Basics of Economics: educational manual 9786010432574

Citation preview

AL-FARABI KAZAKH NATIONAL UNIVERSITY

BASICS OF ECONOMICS Educational manual

Almaty «Qazaq University» 2018 1

UDC 330 (075.8) LBC 65.01 я 73 B 29 Recommended for publication by the decision of the Higher School of Economics and business, RISO of the Al-Farabi Kazakh National University (Protocol №4 dated 29.12.2017)

Reviewers: Doctor of economic sciences, Professor B. M. Mukhamediev Doctor of economic sciences, Professor L. S. Spankulova

B 29

Basics of Economics: educational manual / Z.Y. Aubakirova, A.B. Aitbembetova, R. Kabylkairatkyzy, B.Z. Nurmanova. – Almaty: Qazaq University, 2018. – 198 p. ISBN 978-601-04-3257-4 The course «Basics of Economics» is dedicated for economic and noneconomic faculties in the frame of course «Economic Theory». The textbookis focused on the formation of economic theoretical knowledge that studies the formation and manifestation of economic processes in interrelation with scientific and technological progress, state policy, national and world economy. Publishing in authorial release.

UDC 330 (075.8) LBC 65.01 я 73 ISBN 978-601-04-3257-4

© Aubakirova Z.Y., Aitbembetova A.B., Kabylkairatkyzy R., Nurmanova B.Z., 2018 © Al-Farabi KazNU, 2018

2

INTRODUCTION This textbook on the discipline «Basics of Economics» is written in English language due to the fact that according to the principles of the Bologna Declaration, to which Kazakhstan joined, it is important to create and implement a multilingual education system in the country to create a modern and competitive education system. It is the teaching of economic science in english that will speed up the synthesis of science, innovations through the organization of scientific research and technical developments and will open the way for systematic, organizational, and technological progress of science and society. The modern economy is the science of rational decision-making with limited resources, which is built on the foundation of the most modern knowledge, competitive innovations. The course of «Basics of Economics» is focused on the formation of economic theoretical knowledge that studies the formation and manifestation of economic processes in interrelation with scientific and technological progress, state policy, national and world economy. The proposed course contains a systematic presentation of the foundations of the conceptual provisions of economic development in retrospect and in modern conditions. The purpose of teaching the course is to form a system of knowledge about the economic patterns of development of society and the problems of its effective functioning in a market system. In addition, it is the training of modern highly qualified specialists in various fields of activity that calls for the formation of a modern economic worldview. The goal of the course is to familiarize students with the economy as a system, basic concepts, categories, laws and patterns of economic development, principles and motivations of people's economic behavior in the search for effective ways of using limited production resources to meet the growing needs of society. This course includes 16 chapters with control questions, basic terms and concepts, outlined in each chapter and contains test tasks with different levels of complexity. 3

When mastering the course «Basics of Economics» students will understand and become familiar with the essence and specificity of the mechanism of functioning of a market economy, the main problems of socio-economic development of the Republic of Kazakhstan in terms of a socially oriented market economy, the main directions of modern economic policy in the country and in the world.

4

Chapter 1

THE SUBJECT AND METHOD OF ECONOMIC THEORY 1. The emergence and stages of the formation of economic theory. 2. The subject of economic theory and its structure. 3. Methods of cognition of economic phenomena and processes.

1. The emergence and stages of the formation of economic theory The term «economy» comes from the Greek word «Oiconomos».

«nomos»

«oikos» (house, household)

(the law)

The word «economy» consists of two words:

In a literal, original sense, «economy» means the science of household, the art of housekeeping. The origins of economic science should be sought in the teachings of thinkers of the Ancient World, primarily the countries of the Far East - the cradle of the world civilization. The first attempts to theoretically comprehend the economic structure of society were made in the works of Xenophon, Plato, and Aristotle. 5

Main stages of development of economic theory The birth of economic thought Mercantilism Physiocrats Classical economical school Marxism Neoclassical economic theory Keynesian economics Institutional economics Monetarism

Xenophon in his treatise «Oeconomicus» praised the virtues of agriculture and condemned the occupation of crafts and trade. Plato in his project on the state structure gave the state the function of resolving the contradiction between the diversity of people's needs and the monotony of their abilities. Aristotle made a great contribution to the development of economic science by analyzing the forms of value, the duality of goods and the development of forms of trade. His arguments about ways of acquiring wealth and satisfying his needs are interesting. Economic thought of the era of feudalism covers a wide range of problems, beginning with the justification of the legality of the 6

ownership of feudal land, the eternity of dividing society into classes and ending with the intensification of attention to the problems of commodity-money relations. Since capitalist relations began to take shape primarily in the sphere of trade, the first, early course of economic thought in the 15th-17th centuries – mercantilism (from the Italian «mercantile» – merchant, merchant) – was to learn the patterns of trade. Among the most prominent representatives of this direction are A. Monkretien, T. Mun, J.B. Colbert and others.

Mercantilism A. Monkretien T. Mun J.B. Colbert

According to this theory, the wealth of society is expressed in the accumulation of money, especially gold and silver, as a result of external trade. Of all the activities priority was given to labor, engaged in trade, primarily international, as it contributed to the accumulation of wealth. Mercantilism was not yet an economic science. Its main provisions are the result of not a theoretical analysis, but a simple description of the observed phenomena and partly their classification. In France, F. Kene and A. Turgot became the founders of the school of Physiocrats.

F. Kene

Physiocrats

A. Turgot

7

The term is derived from the Greek words «physio» (nature) and «cratos» (power) crunch. Representatives of the Physiocrats believed that wealth was created only in agriculture. Only the land is productive and only the labor of agricultural workers is able to create net product.F. Quesnay, in his work «Economic Table» indicated that all other activities (industry, trade) were «fruitless», since they only process products without increasing their quantity. Their income, according to Quesnay, industrialists and merchants receive from the «second hand». The classical economical school actively developed at the end of the 18th century – the 30s. 19th century. The main representatives are Adam Smith, J.-B. Say, D. Ricardo, T. Malthus, J.S. Mill.

The classical

Adam Smith,

economical

J.-B.Say,

school

D. Ricardo, T. Malthus, J.S. Mill

Outstanding English economist Adam Smith went down in history as the founder of economic theory. The merit of Adam Smith is the idea of liberalism, the minimum intervention of the state in the economy. The greatest work of Adam Smith is «An Inquiry into the Nature and Causes of the Wealth of Nations» (1776). The starting point of his entire study is the problem of the division of labor, which binds «individuals-egoists» into a united society. After researching this problem, he proceeds to the presentation of the origin and use of money. Smith made a significant contribution to the theory of value, the doctrine of income, productive and unproductive labor, capital and reproduction, and the economic policy of the state. The central place 8

in D. Ricardo's theory is occupied by theories of value and money, wages and profit, land rent, the theory of capital and reproduction. Summing up the classical school, it should be noted that the main object of research here is production as such, regardless of its industry characteristics, as well as the distribution of benefits. Its eminent representatives put forward and substantiated a system of concepts and categories that are a scientific reflection of many economic processes. When the capitalist society reached a sufficiently high degree of economic maturity and its internal contradictions were revealed, when the working class emerged into the arena of history, the scientific tree of the economy split. One direction through the neoclassical economy and Keynesianism has come to the modern post-Keynesian backbone economy. Another direction Marxism came from the «Capital» (1867) of Marx. K. Marx and F. Engels created a doctrine of surplus value, which revealed the nature of capitalist exploitation.

Marxism

K. Marx F. Engels

The analysis was made of the capitalist system, which led the authors to a conclusion about its historical limitations and the logical replacement of the socialist system. In the last third of the 19th century, in Austria, the United States, and England, a genuine revolution in economic theory took place: a neoclassical trend arose. The basis of the neoclassical theory was the development of three scientific schools: the Austrian – K. Menger, E. Böhm von Bawerk and F. Wieser; Cambridge – A. Marshall and Lausanne – L. Walras. 9

The neoclassical economical theory the Austrian − K. Menger,

Cambridge −

E. Böhm von Bawerk,

A. Marshall

Lausanne − L. Walras

F. Wieser

Supporters of neoclassical direction unites the notion that the market economy will function best if to provide each of its subjects with maximum economic freedom. In this sense, neoclassicists are direct followers of A. Smith. They were and remain the protectors of the traditional values of the capitalist economy - that is, private initiative and freedom of private enterprise, the absence of state regulation. These values, from their point of view, are the main conditions for the effectiveness of the entire social system. The neoclassical theory focuses on a separate firm, a separate consumer, maximum profits and minimum costs, i.e. studied microeconomics. Neoclassical economics is one of the three currents of modern Western economic theory (economics). Western economic theory, unlike Marxism, is not a whole, but a set of different currents, schools, sometimes sharply different methods of analysis, final conclusions and recommendations in the field of economic policy. Modern economic theory develops mainly within the framework of three main currents: 1) neoclassical (about this it was said above), 2) the theory of regulated capitalism-Keynesian economics, 3)institutional economics. Formation and development of the theory of regulated capitalismKeynesianism began in the 30s of the 20th century. Its main idea is that the state should actively intervene in economic life. This doctrine denies the ability of the market mechanism to self-regulate, i.e. believes that the market economy cannot itself cope with such phenomena as unemployment, inflation, low economic growth rates, crises. According to the theorists of this direction, the market mechanism must be unconditionally preserved (for in the sense of economic efficiency it does not have an alternative substitute), but is 10

supplemented by comprehensive state regulation. The most recognized school, which offered its recommendations for regulating the economy, is connected with the works of the English scientist John Maynard Keynes. Institutional economics is a rather vague current, because the views of its representatives vary greatly in a number of problems. However, we can identify some of the leading ideas of this trend: 1. Representatives of institutionalism do not confine themselves to an analysis of purely economic relations, but urge to take into account all the conditions affecting economic life-that is, forms of economic organization, standards of conduct, legal laws, customs, and traditions. 2. They propose to study not so much how it functions, how much the capitalist society changes as it develops and changes. And for them, a generally critical attitude to capitalism and the demand for expanding social programs with the help of the state are characteristic. 3. The market is not a neutral and non-universal mechanism for allocating resources. It seeks not to meet the needs of people, but to support and enrich large enterprises (monopolies). The basis of the power of large enterprises is technology, not market laws. Against the dictates of entrepreneurs, joint action by the trade unions and the state is necessary. In addition, the state needs to take care of such vital areas as ecology, education and health. The founder of institutionalism is the American scientist T. Veblen.

Institutionalism

T. Veblen, W. K. Mitchell, J. M. Clark, J. Commons

11

Monetarism is a macroeconomic theory, according to which the amount of money in circulation is the determining factor in the development of the economy. Modern monetarism originated in the 1950s as a series of empirical studies in the field of monetary circulation. The founder of monetarism is Milton Friedman. Getting acquainted with the main milestones in the history of the development of economic theory shows how complicated and contradictory the process is, reflecting the complexity and contradictoriness of the object of study in the economic life of society. None of the many theories, schools, and currents could explain this process in its entirety, but each of them contributes to the knowledge of economic laws. In studying the subsequent economic disciplines, you will be better acquainted with the current trends of economic theory. 2. The subject of economic theory The ideas about the subject of economic theory changed in the course of deepening knowledge about the economic activities of people and as the activity itself became more complicated. Economic theory studies

the economic behavior of people, that is, their actions that are associated with the production, distribution, exchange and consumption of material and non-material goods.

That is why this science is social, studying the patterns of human behavior.

The subject of economic theory is

•relations arising between people in the process of production, distribution, exchange and consumption of material goods and services in a world of limited resources

12

The purpose of the discipline is to achieve the effective use of limited economic resources to maximize the satisfaction of people's material needs. From the point of view of the object of study in general economic theory, three sections can be distinguished: introduction to economic theory, microeconomics and macroeconomics. The first section has a methodological, fundamental significance, since it serves as the main means of investigating the following two divisions: microeconomics and macroeconomics. The economic theory formulates its principles and laws at various levels of analysis. Depending on the scale, micro and macroeconomics are singled out. Microeconomics studies small economic units, gives an explanation to the choice that individuals, firms, government agents do, examines the laws and the consequences of their functioning in a market economy. Macroeconomics studies large-scale economic phenomena. It is connected with the functioning of the national economy as a whole and studies the processes taking place at the level of the whole society, considers the aggregate indicators of income, income, inflation, economic growth, determines the laws of state economic policy. There is no clear boundary between microeconomics and macroeconomics, since the set of decisions made at the micro level determines the macroeconomic indicators of the functioning of the economy, and vice versa. If because of the economic analysis it was possible to find strong cause-effect relations, then there is a reason to speak about the existence of a regularity, i.e. on the subordination of the processes that take place to the action of economic laws. By economic law we mean a stable, repeated causal relationship between economic processes, manifested as an objective necessity. Economic laws are the laws of the development of production relations (or property relations) in their interrelation with the development of productive forces. Economic laws, like the laws of nature, have an objective character. However, they differ significantly from the laws of nature, because arise, develop and act only in the process of economic activity of people - in production, distribution, exchange and consumption. In addition, unlike the laws of nature, economic laws are not eternal. The system of economic laws includes four types. 13

General •Laws inherent in all social modes of production (the law of growth in labor productivity, the law of saving time, etc.)

Special •laws that act in several socio-economic formations (the law of value, the law of supply and demand)

Specific •laws that operate under the conditions of a single social mode of production. The most important of these is the basic economic law, which expresses ties in the process of interaction between productive forces and property

Private •laws that operate only at one stage of the social mode of production. For example, the law of the formation of a monopoly by concentration of production, which operates at the highest stage of development of capitalism, i.e. from the beginning of the 20th century

Economic categories are theoretical expressions, mental forms of production relations, economic phenomena and processes that actually exist. These are specific concepts in which the economic signs of objects, phenomena, and processes are reflected. They theoretically reflect, first, property relations in their interaction with the development of the system of productive forces. Since the content of the latter is the interaction of man with nature in the process of labor, then one side of the economic category has separate parts of this interaction. Such categories, in particular, are labor, objects of labor, methods of labor, consumer value, the product of labor, etc. The other side of the economic category is the relationship between people about the appropriation of different objects of ownership, the results of labor. Individual sections of these relations are expressed in categories: money, price, value, wages, profit, rent, etc. In addition, each law groups around itself a certain number of economic categories. For example, the law of value is disclosed with the help of such categories as necessary working time, market value, price, etc. Since economic categories are a theoretical expression of individual aspects of property relations in their interaction with the 14

development of productive forces, the emergence of new forms of ownership is characterized by the emergence of new economic categories. Thus, in the 18th century, the relationship between people over the purchase and sale reflected the category «market». Next to it in the 20th century, the categories «regulated market», «monopolized market», «government market», «world market» began to be used. Economic theory is the methodological foundation of a whole complex of economic sciences: sectorial, functional and intersectional. Economic theory is one of the social sciences, which is recognized to reveal social phenomena of human life. The totality of all theoretical, social and historical sciences is able to explain to us the social life of society and the country. Economic theory takes into account the knowledge gained by specific economic sciences, as well as other social sciences, such as sociology, philosophy, history, psychology, etc. 3. Methods of cognition The methods of economic science is a set of approaches, tools and principles, through which the economic phenomena and processes are studied. Deductive method – is also known as the abstract, analytical or hypothetical method. This method accepts certain universal truths or axioms and tries to deduce inferences about the particular events through a process of logical reasoning. In other words, deductive method goes from general to particular. Inductive method is also known as historical method, concrete method, and realistic method. This method starts investigation on the basis of particular facts, historical events and tries to generalize them with reference to the whole economy. Inductive method thus moves from particular to general. On the basis of real facts and particular events attempt is made to formulate general laws. Dialectics is a method of argument or exposition that systematically weighs contradictory facts or ideas with a view to the resolution of their real or apparent contradictions. Analysis is the process of breaking a complex Chapter or substance into smaller parts in order to gain a better understanding of it. 15

Synthesis is the combining of the constituent elements of separate material or abstract entities into a single or unified entity An economic model is a simplification of reality which abstracts from the complexities of the real world in order to explain economic phenomena and to make predictions. Models can be expressed in various ways: word models; verbal models; mathematical and graphic models. Any model is a considerable simplification of reality. In the construction of economic models, the development of theories, the identification of economic laws, economic science widely uses the method of functional analysis, reflecting the principle of mutual dependence of economic phenomena. Functional dependencies are very clearly manifested when using graphical constructions in the framework of modeling economic processes. Many functional dependencies in economic theory are investigated using the method of marginal analysis. Positive analysis is aimed at identifying objective laws and phenomena in the form in which they exist, i.e. ascertaining the facts. Normative analysis assumes value judgments, i.e. whether or not these economic phenomena are favorable. It is important in the formation of state economic policy. Economic theory performs four functions: cognitive

practical

methodological

prognostic

16

Cognitive function is expressed in the study and explanation of the essence of economic processes. The development of new knowledge helps to foresee the future state of the economy, which, in turn, requires efforts to transform reality. This role is played by the practical function of economic theory. The practical function is in the form of developing principles and methods of rational management, scientific substantiation of the economic strategy for carrying out economic life reforms. The practical function of economic theory is closely linked with economic policy. The principle of communication: «ideas – solutions». Economic policy is a purposeful system of state measures to regulate the economy. The methodological function is expressed in the fact that economic theory is the theoretical foundation for a whole group of sciences: sectorial (economy of construction, industry, agriculture, etc.); functional (accounting, finance, marketing, etc.);

interbranch (statistics, econometrics, economic history, demography, etc.).

The prognostic function of the economic theory is to determine the prospects for socio-economic development for the future. Studying and systematizing the facts of economic reality, revealing the content of economic categories, laws, regularities, economic theory makes it possible to predict economic development, which makes it possible to better take into account the needs of society and make more rational use of limited resources. The study of economics is divided into two parts: macroeconomics and microeconomics. Macroeconomics deals with 17

the overall economy, economic growth, unemployment, inflation etc. Microeconomics deals with individual markets and actions by buyers and sellers in those markets. A specific product, business, job or industry would fit. Control questions: 1. Describe the main stages and directions of development of economic theory as a science. 2. Explain what is the subject and function of economic science. 3. Uncover the basic methods of cognition of economic phenomena and processes. What are the similarities and differences in the positive and normative approaches to the economy? 4. What place does the economic theory occupy in the system of economic sciences? Basic terms and concepts: Economy Mercantilism Physiocrates Classical School of Economics Marxism Neoclassical theory Keynesian economics institutional economics The subject of economic theory Economic behavior of people Limited economic resources Microeconomics Macroeconomics Economic laws Economic Categories Methods of cognition The method of scientific abstraction Method of dialectical development Method of induction and deduction The method of unity of historical and logical The method of unity of analysis and synthesis Functional Analysis Positive analysis Normative analysis Economic policy

18

Test tasks: 1. Which scientists belong to classical school of economic thought: a) A. Smith b) J.M. Keynes c) L. Robbins d) A. Marshall e) M. Friedman f) D. Ricardo g) J. Say 2. «An Enquiry into the Nature and Causes of Wealth of Nations» is the book of economist – a) K. Marx b) A. Smith c) A. Marshall d) M. Friedman e) D. Ricardo 3. The circular-flow diagram is an example of a) a social experiment b) a laboratory experiment c) an economic model d) a mathematical model e) a geographic map 4. The field of economics is traditionally divided into two broad subfields, a) microeconomics and macroeconomics b) national economics and international economics c) consumer economics and producer economics d) private sector economics and public sector economics e) economic history and history of economic thought 5. Microeconomics is the study of a) how money affects the economy b) how government affects the economy c) how individual households and firms make decisions d) how the economy as a whole works e) how unemployment affects the economy 6. Which of the following would likely be studied by a microeconomist rather than a macroeconomist? a) economic growth b) how individual households and firms make decisions. c) rate of inflation d) the effect of a sales tax on the cigarette industry 19

e) f) g) h)

types of unemployment the effect of a war on government spending changes in the money supply on the inflation rate individual choice

7. Identify each of the following Chapters as being part of macroeconomics: a) factors influencing the rate of economic growth b) the impact of a change in consumer income on the purchase of luxury automobiles c) the impact of tax policy on national saving d) the degree of competition in the cable television industry e) the effect of a fiscal policy on economic stability f) factors influencing the demand for tractors g) the effect of a change in the price of Coke on the purchase of Pepsi h) how individual households and firms make decisions 8. Economics is the study of a) how society manages its unlimited resources b) how to reduce our wants until we are satisfied c) how to fully satisfy our unlimited wants d) how society manages its scarce resources e) how to avoid having to make trade-offs

20

Chapter 2

PUBLIC PRODUCTION 1. Production and its role in the life of society. 2. Resources and factors of production. 3. The problem of choice in conditions of limited resources. The production capacity

1. Production and its role in the life of society Production of material wealth is the basis of the life of man and society. All that a person needs to satisfy his strategic needs cannot be provided by nature in ready-made form. All this people get in the process of production. Production as a continuous process, reflects both the interaction of man and nature, and the interaction of people among themselves in the process of their economic activities. In production, it is precisely the trinity of the substance of nature, human labor and instruments of labor. Modern production is impossible without any of these components. Production as a whole (public production) is a complex selfreproducing, self-regulating and evolving system aimed at meeting the needs. At the same time, signals about the appearance or change of the needs of the society enter the production system either through a market mechanism or through the state. Self-reproduction of the system of public production means that this system produces not only the benefits that are consumed by society, but reproduces everything that is necessary for production. In the system of public production, the result of production is the creation of material and non-material goods that satisfy human needs. Material includes industries for the production of material goods, services (industry, agriculture, construction, utilities, household services, etc.). Non material production is engaged in the provision of intangible services and the creation of spiritual values (health, education, culture, physical culture, etc.). These two areas of people's 21

activities are inextricably linked, which ensures the harmonious development of society. Production in the historical perspective existed in various forms. If the level of development of the productive forces is taken as indicators of classification, then we can single out: 1. Pre-industrial production, which is dominated by agriculture and handicraft industry. 2. Early industrial production. 3. Industrial production, which is dominated by the mechanized production of material goods. 4. Post-industrial production, in which the service sector plays an increasing role. Depending on what structure of society is formed on the basis of the production system, it is possible to single out: primitive production, slave-owning, feudal, capitalist, and socialist. Thus, the ultimate goal of the functioning of the economic system is the satisfaction of the needs of society and individuals. This is the direction of the production process, inextricably linked with the consumption of goods and services. As a result of public production, a product is created that passes through a series of interrelated stages:

production

distribution

exchange

consumption

Production is the starting point for the creation of material and non-material goods, so that a person carries out his life activity. In a market economy, production will be carried out only when the market and the sphere of exchange in general give the producer the appropriate price signal. Being created in the process of production, the goods complete their movement in consumption. But it is important to emphasize that consumption is the immediate goal of production only in non-market systems of economy. In general, in a 22

subsistence economy, consumption is the goal of production. However, in the market economy system, the immediate goal is to make a profit. This is not a flaw in the system of the market economy, but its most important advantage. «The pursuit of profit», stresses the distinguished Austrian economist F. Hayek, «is precisely what allows us to use resources most efficiently ....» But it should be noted that the final and immediate goal of production may not coincide, as it does in the system of market economy. If production is viewed as a continuously renewed process, which includes the distribution, exchange and consumption of the goods produced, then we are dealing with reproduction processes. Distribution as a category of economic science is not only the distribution of goods and services produced. This is the distribution, or allocation of resources, or factors of production. In this sense, the distribution in society depends on the institution of ownership, since the factors of production belong to their owners. In the market system of the economy, the distribution of resources occurs under the influence of the price mechanism, and not on someone else's instructions. Distribution and exchange do not simply mediate the link between production and consumption. In a certain sense, production in general is impossible without the «primacy» of exchange and distribution. The tradition of Western economic thought to begin analyzing the market economy precisely from the sphere of exchange and distribution can be traced quite distinctly, beginning with the times of A. Smith. This is not an accident. After all, the economy appears only when there is a voluntary exchange, and distribution is carried out, but on the basis of objective market signals. Exchange as an economic category can be understood in connection with the specialization and division of labor in society. So the social division of labor and specialization means that in any more or less numerous community of people, none of the participants in the economy can live at the expense of complete self-sufficiency with all production resources, with all economic benefits. Different groups of producers are engaged in separate types of economic activity. This means specialization in the production of certain goods and services. Specialization, in turn, is determined by the principle of comparative advantage, i.e., the ability to produce products at a relatively lower alternative cost. Producers have different skills, skills, and differently 23

provided with limited resources. And they enter into an exchange in connection with the fact that one has the advantage of producing one commodity, and the other is an advantage in the production of another commodity. Therefore, everyone should fully concentrate (specialize) on the production of one product, another manufacturer should be more specialized in the production of other products, since this benefit has a relatively lower alternative cost to the manufacturer. The exchange from this point of view is as productive as production, because it facilitates the movement in the space of goods in a way that more fully satisfies human needs and, consequently, increases the wealth of society. Consumption determines the structure, volume and quality of the produced social product. Consumption can be divided into two types – personal and productive consumption. The first type of consumption is carried out outside the framework of public production: food, drink, and reading always remain an individualized process. At the same time, there are a number of benefits that, by their nature, imply social, collective consumption: theatrical performances, movies, football matches, etc. With the development of new electronic media, the Internet system, etc., and this type of goods becomes possible to consume Individually. The second type of consumption involves the use of indirect benefits, or means of production, to create new consumer goods. In essence, the process of production is nothing else than the process of productive consumption. The process that takes place in constant repetition and renewal is called reproduction. 2. Resources and factors of production In the process of production, productive forces take the form of production factors. Between them there is a close relationship, balance, proportionality, adequacy. Marxists distinguish material and personal factors of production. The material means are the means of production, and the personal power to the personal. For the labor process, first, the productive forces are necessary, and secondly, people in the production process cooperate, i.e. Unite efforts, while entering into production relations. 24

1. Productive forces: – work force, – means of production = instruments of labor + objects of labor, – science and information 2. Man in the production process enters into a certain relationship: – with nature (advocates of studying only these relations, adherents of their priority are technocrats) – with people about things and nature (the followers of the priority of these relations are social scientists). Relations between people about the production, distribution, exchange and consumption of living goods – this is the production relationship. The unity of productive forces and production relations is a mode of production. «Epochs differ not in what they produce, but in the way they produce it». Bread is baked from time immemorial, fabrics are weaved for centuries. But there are differences in the methods of production: technologies, principles of management and marketing. Marginalists distinguish 4 factors of production: land

labor Factors of production capital

entrepreneurship

The land is the natural resources necessary for the existence of human society and used in the economy. The term «land» encompasses everything that is given by nature in a certain volume and over which man does not have the power to offer. 25

