or renting can also involve decisions by users of fairly inexpensive items. Consumers need to decide whether they will buy or rent such "small ticket" items as lawn mowers, cement mixers, folding chairs, and tuxedoes and evening gowns. In many cases, opportunity cost considerations will influence the decisions that are made.

Cash or Credit

The decision whether to pay cash or to use credit in making purchases is faced daily by most consumers. Tens of millions of Americans own credit cards, sometimes as many as 10 different cards. The cards entitle consumers to buy goods and put off payment until a later date. In addition, many stores and other businesses extend credit services to customers.

In some cases the use of credit is helpful in permitting shopping without having to carry large sums of money. Credit is also a useful means for making purchases in a period between salary or wage payments. But the use of credit also has its bad side. In many cases there is an interest charge for the sum owed. This adds to the cost of the items purchased. Worse than this is the sad fact that the easy use of credit encourages many people to buy more than they can afford. The consumer must weigh the pros and cons of the issue before deciding whether to use cash or credit. Considerations of opportunity cost can influence the decision. Is the immediate advantage of using credit worth the possible future disadvantages of extra costs and possible misuse of credit? The consumer must weigh the problem before making a decision.

Brand Names, Style, and Fashion

People are not all alike and they do not have a single way of looking upon purchases. Some of the more value-conscious consumers seek value for their money. They want to know that the items they buy are of a high quality. There are consumers who can personally judge quality. But most people need help in this area. They can turn to special consumer groups or to the government for help in determining the quality of products.

Many consumers judge quality in terms of the brand names used by producers. These brand names have, in some cases, come to be identified with high quality and reliability. For this reason many producers register their brand names and do not allow others to use that name on their products. These brand names protected by law are called trademark names or simply trademarks.

Sometimes consumers will pay higher prices because the items they buy are fashionable at that moment. Within a short period of time, the items are of little use or value. But they have served the purpose of being used when in fashion. Consumers will also buy some products that bear the name of someone associated with high fashion. This is very common in the areas of cosmetics, perfumes, and clothing. It is not unusual for people to pay very high prices for designer jeans when a very similar pair of ordinary jeans costs much less. Is it worth being "in style" when the cost is high? That is a decision that consumers have to make for themselves. Opportunity cost will enter into that decision. The consumer must decide if the pleasure of having a brand name item or the latest in style and fashion is worth the extra cost and the possible effect it might have on future buying plans.

Health and Environment

These are areas in which a growing number of consumers are taking an interest. They seek to learn what effects, if any, their purchase of certain products will have upon their health and upon the environment. These consumers are aware of possible health dangers in using tobacco, drugs, or alcohol, or in eating canned foods with high amounts of salt or preservatives. They are also alert to the possible environmental dangers of using products that involve killing animals that are members of an endangered species.

Business Word Families

Find the odd one in each of these groups of the basic business words:

Answers:

1 - order, 2 - deliver, 3 - consumption, 4 - foothold, 5 - components, 6 - research,     7 - withstand, 8 - product, 9 - assembling, 10 - strategy, 11 - distributor, 12 - rise,     13 - agent, 14 - computer, 15 - afford.

Match the words from the left column with their corresponding definitions:

Answers:

I - H; 2 - P; 3 - E; 4 - B; 5 - C; 6 - F; 7 - K; 8 - L; 9 - D; 10 - G;

II -Q; 12-1; 13-Z; 14-M; 15-0; 16-N; 17-T; 18-U; 19 - R, 20 - S; 21 - Y; 22 - X; 23 - V; 24 - A; 25 - W; 26 - J

Match the words from the left column with their corresponding definitions:

Answers:

1. – B; 2. – F; 3. – J; 4. – K; 5. – A; 6. – G; 7. – H; 8. – D; 9. – Q; 10. – L; 11. – M; 12. – C; 13. – I; 14. – P;  

15. –R; 16. – U; 17. – T; 18. – S; 19. – W; 20. – N; 21. – O; 22. – V; 23. – X; 24. – Y; 25. – Z; 26. – E.

What is accounting?

Pre-reading

• What do you think are the main purposes of accounting?
• Does accountancy only describe the past or is it useful in dealing with the future?
• Is accounting completely objective or does it involve subjective judgements?

Skim and scan

Read the text quickly to say whether the following statements are true or false. Don't worry about any words you don't understand.