Land is for man the environment of his dwelling, a source of mineral and organic resources, and the sphere of employment of labor, capital and entrepreneurial skill. As a branch of material production, agriculture is organically connected with all other types of economic activity. Land as the location of any enterprise appears as a universal condition of production. Land for agriculture, mine. Natural differences are the basis of different labor productivity in industries where natural resources are the main material factor of production. Labor is an expedient, conscious human activity aimed at satisfying the needs of the individual and society. In the process of this activity, man uses, with the help of tools of labor, mastering, changing and adapting to his goals objects of nature, using the mechanical, physical and chemical properties of objects and phenomena of nature and forcing them to mutually influence each other to achieve a preplanned goal. Labor as a production factor has quantitative and qualitative characteristics. The quantitative characteristics of labor reflect the expenditure of labor, determined by the number of workers, their working time and the intensity of labor. Qualitative characteristics of labor reflect the level of qualifications of workers – the degree of complexity of their work. Wages as a price factor of production - labor will be considered separately in the Chapter 9. Capital is an economic resource that is defined as the totality of all the technical, material and monetary resources used to produce economic goods. The direction of assets in the production or provision of services for profit is also called capital investment or investment. Capital has five properties: 1. Limited economic resource. Like all economic resources, capital is also limited. 2. Accumulated economic resource. Capital is a resource not only preserved, but also replenished. 3. A resource with a certain liquidity, the ability to turn into a monetary form. This means the ability, directly or indirectly, regardless of subject matter, turns into a monetary form. Liquidity is provided by the availability of a value, which is understood as the quantitatively determined ability to exchange for other resources. 26

4. Cost, reproduced in the process of continuous circulation of forms. Capital is capable of conversion. Capital as a dynamic resource is revealed in the constant change of its own forms: money, production, and commodity. 5. Cost, bringing a new, added value. Capital reproduces not only its value, but also brings an additional (surplus) value, or profit. Capital acts as a self-increasing value. Capital is traditionally divided into basic and negotiable. In the sphere of functioning, capital is divided into production (industrial), commercial and financial (loan). The capital involved in the economic process is in constant flux. The starting point is money capital, which is advanced to purchase means of production and labor. In the production process, economic factors interact and the result is finished products. Thanks to the market, the form changes again to cash. The advanced money-capital returns to its owner in increments. Money ——> Commodity ——>Production ——> Commodity' ——> Money' The goal of this capital movement is to make a profit. In each specific case, the final result depends on a variety of factors, both the production nature and the market situation. The owner of the capital may receive a loss instead of the expected profit. Among the theories of capital and profit, labor theory, the theory of abstinence, and the theory of capital as a good that brings in income are best known. A. Smith characterized capital only as an accumulated stock of things or money. Smith divided into fixed and working capital. Smith attributed to the main capital cars and tools, buildings and buildings, the ability of all members of society. To working capital, A. Smith attributed food, materials, finished products, which are constantly in circulation. K. Marx approached capital as a social category. K. Marx argued that capital is a self-increasing value that creates surplus value. The surplus value is created only by the labor of hired workers. K. Marx divided capital into a constant and variable. Permanent capital is a part of capital, the value of which is reproduced in the price of the product 27

in a constant amount. The fixed capital includes equipment, raw materials and materials. Variable capital is a part of capital advanced for hiring labor. Labor is the source of newly created value. N.W. Senior (1790-1864) created the theory of abstinence. From the point of view of N.W. Senior, work was seen as a "sacrifice" of a worker who was losing his leisure and peace. Capital is the "sacrifice" of the capitalist, who refrains from personal consumption and turns it into capital. According to N.W. Senior, the benefits of the present are of greater value than the blessings of the future. Those who invest their money in economic activities deprive themselves of the opportunity to realize part of their wealth for the sake of the future. This is expressed in the form of profit and interest. According to the American economist I. Fischer (1867-1947), capital is a stream of services that turns into a flow of income. The more valuable the services of a particular capital, the higher the incomes. The value of capital is estimated on the basis of the amount of income received from it. The direction of assets in the sphere of production or the provision of services for profit is also called capital investment or investment. Entrepreneurial ability is a factor linking the remaining resources of production, an economic resource, which should include entrepreneurs, entrepreneurial infrastructure, as well as entrepreneurial ethics and culture. The uniqueness of the importance of entrepreneurship lies in the fact that it is thanks to it that other economic resources come into contact – labor, capital, land, knowledge. The main and most important for entrepreneurship, as a method of economic management, is the independence of economic entities, the existence of a certain set of freedoms and rights for choosing a type of entrepreneurial activity, sources of financing, the formation of a production program, access to resources, the sale of products, the establishment of prices for it, disposal of profit, etc. The second condition of entrepreneurship is responsibility for decisions, their consequences and the associated risk. Risk is always connected with uncertainty, unpredictability. A constant companion to entrepreneurial activity is a factor of unpredictability. The third condition of the entrepreneur is the orientation toward achieving commercial success, the desire to increase profits. 28

The profit of an entrepreneur is understood as the difference between income and expenses. Modern economists treat profit as a reward for the function of the entrepreneur, i.e. as income from the business factor. This material will be presented in more detail in the following chapters. 3. The problem of choice in conditions of limited resources. The production capacity Making their choice in conditions of unlimited needs and limited opportunities, each society should find the answer to the following questions: What products and services should be produced and in what quantity?

How should these goods and services be produced?

Who will receive and will be able to consume these goods and services?

In order to produce the product, it is necessary to choose the most optimal and promising combination of factors of production, based on the importance of consumer product properties and economic efficiency. Since in a market economy all subjects are interested in the profitability of production, they come from the effectiveness of the use of factors of production: from labor productivity, production efficiency. To illustrate the problem of choice and limitation, we will use the production-possibility curve (fig. 2.1). 29

Suppose that in the economic system: 1. Only two groups of goods are produced (guns and butter). 2. The number of all resources is limited to some strictly defined volume and is a constant value. 3. The level of technology is set and does not change. 4. The economy is closed, i.e. there are no foreign economic relations. Draw the system of coordinates and we will plot the amount of guns along the vertical, and the number of butter horizontally. If the society uses all the resources only for the production of guns, then the economy is at point A, i.e. the maximum possible volume of guns production is equal to segment OA, and the maximum possible volume of production of butter is zero. Accordingly, if the society uses all resources only for the production of butter, then the economy is at point F (this means the maximum possible production of butter in the volume of OF and guns in zero volume). The obtained curve ABCDEF defines the boundary of the production capacities of the society and has the form as in the figure (2.1): Production-possibility curve

Guns (in thousands)

T A

0

B

С

D E

S

F 2

4

6

Butter (in Quintals) Fig. 2.1

Each point on the given curve shows the maximum possible volume of production of both goods, with full use of all available 30

resources. At all intermediate points (B, C, D, E), the society produces both goods, but the society has to choose which of the goods to produce to a greater extent, because the additional production of one of the goods is possible only by reducing the production of another commodity. Due to the limited resources, output at the point T (i.e. outside the area of production opportunities) is impossible. A release at point S characterizes the underutilization of available resources or the low efficiency of their use. Control questions: 1. How do you understand the problem of the scarcity and limitations of economic resources? 2. Imagine the main factors of production. 3. Present and describe the stages of public production. 4. Explain what is the problem of choice in the economy. Basic terms and concepts: Production Exchange, distribution, consumption Reproduction Material and non-material goods Specialization of production Principle of comparative advantage Personal and industrial consumption Real and personal factors of production Resources and factors of production Productive forces Work force Means of production Tools Subjects of Labor Relations of production Needs Limitation Land Work Capital Entrepreneurial ability Problem of choice Production-possibility curve

31

Test tasks: 1. Factors of production are a) social conditions that affect production b) political conditions that affect production c) used to produce goods and services d) also called output e) unlimited f) inputs into the production process g) labor, land, capital 2. Which of the following is a factor of production? a) Money b) Stocks and bonds c) Political conditions that affect production d) Capital e) Social conditions that affect production 3. Which of the following is not a factor of production? a) Labor b) Land c) Capital d) Money e) Entrepreneurship 4. Capital as a factor of production is a) money b) buildings and machines used in the production process c) stocks and bonds d) the finances necessary for firms to produce their products e) political conditions that affect production f) machinery and other equipment used in the production process g) the man made physical goods used to produce other goods and services 5. Any point on a country's production possibilities frontier represents a combination of two goods that an economy a) will never be able to produce b) can produce using some portion, but not all, of its resources and technology c) can produce using all available resources and technology d) may be able to produce in the future with more resources and/or superior technology e) produced in the past

32

6. Efficient production is represented by which point(s)?

Q S

R

T

U a) R b) Q c) S d) T e) U 7. Which of the following is an opportunity cost of building a new public high school? a) Other goods and services given up in order to build the school b) Cost of hiring teachers for all subjects at the new school c) Change in the annual tax rate to pay for the new school d) Cost of constructing the new school at a later date teacher’s salary e) Cost of hiring workers for building 8. The most important factors of production are a) water, earth, and knowledge b) money, stocks, and bonds c) management, finance, and marketing d) labor, land, and capital e) business, firms, enterprises Tasks: 1) Draw the production-possibility curve of the country, where 15 units of product X or 25 units of product Y are produced daily. As the result of technology development, production of product X has increased up to 20 units. What has happened to PPC?

33

Chapter 3

OWNERSHIP AND ECONOMIC SYSTEMS 1. Ownership as an economic category. Subjects and objects of ownership. 2. Bundles of property rights. 3. Economic systems: essence and typology.

1. Ownership as an economic category Subjects and objects of ownership The economic basis, the carrying construction of any economic system is ownership. If you know who owns the power plant, then you can determine the policy of the state on the effective use of this strategic facility. If the roof of the house fell on a parked car icicle, the owner of the house bears material and moral responsibility for the damage caused to the owner of the car. The most important methodological problem of economic theory is the identification of content and the definition of mechanisms for the realization of property relations. Property (ownership) expresses the relationship of appropriation (alienation) of material goods. The property should distinguish: object subject economic content legal form

The object of ownership is, first, material components of social wealth (the means of production and consumer goods). The subjects of ownership are separate individuals, families, collectives, firms and the state. 34

The economic content of property is the relationship between the subjects of ownership over the reproduction of its objects: production, distribution, exchange and consumption. We concretize the concepts of «subject of ownership» and «object of ownership». The subject of ownership is the owner, i.e., the one who appropriates, owns, uses and disposes of the objects of property, this is the active side of property relations. The property object is what is appropriated (the means of production and production results, knowledge, information, etc.), this is the passive side of property relations. Property is, on the one hand, the relationship of the subject to the object, that is, the owner's man to his own thing. These are property, or subject-object relations. Property, on the other hand, is the relationship between people, that is, the subject to the subject, that is, subject-subject relations, which are of a socioeconomic nature and are the subject of economic theory. Subject-object relations are reduced to three powers: possession, use and disposal. Thus, subject-object relations express property as a legal category, and subject-subject relations express property as an economic category. Distinguish types and forms of ownership of the means of production. There are two types of property: private and public. Private property expresses the relationship of appropriation of means of production, and, consequently, of the results of production by individual subjects who own these funds. Private property acts as: – Private individual labor ownership, based on personal labor and work of family members; – private property, based on the use of someone else's labor, which has three forms: slave, feudal, bourgeois. Public ownership means the joint appropriation of means and results of production. Within the framework of private and public property there are various forms: state property, property of citizens, collective property, property of public associations. There are the following types of property rights: 35

– Private ownership. In this case, exclusive rights belong to individual individuals. – State ownership. Those who control its own exclusive rights by the state, or more precisely. – Collective ownership. In this case, a certain community of people controlling access to the resource owns exclusive rights. – Common ownership or free access. These basic types of property rights can exist in different combinations and in different countries. The common property is an accessory of a thing not to one, and simultaneously to two or more persons (proprietors). Relations of common property are characterized by a plurality of subjects of ownership of a particular object. Common and private property has one essential essence and their difference is not brought to the opposite. Common property can be transformed into private property, and private property into a common property. On the other hand, property cannot remain unchanged. Therefore, various types of common and private property are formed, through which the diversity of forms of ownership is manifested. 2. Bundles of property rights The property right is a behavioral relationship between people that is authorized by the society (state laws, traditions, administrative orders) that arise in connection with the existence of goods and relates to their use. In the 60-70th years of the 20th century, the theory of property rights began to be formed in Western economic science. At the sources of it were R. Coase and A. Alchian. The theory of property rights is based on two important features. First feature is instead of the concept of «ownership», the concept of «property rights» is used here. Not a resource in itself is the property, but the right to use it. «A bundle or share of rights to use a resource – that's what constitutes property» 1 . According to British scientists A. Honore, there are 11 property rights: 1

http://www.econlib.org/library/Enc/PropertyRights.html

36

1. The right of possession, i.e. the right of exclusive physical control over goods. 2. Right to use, i.e. the right to use the beneficial properties of the good for oneself. 3. The right of management, i.e. the right to decide who and how will ensure the use of goods. 4. Right to income, i.e. the right to enjoy results from the use of goods. 5. The right of the sovereign, i.e. the right to alienate, consume, modify or destroy the good. 6. The right to security, i.e. the right to protection from expropriation of goods and from harm from the external environment; 7. The right to transfer wealth to the inheritance. 8. The right to the perpetuity of the possession of the good. 9. Prohibition of harmful use, i.e. prohibition of the use of a thing in a way that harms the property of other economic agents. 10. The right to liability in the form of collection, i.e. the possibility of collecting the good to pay the debt. 11. The right to residual character, i.e. the right to conduct procedures and institutions ensuring the restoration of violated competencies. Not all of these 11 listed rights are equivalent. The most important are usually the first four - the rights to own, use, manage and generate income. Moreover, some in general exist only in combination with others and taken by themselves have no value, for example, the right to transfer wealth to the estate without the right to own these goods. Let us pay attention to the fact that for an effective activity an entrepreneur does not need to possess the full set or a bundle of rights. Rather, even on the contrary, full ownership is an onerous burden, for example, because of the increase in transaction costs. The entrepreneur needs property rights of such a level, in which the maximum possible efficiency of the firm's functioning is achieved. The category of transaction costs was introduced into the economic science by R. Coase. Transaction costs – this is the costs arising in connection with the collection and processing of information, negotiation and decision-making, control over the legal protection of performance of the contract, etc. The second feature underlying the theory of property rights is related to the notion of rarity or limited resources. C. Menger also 37

noted that property with its ultimate basis has the existence of benefits, the number of which is less in comparison with the needs in them. Therefore, the institution of property is the only possible institution for resolving disproportionate problems between the need and the available disposal of the amount of benefits. This discrepancy leads to the fact that one of the main features of property relations is their exclusive character. In other words, property relations are nothing more than a system of exclusions from access to resources. If there are no exceptions, i.e. resources are equally accessible, it means that they are nobody's, no one's, and they do not form an object of ownership. To exclude someone from free access to resources means from the point of view of the theory in question to specify the property rights, i.e. to assign individual powers to one or more entities. It should be noted that the specification of property rights is directly related to the efficiency of management, moreover, it is a necessary condition for effective work. The more clearly defined and more securely protected property rights, the closer the relationship between the actions of economic entities and their level of welfare, and, therefore, the specification as it leads to the adoption of the most effective and appropriate solutions. Conversely, if property rights are not clearly defined, «blurred», poorly protected and subject to all kinds of restrictions, then the actions of economic entities are generally ineffective. In this sense, it can be said that the purpose of the specification is to create conditions for the acquisition of property rights by those who value them higher and who are able to derive greater benefits from them. «If the rights to carry out certain actions can be bought and sold», said R. Coase in this connection, «they eventually get acquired by those who appreciate the opportunities they give to production or entertainment, which will be acquired, subdivided and combined in such a way that the activities allowed by them would generate revenue that has the highest market value». 3. Economic systems: essence and typology The economic system is a way of organizing the economic life of society. They differ among themselves: 38

 By the way of coordination of economic activity of people, firms, etc.; in other words, depending on how society responds to three main tasks, the main question from the triad of the economy: – what to produce, – how to produce, – For whom to produce.  By type of ownership of factors of production: motives that stimulate the conduct of economic activity. The following economic systems are known: Traditional

Market

Planned - administrative or command

Mixed

Traditional economy is a way of organizing an economic life in which land and capital are in common ownership. The limited resources are distributed in accordance with existing traditions.

Benefits:

Disadvantages:

stability;

A closed, isolated character of management;

multistructure.

Non-economic coercion to work; Satisfaction of basic life needs, low labor productivity; Primitive tools.

39

In the modern world, the traditional system is preserved in the tribes of Central Africa, south and south-east Asia and the valleys of the Amazon. Planned, administrative or command system is a way of organizing the economic life of a society in which land and capital are owned by the state, and the distribution of limited resources is carried out by the central authorities of the state in accordance with the plans. The main problems of the planned economy: 1. Commodity deficiency. 2. Plans are not flexible and long-term. 3. Information on the actual volumes of production is unreliable. 4. The manufacturer's lack of choice. 5. Inefficient use of resources.

Benefits:

Disadvantages:

Stable government prices;

Сentralized economic power in the form of a hierarchy and plan;

Full employment; Social security of the population

Low production efficiency; Non-economic coercion to work; Low standard of living.

Such an economic system has survived in North Korea and Cuba. Another type of economic system is a market system. The market economy has the following main features: 1. Economic isolation of business entities. 2. Private ownership of resources. 3. Free exchange of resources. 4. Economic coercion to work, individualism. 5. The mechanism of price signals based on the laws of supply and demand. 6. Competition between subjects of market relations. 7. Social differentiation. 40

Benefits:

Disadvantages:

The ability to meet a variety of needs;

Does not guarantee full employment;

Freedom to choose and act on Is subject to cyclical fluctuations the subjects of market economy; in the economy; Flexibility and adaptability to changing conditions;

Is subject to the inflationary rate of price changes;

Efficient allocation of resources;

Does not contribute to the preservation of non-reproducible resources

The use of achievements of scientific and technological revolution

Currently, the most widespread system is a mixed economic system, which is a market system based on private property and free enterprise regulated by the state. This type of economy includes both private and corporate, and public or state ownership of the means of production. The basis for the formation of a new, mixed type of economy was its individual elements, nascent at the end of XIX and to no small degree, formed by the middle of the XX century. The crisis of the 30s of the 20th century revealed the following needs of state intervention in the economy. A pure market economy is rather a utopia, and in practice, the mixed economic system often acts. With a mixed economy, the interests of the individual, with its many needs, are at the center of the country's socioeconomic development. Tasks of the state in the mixed economic system: – Providing a legal framework and a social climate; – antimonopoly policy and maintenance of competition; – development of industrial, social and environmental infrastructure; – carrying out investment and structural policy, financial and tax control over the level of production, unemployment and inflation; – implementing social policies for disabled people; 41

It is worth noting that the mixed economy in different countries at different stages of development is different. To date, there are the following models of mixed economy: American, or liberal model The American economic model is characterized by: – In an every possible way encouraging the American society and the state of entrepreneurial activity, a favorable business climate, a public attitude towards achieving success for every person, regardless of their origin and social status; – Relatively low level of GDP redistribution through the state budget (less than 17-18% through the federal budget and about 30% through the consolidated budget, that is, much less than in most other developed countries); – The relatively low share of the state in the GDP produced (about 12%). State property is represented only in nuclear energy, in industrial infrastructure (bridges, roads, pipelines), in education and health care; – More limited than in many other developed countries, but very effective government intervention in the economy; – High labor morality, largely based on Protestant ethics, diligence and faith of the majority of citizens in their own strengths. One of the most important features of modern USA economic development is the orientation toward flexible, diversified and smallscale production, the ability to adapt to the rapidly changing needs of the economy and the population. This is achieved through the use of new technologies based on microprocessors, microelectronics, programmable automation and bioengineering in material production and services. The effectiveness of the existing socio-economic model is evidenced by the high level of economic, scientific and technical development of the country. German model The German model is characterized by the following features: – individual freedom as a basic condition for decentralized decision-making and effective functioning of the market mechanism; 42

– social equality through active social policy, which relies on the active and direct participation of the state in the provision of social benefits; – stimulation of organizational and technological innovations; – countercyclical regulation; – effective structural policy; – comprehensive promotion and protection of competition. Another feature of the economic development of Germany is the so-called «Rhenish capitalism», characterized by a significant role of banks in the country's economy. Banks are in Germany major shareholders of industrial companies and companies in the service sector. Therefore, it is not by chance that banks actively intervene in the process of making business decisions. For the German economy, «superindustrialization» is characteristic, that is, a rather large share of industry in the production of GDP in comparison with many developed countries of the world. Swedish model The Swedish model is characterized by: – maintaining high and stable employment, – rapid economic growth, – equalization of incomes of the population, – maintaining regional economic equilibrium, – achievement of price stability. State regulation is carried out primarily through the regulation of labor relations at the national level and state ownership of enterprises. Social policy provides a high level of satisfaction of social needs through transfer payments (free services). The core of the Swedish system is social policy, which is based on three basic principles: – Equality; – Providing social guarantees to the population; – Full employment of the able-bodied population. In Sweden, employment is almost the highest among non-CIS countries. This is facilitated by a powerful trade union movement (95% of all employees are union members, while in the UK, for example, 54%, and in the United States – 59%), and the policy of the state to retrain workers. 43

Japanese or patriarchal-corporate model. The Japanese management model is characterized by: – Severe state regulation, i.e. mobilization of all resources for priority tasks; – Export orientation of the economy to create a powerful accumulation and investment fund; – Wide attraction of foreign capital for the development of scientific and technological progress; – Creation of large national monopolies to improve product quality and compete in foreign markets. – A system of lifelong hiring, which means that an employee works all his life in the same company, constantly moving up the career ladder. – Quality circles that involve workers in activities to improve product quality. In Japan there are about 1 million quality circles, they involve about 10 million people. An important feature of the development of the Japanese economy is the structural transformation based on the introduction of scientific and technological progress. It should be noted that the Republic of Kazakhstan is implementing a socially oriented market model of the economy. The Kazakhstan model is based on integration into world market processes and the development of a strong innovation-type economy. Due to the stable political situation and effective anti-crisis measures, Kazakhstan maintained a high rate of growth and low unemployment during the crisis. Kazakhstan achieved positive results due to reforms in public administration, pension provision, financial system, housing and communal services. The Kazakhstan economy has entered the trajectory of sustainable economic growth, which has been characterized by high rates and has not been interrupted since 1998. In many respects, Kazakhstan is ahead of other CIS countries, and by some (the volume of foreign investment, GDP growth rates) is among the world leaders. Kazakhstan was the first among the CIS countries to receive the status of a country with market economy – in 2000 from the European Union, in 2002 – from the USA.

44

Control questions: 1. Expand the forms of ownership, their distinctive features. 2. Give an interpretation of the economic content of the property. 3. Describe the concept of «bundles of property rights». 4. What economic systems do you know? Describe them. Basic terms and concepts: What to produce? How to produce? For whom to produce? Property An object of property Subjects of property Economic content of property Private ownership Collective ownership Property rights State ownership Common ownership Specification of property rights Economic system Traditional economy Market economy Command economy Mixed economic system Test tasks: 1. Which activities would be most characteristic of people in a traditional society? a) Establishing a mercantile system of trade b) Having the same occupation as their parents c) Working in an industrialized cities d) Serving in government assemblies e) Hunting and gathering f) Subsistence agriculture 2. The main characteristics of a mixed economy: a) different types of property b) Economy is regulated by the market and by the state, too c) the main economic agents are households, firms and the government d) only government property e) regulation of production is based on tradition f) Resources are allocated by government decisions 45

g) only private property h) Sole regulator of production is – market 3. The main characteristics of a command economy: a) Private property b) The government ownership, control and regulation of property c) Producers can produce whatever they wish d) Officials of the government control all aspects of economic activity e) Resources are allocated by government decisions f) Prices change according to changes in the supply and demand for products 4. The term that indicates ownership, either by individuals or by a business, is ... a) b) c) d) e) f)

Centrally planned economy business Competition Free enterprise Private property public

5. What are the basic questions all economic systems try to answer? a) What to buy? b) For whom to produce? c) When to buy? d) Why to produce? e) What to produce? f) When to produce? g) How to produce? 6. Who make the decisions in a market economy? a) The government b) Pets c) Voters d) The consumers e) The producers 7. The term _______________ is used to describe circumstances where government takes over ownership of a business. a) Competition b) deregulation c) regulatory capture d) nationalization e) Free enterprise f) privatization

46

8._____________has occurred if a government-owned firm becomes privately owned. a) Competition b) deregulation c) regulatory capture d) Privatization e) nationalization 9. Advantages of a market economy are a) does not provide for the basic needs of everyone in the society b) high degree of uncertainty c) high degree of individual freedom d) small degree of government interference e) high degree of consumer satisfaction 10. Disadvantages of a market and economy are a) economic fluctuations b) high degree of uncertainty c) high degree of individual freedom d) small degree of government interference e) high degree of consumer satisfaction

47

Chapter 4

FORMS OF PUBLIC ECONOMY. COMMODITY AND MONEY 1. Main forms of the economy. 2. The commodity and its properties. 3. Money: the essence and the origin. Functions of money. 4. Tenge in the economy of Kazakhstan: socio-economic consequences and prospects.

1. Main forms of the economy The form of management is a certain way, the type of organization of economic activity of people. The forms of management are characterized by the following elements: the dominant form of ownership, the level of division of labor, the nature of the exchange and distribution of the product of labor. Distinguish the following forms of social economy: Natural economy Commodity economy

The natural economy is a closed system of economy, in which production is directed at satisfying the producer's own needs. In the case of subsistence farming, each business unit relies on its own production resources and self-sufficient for everything necessary for life. She performs all kinds of economic work, starting with the extraction of different types of raw materials and finishing with their final preparation for consumption. For natural production, manual universal labor is as a rule of thumb. It uses the simplest technique (hoe, shovel, rake, etc.) and a handicraft tool. Of course, under such conditions, labor activity is inefficient, output cannot significantly increase. The natural economy is characterized by direct economic ties between production and consumption. It develops according to the 48

abbreviated formula «production – distribution – consumption». That is, the products created are distributed among all participants in the production and, bypassing its exchange, goes to personal and industrial consumption. Such direct communication provides sustainability to subsistence farming. Natural economy is historically the first type of economic activity of people. It arose in the extreme antiquity, during the formation of the primitive communal system, when the productive activity of man began and the first branches of the economy-agriculture, cattlebreeding, appeared. Natural economy existed among primitive peoples who did not know exchange and private property. It was a system of closed, economically independent communities. Natural economy also prevailed in the ancient slave states, although there was already a fairly developed commodity production. It was one of the main features of the feudal economy. Separate elements of subsistence economy also exist in modern developed countries, where commodity-money relations dominate. Natural economy prevails in many developing countries. More than half of the population is employed in the subsistence and semi-natural economy of underdeveloped countries. According to forecasts of specialists for a long time subsistence economy will occupy a significant place in the economy of these countries. Many peoples of Africa, Indian tribes living in the interior regions of Latin America, in South-East Asia, retain a wide variety of specific forms of subsistence farming (hunting, fishing, cultivation of land, nomadic cattle breeding). The main drawback of subsistence farming is that it cannot ensure the growth of labor productivity, and therefore supports only minimal living conditions. Therefore, starting with a natural economy - the very first form of organization of economic life, mankind did not stop there and switched to commodity production. Commodity production and its main features. This is such an organization of the public economy, in which products are produced by separate producers, where each of them specializes in the production of one product. Therefore, in order to meet public needs, it is necessary to purchase and sell products that become commodities on the market. This economy is an open system of organizational and economic relations. Here, workers create useful products not for their own 49

consumption, but for selling them to other people. The whole flow of new things goes beyond the limits of each production unit and rushes to the market to meet the demand of buyers. The production of goods is based on the division of labor. Its development depends on the extent to which the specialization (separation) of workers and enterprises in the output of certain types of products or parts of complex products is deepening. Such a phenomenon is objectively caused by technological progress, and the latter, in turn, receives a big push in the division of labor. The indissoluble connection of commodity production with the division of labor, and consequently with the progress of technology, is one of its undoubted advantages in comparison with subsistence farming. The commodity economy has indirect links between production and consumption. They develop according to the formula «production – distribution – exchange – consumption». Manufactured products first enter the market for exchange for other products (or for money) and only then falls into the sphere of consumption. The market confirms or does not confirm the need to manufacture this product for sale. The commodity economy includes such general organizational links that can serve a variety of socio-economic systems. However, the volume and importance of the production of goods and their exchange are not at all the same. Because of this, the commodity economy has a historical character: it has changed significantly throughout history. First of all, it is important to reveal the genesis of commodity production. One of the reasons for its emergence is the social division of labor. The beginning here was laid by a large social division of labor: the first (separation in agriculture farming and livestock) and the second (the seperation of craft from agriculture). In the future, the economic law of the division of labor is gaining in strength. In accordance with this law, the economy is progressing due to the increasing qualitative differentiation of labor activity, which leads to the isolation and coexistence of its various types. As a result, there are several forms of the division of labor: international (between countries), the general (between major branches of the people's economy, farming – agriculture, industry, etc.), private (division within large industries in the sub-sector) and individual (within enterprises – their units). 50

The division of labor helps to increase its productivity and creates the material prerequisites for the emergence of an exchange. This is due to the fact that farms specializing in the production of any product cannot fully use it and at the same time satisfy all its needs, and therefore it is necessary to exchange goods between producers. The second reason for the emergence of commodity production is the economic isolation of producers. It assumes ownership of the product, the existence of a strong economic interest of the economic entity, its freedom to choose the type of economic activity and certain obligations to society, the state and partners. Economic isolation of producers is such a state that allows them to relatively freely dispose of, manufactured products, alienate and own it. Originating in the period of the decomposition of the primitive communal system, commodity production served the slave system, feudalism and universal character acquired under capitalism. In the slave-owning society, the share of commodity output in the total volume of public production ranged from 5 to 10%. Under feudalism, especially with the transition to the monetary form of rent, commodity production increased the share to 30%. In the system of relations of classical capitalism, the production of goods in the total volume of output is close to 100%. Commodity production prevails in modern developed countries and in developing countries. Commodity production is highly adaptable to different economic systems. In each of them it serves the realization of those forms of property that are peculiar to them. Two types of commodity production are known to history: simple and large capitalist. A simple commodity production is the production of small commodity producers, based on their private property and their own labor. We are talking about peasants and artisans who produce products for exchange. The appearance of a large, universal commodity production is connected with the assertion of a capitalist economic system. Therefore, it is called capitalist commodity production. Here the goods become not only the products of labor, but also the factors of production, including labor. Market relations assume a universal character. Simple and capitalist commodity production have common features and differences. Their common features are private ownership 51

of the means of production, the spontaneous nature of development, the existence of competition, the orientation of production to the market. The differences between them are manifested in the following: – In simple commodity production, the means of production belong to the producers themselves, and under capitalist commodity production – to the entrepreneurs; – Simple commodity production is based on personal labor, and capitalist labor is based on wage labor; – At simple commodity production the product belongs to the manufacturer, and at capitalist – to the businessman; – In simple commodity production, labor power is not a commodity, and in the case of capitalist production, it is a commodity; – At the first stage, commodity production was not a universal form of production, and under capitalist commodity production it is universal; – In simple commodity production, the main goal is to satisfy the needs of the producer, and in the capitalist sector, to obtain profit; – Simple commodity production is based on backward technology, and capitalist production is based on developed machine technology. The similarities and differences of simple and capitalist commodity production predetermine the nature of the small producer: on the one hand, he acts as a worker, and on the other, as an owner. This remark is important for determining the patterns of development of small commodity production, which prevails in developing countries. In modern conditions, a certain type, a model of commodity production, can be considered entrepreneurship – initiative, independent economic activity of citizens and their associations. In the literature, there are other models of commodity production: – A free-trade economy, – Commodity economy of the organized market, – Planned model. In the first case, there is no monopoly, there is private free competition. The second model is characterized by the presence of 52

various forms of economic monopoly and state regulation. Finally, the third model is a regulated economy based on directive planning. Thus, the commodity economy is a system of organizational and economic relations, thanks to which the equitable progress of the economy is ensured. With the deepening of the division of labor, the application of more and more advanced technology is expanding. This causes an unprecedented increase in the production of products. And thanks to increased productivity, output per capita increases. In addition, an increasing variety of products is created, designed to be exchanged in the market for other products. 2. The commodity and its properties Commodity production is the basis of market economy. The elementary form of existence of market economies is the commodity. It is important to note that we will present this problem through three schools: the Marxism, the marginal and the neoclassical. The most important characteristics of the commodity are consumer value and exchange value. These categories are introduced into scientific circulation thanks to the works of Aristotle, A. Smith, D. Ricardo, T. Malthus and many other economists. At the same time, K. Marx on the basis of their works presented the following concept of the product and its properties. 1. Consumer value – the ability of a product to satisfy a person's need. The usefulness of the product gives it a property of consumer value. 2. Exchange value – the property of a commodity exchanged for other goods in certain quantitative proportions. The consumer value is the result of a specific labor, i.e. a certain skill, skill, professionalism. Those in the production of goods, participate in two types of labor – concrete and abstract labor. Concrete labor is a labor of a specific kind that is characterized by the use of specific objects and tools, the peculiarity of the production process, the skills of the worker and the concrete result, the commodity of a certain use value. Exchange value means the ability of a commodity to be exchanged for another commodity. The commodity is a product of 53

labor, a thing made not for own consumption, but for exchange for other goods. Consumer value is produced by concrete labor, and exchange value by abstract labor. Abstract labor is the expenditure of human effort, energy in general, its brain, muscles, and social labor in general. In the basis of the definition of value, the price of the commodity is the socially necessary labor input – this is the average expenditure of labor with an average level of production development, with an average supply of production factors. This explains the dual nature of labor and the existence of two properties of the goods according to Marx. A significant contribution to the disclosure of the product and its properties was made by J.B. Sey, D. Mill, D. McCulloch. According to the three-factor concept, the basis of value are such factors of production as land, capital, labor. In production, capital owners, landowners and workers interact and complement each other. The participants in the production process do not contradict, but, on the contrary, supplement each other. Each factor of production creates its own part of value: capital – interest, labor – wages, and land – rent. Considering the costs of production as the basis of exchange value and prices, they came to the conclusion that the new value is created not only by living, but also by previous labor. The value of a good depends on the amount of labor necessary to produce it, but other factors can also influence it. J. Mill illustrates this with the so-called «paradox of the old wine»: the cost of producing the young and old wine is the same, and the prices are significantly different. Hence the conclusion – when determining values, it is necessary to take into account not only labor costs. Fundamentally new approaches to the definition and analysis of value continued to develop. The labor theory of value and the theory of production costs gave an answer to the question – what is the basis for the formation of value in the production process. At the same time, representatives of the new direction answered the question – what is the basis for demand for the goods, how demand is formed, what determines the behavior, the choice of buyers. These problems became central to their research and began to develop the theory of marginal utility, which became the starting point 54

of marginalism, i.e. theory of limit values. Adherents of this trend were economists W. Jevons, C. Menger, F. Wieser, E. von Bawerk, L. Walras and others. According to the marginalism theory, the value of a commodity is determined by its marginal utility, i.e. the value last unit of commodity. The theory of marginal utility is based not on the objective factors of its formation (production of goods) as the basis of value, but the subjective factor is the utility that the consumer provides. Therefore, this theory is focused on the study of the interests and motives of consumers, which contributed to the creation of a theory of consumer behavior, which has become a kind of compromise between various areas of economic science, including the theory of value. It was developed by the English mathematician and economist A. Marshall. The basis of the theory of consumer behavior is the study of the problems of interaction between supply and demand as forces that determine market processes. On this basis, Marshall proposed a compromise theory of prices, emphasizing the importance of quantitative estimates of the motivation of actions of people, measuring them with the help of a «money price». He believed that the costs of production, the intensity of demand, the limit of production and the price of the product are mutually regulated. Analysis of needs, demand and usefulness makes it possible to construct an equilibrium price model. 3. Money: the essence and the origin. Functions of money The development of commodity production at a certain stage led to the appearance of money. In economic science, there are various concepts of the origin of money, among which two important ones can be distinguished. Supporters of the rationalist concept believe that money arose as a result of an agreement between people who decided that such a method of exchange would be more convenient and profitable for them. With this approach, money is regarded as an artificial social convention (P. Samuelson, J. Galbraith). Representatives of the evolutionary concept explain the origin of money by the action of objective market forces that are not subject to man (K. Marx). The appearance of money and their further 55

development are connected with the expansion of the volume of production of goods. At the same time, some products are exchanged for products of other manufacturers and there is a need for a universal product that could be used for exchange for all other products and in which its value would be measured. The appearance of money and the development of their forms made it possible to facilitate and accelerate the performance of exchange transactions. Initially, goods were exchanged for goods, but this was not always convenient because of the necessity of the double coincidence of wants. The use of precious metals in the role of money was due to the presence in gold and silver of such qualities as homogeneity, divisibility, portability and security against damage, as well as the simplicity of their account and the measurement of the value of all other commodities in them. The withdrawal from full-fledged gold money was caused by high costs of their production and circulation, the lack of sufficient metal for the further development of the economy. In circulation, paper money appeared, which demanded gold security for their entire amount. However, the growth in demand for gold as a monetary metal significantly outstripped the possibilities of its extraction. In connection with this, the gold provision of the issued paper money gradually began to decline. Currently, money is of a credit nature. Their value is determined not by the amount of gold they are exchanged, but only by the quantity of goods and services that can be purchased with this money. However, the most striking example of the transition to more simple and convenient money is the use of non-cash and mostly electronic money. They allow you to make transactions in a matter of seconds for huge amounts with minimal effort and money. The emergence of money was not simply caused by the need for rapid economic development, once appearing, they contributed to the further development and improvement of economic ties. Thus, the development of the economy and historical forms of money are two interrelated and interrelated processes. The goods having the greatest sales ability become money. Money is a completely liquid medium of exchange. Money acts as a universal commodity equivalent, a universal medium of exchange. 56

Evolution of forms of money:

commodity premonetary equivalents

Gold, silver coins

Bilateral coins

Paper money

Credit money

With the growth of the productive forces and the expansion of the market, one commodity gradually emerged, which became the role of money. Money performs the following 3 functions: Unit of account It is a standard unit of prices. Unit of account provides a standardized unit of evaluating the price of goods and services. From there, the monetary unit should be comparable to the comparison of the cost of goods and services, through the scale of prices. The scale of prices is a monetary unit (for example, tenge), used to measure and compare the values of goods and services

Medium of exchange Medium of exchange intermediary in trade. It can be widely accepted in exchange for goods and services, because, in modern society it is legally recognized asset. This function allows you to overcome barter

Store of value Store of value is ability of money to save buying capacity in the future, and it functions as holds of buying capacity over time. It provides their owner with purchasing value in the future. This is due to the fact that the money has absolute liquidity.

Money is the means which has an absolute liquidity. Liquidity is the ability to use the asset quickly as a means of exchange and the ability to store its value. Depending on the degree of liquidity, the following indicators are distinguished: M1 = banknotes, billon coins + cash on current accounts. M2 = M1 + savings and time deposits. M3 = M2 + contributions to specialized institutions, special types of savings. 57

Money circulation is the continuous movement of money, performing the functions of a medium of circulation and a measure of value, serving the circulation of goods and services. 4. Tenge in the economy of Kazakhstan: socio-economic consequences and prospects An important event of the 90s of the 20th century in the Republic of Kazakhstan was the introduction on November 15, 1993 of its own currency, the tenge, which allowed the formation of a sovereign monetary system. Tenge as a national currency, plays an important role in the history of our country. The Kazakhstan tenge has 17 degrees of protection. Therefore, tenge is among the most protected currencies in the world. The national currency was one of the state symbols and an indicator of the sovereignty of the country. The introduction of the national currency led to the emergence of fundamentally new tasks. One of the main tasks was to strengthen the payment function of the tenge and increase confidence in the national currency. Among the measures taken in this direction were: transfer of payment of export and import duties, customs payments, prohibition of retail trade for foreign currency, prohibition of barter transactions by legal entities. An important task was also the formation of a liquid foreign exchange market. With the purpose of increasing the supply of foreign currency on the domestic market, as a temporary measure, that from January 1, 1994 mandatory sale on the currency exchange of 50% of export proceeds was introduced. To meet the needs of the population in cash foreign currency, the opening of exchange offices was legally regulated. Simultaneously with the introduction of the tenge, measures were taken to ensure its convertibility. The freedom of money transfers connected with foreign investments was guaranteed. For non-residents, a free order was introduced for the conversion and purchase of foreign currency on the domestic market. Individuals were allowed to export foreign currency for a certain amount without presenting supporting documents. In the early years of the formation of the national currency, there was a significant shortage of domestic sources of foreign exchange supply. As a result, the outflow of foreign exchange funds from the country posed a threat to the stability of the 58

exchange rate. Therefore, foreign exchange operations were envisaged for licensing, providing for the transfer of capital from residents to non-residents. With the development of production, an increase in the influx of foreign capital into the country, the appearance of large domestic investors, the strengthening of both the national currency and the foreign exchange market occurred. At the same time, confidence in the national currency increased. In these conditions, to further stimulate economic activity, liberalization of currency relations began. Macroeconomic and financial stability in Kazakhstan was facilitated by the creation of a domestic banking system that in a short time became the CIS leader in terms of its development level. The state carried out an active policy to create an attractive investment climate, guaranteeing a firm compliance with its contractual obligations. As a result, in the first years of reforms, the influx of foreign investment totaled billions of dollars. In the industry came the latest technology and modern production and management experience. The introduction of its own monetary unit allowed the National Bank and the Government of the Republic of Kazakhstan to conduct an independent economic and monetary policy. The main goal of monetary policy was defined as achieving internal and external stability of the national currency. Kazakhstan for more than 20 years managed to develop and implement an effective investment policy. In Kazakhstan, a strategic investment course was defined, a clear investment policy, a favorable climate was created, long-term investments were legally guaranteed. As a result, during the years of independence, record values were achieved, the volume of foreign investment in the country's economy exceeded $ 131.9 billion. Kazakhstan has achieved one of the highest rates of development of the national economy. The developing economy of the country becomes an important factor of development and a stimulus for production, a catalyst for the emergence of new branches and industries. Control questions: 1. Uncover the essence of subsistence farming. Imagine the characteristics, features and conditions of its occurrence. 59

2. Uncover the essence of commodity production. Present the characteristics and conditions of occurrence. 3. Show what is the essence of money, its evolution and functions performed by money. 4. Discover what is a commodity as an economic category, and what properties it possesses. Basic terms and concepts: Forms of public economy Natural form of economy The commodity form of economy Product and its properties Labor theory of value Consumption and exchange value Concrete and abstract labor Socially necessary labor inputs Cost (value) The theory of marginal utility Money Commodity pre-monetary equivalents; Gold, silver coins Bilateral coins Cash Credit money Functions of money Scale of prices Liquidity Money turnover Tenge Test tasks: 1. A _______________ describes the common way in which market values are measured in an economy. a) medium of exchange b) unit of account c) store of value d) unit of exchange e) factor of production 2. In modern economies, credit cards are a _________________ because of their wide acceptance as a method of payment for both goods and services. a) factor of production b) unit of account c) medium of exchange 60

d) store of value e) unit of exchange 3. ________________ serves society in three functions: medium of exchange, unit of account, and store of value. a) Barter b) Money c) Goods d) Bonds e) Stocks 4. Money as economic category is a) gold b) stocks c) bonds d) an universal equivalent e) silver f) the set of assets that people use to buy goods from other people 5. Commodity production's emergence conditions a) private property b) the social division of labor c) common property d) production for own consumption e) natural production 6. Store of value a) is intermediary in trade b) something that is generally acceptable in exchange for goods and services c) a legally recognized asset that is generally accepted in exchange for goods and services d) the ability of money to save purchasing power in the future e) something that provides a standardized means of evaluating the price of goods and services 7. A unit of account a) is intermediary in trade b) standard measure of prices c) something that is generally acceptable in exchange for goods and services d) a legally recognized asset that is generally accepted in exchange for goods and services e) is a repository of purchasing power over time f) something that provides a standardized means of evaluating the price of goods and services.

61

Chapter 5

MARKET. STRUCTURE AND INFRASTRUCTURE OF THE MARKET 1. The essence and types of the market. 2. Competition: the concept and types. 3. Market infrastructure. Basic elements of modern market infrastructure.

1. The essence and types of the market The commodity economy became the basis of the market economic system, i.e. a system in which relations are regulated by the market. Market relations are not only relations in the sphere of exchange, it is the whole cycle of relations of the stages of public production: production, distribution, exchange and consumption. The simplest concept of the market is the place of purchase and sale of goods. With the development of commodity-money relations, along with a simple concept, a more extended one appeared. Under the market in a broader sense, the sphere of circulation (exchange) of commodities began to be understood, which includes the economic relations between sellers and buyers. Market relations are regulated and coordinated through a market mechanism. The market mechanism is a mechanism of interaction between sellers and buyers about the establishment of prices, production volumes, its structure and product quality, it is a mechanism for allocating resources and revenues on the basis of objective economic laws. The market mechanism as a regulatory mechanism is a complex system, including the following elements. 1) subjects (households, firms, the state); 2) objects (different types of the goods market); 3) economic links between entities that may manifest themselves in cooperation or competition; 4) availability of information on decisions taken to establish economic ties; 5) pricing mechanism. 62

Factors forming the market are: – the social division of labor and specialization; – economic isolation of market entities; – value of transaction costs; – free exchange of resources. Under the influence of these factors, the product of labor turns into a product that people need to meet their needs, but which can be obtained from the owner of the product only by equivalent exchange for other labor products or their substitutes (for example, money). It is possible to understand the essence of the market by studying the institutions of the market. Under the institutions in this case are understood norms and principles of behavior, economic traditions and customs. The market economy covers the following institutions: a) private property; b) freedom of entrepreneurship and choice; c) personal interest as the main motive of behavior; d) competition; e) pricing based on the interaction of supply and demand. Adam Smith, in his work «An Inquiry into the Nature and Causes of the Wealth of Nations» (1776) described the operation of the «invisible hand» rule, which most accurately describes the essence of market relations. Despite the fact that everyone decides that how and for whom to produce in the market there is no misunderstanding between sellers and buyers. Interest in personal gain forces producers to offer goods that are in demand. At the same time, resources are directed to the production of exactly those benefits that people agree to pay for. You can select different types of markets depending on the feature being analyzed. According to the economic purpose of the objects of market transactions, the following types of markets are distinguished. 1) The market of consumer goods and services: – The market of food products; – The market of non-food products; – service market. 2) Factors’ market: – labor market; – the market of means of production; 63

– market of raw materials. 3) Financial market: – the stock market (securities); – money market (deposits, currencies); 4) The real estate market: – The land market; – real estate market; 5) Information market: – market of spiritual and intellectual product. According to the spatial feature distinguish: 1) Local market; 2) Regional market; 3) National market; 4) World market. The market performs a number of important functions that streamline the economic life of society. First, the market is the link between sellers and buyers, a means of moving economic goods between people, territories and even states; moreover, communication between people is carried out independently of the division of people into classes, nationalities, races, sex, religious beliefs – only sellers and buyers act on the market. Secondly, the market realizes the public recognition of the goods offered for sale, and therefore of the labor invested in them. The market can reject goods or goods that people do not need, which do not satisfy people's needs. That is, the market regulates the supply and demand of goods, as well as price setting. Thirdly, the market is an independent distributor of economic benefits only on an equivalent and on a fee-for-service basis. Fourth, the market is a mechanism for rewarding successes and failures, it is an objective appraiser of the capabilities of each person as a consumer, producer, entrepreneur. Fifth, the market performs a signifying function, «culling» those producers who cannot offer the best quality at the lowest price. In the sixth, the market performs the function of allocating resources, directing resources to those industries whose results are in demand. 64

2. Competition: the concept and types The market mechanism is optimized through competition. The reason for the emergence of competition is the scarcity of resources and benefits. You can distinguish between the competition between sellers and the competition between buyers. Sellers compete for the right to sell products. The one who offers the lowest of the prices wins. Buyers compete for the right to buy goods and services. The one who offers the largest of the prices wins. For the sake of justice, it should be noted that the market economy is characterized by competition between sellers, and for the team – competition between buyers. Competition is a struggle between commodity producers, suppliers, sellers for leadership, for the primacy in the market. Competition serves as the most important ways to increase efficiency, both of the whole economic system and of all its links. Competition is a civilized form of struggle for survival, this is the strongest way to continuously stimulate workers and work collectives. Thanks to economic freedom, the concomitant competition, the market economy is superior to the planned economy, in which there is no competition. The most effective market mechanism operates under conditions of free, or perfect competition, i.e. when the market situation is characterized by: 1) the set of buyers and sellers; 2) high mobility of factors of production; 3) the absence of barriers to entry or exit from the market; 4) homogeneity (standard) of the products sold; 5) equal access of all market participants to information. As a result, with perfect competition, the share of each participant in sales or purchases is negligible, therefore none of the sellers or buyers in themselves are able to influence the market price. If at least one of the signs of perfect competition is absent, then such a market structure is called imperfect competition. There are three main types of imperfect competition: Pure monopoly – characterized by the presence on the market of a single seller of a unique (not having close substitutes) goods. Absolute or pure monopoly is the complete opposite of perfect 65

competition. The monopolist possesses all the fullness of market power: it establishes and controls prices, decides what volume of goods to offer to the market. Under monopoly, the industry, in fact, is represented by only one firm. Barriers to entry to the market (both artificial and natural) are almost insurmountable. Pure monopoly phenomenon is quite rare. More often it is represented as a natural monopoly. The industry is a natural monopoly if a single firm provides the market with some kind of product or service at a lower cost than would be possible for two or more competitors. Examples are utilities: water, electricity, etc. Oligopoly – characterized by the presence on the market of a small number of large sellers, whose merchandise can be either homogeneous or differentiated. The entrance to the oligopolistic market is difficult, the entrance barriers are very high. Control of individual companies over prices is limited. Examples of oligopoly can serve the automotive market, cellular communication markets, household appliances, metals. The peculiarity of the oligopoly is that the decisions of the companies about the prices for the goods and the volumes of its supply are interdependent. The situation on the market depends heavily on how companies react when the price of a product changes with one of the market participants. Monopolistic competition, which is characterized by the presence on the market of a relatively large number of firms that produce differentiated products. In conditions of monopolistic competition, the entrance to the market is sufficiently free, there are barriers, but they are relatively easy to overcome. For example, to enter the market the firm may need to obtain a special license, patent, etc. The control of firm-sellers over the prices is limited. To the monopolistic competition can be attributed markets of food and light industry, the market of medicines, clothing, footwear, perfumes. Goods in such markets are differentiated – one and the same product (for example, clothes) from different vendors (manufacturers) can have a lot of differences. Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in the service: the availability of warranty repair, free delivery, technical support. 66

There are two main methods of competition: Price competition Non-price competition Price competition arises from differences And non-price competition is based in prices from manufacturers. on the difference in the quality of the goods and services offered.