(a) The author thinks that accountancy is a totally objective activity.

(b) Accountancy is important whatever the type of economic system a country has.

What is accounting?

Accounting contains elements both of science and art. The important thing is that it is not merely a collection of arithmetical techniques but a set of complex processes depending on and prepared for people. The human aspect, which many people, especially accountants, forget, arises because:

1. Most accounting reports of any significance depend, to a greater or lesser extent, on people's opinions and estimates.

2. Accounting reports are prepared in order to help people make decisions.

3. Accounting reports are based on activities which have been carried out by people.

But what specifically is accounting? It is very difficult to find a pithy definition that is all-inclusive but we can say that accounting is concerned with:

the provision of information in financial terms that will help in decisions concerning resource allocation, and the preparation of reports in financial terms describing the effects of past resource allocation decisions.      

Examples of resource allocation decisions are:

Should an investor buy or sell shares?

Should a bank manager lend money to a firm?

How much tax should a company pay?

Which collective farm should get the extra tractor?

As you can see, accounting is needed in any society requiring resource allocation and its usefulness is not confined to 'capitalist' or 'mixed' economies.

An accountant is concerned with the provision and interpretation of financial information. He does not, as an accountant, make decisions. Many accountants do of course get directly involved in decision making but when they do they are performing different function.

Accounting is also concerned with reporting on the effects of past decisions. But one should consider whether this is done for its own sake or whether it is done in order to provide information which it is hoped will prove helpful in current and future decisions. We contend that knowledge of the past is relevant only if it can be used to help in making current and future decisions, for we can hope that we shall be able to influence the future by making appropriate decisions but we cannot redo the past. Thus the measurement of past results is a subsidiary role, but because of the historical development of accounting and, perhaps, because of the limitations of the present state of the art, 'backward looking' accounting sometimes appears to be an end in itself and not as a means that will help in achieving a more fundamental objective.

The accounting equation

Skim and scan

(a) Was progress in accountancy quick or slow in the past?

(b) What does a balance sheet represent?

The accounting equation

Accounting is at least the second oldest profession in the world. But while earlier professionals rapidly got to grips with basic techniques and even introduced refinements, it is remarkable that generations of tax collectors and merchants staggered on for thousands of years before finding a satisfactory general method of keeping a record of their affairs.

This should serve as a warning. The problem is common sense but the answer is not. It is highly contrived and in some respects still imperfect. It begins with a particular way of looking at a business which we present in the next section.

A business may be pictured as a box. The box has contents and by virtue of owning the box, the owner has a claim to the value of the contents. Others also may have a claim on the contents, by virtue of having lent money to the business or of having supplied goods or services to the business for which they have not yet been paid. These are the '''creditors of the business.

As the business buys and sells goods and services, so the value of the contents of the box will increase or decrease, depending on whether the business makes a profit or a loss. These changes in value of contents must be equalled by changes in value of claims on contents. Specifically the claims of the owners will vary so that the total value of claims is always equal to the value of the contents.

Now we may list the value of the contents of the business box at any time, say down the left side of a piece of paper. On the right side we may list the value of claims on those contents. The claims of third party creditors will be known. The claims of the owners will amount to whatever is necessary to make the total value of claims equal to the total value of contents.      

Such a list of contents (on the left) balanced by a list of claims (on the right), constitutes a simple balance sheet. A balance sheet is a presentation of the state of affairs of a business in a succinct, systematic and recognizable format.

Restating the original theory, with the picture of the business as a box, we can write

£ contents =  £ claims on contents

 In accounting terms, this becomes

(1) ASSETS = EQUITY + LIABILITIES

where assets are simply what is held in the business, equity is the claim of the owners, and liabilities are the claims of third parties.

By transferring liabilities to the other side of the equation we may write

ASSETS –  LIABILITIES – EQUITY

or, using a technical term

(2) NET ASSETS = EQUITY

Finally we may split equity into the capital originally put into the business and reserves. Reserves represent profits which have been reserved or kept in the business. The equation now becomes

(3) NET ASSETS = CAPITAL + RESERVES

1, 2 and 3 above are forms of the fundamental accounting equation.      

Источник

1. Статьи из газет «English». Приложение к газете «1-ое Сентября». (Рубрика «Business English» by Jakovlev V.).