In practice, it is difficult to dismember them, since a better product presupposes a higher price. Competition has both its pluses and minuses. Positive consequences of competition: 1) reduction of costs; 2) rapid introduction of scientific and technical progress; 3) flexible adaptation to demand 4) high quality products; 5) an obstacle to overstating prices. Negative consequences of competition: 1) The ruin of many subjects of a market economy; 2) Anarchy and production crisis; 3) Excessive exploitation of resources; 4) Environmental violations. However, the effectiveness of a competitive economy is much higher than that of a monopolized economy. Therefore, modern states conduct an active antimonopoly policy, policies to support and develop competition, take measures against unfair competition. 3. Market infrastructure. Basic elements of modern market infrastructure Infrastructure is an indispensable component of any integral economic system and subsystem. It is an integral part of the overall structure of economic life, having a subordinate auxiliary character and ensuring the normal economic activity of the economy as a whole. For the first time the term infrastructure was used at the beginning of the XX century. To designate facilities and facilities that ensure the normal operation of the armed forces. It came from the Latin words «infra» – below, under; «struktura» – structure, location. Despite widespread use, there are various interpretations of this concept. 67

In the 40s of the XX century in the West countries, under the infrastructure, the totality of industries serving the normal functioning of material production began to be understood. In our economic literature, this problem was mainly developed in the 1970s. It is accepted to allocate: – production infrastructure, serving production (transport, communications, wholesale, etc.); – social infrastructure – the totality of objects in the service industries (transport and communications for the provision of services to the population, education, health care, social security, etc.), whose activities are aimed at satisfying personal needs, providing vital activity and intellectual development of the population; – market infrastructure. Market infrastructure is a set of various organizations, institutions, commercial and state enterprises and services that ensure the normal and stable functioning of the financial and commodity market, which is the main purpose of the infrastructure institutions. The market infrastructure includes many elements that are related to each other and together constitute an organized and structured system. The market infrastructure performs the following functions: – organizes the registration of market relations; – increases the efficiency and efficiency of market actors; – facilitates the realization of the interests of market participants; – simplifies the form of economic and legal control. The functioning of market infrastructure is of a dual nature. On the one hand, it is the service of market actors. On the other hand, the reproduction of labor resources, of the person himself, i.e. factor, which directly participates in the market. Market infrastructure is designed to ensure the developed nature of the work of market entities not imposed from the outside, but generated directly by market relations. Based on all of the above, we can conclude that the infrastructure of the market has a great influence on the activities of the economic system and is an integral part of the market economy. 68

For the timely and full-fledged development of the infrastructure sector in the Republic of Kazakhstan, activities are carried out in the following areas: – Creation of favorable conditions for the competition of enterprises; – Stimulation of enterprises for solving the main tasks of economic growth and unconditional fulfillment of the functions assigned to them; – Attraction of foreign investments for the priority development of market infrastructure facilities; – Solving the problems of obtaining education, taking into account the requirements of the market, providing the right and opportunity to work in the specialties that market infrastructure facilities need. The main elements of market infrastructure include banks, exchanges, auctions, advertising agencies, information technology, business communication tools and credit and tax systems. Briefly describe the most important elements of the infrastructure. Commodity exchange – an institution in which wholesale transactions for the sale of goods on samples and standards are carried out on the basis of a preliminary exchange examination. On the commodity exchange, as a rule, not goods are sold and bought, but contracts for their supply. The merit of commodity exchanges is that here the buyer freely chooses the seller, as well as vice versa, that prices are formed under the influence of supply and demand, that trades are conducted according to common exchange rules, and the standard contract form simplifies trading. Distinctive exchanges are specialized and universal, public and private. On specialized exchanges, the object of the transaction is a certain kind of a homogeneous product (copper, aluminum, nickel, precious metals, cotton, wool, gasoline, rubber, potatoes and some others), on universal – a lot of goods. On commodity exchanges, on the instructions of their clients, brokers enter into transactions. In the role of such can act as highly qualified professionals who are well aware of the legal rules of registration of transactions, market conditions, and brokerage firms registered on exchanges and representing the interests of their clients. The source of the broker's income is the commission fee provided for 69

in the charter of the relevant exchange. The subjects of the commodity exchange are dealers – bidders who carry out exchange transactions on their own behalf and at their own expense. By their nature, exchange transactions are in two varieties. Transactions for real goods are called spot transactions. They give guarantees of the realization of the product that is already available. In such transactions, the producer is exposed to the risk of price changes at the production stage. Therefore, an increasing number of transactions in the exchange trade are acquired by «forward» transactions, guaranteeing the delivery of goods at the right time and at prices that ensure the corresponding profit. With such a transaction, not the goods themselves, which have not yet been produced, are sold, but the right to receive it. A variety of forward transactions are «futures-transactions». This transaction for the «goods of the future». With this transaction, partners do not expect to transfer the goods sold to each other. The purpose of a futures deal is to obtain a difference in price for the period between the conclusion of a contract and its execution. At the same time, the system of futures contracts allows you to protect prices for goods from the influence of random factors, is a kind of guarantor for both sellers and buyers. Auctions are a public sale on the basis of trades at a predetermined time and at a pre-established location of specific goods or their samples. Fair – regional bidding, organized at a specific time (Sundays, holidays, etc.). Stock Exchange – the organization of trading enterprises and individuals, created for the implementation of free purchase and sale of securities at market prices. The purchase and sale of securities on the stock exchange is carried out on the basis of their exchange rate, which varies depending on the relationship between supply and demand. Registered exchange rates (exchange quotations) are published in special exchange bulletins. Currently, the dominant volume of trading in securities falls on international exchanges of major financial centers in New York, London, Paris, Frankfurt am Main, Tokyo, Zurich. The implementation of the functions of the stock exchange is impossible without the participation of intermediaries acting on it – 70

brokers and dealers. The broker only reduces the seller of securities to their buyer, receiving commission for this, and the investment dealer also buys securities in his name and at his own expense to resell them. Revenue from resale is its profit. Recently, more and more large companies are engaged in intermediation on the stock exchange, integrating brokerage and dealer operations in their work. The modern stock exchange is a super-powerful computer center, having means of operative communication practically with the whole world. All transactions are entered into the memory of the machine, and information about the market spreads in a matter of seconds. The labor exchange is an organization specializing in performing intermediary operations between entrepreneurs and workers with the purpose of buying and selling labor. It allows you to streamline the employment of labor companies and reduce the time for citizens to find work. In addition to employment measures, these exchanges provide services to people who want to change their place of work, study the supply and demand of the workforce, collect and disseminate information on the level of employment in relation to certain professions and regions. Under the existing laws of most countries, all available vacancies in enterprises must be registered on local exchanges. The credit system is a set of banks and other credit and financial institutions that mobilize free monetary resources and provide them with a loan using a tool specifically designed for this purpose. The core of the credit infrastructure is the banking system. Banks are financial organizations that issue, store, provide, distribute, exchange and control money and circulation of money and securities. In a market economy, banks are a powerful instrument of structural policy and regulation of the economy, carried out by redistributing finance, capital in the form of bank lending to investment. The banking system includes: – Central (issuing) bank that has the right to issue banknotes; – commercial, or deposit, banks, engaged in a wide range of operations, including the provision of loans; – investment banks specializing in financing and long-term lending to investments of various enterprises and entire industries; 71

– mortgage banks, building their activities on the provision of long-term loans secured by real estate; – innovative banks that provide loans for the creation and implementation of various innovations and scientific and technical developments; – savings banks that accumulate free money of the population, provide loans, conduct cash settlement operations to provide services to the public. In the active impact on the course of economic development, the central bank has its own tools. So, by limiting or increasing the release of money into a national economic circulation, the bank significantly affects the state of the money market. In most countries with a market economy, the central bank enjoys administrative autonomy. Varying the rate of interest for a loan, the central bank facilitates or complicates access to these loans. In addition to emissions, instruments of direct regulation are economic regulations that control the activities of commercial banks. The market infrastructure includes public finance. They are based on central and local budgets. Through the state budget there is a redistribution of incomes, financing of social programs. An important part of the market infrastructure is a ramified system of legislation that regulates the legal relationships of economic entities and defines the rules of the «market game». Thus, it can be concluded that all elements of the market infrastructure operating within specific markets and performing certain functions contribute to the realization of the basic function of the infrastructure to link all spheres of production and exchange with the goal of creating organizational and economic conditions for the development of the market. Control questions: 1. Explain the essence and functions of the market. Imagine the classification of the market. 2. What are the subjects of economic activity in a market economy and characterize them? 3. Form the essence of the infrastructure of a market economy. Point out the role and structure of market infrastructure in the modern economy. 4. Give a description of the competition. What kinds and methods of competition do you know? 72

Basic terms and concepts: Market Market mechanism Subjects of market economy Objects of market economy Public division of labor and specialization Economic isolation of market entities The value of transaction costs Free exchange of resources Institutes of the market Competition Perfect competition Imperfect competition Pure monopoly Oligopoly Monopolistic competition Price competition Non-price competition Production Infrastructure Social Infrastructure Market Infrastructure Forward Futures-transactions Brokers Dealers Test tasks: 1. A perfectly competitive market has a) firms that set their own prices. b) firms that has no control over price c) only one seller. d) many buyers and sellers. e) at least a few sellers. 2. a) b) c) d) e) f)

A monopolistic market has only one seller. firms that are price takers. many buyers and sellers. firm that has considerable control over price at least a few sellers. blocked entry for new firms

3. Which of the following is NOT a characteristic of a competitive market? a) There are many buyers and sellers in the market. 73

b) c) d) e) f)

The goods offered for sale are identical. There is only one seller Firms can freely enter or exit the market. Firms have market power The goods offered for sale are differentiated

4. A market structure in which many firms sell products that are similar but not identical is known as a) monopoly. b) perfect competition. c) monopolistic competition. d) duopoly e) oligopoly. 5. Competition occurs if ... a) Two or more businesses try to sell the same type of goods or services to the same customer b) Government agencies are the only producers of goods or services c) One business has the approval to sell the total production of one type of good or service d) One large business owns all the natural resources needed to produce some particular product e) There is only one seller 6. An oligopoly is a market structure with a) a small number of firms b) many firms c) a single firm in which the entry of new firms is blocked. d) firms large enough to impact the market price e) many sellers. f) only one buyer 7. In a monopolistic market there is (are) a) many firms b) free entry of new firms c) a single firm d) at least a few sellers e) manybuyersandsellers f) entry of new firms is blocked 8. On the basis of place, the market is classified into: a) local market b) regulated market c) non-regulated market d) national market e) black market 74

f) international market g) markets for goods and services h) markets for the factors of production. 9. On the basis of place, the market is classified into: a) regulated market b) non-regulated market c) local market d) national market e) black market f) international market g) markets for goods and services h) markets for the factors of production.

75

Chapter 6

MARKET MECHANISM AND ITS ELEMENTS 1. The law of demand. 2. The law of supply. 3. The equilibrium price. Infringement of market balance. 4. Elasticity of supply and demand. Coefficients of elasticity.

1. The law of demand Market mechanism is implemented through its basic elements. Basic elements of market mechanism are: demand, supply, price and their interrelation. All economic activity is based on this market mechanism. Demand (D) describes a consumer's desire, willingness and ability to pay a price for a specific good or service. It is important to recognize demand and quantity demanded. Demand refers to the entire relationship between prices and the quantity of this product or service that people want at each of these prices, where the quantity demanded refers to how much of the product is demanded at one particular price. There is a strong and sustainable relationship between price of goods and services and the quantity demanded, which is called the law of demand. The higher the price, the lower the quantity demanded is the law of demand. This law shows a causal relationship between the prices and the purchasing power of the market. This relationship can be demonstrated by a demand curve. Demand curve is a graph of the relationship between the price of a good and the quantity demanded. Graphically depicts the relationship between the unit price of goods (the y-axis) and the volume of output that will be bought at a certain price (the x-axis). The curve goes down, because the consumer can buy more goods at a declining price. Demand on the graph should be thought of as the whole demand curve, while quantity demandedis one particular point on the demand curve. 76

When analyzing market conditions, it is necessary to make a clear distinction between changes in demand and changes in the quantity demanded for the product itself. The change in quantity demanded

The change in demand

is observed when the price of the commodity in question changes and the parameters (tastes, incomes, prices for other goods) are unchanged. On the graph, this change is reflected by the movement along the demand curve from one point to another one (in the figure, arrow 6.1). occurs when the market prices for the commodity in question are unchanged; is observed under the influence of any non-price factors, and is reflected on the graph by shifting the demand curve to the right or to the left (in the figure, arrow 6.2).

Change in quantity demanded vs. change in demand Change in quantity demanded

Fig. 6.1

Non-price factors affecting demand: – Number of customers. An increase in the number of buyers leads to an increase in demand, and vice versa. – Income of buyers. As a rule an increase in income leads to an increase in demand. Such goods are called normal goods. But 77

there are situations when an increase in income leads to a decrease in demand (for example, the demand for shoe repair). Such goods are called inferior goods. – Consumer tastes and fashioncan also lead to a change in demand with the invariability of other factors. – Change in prices for interrelated goods. Two goods for which an increase in the price of one leads to an increase in the demand for the other are substitutes (for example, different types of meat). Two goods for which an increase in the price of one leads to a decrease in the demand for the other are complements (for example, gasoline and cars). Change in demand

Fig. 6.2

2. The law of supply Supply (S) is amount of goods and services that sellers are willing and able to sell. It is important to recognize supply and quantity supplied. Supply refers to the entire relationship between prices and the quantity of this product or service that producers are able to sell at each of these prices, where the quantity supplied refers to how much of the product is supplied at one particular price. There is a strong and sustainable relationship between price of goods and services and the quantity supplied, which is called the law 78

of supply. Relationship between price and quantity supplied is called the law of supply: when the price of a good rises, it becomes more profitable to produce and the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well. This relationship can be demonstrated by a supply curve. Supply curveis a graph of the relationship between the price of a good and the quantity supplied. Supply on the graph should be thought of as the whole supply curve, while quantity supplied is one particular point on the supply curve. The supply curve shows how much the product is and at what price of the producer, the product is sold on the market. The curve rises up because, the higher the price, the more effective firms can expand their production by using part of their profits, i.e. due to the accumulation of capital. Change in supply vs. change in quantity supplied Change in quantity supplied

Fig. 6.3

In addition, the high price attracts new firms wishing to produce this product. The main motive is a high price, which allows you to get more profit. As with the consideration of demand, one should not confuse changes in the quantity supplied and changes in supply: 79

1. The change in the quantity supplied is observed when the price of the commodity in question changes and other market factors remain unchanged, and involves movement along the supply curve (in the figure, arrow picture 6.3). 2. The change in supply, on the contrary, means changing the whole function of the offer by changing any non-price factors at a constant price for the analyzed product (in the figure, arrow picture 6.4). Non-price factors affecting supply: – Number of producers. An increase in the number of producers leads to an increase in supply, and vice versa. – The price of resources. The supply of a good is negatively related to the price of resources used to make the good. – Production technology. The introduction of new technologies increases the supply of good. – Taxes and subsidies. The increase in taxes leads to a reduction in supply, and state subsidies increase the supply. Change in supply

Fig. 6.4

3. Equilibrium market price. Infringement of market balance Buyers need to buy, sellers need to sell, interests counter, somewhere cross. The intersection of demand curve and supply curve will determine the equilibrium price of market (picture 6.5). 80

Equilibrium market price

Fig. 6.5

Equilibrium Market Price

When quantity demanded and quantity supplied becomes equal then the market price is fixed for the product

If the price is higher than the equilibrium price, then production will be profitable and the supply will increase. With an unchanged demand, the supply will exceed demand: there will be a surplus. Unrealized products will bring losses to the manufacturer, production will begin to decline. Later, prices will fall. If the price is lower than the equilibrium price, production will become unprofitable, the supply will decrease and there will be a shortage. Excess of demand over supply will cause a rise in prices: 81

production will become profitable: gradually prices will rise and return to the equilibrium price. 4. Elasticity of supply and demand. Coefficients of elasticity The elasticity index was introduced into economic analysis by A. Marshall. The reaction of buyers and sellers to the changing market conditions, in particular, to price changes, can vary in intensity. To characterize the degree of influence of price changes on the behavior of buyers and sellers in the economy, the concept of elasticity is usedthe degree of reaction of one magnitude to the change in the other. This concept is important from a practical point of view. It is necessary to know how the decrease in the price of the goods affects the volumes of their sale and revenue. Estimation of elasticity occurs with the help of the elasticity coefficient, which is defined as the ratio of the percentage change of one value to the percentage change of the other in absolute and relative indices. Dependence of the change in demand for a product from a change in its price is called the price elasticity of demand: Ed=

∆

:

∆

–

=

:

–

.

It is accepted to distinguish three variants of price elasticity: – Elastic demand, when, with insignificant price reductions, the volume of goods increases significantly (Ed> 1); – unit elasticity, when the price change, expressed in%, is equal to the percentage of change in sales volume (Ed = 1); – inelastic demand, if the price change does not lead to a significant change in sales (Ed1 e) unit price elastic. f) income elastic.

84

7. The price elasticity of demand is defined as a) the percentage change in the quantity demanded divided by the percentage change in income. b) the percentage change in price of a good divided by the percentage change in the quantity demanded of that good. c) the percentage change in income divided by the percentage change in the quantity demanded. d) Ed = ΔQd(%) /ΔP(%) e) the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good. 8. Which of the following shifts the supply curve to the right? a) an increase in the price b) a fall in the price of raw materials c) a decrease in consumer incomes d) Technological improvements e) a decrease in the price f) an increase in the price of raw materials g) Lower costs of production 9. There is a market of running shoes. According to the table, draw the demand and supply curves: Price (usd.) 5 4 3 2 1

quantity demanded 5 10 25 40 60

quantity supplied 40 30 25 10 2

How will the following factors influence supply and demand curves: a) increase in consumer income, provided that the sneakers - a normal product? b) sneakers were worn not only for sports, but also in everyday life? c) the use of more expensive materials in the production of sneakers? 10. Demand for the product is described by the equation Qd = 600-20P, the offer of this product is written as Qs = 300 + 10P. Determine the equilibrium price and the equilibrium sales volume. 11. The demand function for the goods: Qd = 100 - P, the supply function of this product: Qs = - 50 + 4P. a) Determine the equilibrium price and the equilibrium sales volume. b) The state has fixed a fixed price for this product at the level of 20 monetary units. What will happen in the market: excess or deficit? What will be its value? 12. The price of a chocolate bar increases from 120 to 150 tenge and the amount of purchases falls from 10 to 8 bars. What is the price elasticity of demand? 85

Chapter 7

FIRM AS THE BASIS OF ORGANIZATION IN A MARKET ECONOMY 1. Essence of entrepreneurship 2. Forms of entrepreneurship. 3. Types of entrepreneurship.

1. Essence of entrepreneurship Entrepreneurship is a free, initiative activity of an economic entity that carries out new combinations of factors of production in order to increase profits and achieve a socio-economic effect. This activity is always associated with various kinds of risks. J. Schumpeter linked entrepreneurship with the production of a new product, the introduction of a new production method, the development of a new sales market and new resources. Conditions necessary for the development of entrepreneurship and business: I. Economic: – Private property (individual, associated), as the dominant form of ownership. – Freedom to choose material and financial resources. – Availability of conditions for the formation of initial capital. – Ability to adapt in a competitive environment. – Free access to information and its reliability. П. Political: – Political stability – Economic policy aimed at developing market relations. Ш. Legal: – Legal regulation of entrepreneurship – Legal literacy and culture: knowledge of laws and regulations, compulsory execution for all subjects of society. IV. Free competition. 86

V. Developed infrastructure of the market.  Banking system, securities market, risk insurance system, information technology. It is necessary to distinguish between commercial and noncommercial entrepreneurship. Difference between commercial and non-commercial entrepreneurship commercial entrepreneurship

non-commercial entrepreneurship

Commercial entrepreneurship and business are activities aimed at making profits and risk-related

This is the activity of charitable foundations, cultural and educational activities, patronage. Its goal is to achieve a social effect

This entrepreneurial activity is aimed at recovering the costs of the market, leveling (smoothing out) the costs of the market, such as social inequality and social injustice. A firm is an organization that owns one or more enterprises and uses resources to produce goods or services for profit. Definitions of the company (enterprise): From the organizational and economic point of view – the enterprise is an organizational and economic unit that represents the unification of workers into a single labor co-operation for large-scale production and economic activities. From the socio-economic point of view – the enterprise is a labor collective united by a commonality of goals and objectives, a unity of economic interests. From the technical and economic point of view - the enterprise is a complex of means of production, which have technological unity and interconnection of the individual stages of the production process, during which production of goods and services takes place. Principles of firms activity: – economic freedom, independence in solving economic problems; – orientation of activities to commercial success; – financial interest in the results; 87

– economic risk and liability; – search for new, non-standard solutions. The highest goal of the company is to generate income and profits. Other purposes: – save resources, – product quality, – increase in labor productivity, – reduction of costs per unit of production, etc. Functions of firms: – the creation of values; – providing competitive advantages in the market; – choosing the right market strategy. Traditional theories of the firm are based on the assumption of profit maximization and enable the production of various forecasts of production prices, depending on the level of competition in the market on which the firm operates. 2. Forms of entrepreneurship Entrepreneurship can be classified on different basis: On the basis of ownership: state and private. We can distinguish main types of firms on the basis of organizational and legal forms: – Individual entrepreneurship or sole proprietorship – Partnership – Corporation (joint-stock company). Individual entrepreneurship is a kind of business, owned by one person. The owner of an individual business simultaneously performs the functions of a manager. It bears unlimited property responsibility. Advantages:

Disadvantages:

It is easy to establish

Limited financial resources

Considerable freedom of action

Difficulties in combining control and management functions

The incentive for effective performance

Full financial responsibility

88

A partnership is a business that two or more people own. Business partnerships – an arrangement where two or more individuals share the ownership of a business. There are two main types of partnership: general partnerships and limited partnerships. In a general partnership all partners are personally responsible for the business, meaning they are liable for any losses or debts with their personal income or wealth if necessary. In a limited partnership partners are not personally liable if the business incurs any losses or debts. Advantages: It is easy to establish

Disadvantages: The possibility of inconsistencies in the management

Broad financial opportunities

The risk of the company disintegrating upon the exit of one of the owners

Wide specialization in management

Unlimited financial responsibility

A corporation is an aggregate of persons united for joint business activity as a single legal entity. The right to ownership of a corporation is divided into parts by shares, so the owners of corporations are called shareholders, and the corporation itself is a joint-stock company. Owners of corporations bear limited liability for corporate debts, determined by the contribution to shares. Advantages:

Disadvantages:

Wide opportunities for fund raising

Opportunities for economic abuse

Limited liability the advantages of pooling the fund

Double taxation

Attraction of professional specialists for management functions

Separation of ownership and control functions

On the basis of the size of the firm distinguish: – Small enterprises; – Medium-sized enterprises; – Large enterprises. 89

Small enterprises

In the modern economy forms the largest sector of the economy. Without significant capital investment, it is possible to expand the production of consumer goods and services; involves in production material and financial resources of the population; creates an opportunity for employment. The number reaches 1015 people. Abroad, the most typical forms of small business are the system of franchising and venture business.

Medium sized enterprises

Performs a less prominent role. It is not strong, because it is necessary to compete with both large and small businesses. Exceptions are firms monopolists in the release of any specific products (repair of city hours, repair of invalid equipment, etc.). The number of employees is 50-500 people.

Large enterprises

It is more durable than other forms of entrepreneurship. Monopoly position on the market allows producing cheap and mass products, designed to meet the needs of a wide consumer. The number is over 500 people.

Above table describes general characteristics of enterprises which is common worldwide. According to the Entrepreneural Code of the Republic of Kazakhstan, two measures that are applicable to nearly all businesses are number of employees and annual turnover, i.e. the total value of sales made over the period of a year. – Large enterprises employ more than 250 people and have an annual turnover of more than 3 mln kzt monthly calculation index (MCI). – Medium-sized enterprises employ 101 – 250 people and have an annual turnover of 300 thousand kzt – 3 mln kzt MCI. – Small enterprises employ fewer than 100 people and have an annual turnover of no more than 300 thousand kzt MCI. – Microenterprises employ fewer than 15 people and have an annual turnover of no more than 30 thousand kzt MCI. Businesses with fewer than 250 employees are often collectively classified as small and medium-sized enterprises (SMEs). 3. Types of entrepreneurship Industrial entrepreneurial activity The entrepreneur produces goods, products, and works, provides services, information, creates spiritual values, which then realizes to 90

the consumer. Production can be industrial, agricultural (farming), construction and other types. Industrial entrepreneurial is a very expensive and difficult type of activity. It necessarily needs a starting, basic and working capital. It is necessary to establish links with suppliers of raw materials, containers, spare parts for machines (machines), and fuel. Production requires room, working equipment, tools, transportation, computers, etc. There are two options for organizing production - to acquire all this at once or at first to rent. You should take into account the costs associated with hiring manpower, recruiting staff. A well-designed business plan will greatly simplify and facilitate the start-up of the manufacturing company. Commercial business activities Commercial business activities’ essence is trade-exchange and commodity-money transactions, purchase and sale of goods and services. Now on the territory of the CIS countries – this is almost the most common type of entrepreneurship. A large number of individual entrepreneurship in Kazakhstan is engaged in commercial activities. This type of entrepreneurship is very flexible, easily «guesses» demand, because constantly studying it. The direction of production would be more difficult to change, and the realization of an already produced commodity is much easier to redirect. The percentage of profit from resale on average ranges from 20 to 30%, whereas in production, 10-12% is considered sufficient. Risks in commercial business are the highest. When concluding contracts, making deals it is important to take into account all possible nuances: the situation on the market, the rate of the currency used, the rates of customs duties, the cost of delivery and much more – all this determines the percentage of profits from trade. Trade can be: wholesale and retail; external and internal (import, export); durable goods, etc. Auctions, commodity exchanges, fairs, are the main points of wholesale trade. Visitors to wholesale fairs directly or online choose goods, evaluating it on the model and catalogs with a description. At the auction, the subject of sale is usually all available here and now. The price is determined by means of a tender among buyers. At the auction, 91

they sell wholesale lots of goods, and single copies (as a rule, these are rarities-rare and very expensive things). Trade in retail has many options for organization. Universal supermarkets, trading houses, shopping complexes, online sales through the Internet represent a class of «giants». Their opposite – small retail outlets (stalls, kiosks, mini-markets, pavilions, spontaneous and organized markets). They are serious competitors for the «giants», as prices are dumped and lightly adjusted to the consumer's wishes. Financial business activities The object of trade in this case is money, currency, securities. This activity is carried out mainly by stock and currency exchanges, investment banks. Financial entrepreneurship has the following forms: – Issue of securities (issue); – Acquisition of shares and other securities. Financial services – activities of participants in the insurance market, the securities market, accumulative pension funds, banking, the activities of organizations to conduct certain types of banking operations, carried out on the basis of licenses obtained in accordance with the laws of the country, as well as the activities of the central depository, a single registrar and societies Mutual insurance, not subject to licensing. Innovative entrepreneurial activity This is the creation and commercial use of inventions of technical and technological nature. It is a venture enterprise that finances scientific research, promotion and adaptation of innovations and discoveries, experimental production. It identifies three main types of innovation: 1. Product innovation, i.e. renewal of the functioning mechanism of the firm. 2. The innovation of technology, or the introduction of new production methods that reduce the consumption of raw materials and money, increase the «yield» of products with reduced effort and time. 3. Social innovations, which give an opportunity to maximize the motivation of employees of your enterprise. 92

Stages of innovative business process:

1) Search for an innovative idea and an assessment of its potential success; 2) The creation of a business plan; 3) Attracting investors who will provide seed money; 4) Competent management of the company.

The segment of small business is optimal for conducting innovative entrepreneurship, because in its conditions it is easier to maneuver. Farming activity Farming (peasant farming) is one of the most common forms of small business. A farm is a family-labor association of individuals that uses agricultural land and produces agricultural products, and also processes and sells it. Farmers are individuals who conduct their business without forming a legal entity. Members of the peasant (farmer) economy are mainly relatives of the head of the economy - spouses, children (relatives and adopted by law), parents, etc. Naughty relatives – «property» – also have the right to be members of farming. Forms of peasant farm: – Family business on the basis of common joint ownership – Farming in the form of personal entrepreneurship – A farm based on common share ownership (a simple partnership) on the basis of a joint business agreement. World experience shows that the most profitable are the farms with narrow specialization, as well as those in which advanced technologies and modern methods of organizing the working process are widely used. Control questions: 1. 2. 3. 4.

What is the essence and content of entrepreneurship? What are the organizational and economic forms of enterprises you know? Present the main types of entrepreneurship. Present modern types of entrepreneurship

93

Basic terms and concepts: Entrepreneurship Commercial and non-commercial entrepreneurship Firm Individual entrepreneurship Partnership Corporation Small enterprises; Medium -sized enterprises; Large enterprises. Industrial Entrepreneurship Start Up Commercial Entrepreneurship Online sales Financial Entrepreneurship Innovative entrepreneurship Product Innovation Technology Innovation Social Innovations Farming Test tasks: 1. Individuals who are willing to take risks, to bring the resources together and develop new products, and start new businesses a) A bureaucrat b) A manager c) An engineer d) An entrepreneur e) An accouter 2. The form of business organization that has the largest sales volume is the: a) partnership b) cooperative c) sole proprietorship d) sole trader e) corporation f) limited partnerships 3. Which of the following are the advantages of a sole proprietorship? a) ease of starting a business. b) being your own boss. c) unlimited liabilities d) lower start-up costs. e) It is difficult to find outside investors 94

f) solely liable for all debts and actions of the company growth potential is very limited 4. The most effective form of business organization for raising capital is the: a) partnership b) proprietorship c) corporation d) limited partnerships e) sole trader 5. Advantages of corporations are a) solely liable for all debts and actions of the comp b) The most effective form for raising capitals c) growth potential is very limited d) ease of starting a business e) unlimited liabilities 6. Characteristics of an entrepreneurship a) social security b) Willingness to accept risk c) Stable profit d) Creating and innovating e) Willingness to accept failure f) Lack of the risk 7. A small firm’s advantages are a) flexibility, adaptation, independence b) the ability to modify its products or services in response to unique customer needs c) limited financial resources d) Doubletaxation e) economies of scale f) expensive to incorporate 8. A voluntary association of two or more persons to act as co-owners of a business for profit a) corporation b) Proprietorship c) sole proprietorship d) Partnership e) sole trader 9. Schumpeter stressed the following features of an entrepreneur a) the entrepreneur avoids risk b) the entrepreneur implements change in an economy by introducing new goods 95

c) d) e) f)

the entrepreneur doesn’t take risk the entrepreneur prefers stability the entrepreneur avoids change the entrepreneur is an innovator

10. In the Republic of Kazakhstan enterprises differ on small, mediumsized, large enterprises on the basis of the following indicators a) number of employees b) оwnership structures c) legal forms d) annual turnover e) number of enterprise managers f) industry sector 11. The greatest impact on enterprise development theory had a) Robert Solow b) Thomas Robert Malthus c) Richard Cantillon d) David Ricardo e) William Petty f) Joseph Schumpeter

96

Chapter 8

COSTS AND INCOME OF THE FIRM 1. Essence of production costs. 2. Classification of production costs. 3. The essence of profit and its types.

1. Essence of production costs The concept of costs was first investigated by representatives of classical political economy, especially by A. Smith and D. Ricardo. They investigated the notion of «costs» in connection with studying the theory of external trade. According to K. Marx, costs represent the sum of expenditures for the acquisition of means of production and labor (constant and variable capital). For marginalists (C. Menger, F. von Wieser), the costs relate to a separate enterprise whose costs and revenues are regarded as functions of the scale of production. The institutional cost theory (C. Clarke, J. A. Hobson) investigated such types of costs as social, long-term, short-term and others, and introduced the notion of human costs. Representatives of new institutional economics (R. Coase) introduced the concept of transaction costs, i.e. Costs arising from the trade in goods and services. – Costs from the standpoint of socio-economic relations are divided into the costs of society (the cost of all living and materialized labor) and the costs of the enterprise (expenditures for the means of production and the payment of wages); – Economic and accounting costs. The economic understanding of costs is based on the fact that resources are scarce and the possibility of their alternative use. They can be explicit (external) or implicit (internal). Explicit ones are alternative costs, which take the form of monetary payments to suppliers of production factors and intermediate products. They are connected with the acquisition of resources 97

on the side. For example, wages to workers, payment of transportation costs, etc. Implicit - this is the opportunity cost of using resources owned by the owners of the company, which are not received in exchange for monetary payments. For example, the lost profit in refusing to rent out their own buildings. In the accounting, implicit costs are not reflected. Accounting attitude takes into account only explicit (external) costs. That is why they are also called accounting cost. 2. Classification of production costs Practical significance has the division of costs into fixed and variable. Graphic image of FС: Fixed costs (FC) are costs, the amount of which in a given period of time does not depend directly on the size and structure of production and sales. Constant costs must be paid, even if the products are not produced. These include rental payments, part of the deductions for depreciation of buildings and equipment, etc. Graphic image of VС: Variable costs (VC) – associated with the cost of purchasing raw materials, labor and the application of which directly affects the volume of products.

Total costs (TC) – this is the sum of fixed and variable costs: TC = FC + VC. Total costs with each new unit of production increase by the same amount as the sum of variable costs. For practitioners, it is not just costs themselves that are important, but the costs of production unit, that is, average total costs (ATC), i.e. costs per unit of output: ATC = 98

.

Average fixed costs (AFC) and average variable costs (AVC) are calculated in a similar way. Average fixed costs: AFC = ; .

Average variable costs: AVC =

Accordingly, average total costs can be demonstrated as follows: ATC = AFC + AVC. The application of an increasing number of variable resources will trigger a decreasing returns law. This means that, starting from a certain point, additional inclusion of units of a variable resource with a fixed value of another resource yields a decreasing marginal product per each subsequent unit of the first. The marginal cost (MC) is the additional cost required to produce an additional unit of output: MC=

∆ ∆

.

Marginal costs are equal to the increment of variable costs if it is assumed that the fixed costs are unchanged. The firm expands production if the additional unit of production costs it less than its selling price, while marginal costs do not equal the price of the products. In the short run, the marginal cost curve has a U-shape. The division of costs depends on the time interval being adopted. Obviously, in the short term costs are divided into fixed and variable, but in the long term all costs become variable. When the average total costs in the long-term period decrease with an increase in output, this means that there is saving due to the increase in the scale of production (economies of scale). When, with an increase in output, the average total cost in the long run increases, it means that there is an increase in costs due to the scale of production (costs associated with increasing scale). If the average total costs in the long-term remain unchanged, regardless of the volume of production, there is a constant return on scale. Savings from scale arise, for example, if large enterprises use the latest assembly lines with a large number of workers, each of which specializes in performing a specific operation. 99

At the same time, the production of an additional unit of product, generating additional costs, brings in additional revenue, the proceeds from its sale. In the conditions of free competition, the producer cannot affect the level of the market price, and, therefore, sells any quantity of its products at the same price. This means that the marginal revenue (MR) will be equal to the price, i.e. MR = P. Introducing the concepts of marginal costs and marginal revenue, we can determine the equilibrium point of the firm, or the point where it stops production, achieving the maximum possible amount of profit at a given price. Hence, if the marginal cost is less than the marginal revenue, the firm can expand production. If marginal costs start to exceed marginal revenue, then the firm will incur losses. Hence, the equilibrium condition of the firm: MC = MR = P. Any economic entity seeking profit, seeks to establish a volume of production, in which this condition is met. The ratio of marginal costs and marginal revenue is the condition for optimum production. 4. The essence of profit and its types. Profit is the main goal and the main indicator of the efficiency of any firm, the ultimate goal and motive of commodity production and market economy. Mercantilists believed that profit arises in the sphere of circulation as a result of the sale at a higher price. In the opinion of the Physiocrats, profit is created in agriculture. Surplus value is created in the branches of material production according to A. Smith and D. Ricardo. K. Marx called profit a transformed form of surplus-value generated by all advanced capital, and the source of surplus-value was considered labor of hired workers. In the twentieth century, there arose theories of productive capital, abstinence, profit as a labor income from entrepreneurial activity, as well as profits as a result of the existence of a monopoly. A common feature of these theories is the recognition of the fact that the source of profit is the entrepreneur's innovative activity. 100

As an economic category, profit reflects the net income received by the entrepreneur. Before determining it, it is necessary to take into account a category such as total revenue (TR) – this is all money received for a certain period and calculated as: TR = P×Q, where, P– is the price of the product; Q – is the quantity of products. The profit received by the firm can be defined as the difference between gross revenue and gross costs: π = TR – TC, where, π– is the profit. There are the following types of profit: – Accounting – the part of the firm's income, which remains from the total revenue after reimbursement of external costs. – Economic (net) – the difference between the proceeds from the sale of products and the total alternative factor costs associated with the manufacture of these products. – Balance - the difference between the proceeds from the sale of products and the amount of material costs, depreciation, wages. There are also such concepts as gross profit, normal, and marginal. In the conditions of market relations the enterprise should strive if not to obtain maximum profit, then at least to the volume of profit that would allow it not only to firmly hold its positions in the market for the sale of goods and services, but also to ensure the dynamic development of production in Conditions of competition. Control questions: 1. Uncover the role and essence of production. 2. Explain the essence of costs 3. Present the types and classification of costs. 4. Explain the equilibrium condition of the firm. 5. Point out the differences between income and profit. 6. Imagine economic and accounting approaches when determining profit.

101

Basic terms and concepts: Costs Transaction costs Explicit and Implicit Costs Total Costs Fixed costs Variable costs Average total costs Average fixed costs Average variable costs Marginal costs The law of diminishing returns Marginal revenue Total revenue Profit Accounting profit Economic profit Balance sheet profit Test tasks: 1. Accounting profit is equal to total revenue minus a) explicit costs b) implicit costs c) variable costs d) the sum of implicit and explicit costs e) marginal costs 2. Economic profit is equal to a) total revenue minus the sum of implicit and explicit costs. b) explicit costs. c) implicit costs. d) total revenue minus variable costs. e) accounting profit minus implicit costs. 3. Fixed costs a) depend on a firm’s level of output. b) do NOT exist in the long run. c) are zero if a firm produces no output. d) are total costs minus variable costs. e) are total costs minus average variable costs. f) are total costs divided by the quantity of output g) constant as output increases h) are the increase in total cost

102

4. Variable costs – a) depend on a firm’s level of output b) constant as output increases c) do not vary with the quantity of output produced d) are total costs minus fixed costs e) are zero if a firm produces no output f) are total costs divided by the quantity of output g) are the increase in total cost 5. The formulas for total cost are a) AFC+AVC. b) FC+VC. c) AC×P. d) the sum of all the firm’s implicit costs e) AC×Q. f) FC-VC g) FC×VC 6. Average total cost a) is total costs divided by the quantity of output b) ΔTC/ΔQ c) FC/Q d) TC/Q e) VC/Q f) is the average cost of producing each unit of output g) FC+VC. 7. Marginal cost a) FC/Q b) is the additional cost incurred in the production of one more unit of a good c) ΔTC/ΔQ d) FC+VC e) TC/Q f) ΔVC/ΔQ g) VC/Q 8. Any firm’s total revenue equals a) MR × Q b) P × Q c) P/Q d) MR/q e) the amount a firm receives for the sale of its output f) the market value of the inputs a firm uses in production g) FC+VC

103

9. The added revenue that a firm takes in when it increases output by one additional unit is a) total revenue. b) fixed revenue. c) marginal revenue. d) variable revenue. e) annual revenue. f) average revenue. Tasks: Fill the table: Q TC FC VC ATC AFC AVC MC

0 20

1 24

2 28

104

3 32

4 36

Chapter 9

THE MARKET OF FACTORS OF PRODUCTION AND INCOME GENERATION 1. Labor market. 2. The essence and forms of wages. 3. The land market. Rent and its types. The price of land and rent. 4. Capital market and interest income.

1. Labor market Labor is the main factor of any production activity. In the conditions of market economic relations wage labor becomes a commodity that is sold and bought in a specific labor market. The labor market is a system of economic mechanisms, norms and institutions that ensure the reproduction of labor and the use of labor. The labor market can be viewed both at national and local levels. At the national level, the demand for labor is directly dependent on the level of development of the national economy, the peculiarities of the structure of the national economy, the level of productivity of social labor. The labor supply at the national level is determined by the prevailing demographic situation in the country (population size, age composition, educational level). At the local level, the demand for labor is borne by entrepreneurs. The supply of labor is formed as the sum of supplies of the services from people wishing to receive a workplace. The peculiarities of the labor market are: – the duration of the relationship between sellers and buyers, i.e. for the duration of the employment contract; – non-monetary factors – complexity and prestige of work, working conditions, its safety for health, guarantees of employment and professional growth, moral climate, etc.; – Institutional structures – trade unions, labor legislation, state policy of employment and vocational training, employers' unions, etc. 105

The labor market is characterized by: – the presence of a large number of enterprises competing with each other to hire the right employees; – the presence of numerous workers of the required qualifications.

Fig. 9.1. The demand curve for labor

W – the wage rate; L – the amount of labor required; DL– the demand curve for labor. Buyers in the labor market are firms. They demand for labor services and among them there is competition for highly skilled personnel. Demand is the need for labor. The demand for labor is in inverse relationship to the real wage rate, which is defined as the ratio of nominal wages to the level of prices. In the competitive labor market, the demand curve for labor has a negative angle of inclination: with an increase in the overall level of wages, the demand for labor falls. Demand in the labor market is formed under the influence of the following factors: 1. The structure of national economy; 2. The level of development and scale of national economy; 3. Dominant forms of public production; 4. The level of scientific and technological development of the national economy; 106

5. Rates of growth and development of the national economy. Sellers in the labor market are households and between them there is competition for better terms of sale of the services of their labor. The supply is the number and structure of available labor resources, practically all the able-bodied population. The supply of labor depends on the amount of wages. The labor supply curve has a positive slope angle: with an increase in the total wage level, the labor supply increases. The supply on the labor market is formed under the influence of the following main factors: 1. The average wage level. 2. The number of people and, in general, the demographic situation. 3. The professional structure of the labor market (consists in overabundance or lack of certain professions). 4. Mobility of the population. 5. Ethnic, religious, cultural, psychological characteristics of the population.

Fig. 9.2. The labor supply curve

W – the wage rate; L – the size of the proposed work; SL – the labor supply curve.

107

Combining both the curves – the demand curve and the supply curve, we get the point of intersection E, in which the demand for labor is equal to the supply of labor, i.e. the labor market is in an equilibrium state (Figure 9.1). This means that all entrepreneurs who are willing to pay wages of the We find the required amount of labor on the market, their demand for labor is fully satisfied. In a position of market equilibrium, all employees who want to offer their services at a salary of the We are fully employed. Therefore, the point E determines the position of full employment. At any other value of wages, other than We, the equilibrium in the labor market is violated. With the coincidence of the demand for labor and labor supply, wages are the price of equilibrium in the labor market.

Fig. 9.3. Equilibrium in a competitive labor market

If the wage rate is higher than the equilibrium level, then the supply on the labor market exceeds demand. In this situation, there is an excess of labor supply. In the case of a reduction in the wage rate, compared with the equilibrium, the demand in the labor market exceeds supply. As a result, unfilled jobs are generated due to a shortage of workers. Both these situations (unemployment and the availability of unoccupied jobs) cannot be sustainable (long-term), they are adjusted by the market mechanism towards the restoration of the position of full employment. 108

Thus, the labor market develops, like any market, according to the laws of supply and demand, the balance is restored on it, and there cannot be long-term unemployment. The regulation of the labor market involves both demand and labor supply. The objects of regulation are wages, the duration of the working week and holidays, the procedure for hiring and dismissal, various types of social security and etc. 2. Essence and forms of wages The main type of income that an employee receives for his work is wage. The essence of wages consists in the fact that it represents the proportion of workers expressed in money and is directed to the purposes of personal consumption and distribution by the number and quality of labor in public production. Wages are the main part of the funds allocated for consumption. Wages are a share of income (net output), depending on the final results of the work of the collective and distributed among employees in accordance with the quantity and quality of labor expended, the real labor contribution and the amount of invested capital. In modern economic theory, labor is considered a factor of production, and wages - at the cost of using the labor of an employee. Labor is understood broadly as the activity of any recipient of profit. In the labor markets, sellers are employees of a certain qualification, specialty, and buyers are enterprises and firms. The price of labor is the basic guaranteed wages in the form of salaries, tariffs, forms of piece-rate and time-based payment. Demand and supply for the workforce is differentiated by its professional training, taking into account the demand from its specific consumers and the proposal from its owners, that is, a system of markets is formed for its separate types. The purchase and sale of labor is based on labor contracts, which are the main documents governing the employment relationship between the employer and the employee. The most important condition for the organization of public production, stimulation of highly effective labor activity is the establishment of a measure of labor and measures of its payment. The remuneration measure is the remuneration or salary received by employees for the provision of their workforce. Practically, the salary 109

or income of a particular employee can take the form of various monetary payments: monthly salaries, hourly rates, bonuses, fees, fees, compensation, etc. Wages have several functions. 1. The reproduction function consists in ensuring the possibility of reproducing the labor force at a socially normal level of consumption, that is, in determining the absolute amount of wages that allows the conditions for the normal reproduction of labor. The employee should be able to raise and educate children, future labor resources. 2. The stimulating function is that it is necessary to induce the worker to work activity, to maximum efficiency, to increase the efficiency of work. An employee should be interested in improving his / her qualifications in order to earn more money: higher qualifications higher paid. Enterprises are interested in more highly qualified personnel to increase labor productivity, improve product quality. The implementation of the stimulating function is carried out by management through specific wage systems, based on the evaluation of the results of labor and communication of the size of the wage fund with the efficiency of the enterprise. 3. The regulatory function is the regulation of the labor market and the profitability of the firm. An employee is hired to work in a company where they pay more. But it is also true that it is not profitable for an enterprise to pay too much, otherwise its profitability is reduced. Enterprises employ workers, and workers offer their labor in the labor market. In connection with the existence of inflationary processes, it is necessary to distinguish between nominal and real wages. Nominal wages – the amount of money that an employee receives for the work done. It characterizes the level of wages irrespective of changes in the prices of goods and services; therefore it is one of the factors for improving the well-being and living standards of workers. On the nominal wage received, the employee must purchase food, clothing, footwear, pay for utilities and other goods necessary for the existence of himself and his family. Various taxes and payments significantly reduce the nominal wage. In addition, prices for goods and services are not constant, they are constantly growing. Therefore, 110

the size of nominal wages does not give a real idea about the real life level of the employee. This is indicated by real wages. Real wages are the number of goods and services that can be purchased for a nominal wage, i.e. real wages are the purchasing power of nominal wages. The real wages depend on the nominal, on the prices of goods and taxes. In conditions of state regulation of the distribution of the national income and income of the population, the minimum wage is legislated in almost all countries. The minimum wage is the legally established amount of wages for simple, unskilled work, below which there can be no payment for the monthly or hourly rate of work performed by the employee. The minimum wage is a state social guarantee obligatory for enterprises of all forms of ownership. The minimum wage is established annually by the law of the Republic of Kazakhstan on the republican budget for the corresponding financial year. The minimum wage should not be lower than the subsistence level and does not include additional payments, compensatory and social payments. In 2017, the minimum wage in Kazakhstan was 24,459 tenge2. There are 2 main forms of wages: 1. Time-rate payment (time wage system) – the wage system in which worker is paid for the amount of time he has spent on the job. 2. Piece-rate payment (piece wage system) – the wage system in which workers are paid on the basis of the units of output produced. Today, the most common is the time wage. This is due to the extensive use in the production of conveyors, machine tools. On the basis of hourly and piecework forms of wages, enterprises use different systems of labor remuneration, which are aimed at stimulating the growth of the quantity and quality of the products produced, and in the intensification of labor. With their help, the owners of enterprises strive to attract the hired personnel to the highest efficiency, in the best performance of their duties.

2

https://uchet.kz/stavki/MZP

111

3. The land market. Rent and its types. The price of land The land market is a market in which the object of sale is the use of land leased by landowners to firms. As a factor of production, land is needed in any branch of the economy. Cultivated plants are grown on the ground, cattle are grazed, buildings are built, roads and other communications are laid. One of the most important features of the land as a factor of production is its absolute (physical) limitation. The land and its bowels bring in income called rent. Economic rent is a payment for the use of land and other natural resources, the quantity or reserves of which are strictly limited. In this case, the value of the rent depends on: A. Natural conditions (climate, soil type, etc.); B. The fertility of the soil (lands with better characteristics bring a greater rent); C. The location of the land (proximity to the market). In economics, differential, absolute, monopoly rent is distinguished (Fig. 9.4.).

Types of land rent

Differential

Absolute

Monopoly

Differential rent Differential rent is formed because of the monopoly of land as an object of management that is carried out by the owner or lessee of the land plot. The conditions of formation, sources and forms of withdrawal of differential rent are given in Table 9.1. Concentration of agricultural production on the best lands is impossible because of the limited land and the growing demand for agricultural products. This forces the processing of all lands: the best, medium, worst. 112

The features of obtaining differential rent I and II Peculiarities of rent Differential Rent I Differential Rent II Sources of rent Conditions for Rent

Fertility and land location Different productivity in different quality lands

Intensity of farming Different productivity in the same section

Form of management Place of origin of rent Subjects

Extensive The best and average land Land Owners

Intensive Worst lands Entrepreneurs

Therefore, the social value of agricultural products is determined not by average production costs, but by individual production costs in the worst parts of the land. Under such conditions, the harvest, and therefore the profit from its sale from the best and middle sections of the land (both by fertility and by location), will be more than average. And in the worst sectors, differential rent does not form. Absolute rent. In the conditions of limited land, not only the best, but also the worst lands are included in turnover. At the same time, the rent is collected by the owners for all kinds of land, including the worst. As a result, land rent appears on the worst lands, which acts as an absolute rent. The mechanism for the formation of absolute rent is ensured by the fact that production costs in the worst lands are the social costs of production in agriculture, and products are sold at public prices. The difference between them allows you to receive additional profit in the form of absolute rent. Monopoly rent. The reason for the formation of monopoly rents is the mono-floor price, which is established for some rare agricultural products, or products not grown in the given natural and climatic zone, and also on rare useful things. The monopolistically high price of rare agricultural products does not depend on their public production price. It is determined by the ability of the buyer to pay a high price for such a product. Monopoly rent, therefore, is an excess not only over the social price of production, but also over the price of all agricultural products. A variety of monopoly rent is rent of rarity, against which competition is 113

powerless. In agriculture, monopoly rent often occurs in those lands where rare crops are grown (for example, tea, grapes, tobacco, etc.). The land and its subsoil, being one of the factors of production, bring in income, called rent. Labor has an important feature: unlike the other two factors (labor, capital), which are freely reproducible, the supply of land is limited. Therefore, the offer of land is inelastic. When studying the equilibrium state of the land market, neoclassical theory uses the concept of marginal costs and considers two cases. When the owner of the land itself conducts the economy, i.e. is a farmer.

D E

We

LQ Le Fig. 9.5

It can be seen from the figure that the owner of the land will employ workers to the point Le, i.e. until the marginal product of the employee is equal to the salary. The wage of all employees is determined by the area OWeELe. The rest of the WeDE area is the size of the ground rent. The size of the rent is determined by the «residual» method, when the total amount of wages is subtracted from the total value of the created product. 1. When the land does not belong to the farmer, he only rents it. Neoclassicists proceed from the principle that the price of any factor, be it wages, interest or rent, is set at the level at which demand and supply are equal. 114

It is known that the supply of land is inelastic. Therefore, the supply curve of the earth SQ is a vertical line. D – the demand curve for land, point E – the level of land rent, which balances the demand and supply of land. R

S

D

Re

Q

O Q1 Fig. 9.6

If the level of rent increases (above point E), the supply of land will exceed demand for it, landowners will experience difficulties in leasing land and therefore lower the rent paid by tenants. If the level of rental rates drops (below point E), then the demand for land will exceed its supply. In these conditions, the owners of the land will raise their rent. This means that only at point E there will be equality of demand and supply of land. From the above we can draw two conclusions. First, the level of rent is directly dependent on the inelasticity of supply. Secondly, the level of rent depends on the demand for the final product. For example, if the price and demand for wheat fell, then the demand for land where it was grown will also decrease, so the rent rates will fall. The opposite situation is possible. Improvement of rental relations requires the improvement of land use and rental relations to give a classification assessment of the quality of land, their natural and economic fertility. The economic fertility of the land, characterizing its ability to ensure the production of agricultural products. 115

In a market economy, land, like any other good that brings in income, is a commodity. The land is bought and sold. In economically developed countries, land purchase and sale usually does not exceed 3%. Since the supply of land is fixed, the price of land, like rent, is entirely determined by the demand for land. The price of land is the price of ownership of a piece of land. The peculiarity of land as a commodity is that it is not the land itself that is bought, but the income that it brings. In other words, the right to receive regular income is purchased for an unlimited period of time. The owner of the land plot intends to receive from the sale of the land plot such an amount, placing it in the bank you can get an income in the form of a percentage ½ equal to the rent. Land rent is the price of land services. Earth rent determines the price of the land. The higher the rent from the services of a plot of land, the higher the price of land. The price of land is determined by the capitalization of rent. The capitalization of the factor of production consists in assessing its value in the event that a decision is made to purchase it, that is, the entrepreneur will make it his own asset. Capitalization makes it possible to establish a correlation between the income of the factor of production and its price as an object of property. The capitalized value of rent is the sum of all future lease payments that this land can bring. Thus, the price of land is equal to the sum of money, which, if placed into a bank, the former owner of the land, would receive a similar percentage of invested capital. The price of land is calculated as follows: РL=

× 100%,

where: РL– land price; R – annual rent; r – Interest rate. From the formula it is clear that the price of the land will increase if the rent increases, and fall if the rate of interest rises. Kazakhstan's land market is developing intensively. Rural and urban residents of Kazakhstan received land plots for gardens, vegetable gardens, housing construction, for expanding personal subsidiary plots and organizing peasant (farm) farms. During the years of independence, the collective farms, state farms and their land use were reorganized; new forms of agrarian formations were formed. 116

2.3 million Rural residents became owners of land shares and disposed of them. A significant layer of peasant (farmer) farms (over 120,000 farms) has been formed, to which about 30 million hectares of land have been transferred. In the regions, due to unused land, a special land fund has been created for the redistribution of land on an area of more than 11.2 million hectares. Over 60.0 million hectares or 65.4% of all agricultural lands of the country were transferred to the land use of non-governmental legal entities (business partnerships and joint-stock companies, agricultural production cooperatives, private farms)3. 4. Capital market and interest income In the capital market, the demand for capital is made by business, and the offer is carried out by households. Demand for capital is the demand for borrowed funds (loan capital), which entrepreneurs use for investment activities. Households provide borrowed funds (free savings), which are one of the sources of the formation of loan capital. The demand for capital can be represented graphically; on the axis of the abscissa we set aside the amount of borrowed funds, on the ordinate axis – the income from the investments made (Figure 1). The rate of return on investment is calculated as the ratio of the investment income to the amount invested, expressed as a percentage. In Fig. 2 shows the supply curve of capital. On the axis of abscissas is the amount of savings, on the ordinate axis – the marginal costs of missed opportunities, or the price of abandoning current consumption of savings. Now you can combine the demand and supply curves in the loan capital market on one chart (Fig. 9.7). Demand for loan capital market. Supply for loan capital market. Loan capital market balance. Graph # 3 allows you to understand the category of interest as a kind of equilibrium price: at the intersection of curves Dk and Sk an equilibrium is established in the loan capital market. 3

http://www.kazportal.kz/razvitie-zemelnogo-ryinka-v-kazahstane

117

К

К

Dk

Sk Q

Q

Fig. 9.7a

Fig. 9.7b

E

Sk

Dk

Fig. 9.7c

The rate of interest is the ratio of the income received from the provision of a loan to capital, to the value of the loaned capital, expressed in percent. For example, the amount of the loan is $ 1,000, the resulting annual income of $ 100, and then the interest rate will be 118

×100% = 10%. They distinguish between the average interest rate, which is determined over a long period of time, and the market rate of interest, which is formed daily. There are also nominal and real interest rates. Nominal is the current market rate that does not take into account the level of inflation. The real is the interest rate adjusted for inflation. Real Rate = Nominal Rate – Inflation Rate For example, the nominal annual interest rate is 10%, the expected rate of inflation is 4% per year, then the real interest rate will be (10 - 4) = 6%. The range of rates can fluctuate (for example, from 10 to 20%) depending on a number of factors: 1. Risk. The greater the chance that the borrower will not repay the loan, the higher the lending rate will be charged by the lender. 2. Urgency. Long-term loans are usually issued at high interest rates, rather than short-term loans. Long-term loans can cause financial damage due to the refusal to use alternative money for their own money. 3. The size of the loan. As a rule, for a smaller loan, the interest rate is higher. The reason is that the administrative costs of large and small loans almost coincide. The role of the interest rate is very high, because it affects both the level and the structure of production: 1. A low interest rate leads to increased investment and expansion of production. A high interest rate reduces investment activity and restrains production. 2. The interest rate affects the allocation of capital, because it allocates investment resources between those areas where they will be the most profitable. Factors influencing the capital market and interest income, usually inherent in the modern market economy and taking place in the economy of Kazakhstan, can also include tax defaults, insufficient 119

investment, depreciation of production assets, strong dependence on the world market conditions, etc. Control questions: 1. What are the features of the land market and the price of land? Show on the chart features of the land market and the condition of its equilibrium. 2. Give a description of the types of rents. 3. Explain the essence of the labor market. Show on the chart the condition of equilibrium in the labor market. 4. Expand the purpose and essence of the capital market, apply the schedule. What is the nominal and real interest rate? Basic terms and concepts: Labor market Wage Time and piecework forms of wages Nominal wages Real wages Land market Rent The price of land Land rent Capitalized value of rent Capital market Interest income Nominal interest rate Real interest rate Test tasks: 1. Piecework rate is most suited for: a) HR professionals. b) routine jobs. c) white collar jobs. d) jobs where the output can be calculated easily e) knowledge workers. f) managerial jobs. 2. The wage system in which worker is paid for the amount of time he has spent on the job is a) Time-rate payment b) Piece wage system 120

c) d) e) f) g)

Piece-rate payment real wage Time wage system nominal wage piece-plus-bonus wages

3. The wage system in which workers are paid on the basis of the units of output produced is a) Time-rate payment b) Time wage system c) Piece-rate payment d) real wage e) nominal wage f) Piece wage system 4. Discrimination in labor markets arises if workers receive different pay because of their a) skill levels b) race c) The education level d) work experience e) productivity f) gender g) training 5. If the nominal wage increased by 10 percent and the inflation rate is 10 percent, then the real wage a) remains the same b) increases by 10 percent c) decreases by 10 percent d) increases by 20 percent e) decreases by 20 percent 6. The form of capital income is a) rents b) depreciation c) wage d) salary e) interest f) investments 7. The forms of labor income are a) salary b) investments c) rents d) wage 121

e) interest f) depreciation 8. Which of the following events would shift the labor supply curve? a) The wage rate increases. b) changes in the number of women willing to work c) immigration of workers d) changing attitudes towards work e) The price of a firm's product increases. f) The wage rate decreases. 9. The knowledge, skills, education and training an individual possesses is known as a) physical capital b) resource capital c) labor capital d) entrepreneurial capital e) human capital f) money capital

122

Chapter 10

NATIONAL ECONOMY: THE ESSENCE AND MEASUREMENT OF RESULTS 1. The concept of macroeconomics. National economy and its main objectives. 2. System of national accounts and measurement of the performance of the national economy.

1. The concept of macroeconomics. National economy and its main objectives Macroeconomics studies the features of the functioning of the national economy as a whole, analyzes the general processes that reflect the nature of the interactions and interrelations between its elements in the scale of society. Macroeconomics is a division of economic theory that studies the patterns of the functioning of the economic system as a whole. Macroeconomics studies how the economy as a whole works, makes an analysis of the conditions, factors and results of the development of the national economy of a single state. The very concept of «macroeconomics» is associated with the Greek words «makro» – large and «economics» – the art of managing the economy. Macroeconomics studies two aspects. On the one hand, it is a real economy, a national economic complex in which the branches of material and non-material production are organically united. On the other hand, macroeconomics is a division of economic theory that studies the behavior of the national economy as a whole, its nature and the results of its functioning. Macroeconomics is one of the youngest and fastest growing sections of economic theory. Its special subject and specific method of research began to be formed from the 30s of the XX century. This period of development of science was characterized by the accumulation and systematization of data on the functioning of the economy, allowing calculating indicators characterizing the development of the state as a whole (gross domestic product, national 123

income, total investment, etc). At the same time, scientists began to pay attention to the repeated patterns in economic development, which testify to the cyclical nature of economic dynamics. In addition, in 1929-1933 yy. Almost all countries of the world embraced the economic crisis («Great Depression»), expressed in a decline in production and high unemployment. The results of economic development of this period were at variance with the theoretical postulates of the classical economic school about the ability of the market mechanism to self-regulate and achieve general economic equilibrium. All this led to the need for a new theoretical approach in determining the conditions and methods for regulating the economy by the state, with a view to smoothing the negative consequences of crises and preventing them. The founder of modern macroeconomic theory was J.M. Keynes, who developed a scientific concept that explains the emergence of economic fluctuations in the economy, and also proposed a special program of government actions to overcome depression and smooth the economic cycle. The theoretical ideas of J.M. Keynes were set forth in the paper «The General Theory of Employment, Interest and Money» (1936). In a situation where the main macroeconomic goals come into conflict with each other, the society needs to develop a system of priorities in implementing the tasks that it poses to the economy. The concept of «national economy» is one of the most important in economic theory, since it is the national economy that is the object of study at the macro level. The national economy can be defined as a historically established system of social reproduction of the country, interconnected industries, types of production and territorial complexes. The national economy covers all established forms of social division and labor cooperation. The subjects of the national economy are enterprises (entrepreneurial firms), households, and the state, united in a single system by economic relations, performing certain functions in the social division and labor co-operation, producing goods or services. The national economy of each country seeks to achieve certain goals. The main functional goal of the national economy is to meet the needs of the entire population of the country, which it implements through the implementation of a number of sub-goals: 124

1. Stable, sustained economic growth means a steady increase in the volume of production of goods and services in the country without recessions and crises, which creates the opportunity to meet increasing needs and ensure the necessary accumulation. 2. Stable price level. Low prices attract the consumer, but deprive the producer of incentives. High prices, on the contrary, stimulate production, but reduce the purchasing power of the population. Therefore, achieving price stability in practice means not «freezing» them for a long period, but a smooth regulated growth that corresponds to a point of equilibrium between supply and demand. The level of price stability is checked using the consumer price index (CPI). 3. High level of employment. It is achieved when everyone who wants to get a job finds it. If not everyone wants to get a job, this means that full employment does not cover all able-bodied people. In addition, in any country at any given time there are a certain number of people temporarily not working in connection with the change of place of work or residence. Along with this, there is always structural unemployment due to the mismatch of the structure of new jobs to the structure of the existing workforce. Thus, full employment, as a rule, is less than 100% of the able-bodied population. 4. Foreign trade balance, i.e. achieving a relative balance between exports and imports, as well as the stability of the exchange rate of the national currency. If more goods are imported into the country than sold abroad, there is a negative trade balance. If exports are greater than imports, they speak of a surplus. A significant influence on the state of the trade balance is provided by the exchange rate – the value of the monetary unit of one country expressed in the monetary unit of another country. 5. Achieving high production efficiency, which involves obtaining the maximum return with the minimum costs of the limited resources available. It should be noted that in this case the society strives to achieve economic efficiency: the greatest results at the lowest costs. At the same time, it is also necessary to achieve social effectiveness, i.e. the conformity of the results of economic activity with the social goals of society. 6. Fair distribution of income. Within the market economy, the revenues that will be determined by the efficiency of the producing resources will be fair. However, there are people in society (elderly, 125

children, disabled people, etc.) who do not own any of the factors of production; they have nothing to offer in the market for production factors. Thus, the market does not ensure equality in the distribution of income and adjust. This deficiency can be made by the state through transfer payments (unemployment benefits, old age and disability pensions) or by intervention in the pricing mechanism, the introduction of minimum wage legislation, the establishment of procurement prices for agricultural producers, etc. 7. Protection of the natural environment and improvement of the human environment. This very important goal, because pollution of the environment has a detrimental effect on people's health, on the duration of their life. At the same time, the costs of protecting the environment are increasing, and this leads to a reduction in the GDP from which they are kept, and the welfare of the population is ultimately worsening. And nevertheless, the task of the national economy is to ensure the protection of the environment, the creation and implementation of technologies that ensure the non-waste production, the development of medicine, etc. In various economic systems, the realization of this goal has its own characteristics and is largely determined by the economic policy of the state. 8. Economic freedom. All subjects of the national economy should have a high degree of freedom in their economic activities, which stimulates the search for ways to increase production efficiency. All these and other goals require for their implementation the formulation of specific tasks that are reflected in the economic policy of the state. 2. System of national accounts and measurement of the performance of the national economy. The System of National Accounts (SNA) is a system of interrelated indicators used to describe and analyze macroeconomic processes. The standard system of national accounts, developed by the UN Statistical Commission, has been applied in world practice since 1953. The System of National Accounts (SNA) is a set of balance sheet economic tables reflecting the costs of business entities for the purchase of goods and their income from the results of economic 126

activities. The basis of this system is the consolidated accounts of GDP, investment, income and expenditure of households and government agencies, foreign economic operations. National accounts allow you to organize information on economic activities, performing for the national economy a role similar to the system of accounts in the enterprise. The SNA does not take into account the production of household goods and services for domestic consumption and the production of an intermediate product consumed within the business. The central indicator of the System of National Accounts is the gross national product (GNP). Methods are developed for calculating GNP for expenditures on the products created in the country and on income derived from the production of products: Calculation of GNP by expenditure: GNP = C + Ig + G + Xn , C – expenditure on consumption includes household expenditure on various types of goods and services; Ig – is gross investment, the costs of investment goods, which include equipment, production buildings, inventories, housing construction and depreciation costs. Gross investment is consisted of net investment and depreciation; G – public expenditure combines the costs of the state, going directly to the production of goods and services. They are estimated by costs; Xn – net exports – the difference between volumes of exports and imports. Calculation of GNP by income: GNP = W + R + i + π+ depreciation + indirect taxes, W – wages of workers and employees, including additional payments for social security, social insurance, payments from private pension funds; R – rental income received by households as a result of renting out land, premises, housing, etc; i – the percentage is in the form of income from money-capital saved by households; π – is the profit that owners of partnerships, individual owners and corporations receive. Depreciation – is the amount by which asset’s value falls in a given period (consumption of fixed capital). Indirect taxes – are taxes like sales tax, customs duties. 127

Gross domestic product (GDP) includes products and services produced directly within the country and only using the factors of production of a given country. This indicator is a kind of modification of GNP, but unlike the latter it covers the results of activities in the territory of a given country of all economic entities. GDP and GNP both try to measure the market value of all goods and services produced for final sale in an economy. GNP differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. Net national product (NNP): NNP = GNP – depreciation National income (NI) NI = NNP – Indirect taxes Personal income (PI) is all income earned or received by individuals. It goes on consumption, saving, paying taxes. Disposable personal income (DPI) – income from payment of taxes and payments from the budget. The disposable income is directly allocated to consumption and savings. The GNP in the system of national accounts is calculated in current market prices. Therefore, it estimates the nominal value of the total volume of annual production. To take into account the impact of inflation on the amount of nominal GNP, an indicator is needed to quantify the change in the level of average prices for goods and services. This indicator is called the GNP deflator. Real GNP =

.

The deflator takes into account the change in prices for the widest range of products and services for both consumer and investment purposes. On the basis of data on the value of nominal GNP and the value of its deflator, a real GNP is calculated that characterizes the physical volume of production. 128

The national economy cannot remain unchanged; it has dynamism adequate to the modern stage of scientific and technological revolution and changes in social needs. So after the independence of the Republic of Kazakhstan in the country's economy, radical macroeconomic transformations took place related to the transition from the administrative-command system to market relations, implying the implementation of a number of deep macro- and microeconomic reforms and the introduction of market institutions. The change in the national economy can be carried out gradually: slowly – under the influence of market relations (evolutionary process) or through radical structural changes with active state regulation of this process. Control questions: 1. Formulate the essence of the national economy and present its main goals 2. Describe the main macroeconomic indicators. 3. Explain what the system of national accounts is, its purpose and measurement methodology. Basic terms and concepts: Macroeconomics National economy System of National Accounts Gross national product Gross domestic product Net national product National income Personal income Disposable personal income Real GNP Nominal GNP National volume of production Test tasks: 1. Gross National Product can be measured as the sum of a) final goods and services, intermediate goods, transfer payments, and rent. b) C+Ig+G+Xn c) consumption, investment, government purchases, and net exports. d) consumption, transfer payments, wages, and profits. e) Net National Product, Gross National Product, and Disposable personal income. f) investment, wages, profits, and intermediate production. 129

2. RK Gross Domestic Product (in contrast to Gross National Product) measures the production and income of a) Kazakh-owned firms no matter where they are located in the world b) the domestic service sector only c) people and factories located within the borders of the RK d) the domestic industry sector only e) the domestic agriculture sector only 3. Gross Domestic Product is the sum of the market value of the a) intermediate goods b) manufactured goods. c) inferior goods and services. d) normal goods and services. e) final goods and services. f) agricultural goods 4. The expenditure components of GDP include a) interest b) consumption c) wages d) profits e) rent f) investment g) net exports 5. The income components of GDP include a) consumption b) wage income c) investment d) government spending on goods and services. e) interest income f) profits 6. When there is positive inflation, a) growth in real GDP and nominal GDP are equal b) growth in nominal GDP exceeds growth in real GDP c) there can never be any growth in nominal GDP. d) growth in real GDP exceeds growth in nominal GDP. e) real GDP and nominal GDP cannot increase 7. Suppose that in a given country in a given year, GNP equals $2,000, investment expenditures equal $200, government expenditures equal $150, and the net exports equal $50. Consumption expenditures therefore equal a) $1,600 b) $1,000 c) $1,200 130

d) $1,400 e) $2,000 – ($200+$150+$50) 8. The market value of all final goods and services produced within an economy in a given period is called: a) gross domestic product. b) industrial production. c) the GDP deflator. d) general durable purchases. e) agricultural production. 9. Real GDP means the value of goods and services is measured in a) base-year prices. b) current prices c) actual prices d) constant prices e) average prices f) marginal prices 10. The GDP deflator is equal to: a) the ratio of nominal GDP to real GDP. b) the ratio of real GDP to nominal GDP. c) real GDP minus national GDP. d) nominal GDP minus real GDP. × 100. e) GDP deflator = f) real GDP plus national GDP. 11. National income equals net national product: a) minus depreciation. b) plus depreciation. c) minus indirect business taxes. d) plus indirect business taxes. e) minus net exports 12. It is known that GDP is 500 den.ed., consumer spending of citizens is 300 den.d., private investment is 150 den.e., government purchases are -80 den.e., imports = 50 den.e. Determine the amount of exports from the country 2) GNP = 9000doll. Consumer spending = $ 5000, government spending = $ 1,700, and net exports = $ 180. Calculate: A) The amount of investment B) NNP, provided that the amount of depreciation is $ 300.

131

Chapter 11

ECONOMIC GROWTH. CYCLICALITY OF MARKET ECONOMY 1. Economic growth, its factors and types. 2. Cyclic economy. Characteristic of the phases of the cycle. 3. The economic crisis. Classification and frequency of crises.

1. Economic growth, its factors and indicators Economic development and economic growth express the movement of the economy. Economic development means slumps and upsurge in business activity in society, i.e. contains a positive and negative trend, and economic growth is a positive dynamic of economic life. The result of economic growth is an increase in GNP (the real and potential) basis for increasing the economic power of the state. Therefore, ensuring economic growth is the central task of any state, the priority goal of economic policy. J. Schumpeter first introduced the differences between growth and development of the economy, determined the essence of innovation as the main driving force for economic growth. Unlike the set of indicators for economic development, economic growth is a simpler quantitative indicator. Economic growth is measured either by the real growth rate of GNP (GDP), or by the rate of increase in GNP (GDP) per capita. The ultimate goal of economic growth is to increase the material well-being of the population, ensure social progress and maintain national security. Factors of economic growth are distinguished by the way they affect their production capacities: direct and indirect (Figures 11.1; 11.2). As it is known, natural resources as production conditions are limited by reserves in nature, their quantity and availability are gradually decreasing. The society must take this circumstance into account. The growing scale of the involvement of natural resources in production and the imperfection of their processing and use give rise to problems of global importance. They can be divided into two groups. 132

Fig. 11.1

Fig. 11.2 133

The first is connected with the exhaustion of natural reserves. The person took everything while public production was not so actively developed. Over time, the problem of the exhaustion of resources acquired a local character, then a regional, national one. Today this problem is reaching the world level. The second group of problems is related to the consequences of resource use. The last one and a half century progress in the productive forces has led to a real environmental crisis. Environmentalists assess the current situation as critical. From the economic point of view, the preservation of the environment leads to additional costs for eliminating the negative consequences of the use of resources or their prevention. The need for these measures is in conflict with the desire to maximize profits, which is achieved by reducing production costs. Natural resources are a source of growth from the quantitative side, providing growing volumes of production. From the qualitative side, the source of growth is the whole complex of measures applied to optimize their use. By themselves, natural resources are neutral in relation to economic growth. The growth of population and labor resources is traditionally considered as a factor stimulating economic development. For developing countries with their surplus labor, rapid population growth is not always a positive phenomenon; the effect of population growth depends on the ability of the economic system to create jobs for new workers. This ability is often linked to the rate of capital accumulation and the development of such factors of production as entrepreneurial initiative. Capital accumulation takes place when part of the current income is saved and invested in order to increase future incomes. New factories, equipment and materials – all this increases the stock of physical capital that the country has. In addition to these direct investments in production, there are also investments in social and economic infrastructure – roads, energy, utilities and transport. Such investments are accompanied by production, which provides general conditions for economic activity. Investments in human capital increase the quality of the labor force and are often able to give a greater production effect. The effectiveness of all forms of education, in turn, increases with the corresponding investments in their material base – equipment, 134

buildings, materials (books, personal computers, educational and scientific instruments, etc.). Investments in human capital are a deliberate investment of funds in sectors and spheres that ensure the improvement of the qualitative parameters of a person, especially his labor force. The formation of the theory of human capital and the effectiveness of investment in human capital refers to the 60-80-ies. XX century, associated with the works of T. Schultz, G. Becker, E. Denison, J. Mincer, etc. In particular, E. Denison developed a classification of factors of economic growth, which includes 23 factors. 4 refer to labor, 4 to capital, 1 to land, and the remaining 14 characterize the contribution of scientific and technological progress. In his opinion, economic growth is determined not so much by the number of outlays of production factors as by the increase in the quality of labor. Analyzing the sources of economic growth in the United States for 1929-1982. E. Denison came to the conclusion that education is the determining factor in the growth of output per worker. For studies of behavioral aspects in maximizing benefits at the level of personal and family life rights, incl. From the receipt of education G. Becker (1992) received the Nobel Prize. Human capital has come to be regarded as a long-term economic resource, the profitability of which, over time, with the accumulation of knowledge and experience, increases. Technical progress is the third basic component of growth - many economists consider the most important. In its simplest form, it means the emergence of new, more efficient ways of producing goods. There are three main types of progress: neutral, labor-saving and capitalsaving. Neutral technical progress occurs when production growth is achieved with the same volume and cost structure of factors. An example of this can be such a simple innovation in production as separation. Capital and labor-saving technological progress will allow increasing production with constant expenditure of any one factor capital or labor. Computers, automatic weaving machines, electric drills, tractors, mechanical plows – all these and many other types of modern machines can be called labor-saving forms of technological progress. Capital-saving technological progress is less common. But this is only because almost all scientific research is conducted in 135

developed countries, where the task of saving labor is in the first place. The most effective here (in terms of costs) are various labor-intensive methods of production. The interaction of factors of economic growth often depends on external influence on their behavior, for example, on the part of state administration. State programs for economic development include the goals of economic growth and the state at least provides a legal basis for economic activity. In this case, we are talking about the degree of state influence on economic processes, on the forms and methods of state regulation. Economic growth is always the result of economic and noneconomic factors. The latter include military-political, geographical, climatic, national, demographic, cultural, etc. The influence of these or other factors may be more or less noticeable, but it is impossible to level them. There are 2 types of economic growth: – extensive – intensive. Extensive is due to the quantitative increase in direct growth factors. Intensive – as a result of the qualitative improvement of direct growth factors (progressive technology, professional development of employees, etc.) Extensive type of economic growth allows society to quickly master natural resources, increase employment, but at the same time, it is a costly nature of production development that generates technical stagnation. An intensive type of economic growth is based on the use of achievements of scientific and technological revolution. In conditions of an intensive type, the growth in output exceeds the cost of production, i.e. it is carried out due to growth of labor productivity. In real life, both types of economic growth intertwine, complement each other. The expansion of production is accompanied by an improvement in the quality characteristics of newly introduced production factors. Therefore, characterizing the real type of economic growth, note it as predominantly intense or predominantly extensive, depending on which growth factors prevailed in the increase in real GNP. 136

2. Cyclicity of the economy. Characteristic of the phases of the cycle Cyclicity in the economy (Fig. 11.1) means a constantly recurring movement of production from one point of its highest rise to the next.

Fig. 11.1. Cyclicity of the economy

The period during which the economy passes through these points is called the time of the economic cycle. The economic cycle can be represented by the following figure: Each cycle consists of four phases: contraction, recession, recovery and expansion. Each phase has its own characteristics. Consider them in order. I. Contraction (crisis). The main manifestation of the crisis is a fall in production volumes and a reduction in the size of GNP. Accordingly, the production capacities of enterprises are not fully loaded, the profit is falling, the share price is falling, the employment of the population is falling, the level of wages is falling, the living standard of the population is falling, and poverty is increasing. II. Recession. This phase is characterized by the fact that after the liquidation during the crisis of commodity stocks, the production decline ceases, but there is still no growth. Accordingly, employment is at a low level, but unemployment has already stopped, stabilized, 137

albeit at a low level, wages and profits of enterprises, their business activity is not high. Long-term recession is often called depression. Depression can last from a few months to several years. III. Recovery. The name of the phase speaks for itself. It is characterized by a revival of the economy; some GDP growth is occurring, the demand for labor, on loan capital is increasing. The most important thing is that the investment activity of enterprises is intensified. Usually this phase does not last long; it quickly passes into the next phase. IV. Expansion. This phase is also called a boom, since it is characterized by fairly rapid economic growth. There is an increase in employment, unemployment is resolving, and sometimes in some industries there is a shortage of labor. The wages are rising, the aggregate demand is growing, the volume of sales is growing, and the profit of enterprises is increasing. The population and enterprises have free money, their offer on money markets increases, so the interest rate does not increase, and sometimes it starts to decline. 3. Economic crisis. Classification and frequency of crises The economic crisis (turning point) is a serious disruption in the usual economic activity. The cause of economic crises is often seen in the imbalance between the supply and demand for goods and services. The main types are the crisis of underproduction (deficit) and the crisis of overproduction. The crisis of underproduction, as a rule, occurs as a consequence of non-economic reasons and is associated with a violation of the normal course (economic) reproduction under the influence of natural disasters or political actions (various prohibitions, wars, etc.). The crisis of overproduction is characterized by the presence of a large number of goods that exceed consumer demand. With the development of the market industrial economy, crises of overproduction have become cyclical and today constitute one of the phases of the economic cycle. The consequence of the economic crisis is a decrease in the real gross national product, massive bankruptcies and unemployment, a decline in the living standards of the population. 138

Table 11.1 Basic types of cycles Name Kitchin cycle

Length of cycle 2-4 years

Main Features This cycle arises as a result of changes in working capital, i.e. in inventories of commodity and material values and as a result of market conditions there is an imbalance between supply and demand

Juglar cycle

7-12 years

Kuznets swing

16-25 years

This cycle is the result of a violation of capital investments in active elements of fixed capital - the means and tools of labor, in the change of monetary factors This cycle is caused by a change in the generations of equipment, demographic changes. These cycles can also be caused by the peculiarities of the government's economic policy

Kondratiev wave

40-60 years

Forrester cycle

200 years

Toffler cycle 1000-2000 years

This cycle is explained by important discoveries leading to radical changes due to the achievements of scientific-technical progress and creates conditions for significant economic growth This cycle is explained by the change in the materials and energy sources used. This cycle is explained by the fact that the development of civilization passes through the following stages of development: agricultural, industrial and post-industrial.

Kitchin cycles (reserve cycles). J. Kitchin focused his attention on the study of short waves with a length of 2 to 4 years, based on the study of financial accounts and sales prices for the movement of commodity stocks. Juglar cycles. For the first time in economic science, a cycle of 7-12 years was selected, based on a fundamental analysis of fluctuations in interest rates and prices. As it turned out, these fluctuations coincided with investment cycles, which, in turn, initiated a change in GNP, inflation and employment. Kuznets cycle. S. Kuznets in his work «National Income and Capital Formation» (1937) came to the conclusion that the indicators 139

of national income, consumer spending, gross investment in production equipment, as well as in buildings and structures, reveal interrelated 20-year fluctuations. Cycles of Kondratiev. The rise of the first large cycle N. Kondratiev associated with the industrial revolution in England, the second – with the development of rail transport, the third – with the introduction of electricity, telephone, radio, and the fourth – with the automotive industry. The fifth cycle of modern researchers associated with the development of electronics, genetic engineering, microprocessors. From the point of view of the structure of the economy, there are also different agrarian and other sectorial crises that cover not the entire economic system, but only separate branches: agriculture, energy, heavy industry, etc. Structural crises can occur both in the form of relative underproduction, and relative overproduction, accompany the general industrial cycle or not coincide with it. At present, there is no doubt about the need for state intervention in the process of social reproduction. The question can be discussed about the ways and intensity of this intervention, as the actions of the state can positively or negatively affect the development of the country in the future. The Republic of Kazakhstan is recognized as one of the leaders in macroeconomic growth parameters not only among the CIS countries, but also among countries in which the systemic transformation of economic systems is taking place. Kazakhstan has proved its ability to manage the state for years of its independence. Control questions: 1. Expand the notion of economic growth, its types and factors. 2. Discover the nature and specifics of economic cycles. 3. Give a typology of economic cycles. Basic terms and concepts: Economic growth Economic development Extensive economic growth Intensive economic growth Human capital 140

Cyclicity of the economy The phase of the crisis The phase of depression The phase of recovery Lifting phase Economic crisis Kitchin cycles Juglar Cycles Kuznets Cycles Cycles of Kondratiev Forrester Cycles Toffler Cycles Test tasks: 1. A reasonable measure of the standard of living in a country is a) nominal GDP per person b) real GDP per person c) real GDP d) the growth rate of nominal GDP per person e) nominal GDP 2. An expansion is a period in which: a) rising unemployment b) real national output is rising c) real domestic output falls d) rising incomes e) falling unemployment 3. Economic cycle is a) A long-term fluctuation in economic activity between growth and recession b) the increase in the market value of the goods and services produced by an economy over time. c) the percent rate of increase in real GDP. d) real gross domestic product e) regular ups and downs in the growth of output, jobs, income and spending 4. The economic growth is a) the increase in the market value of the goods and services produced by an economy over time. b) A long-term fluctuation in economic activity between growth and recession c) the increase in real GDP. d) real gross domestic product e) regular ups and downs in the growth of output, jobs, income and spending

141

5. The point on the business cycle where real GDP reaches its highest level is known as the a) Summit b) Peak c) Appogee d) Maximoid e) Trough f) Bottom 6. Economic growth is defined as an increase in: a) investment b) total consumption expenditures c) real GDP d) wealth in the economy e) nominal GDP f) wage income g) real GDP per capita 7. A recession is a period in which: a) real domestic output falls b) real national output is rising c) rising employment d) rising unemployment e) a significant decline in economic activity 8. Which of the following are the ingredients that can stimulate economic growth? a) Technological innovation b) increase taxes c) entrepreneurship d) political instability e) increase government expenditure f) investment

142

Chapter 12

INFLATION AND UNEMPLOYMENT 1. Inflation and its types 2. The essence and basic forms of unemployment

1. Inflation and its types Inflation is a phenomena of economy with a paper-money circulation. The term "inflation" means "swelling". Inflation is an increase in the general price level. In turn, the decline in prices means that there is a deflation. Causes of inflation: 1. Monetary factors: – unjustified emission of money for short-term needs of the state; – financing of the budget deficit (can be carried out through money issue or loans from the central bank). 2. High level of monopolization of the economy. Since the monopoly has market power, it is able to influence prices. Monopolization can increase inflation, which started due to other reasons. 3. Militarization of the economy. Arms production, increasing GDP, does not increase the country's production potential. From the economic point of view, high military spending hinders the development of the country. The consequences of militarization are the budget deficit, imbalances in the structure of the economy, the underproduction of consumer goods with increased demand, i.e. commodity shortage and inflation. Depending on the reasons for the occurrence, two main sources of inflation are considered: supply and demand. 1. Demand-pull inflation It is generated by an excess of aggregate demand, for which for certain reasons production does not have time. Excessive demand leads to higher prices, creates opportunities for increasing the profits of enterprises. Enterprises expand production; attract additional labor 143

and economic resources. The money incomes of resource owners are growing, which contributes to further growth in demand and rising prices. 2. Cost Push Inflation Cost Push Inflation means an increase in prices, provoked by an increase in production costs in the context of underutilization of productive resources With a negative economic situation, the supply in the economy is decreasing. As a rule, this is due to rising prices for factors of production. The costs of production increase and are shifted to the price of the output. If this product is also a resource for any firm, then it is forced to raise the price. 3. Imported inflation is caused by excessive inflow of foreign currency into the country and an increase in import prices; 4. Exported inflation is transferred from one country to another through the mechanism of international economic relations affecting monetary circulation, effective demand and prices. Depending on the pace (speed of flow), the following types of inflation are distinguished: – Creeping (moderate) – the price increase does not exceed 10% per year. The value of money is saved; contracts are signed in nominal prices. Economic theory considers such inflation as the best, because it comes at the expense of the renewability of the assortment, it makes it possible to adjust prices, which are replaced by the conditions of supply and demand. This inflation is manageable, because it can be regulated. – Galloping (spasmodic) – price increases from 10-20 to 50-200% per year. In contracts, prices start to take into account; the population invests money in material values. Inflation is difficult to manage; monetary reforms are often carried out. These changes indicate a diseased economy leading to stagnation, that is, to an economic crisis. – Hyperinflation – a price increase of more than 200% per month. The well-being of even the well-off strata of society and normal economic relations are being destroyed. This type of inflation is uncontrollable and requires extraordinary measures. As a result of hyperinflation, production and exchange stop, the real volume of 144

national production is declining, unemployment is rising, businesses are closing down and bankruptcy is taking place. Hyperinflation means the collapse of the monetary system, the paralysis of the entire monetary mechanism. The highest of all the known levels of hyperinflation was observed in Hungary (August 1945 - July 1946), when the price level for the year increased by 3,8*1027 times with an average monthly growth of 198 times. The general price level determines the average price level of a wide range of goods, measured by the price index. The price index expresses the relative change in the average price level for a certain period. =

× 100%.

Depending on the nature of manifestation, the following types of inflation are distinguished: – Open – a positive increase in the price level in conditions of free, unregulated prices. – Suppressed (closed) – strengthening of the commodity deficit, in the conditions of strict state control over prices. It is characterized by a deficit of goods while restraining the growth of prices, open, manifested with the growth of prices. Thus, under the conditions of inflation, the stability of economic relations and social relations in the society is violated. Modern inflationary processes have some features: if earlier inflation covered the economy of one or several countries, now the price increase is not local, but universal, world-wide, modern inflation is not episodic, but continuous, chronic. Prices grow at all phases of the economic cycle, not falling even during periods of economic growth. It depends on the specifics of the national economy, as well as on the degree of state intervention in the economy. 2. Essence and basic forms of unemployment Unemployment is a social and economic phenomenon when a part of the economically active population does not find a job and becomes an unnecessary population. According to the definition of the 145

International Labor Organization, an unemployed person is a person who wants to work and is looking for it and can work, but does not have a job. To determine the number of unemployed in each country, it is necessary to subdivide the entire population into groups according to the degree of their labor activity. At first all persons are divided into two groups: 1. Economically inactive population – residents of the country that are not part of the labor force. These include: a) students of full-time educational institutions; b) pensioners (for old age and other reasons); c) persons running the household (including those caring for children, patients, etc.); d) desperate to find a job; e) persons who do not need to work (regardless of the source of their income). 2. The economically active population (Ea) is part of able-bodied citizens, which offers labor for the production of goods and services. Then the level of economic activity of the population (La) is determined – the proportion of economically active people in the total population (Tp): La = . In turn, the economically active population (labor force) is divided into two groups: 1. Employed – persons aged 16 years and over (and also persons of younger ages) who: A) work for hire for a fee (on a full or part-time basis); B) work without payment at family enterprises. 2. Unemployed – persons 16 years and older who: A) do not have a job (profitable occupation); B) are engaged in the search for work (applied to the employment services, etc.); C) ready to start work; D) are trained in the direction of the state employment service. The indicator for calculating unemployment and for assessing employment is the rate of unemployment. 146

× 100%

= or –

=

x 100%.

The unemployment rate (Ur) is the share of the unemployed in the economically active population: In connection with the different duration of the period of unemployment, three main types of unemployment are singled out: – frictional; – structural; – cyclic. 1. Frictional unemployment is unemployment that occurs because it takes workers some time to move from one job to another. Some workers are temporarily out of work while changing jobs. The person is «on the way to work». Life circumstances, such as finding a higher-paying job, close to the area of residence; availability of acceptable social conditions, etc. makes people change jobs. 2. Structural unemployment. This term is used to refer to a situation in which an employee is in a state of unemployment for extended periods. These periods are explained by structural shifts in the economy, which devalue the skill level of certain categories of labor. The demand for various goods is constantly fluctuating, which in turn causes a fluctuation in the demand for the labor of workers who produce these goods (for example, the introduction of personal computers has reduced the demand for typewriters, which in turn has reduced the demand for labor in the production of typewriters). Further, since different regions produce different goods, the demand for labor can simultaneously increase in one part of the country and decrease in another. Such changes in the structure of the demand for labor by industry and region are called structural shifts. Unemployment of frictional and structural types exists both in prosperous and in unsuccessful periods. The total number of 147

unemployed of both types is called the natural unemployment rate, this level corresponds to the situation of macroeconomic equilibrium. The modern name of this indicator is not the rate of unemployment that accelerates inflation. The natural rate of unemployment is 5.5 - 6.5% of the total labor force. The reason for the increase in the natural level of unemployment is an increase in the duration of job search, which may be due to: – an increase in the amount of unemployment benefits; – an increase in the time for the payment of unemployment benefits; – an increase in the proportion of women in the labor force; – an increase in the proportion of young people in the labor market. The first two factors make it possible to search for work over a longer period of time. The third and fourth factors, which signify a change in the sex and age structure of the workforce, increase the number of people newly or newly emerging in the labor market and seeking work, and therefore the number of unemployed, increase competition in the labor market and extend the period of job search. Full employment is compatible with the natural rate of unemployment. The volume of production that can be produced in conditions of full employment expresses the productive potential of the economy. 3. Cyclical unemployment is unemployment caused by a cyclical contraction of production. The difference between the actual rate of unemployment and the natural rate is cyclical unemployment. The development of a cyclical form of unemployment leads to an excess of its actual level over the natural level. The economic price of this excess is expressed in the backlog of the actual volume of GNP from its potential magnitude. There also other types which scientists pointed out: seasonal, voluntary, and institutional unemployment. Seasonal unemployment occurs in such sectors as agriculture, construction. Voluntary and institutional unemployment are often associated with the inert state of the labor market. For example, the existence of high unemployment benefits, the duration of these payments causes both voluntary and institutional unemployment. The law on minimum wages also causes institutional unemployment among low-paid workers, since an 148

increase in the minimum wage level leads to an increase in the wage bill and a reduction in employment. Also, the lack of information on the availability of vacant seats is a factor in this type of unemployment. The law of Okun is the law according to which the country loses from 2 to 3% of the actual GDP in relation to potential GDP, when the actual unemployment rate increases by 1% compared to its natural level. The Phillips curve reflects the relationship between inflation and unemployment. Following the Phillips curve, the government can build its economic policy. The state by stimulating aggregate demand can increase inflation and reduce unemployment and vice versa. The Phillips curve (fig.12.1) was completely true until the mid1970s. During this period, stagflation occurred (simultaneous growth of inflation and unemployment), which the Phillips curve could not explain. The employment policy is aimed at creating new jobs, retraining systems, employment centers, etc.

Fig. 12.1. The Phillips curve

All methods and measures by which the state affects employment and unemployment can be divided into two groups: active and passive. Active measures are aimed at creating additional jobs. Among the active measures are, first, the policy aimed at stimulating aggregate demand from the state budget. 149

Secondly, organizational legislative and financial measures of the state, which include: – the organization of the education system and the production and technical training of personnel based on employment services and enterprises; – regulation of sectorial and regional staff mobility; – expansion of production of goods and services due to the growth of government subsidies; – implementation of public works programs in construction, repair and restoration works; – creation of jobs for young people; – subsidies for employment of persons in need of social protection; – investing the most promising or labor-intensive industries; – measures to reduce supply in the labor market; – stimulation of self-employment of the population; – assistance in the development of small and medium-sized businesses. Passive employment policy includes the creation of a system of social insurance and material assistance to the unemployed. The system of social insurance provides for the payment of unemployment benefits taking into account previous earnings, the material assistance system is aimed at providing the unemployed with a living wage. Control questions: 1. Give an interpretation of the essence of inflation, its causes and types. 2. Indicate what unemployment is, its essence, its significance in a market economy and its consequences. 3. What are the causes and types of unemployment? Basic terms and concepts: Inflation Creeping (moderate) inflation Galloping (spasmodic) inflation Hyperinflation Inflation Open inflation Depressed (closed) inflation Inflation demand Supply Inflation Unemployment 150

Unemployed Economically active population The natural unemployment rate Unemployment rate Frictional unemployment Structural unemployment Cyclic unemployment Okun’s Law Phillips Curve Test tasks: 1. The amount of unemployment that the economy normally experiences is known as a) cyclical unemployment b) efficiency wage unemployment c) frictional unemployment d) the natural rate of unemployment e) structural unemployment 2. A man who chooses to stay home and take care of the household is a) a part-time worker b) not in the labor force c) employed d) unemployed e) a discouragedworker 3. A miner who has been unable to find work for so long that he has stopped looking for work is considered to be a) structural unemployment b) not in the adult population c) frictional unemployed d) employed e) not in the labor force f) cyclical unemployment 4. The unemployment rate equals a) (number of people unemployed/labor force) × 100 b) unemployed workers multiplied by 100 c) (number of people unemployed/ population) × 100 d) number of people in the labor force e) [(laborforce)÷(population)]×100 5. If the CPI in 2000 is 100 and the CPI in 2001 is 110, there has been: a) Slight deflation b) Slight inflation 151

c) d) e) f) g)

Extreme inflation Hyperinflation Stagflation Inflation rate is 10% Inflation rate is 110%

6. Which of the following best fits the definition of unemployed? a) not working and not looking for work b) working less than a full work week c) not working but looking for a job d) retired and not working e) lack of desire to work 7. Who among the following are considered to be in the labor force? a) unemployed people. b) full-time students c) retirees d) people on social security. e) people with jobs f) people who are out of a job but not looking for work. g) people who are willing and able to work h) children under 16 years 8. Unemployment caused by a recession is called: a) Frictional unemployment. b) Cyclical unemployment. c) Natural unemployment d) Structural unemployment. e) seasonal unemployment. f) voluntary unemployment. 9. Frictional unemployment often occurs when: a) The economy enters a recession. b) People are discriminated against. c) People first enter the labor force. d) People lose a job because their skills are no longer needed. e) the aggregate demand for goods and services decreases f) workers are temporarily out of work while changing jobs g) The economy enters a depression 10. A rise in the general level of prices over time is called ________. a) deflation b) equilibrium c) recession d) depression e) inflation f) Expansion 152

Chapter 13

THE FINANCIAL SYSTEM 1. The essence of finance and the financial system. Functions of finance. 2. Taxes and their essence. Types of taxes.

1. The essence of finance and the financial system. Functions of finance Finances are historical in nature. The term «finance» comes from the Latin word «financia» – payment or income. The reasons for the close connection between the development of financial relations and the formation and development of the state are that in pre-capitalist formations the state's revenues and expenditures were basically of a natural form (duties, brokers, receipts from in-kind fees). With the development of the capitalist state, monetary incomes and expenditures become increasingly important, which is caused by the complication of the functions of the state. This subsequently led to the separation of the state treasury from the personal treasury and the property of the monarch, the implementation of the transition from the estate to the regular army. These processes required the creation of additional cash sources, which led to the concept of «public finances», «state budget» and «public credit». Features of finance as an economic category: 1) finances is conditioned by the existence of the state; 2) finances act as distributive and redistributive relations; 3) finances is associated with the formation, distribution and use of funds that take the form of financial resources. Financial relations always have a concrete form: – monetary relations of enterprises with the state over payment of taxes and mandatory payments; – monetary relations between enterprises in the form of investments in joint activities, equity participation; – monetary relations of enterprises with employees regarding the use of net profit for additional payments related to labor payment, for payment of dividends and interest on securities; 153

Finance system

– monetary relations of the state with the population with regard to paying taxes, raising funds from the population to finance current and accumulated budget deficits; – monetary relations between enterprises and the population with insurance organizations; – monetary relations with regard to the use of public funds of financial resources (budgetary and extra budgetary); – monetary relations of enterprises with the population in connection with raising funds for the formation of the authorized capital, the implementation of bonded loans. The financial system is constructed depending on the role that various subjects of financial relations play in the reproduction process and includes (Fig. 13.1): – Finances of enterprises, institutions and organizations; – insurance; – public finances.

Finance of enterprises Insurance Public finances

Fig. 13.1. Financial system

The financial system is a collection of relatively separate interrelated financial relations that reflect specific forms and methods of distribution and redistribution of GDP. The financial system acts as an aggregate of financial bodies and institutions that manage cash flows. The financial system is viewed from two sides: the internal structure and the organizational structure. 154

The internal structure of the financial system reflects an objective set of financial relations and is common to all countries. It consists of spheres and links. The sphere characterizes a generalized by a certain attribute set of financial relations. The links show a separate part of financial relations. The level of the economic system is based on the allocation of spheres and links. The organizational structure of the financial system is the aggregate of financial bodies and institutions that characterizes the financial management system. At the heart of the separation of the management bodies of the financial system lies its internal structure. General management of financial activities in the country is carried out by state authorities and management. The structure of the financial system is the totality of its elements and connections between them. It is known that the public financeincludes four links (subsystems): – The state budget; – Local finance; – Special off-budget funds; – Finances of state corporations.

Public finance Budget and budget system

Public credit

Off-budget funds

Finance performs the following main functions: 1) the distribution function consists in the creation of basic or primary incomes by distributing the national income among the participants in material production, as well as in creating secondary or derivative incomes by distributing the national income between the productive and non-productive spheres, the branches of material production, regions, forms of ownership and social groups. The stage of distribution begins with the distribution of the new value and ends with the formation of primary incomes (wages, profits). 155

The stage of redistribution is a multi-stage stage, on which state funds are formed: the state budget, off-budget funds, insurance, bank funds and enterprise funds. Distributive function is an objective property of the category of finance to distribute the value of the created product in monetary terms. The redistributive stage differs from the distributional one in that at this stage the previously generated revenues are redistributed; 2) redistributive function – the redistribution of the created product, i.e. the secondary distribution between members of society. The whole process of GDP redistribution is serviced by public finances on the basis of the formation and use of centralized funds of funds. Centralized funds include budgets of all levels and extrabudgetary funds; 3) control function – the implementation of compliance with the proportions in the distribution process. The proportions for different industries are different, they are formed under different conditions, and also are objective. The object of control is the distribution process. The main controlled proportion is the proportion between accumulation and consumption funds. In connection with the development of market relations, in addition to budgetary relations, extra-budgetary ones appeared. Part of the funds for carrying out social and cultural activities goes through extra budgetary funds. We reduce the budget, but at the same time, the burden on enterprises that make deductions increases; 4) Regulatory function (finance can both stimulate production, and oppress it). Formation of state funds means the accumulation of revenues in budgets and extra-budgetary funds of various levels. As a result of this function, the formation of budget funds that provides the goals of the functioning of the state. The use of funds (income) in the state - ensuring the financing of budget expenditures. As a result of this function, funding is provided for the costs incurred for budget financing. 2. Taxes: their essence and types Taxes can be defined as state revenues collected on a regular basis with the help of the coercive right belonging to them. Also, taxes can 156

be defined as mandatory, non-refundable payments charged by state institutions in order to meet government needs for financial resources. As it follows from the definition, by taxes it is necessary to understand not only those payments in the name of which there is a word "tax", for example, value-added tax, income tax, etc. Tax duties also include customs duties, mandatory contributions to state extrabudgetary funds, for example, to a pension fund, etc. All these payments together constitute a tax system. – Fiscal function, which consists in providing the state with financial resources necessary to carry out its activities (the source of state revenues); In modern conditions, taxes have two main functions: – Regulatory function, through which taxes either stimulate or restrain one or another economic activity (the regulator of the economic system).

The degree of realization of the functions of taxes depends on which set of economic instruments the state enjoys. Together they represent a tax mechanism through which the tax policy of the state is implemented. Using taxes as a regulatory instrument, the state encourages economic agents to do something (taxes are reduced) or, on the contrary, hinders their activities (taxes are increased). Types of taxes: 1. Direct taxes are levied directly from individuals and legal entities, as well as on their income. Direct taxes include income tax, income tax, and property tax. 2. Indirect tax is levied on the price of a good or service. Among the indirect taxes, the main are the value-added tax (VAT), excises, import duties, sales tax, etc. Types of taxes by the nature of taxation: – Proportional (share of tax in income unchanged); – Progressive (the share of tax in income increases with income growth); 157

– Regressive (the share of the tax in income decreases with the growth of income). Raising the tax rates to a certain point will lead to an increase in the collected taxes. Further tax increases undermine incentives for productive activities (since most of the income must be transferred to the state budget), inhibits the growth of scientific and technological progress, slows economic growth and leads to a decrease in the revenues of taxes to the budget. This dependence is expressed by the Laffer curve (fig. 13.2).

Fig. 13.2. The Laffer curve

At the level of the size of tax rates is optimal and ensures the greatest flow of funds to the budget. Tax revenues increase during periods of economic recovery and decline during periods of recession. And transfer payments, on the contrary, decline during periods of economic growth and increase during periods of recession. A sound financial system is the key to the development and successful functioning of a market economy and a necessary prerequisite for the growth and stability of the economy as a whole. This system is the basis that mobilizes and distributes the savings of society and facilitates its daily operations. 158

Control questions: 1. Explain the essence of finance and their functions. 2. Uncover the essence and structure of the financial system of the state 3. Explain what the state budget is. Describe the structure and reasons for the budget deficit. 4. Disclose the economic purpose and essence of the "tax". Imagine the main subjects and objects of taxation. 5. What are the principles of building the tax system of the state and the main types of taxes? Basic terms and concepts: Finance Financial system Insurance Public Finance Taxes Tax system Direct taxes Indirect taxes Proportional taxation Progressive taxation Regressive taxation Laffer curve Test tasks: 1. Which of the following are the examples of expansionary fiscal policy? a) increase in money supply b) reduction in taxes c) increased taxes d) decrease in money supply e) reduced transfers f) increase in government purchases g) increase in government income transfers h) increase in household consumptions 2. If government spending exceeds tax collections a) there is balanced budget b) there is a budget surplus c) privatesavingispositive d) there is a budget deficit e) publicsavingispositive

159

3. The main tools of fiscal policy are a) taxation b) open-market operations c) government expenditures d) currency e) reserve requirements f) the discount rate g) cash 4. An appropriate fiscal policy for a severe recession is: a) a decrease in government spending b) a decrease in tax rates c) appreciation of the dollar d) an increase in interest rates e) an increase in reserve rates f) an increase in government spending g) an increase in discount rate. 5. Fiscal policy refers to the: a) actions taken by a central bank b) an perfectly equitable distribution of income c) manipulation of government spending and taxes d) maintain competition e) using tariffs, quotas or other barriers on imports 6. Expansionary fiscal policy a) is the way to stimulate aggregate demand b) is designed to expand real GDP c) can keep inflation down d) increase interest rates e) increasing government spending and reducing taxes 7. Contractionary fiscal policy a) is the way to stimulate aggregate demand b) increasing taxes and reducing government spending c) decreasing interest rates d) can keep inflation down e) is aimed at reducing aggregate demand

160

Chapter 14

MONETARY SYSTEM 1. The essence and forms of credit. Principles of lending 2. Structure of the modern credit system 3. Monetary policy: essence, goals, instruments

1. The essence and forms of credit. Principles of lending A loan is a system of economic relations in connection with the transfer from one owner to another for the temporary use of values in any form (commodity, monetary, non-material) on terms of repayment, urgency, pay. A loan is a commodity sold for a specific price, a loan interest and on specific terms, for a period, with a refund. It is accepted to distinguish the following types of credit. (Fig. 14.1). usurious

Credit

bank loan mortgage international commercial state consumer lombardy Fig. 14.1. Types of credit

The most important sources of credit are: – funds intended for the restoration of fixed capital and accumulated as the transfer of its value in the form of depreciation; 161

– а portion of working capital released in cash in connection with the mismatch of the time of sale of goods and the purchase of raw materials, fuel, payment of wages, etc.; – the part of surplus value intended for capitalization, accumulated at the expanded reproduction up to the certain size, depending on scales of the enterprises and their technical level; – movement of the budget system, various trust funds and reserves; – formation of incomes and savings of the population.

new forms of credit

factoring

leasing

forfaiting

Fig. 14.2. New forms of credit

Types of loans by maturity: Short term

Medium-term

Long term

Less than 1 year

1-3 (5) year

More than 3 (5) year

Basic principles of lending: 1. Repayment 2. Urgency 3. Repayment 162

4. Security 5. The target orientation. Loan repayment means the need for a timely return of funds to the lender. The borrower cannot dispose of the loan as its own capital. The borrower is obliged to return the received amount by transferring the relevant amount of money to the creditor's account. This provides him with the opportunity to continue his commercial activities. The loan is returned at a time when the released funds enable the borrower to return the money received for temporary use. The process of return is important for both the lender and the borrower. The lender only therefore lends a loan, which implies its return inflow. For a borrower, it is necessary so to use a loan to ensure the timely release of the value and its return. This allows you not to interrupt credit relations in the future. Urgency of the loan assumes that the loan amount should be repaid to the borrower within a specified period of time established by the loan agreement. Violation of the loan repayment period is for the creditor to apply to the borrower economic sanctions in the form of an increase in the interest rate charged. The fulfillment of the term for the borrower is a guarantee of obtaining a loan. Interest is a charge for the use of credit. The economic essence of payment for a loan is manifested in the actual distribution of the additional income received between the borrower and the creditor. Loan repayment is in the form of loan interest, which performs the following functions: 1. Redistribution of a part of profits of legal entities and individuals. 2. Regulation of production and circulation through the redistribution of credit resources on the inter-sphere, inter-sectorial, inter-territorial and interstate levels. 3. Anti-inflation protection of monetary capital of creditors. In the history of credit development, there are numerous examples of interest-free loans: friendly, personal loans to friends and relatives. Interest-free loans in special cases can also be international loans provided in the form of assistance to developing countries. However, a loan without interest is always an exception. Security of the loan – the necessary protection of the creditor's property interests against a possible violation by the borrower of the 163

obligations assumed in the contract. This principle in practice finds expression in the form of a loan secured by inventory, financial guarantees in the form of securities. Especially it is important in the period of general economic instability. The purpose of the loan is for most credit relations. The purpose of the loan is the need for targeted use of the creditor's funds. Typically, the loan agreement specifies the specific purpose of using the loan received. The lender not only controls the compliance with the loan agreement, but also gets confidence in the return of the loan and interest. Fulfillment of this principle is additional collateral for the loan. Violation of this obligation may become the basis for early withdrawal of a loan or the introduction of an increased loan interest. The basic principles of credit are used by participants in credit relations (borrowers and creditors) to influence all stages of the production cycle. 2. Structure of the modern credit system The credit system is a set of banks and other credit and financial institutions that mobilize free monetary resources and provide them with loans using a specially designed tool for these purposes. The modern credit system in Western countries was formed under the influence of such important processes as the concentration and centralization of banking capital, which led to the emergence of giant banks; specialization of credit and financial institutions and complication of the functional structure of the credit system; merging of banking and industrial monopolies and the formation of financial capital; the internationalization of banking system, the emergence of transnational banks and financial groups. In the modern credit system, there are two main links: the Central Bank; commercial banks and specialized financial institutions. The Central Bank holds the leading position in the credit system. Its the primary goal is to provide their countries' currencies with price stability by controlling inflation. It was to the Central Bank that the state granted the exclusive right to issue banknotes. With an active impact on the course of economic development, the Central Bank has its own tools. So, by limiting or increasing the release of money into a national economic circulation, the bank significantly affects the state 164

of the money market. In most countries with a market economy, the Central Bank enjoys administrative autonomy. Varying the rate of interest for a loan, the central bank facilitates or complicates access to these loans. In addition to emissions, instruments of direct regulation are economic regulations that control the activities of commercial banks. In our country, this function is entrusted to the National Bank of Kazakhstan. It is public and has a significant degree of independence in regulating money circulation. Commercial banks are financial organizations that issue, store, provide, distribute, exchange and control money and circulation of money and securities. In a market economy, banks are a powerful instrument of structural policy and regulation of the economy, carried out by redistributing finance, capital in the form of bank lending to investments. The operations of a commercial bank are divided into passive (fundraising) and active (placement of funds). In addition, banks can engage in intermediary transactions (on behalf of the client on a commission basis) and trust operations (property management, securities). The profit of the bank is formed by maintaining the following ratio: Loan interest ≥ Deposit interest. The profit formula of the bank: Profit of the bank = Loan interest – Deposit interest A special place in the modern market economy is occupied by specialized credit and financial institutions, such as pension funds, insurance companies, mutual funds, investment banks, mortgage banks, savings and loan associations, etc. By accumulating huge monetary resources, these institutions actively participate in the processes of accumulation and efficient allocation of capital. 3. Monetary policy: essence, goals, instruments Monetary policy of the state is a combination of state measures in the sphere of monetary circulation and credit in order to regulate the supply of monetary resources to ensure non-inflationary economic growth. 165

Monetary policy is implemented through the stimulation of credit and money emission or by their limitation and deterrence. Stimulating monetary policy (credit expansion) means an increase in the money supply in order to revive economic activity in the country. It is conducted in conditions of falling production and increasing unemployment by expanding the scope of lending and reducing the rate of interest to revitalize the market. Restrictive monetary policy (credit restriction) presupposes a reduction in the money supply in order to contain inflationary GDP growth in the conditions of the economic boom accompanied by speculation in the securities market, rising prices, and growing disparities in the economy. In these cases, central banks are trying to prevent overheating of the economy by restricting lending, raising the interest rate, limiting the issuance of payment instruments. The state carries out monetary policy through central (emission) banks. In our country, this function is entrusted to the National Bank of Kazakhstan. It has a significant degree of independence in regulating money circulation. Methods of monetary policy conducted by the Central Bank 1. Accounting (discount) policy is one of the oldest and most tested methods of credit regulation. These are the conditions on which the central bank buys bills from commercial banks. It refers to direct methods of regulation and is a variant of regulating the cost of bank loans. In Kazakhstan, the rate of refinancing of the National Bank of the Republic of Kazakhstan fulfills the discount rate function, which provides for the provision of direct loans, discounting of bills, loans against securities, organization of credit auctions. 2. Operations in the open market – sale or purchase by the central bank of securities (government treasury obligations, as well as bonds of industrial companies and banks and commercial bank notes recorded by the central bank). This method became actively used after the Second World War, when the central banks of the countries largely reoriented to indirect methods of regulating the economy. When buying securities increases, and when they are sold, the volume of own 166

reserves of commercial banks decreases and the banking system as a whole decreases, which causes a change in the cost of the loan, and hence the demand for money. 3. The establishment of the ratios of obligatory reserves of commercial banks is a method of direct impact on the amount of bank reserves. It was first used in the US in 1933. Commercial banks are required to keep part of their deposits in the central bank in the form of obligatory reserves as a guarantee of meeting their obligations to customers. Their share (the ratio of obligatory reservation) is established legislatively by the Central Bank. This method helps to strengthen bank liquidity, i.e. the ability of banks to fulfill their obligations to customers. At the same time, these ratios act as a direct constraint on investment. The change in the ratio of obligatory reserves determines the value of the money multiplier that characterizes the multiplicity of the growth in the supply of money as a result of an increase in the monetary base. The higher the ratio of obligatory reserves, the smaller the proportion of funds can be used by commercial banks for active operations, which leads to a reduction in the money supply. Conversely, a reduction in the obligatory reserve ratio results in an increase in the lending capacity of commercial banks and an increase in the money supply. Thus, by changing the ratio of obligatory reserves, the central bank has an impact on the dynamics of the money supply and on investment activity. The main goal of the monetary policy of the National Bank of the Republic of Kazakhstan is to ensure price stability. Achieving this goal is one of the most important conditions for long-term sustainable economic development. Control questions: 1. Give an interpretation of the economic category «loan». Point out the principles and functions of the loan. 2. Describe the functions, tasks and instruments of regulation of the Central Bank in a modern market economy. 3. Uncover the essence and structure of the modern banking system. Indicate the main activities of banks in a market economy.

167

Basic terms and concepts: Credit Money-creditpolicy Credit expansion Credit restriction Credit system Issue of payment means Central (issuing) bank National Bank of the Republic of Kazakhstan Commercial banks Specialized financial institutions Accounting policy Open market operations Establishment of reserve requirements Test tasks: 1. Expansionary monetary policy involves: a) lowering reserve requirements, b) an increase in the money supply c) reduced transfers d) increase in government purchases e) increase in government income transfers f) decreasing the discount rate. 2. The term ___________________ describes the proportion of deposits that the bank must hold in the form of reserves that are not loaned out or invested in bonds. a) bond reserves b) reserve funds c) discount rate d) reserve rate e) term deposits 3. Which of the following policy actions by a central bank is likely to increase the money supply? a) decreasing the discount rate. b) decreasing reserve requirements. c) Increasing the discount rate. d) Increasing reserve requirements. e) Buying government bonds in open market operations. 4. The discount rate is a) the interest rate at which commercial banks lend to and borrow from each other. 168

b) banks. c) d) e)

the interest rate on loans that the Central Bank makes to commercial the interest rate the Central Bank pays on reserves. the interest rate the public pays when borrowing from banks. the interest rate banks pay on the public's deposits.

5. The main tools of monetary policy are a) taxation b) open-market operations c) government purchases d) government expenditures e) currency f) reserve requirements g) the discount rate 6. Monetary policy refers to the: a) actions taken by a central bank b) manipulation of government spending and taxes c) an perfectly equitable distribution of income d) maintain competition e) antitrust policy 7. Monetary policy is under the direct control of: a) the Parliament b) the major city mayors c) the commercial bank d) the Prime Minister e) the Central Bank 8. The key goal of monetary policy is to a) keep the budget deficit small b) pricelevelstability c) keep the budget surplus large d) reverse the productivity growth slowdown e) lower taxes 9. The central bank’s responsibilities are a) designs tax policy b) enforces the nation's antitrust laws c) analyzes data on workers d) sets the nation's monetary policy e) To regulate population

169

Chapter 15

GOVERNMENT REGULATION OF NATIONAL ECONOMY 1. The essence and purpose of state regulation in a market economy. 2. The essence of social policy, its direction and function. 3. Reasons for income differentiation.

1. The essence and purpose of state regulation in a market economy. State regulation of economic development is the impact of the state on the activities of economic entities and market conditions in order to ensure normal conditions for the functioning of the market mechanism. J.M. Keynes in his book «The General Theory of Employment, Interest and Money» (1936) substantiated the need for state regulation of the economy as a whole. The purpose of economic activity of the state is to smooth out, prevent negative consequences of the action of market mechanisms. Let us outline the main forms and methods of state intervention in the economy. First of all, it is important to distinguish two main forms: direct intervention through the expansion of state ownership of material resources, lawmaking and management of production enterprises and indirect intervention through various economic policy measures. Direct intervention. In all industrialized countries there is a more or less significant public sector of the economy. Its size can serve as a criterion for the economic role of the state, although it is not absolute. The state has capital in a variety of forms, provides loans, takes a share, and is the owner of enterprises. This makes the state the owner of part of the social capital. In all industrialized countries, the formation and development of the public sector took place in almost the same sectors (coal industry, electric power industry, sea, rail and air transport, aviation and cosmonautics, nuclear energy, etc.). 170

Direct intervention of the state is the adoption of legislative acts designed to streamline and develop relations between all elements of the market system. Indirect intervention. Depending on the purpose of the intervention, economic policy measures may be aimed at: – Stimulating investment and restoring the balance between savings and investment; – Full employment; – Stimulating the export and import of goods, capital and labor; – Impact on the general price level in order to stabilize it and the price of some specific goods; – Supporting sustainable economic growth; – Redistribution of income and some other purposes. To implement these various measures, the state resorts mainly to fiscal and monetary policies. Fiscal policy can be defined as a policy conducted by manipulating state revenues (primarily taxes) and expenditures. Monetary policy is a policy pursued by regulating the money supply in circulation and improving the monetary sphere. Both these directions of state policy are closely connected with each other. Today, we can declare that Kazakhstan is recognized in the world community as a state with a market economy. The basis for building a modern market economy was laid one of the most important priorities as economic growth, based on an open market economy with a high level of foreign investment and domestic savings. In the priority, the principle of limited state intervention in the economy was singled out separately with its active role. 2. The essence of social policy, its principles and functions Social policy is the activities of the state, other economic entities, aimed at providing conditions for satisfying the needs and improving the welfare of the population, creating a system of social guarantees. Social policy permeates all levels of social and economic activity. At the micro level, social policy is one of the directions for creating favorable and sufficient conditions for providing wage earners with incomes that are necessary both to meet primary needs, and to 171

reproduce, maintain the working capacity of the worker, educate and educate children, and create normal conditions in the family. At the macro level, regional and national social policies are implemented, which is an inherently important component of the state's social and economic policy. The material provision of social policy as a whole does not develop by itself, automatically, but requires the creation of certain macroeconomic prerequisites. This process is one of the main tasks of state regulation. Social policy helps achieve social cohesion; markets work better with sustainable incomes and risk reduction, income redistribution smooth out problems and solve social and economic problems. Objects of social policy are individual citizens, groups of citizens, united by specific ties, business, economic and labor relations, the population of the whole country. The subjects of social policy are those who determine the goals, objectives, priorities and legal framework of social policy, and implement actions to implement it. Subjects should include government agencies at the national and local levels, non-state associations, and commercial organizations, individual citizens operating within the framework of civil and public initiative. The main subject, coordinating the implementation of social policy, is the state. The goal of the social policy of the state is the formation of a socially stable and highly developed society capable of providing a decent standard of living and its quality with a sufficient degree of social harmony, without contradictions and social conflicts, neutralizing the negative consequences of a market economy. Consequently, the subjects of social policy are called upon to perform stabilizing and stimulating functions. Realization of the first function is achieved through redistribution of incomes, development of the system of social guarantees and social protection of all members of society and certain social groups. The fulfillment of the second function by the subjects of social policy presupposes the maintenance and stimulation of the economic activity of the society within the framework of the legislation, the formation of high labor motivation of workers for high-productivity work and the recording of the labor contribution of every able-bodied member of society in the creation of a national product. 172

The implementation of these functions requires certain efforts, solving a whole complex and sometimes contradictory tasks, as well as respecting the principles on which social policy is based. The most important principles of the formation and functioning of social policy: – the principle of social justice, which has historical features and assumes the equality of all members of society regardless of their individual and social differences, and the differentiation of the population according to the practical contribution of their labor to the creation of goods. In accordance with this principle of social policy, the state should strive to provide citizens with the equality of the starting conditions for the existence and satisfaction of the most important social needs (egalitarian type of justice), and at the same time for the most active, capable and effective members of society, the state is called upon to create the opportunity to receive for their work a greater remuneration in the form of income (distributive type of equity); – The principle of social guarantees provides for citizens to support with obligatory minimum of social physical and spiritual goods and services, the consumption of which ensures the individual's preparation for independent living; – The principle of individual social responsibility means that every capable member of society is called upon to make every effort to independently satisfy his own needs. If, for reasons beyond the control of the individual, it is not possible to satisfy primary needs, the government must provide assistance to its citizens in accordance with the provisions of national law; – The principle of universality is that social activities should cover all members of society on the basis of a differentiated approach. Social policy from the point of view of the subjects is carried out at the national and regional levels. At the state level, the goals, objectives and priorities of social development are defined, normative and legal acts are adopted, minimum social guarantees in the field of wages, pensions, 173

scholarships, medical services, education, culture are established; determines the procedure for granting citizens benefits and social services; targeted social programs are being developed. At the regional level, decisions are adopted that regulate socioeconomic relations in a certain territory; social programs are developed to address specific problems of the population of the region. In the world practice, the following social development indicators have been adopted: – real GDP per capita; – cash income and expenses of the population; – real wages; – consumption of basic food products per capita; – natural population growth and life expectancy; – share of budget expenditures for the development of the social sphere; – use of free time. In every field of activity, the importance of social policy is growing every year. In Kazakhstan, awareness of the paramount importance of social policy is clearly recorded in the annual addresses of the Head of State to the people of Kazakhstan. As a priority for further modernization of the society, «modern social policy, protecting the most vulnerable segments of the population and supporting the development of the economy»4. In the modern world, the conduct of an active social policy of the state is recognized as one of the main directions of the domestic policy of the country. The acquisition of state independence set Kazakhstan the task of «building a strong sovereign state with a socially-oriented market economy». The Constitution of the Republic of Kazakhstan fixed the following main directions of social policy: – establishment of a guaranteed minimum wage and pension, social security by age, in case of illness, disability, loss of breadwinner; – ensuring guaranteed free secondary compulsory education; – ensuring the right to health protection and free receipt of guaranteed medical care; 4

http://www.inform.kz/ru/social-naya-politika-rk-v-usloviyah-globalizacii_a2943787

174

– protection of the environment, favorable for human life and health, rational nature management. Within the framework of the social policy of the Republic of Kazakhstan, one of the strategic priorities is to ensure decent employment of the population, as the main type of its social protection. At the same time, two goals should be clearly delineated: – Firstly, to protect from vulnerable market impact socially vulnerable segments of the population who cannot do without social support of the state; – Secondly, to promote economic activation of various strata of the population through social policy. The strategic goal of modern social policy today is the transition to the advanced social standards of life through the mutual responsibility of the state and private business. The strategy of Kazakhstan's entry into the list of the 30 most competitive countries in the world assumes that the state should promote alternative participation of the private sector in the system of social protection and provision of social services (education, healthcare, culture). At the same time, the state remains the main source of financing for the system of social protection of the population. The role of the state will be leading even in the case of a high level of development of the social insurance system and the accumulative pension system, since the control over the activities of participants in the system will remain with the state. 3. Reasons for income differentiation Differences in income per capita or per employed person are called income differentiation. There are many phenomena that affect the level of income. Therefore, great attention is paid to the causes of income inequality: Differences of physical, mental and entrepreneurial abilities. The abilities of people are infinitely diverse, therefore some people who possess by nature good abilities, have higher productivity of labor and receive higher incomes than those who are deprived of these abilities. Some of the abilities of people are unique and therefore limited, which brings to their owners intellectual rent. 175

Differences in productivity and intensity of work. Inequality in labor productivity, which causes income inequality, can be recognized as socially justifiable if workers with absolutely identical physical and mental abilities enter the competition on the market. But as noted earlier, people's abilities are infinitely diverse. It is also obvious that people who spend more physical and mental energy to do the job have more opportunities to receive higher incomes than those who work relaxed. However, there is no direct correlation between the intensity of labor and its profitability. The absolute poverty line is the minimum standard of living determined on the basis of a person's physiological needs in food, clothing and housing, i.e. Based on a consumer goods basket that are sufficient to meet basic human needs. The relative poverty line is determined by social and cultural conditions, and is compared with the standard of living in different countries. To determine the degree of income inequality in world practice, the Lorenz curve (fig.15.1) is used. Also, the Lorenz curve can be used to compare the distribution of income in different periods of time, in different countries, between different social groups. When plotting the Lorenz curve, the shares of the families (in % of the total number) are plotted along the abscissa axis with the corresponding percentage of income, and on the ordinate axis – the shares of the incomes of the families in question (in % of total income).

Fig. 15.1. The Lorenz curve 176

The theoretical possibility of an absolutely equal distribution of income is represented by a bisector, which indicates that any given percentage of families receives an appropriate percentage of income. This means that if 20, 40, 60% of families receive 20, 40, 60% of the total income, and then the corresponding points will be located on the bisector. The Lorenz curve shows the ratio of the percentages of all incomes and the percentages of all their commissioners. If revenues were distributed evenly, that is, 10% of recipients would have a tenth of the income, 50% - half, and so on, then such a distribution would look like a line of uniform distribution. The non-uniform distribution is characterized by the Lorenz curve, that is, the line of the actual distribution, the longer the line, the greater the differentiation of income. The shaded area between the line of absolutely equal distribution and the Lorenz curve indicates the degree of income inequality: the larger this region, the greater the degree of income inequality. If the actual distribution of income was absolutely equal, then the Lorenz curve and the bisector would coincide. Thus, social policy is aimed at providing conditions for meeting needs, improving the welfare of the population, as well as targeting a uniform distribution of income. Obviously, the starting point of social policy is income. Therefore, it seems important to clarify the concept of income, the redistribution of income in society, government regulation of the processes of redistribution. Control questions: 1. Describe the methods and instruments of state regulation in a market economy. 2. Identify the strategy of «Kazakhstan-2050» as a new policy of the state. 3. What basic models of developed market systems do you know? What are the achievements of Kazakhstan in building a socially-oriented economy? Basic terms and concepts: State regulation of the economy Direct methods of state regulation of the economy Indirect methods of state regulation of the economy Social politics Принцип социaльной спрaведливости Принцип социaльных гaрaнтий Принцип социaльной ответственности 177

Принцип всеобщности Фискaльнaя политикa Differentiation of incomes Absolute poverty line Relative poverty line Lorenz curve Test tasks: 1. Which of the following is NOT among the reasons why we need the government? a) The government provides social welfare services for the poor and the needy b) The government provides free food for everyone c) The government provides public goods and services d) The government regulates markets when there is a market failure e) The government imposes laws f) The government controls to protect competitiveness of the industry g) The government controls all prices in the country 2. Main goals of economic policy a) absolute economic equality of all people b) low unemployment c) growth in standard of living d) control over all price e) resource allocation f) low inflation 3. An equal distribution of income would yield a Lorenz curve that was a a) line lying directly on the vertical axis at 100%. b) 45‐degree line between 0 and 100%. c) line lying directly on the vertical axis at 0%. d) line lying directly on the horizontal axis. e) any vertical line f) any horizontal line 4. Nonrivalry and nonexcludability are the main characteristics of: a) consumption goods b) private goods c) capital goods d) inferior goods e) public goods 5. Which of the following are the examples of a public good? a) a television set b) a weather warning system c) a sofa 178

d) e) f) g) h)

a bottle of soda a lamp a national defense system a pen street lighting

6. What is the goal of stabilization policy? a) To enable the economy to move freely from peak to trough b) To keep the economy in the area, to avoid the threats of both excessive unemployment and inflation c) To keep the economy as close to the peak as possible, where unemployment remains very low d) to set up the legal structure e) to maintain competition 7. Main functions of Governments in the modern economy are a) maintaining a national defense b) Providing the Legislative Framework c) providing public goods and services d) controlling all aspects of economic activity e) providing all goods and services 8. Why does a market economy need some government intervention? a) To prevent businesses from becoming too profitable b) to help correct market failures c) To make sure consumers get an equal share of the resources d) to provide public goods e) To achieve more equal distribution of income f) To ensure that the government has the freedom to tax as needed g) To create a classless society h) To limit competition

179

Chapter 16

ECONOMIC FUNDAMENTALS OF THE FUNCTIONING OF THE WORLD ECONOMY 1. The essence and structure of the world economy. 2. International trade 3. Globalization of the economy: conditions, factors and consequences. 4. Kazakhstan in the world economy.

1. The essence and structure of the world economy One of the most important reasons for the emergence and development of international economic relations is the difference in the allocation of countries to production factors, which, on the one hand, leads to an international division of labor, and on the other hand, to the movement of these factors between countries. Due to different endowments, production factors of the country specialize in the production of a limited set of products. At the same time, they achieve high labor productivity in its production, but at the same time they are forced to exchange these products to meet their needs. In the beginning, the division of labor arises within the country, and then encompasses neighboring countries and, finally, the whole world. The international division of labor is the highest stage in the development of the social division of labor between countries, which provides for a steady concentration of production of certain products in individual countries, which they exchange among themselves. Before the industrial revolution (the end of the 18th century and the first half of the 19th century), the international division of labor was based on differences in the endowment of countries with natural resources: climate, soils, subsoil, water and forest resources, etc. Then specialization is intensified, based on differences in the country's endowment with other factors of production – capital, labor, entrepreneurial abilities, and knowledge. This is what determines today in many ways what country specializes in manufacturing of what goods and services of the world market. 180

The world economy is a global economy that links national economies into a single system by an international division of labor. International economic relations (IER) include a multilevel set of economic relations between individual countries, their regional associations, as well as individual enterprises (transnational, multinational corporations) in the world economy. IER as a science does not study the economy of foreign countries, but features of their economic relations. And not any economic relations, but only the most frequently repeated, typical, characteristic, defining relations. The IER structure includes: International trade in goods and services

International economic integration

International movement of capital and foreign investment

International monetary, financial and credit relations

International labor migration

International exchange of technologies

One of the most important forms of international economic relations is the international trade in goods and services. 181

2. International trade International trade contributes to the development of the national economy, because it increases labor productivity and increases the total output. Thanks to international trade, the economy can achieve more efficient allocation of resources. International trade can raise living level by allowing each country to produce what they produce best and to consume the great variety of goods and services produced around the world. Goods and services that produced in the country and sold abroad are exports. Imports are foreign-produced goods and services that are sold domestically. The trade balance is an economic indicator that reflects the ratio between exports and imports of the country. If exports are greater than imports – the country sells more goods and services abroad than it buys from other countries. In this case, the country has a trade surplus (net exports are positive). If exports are less than imports - the country sells fewer goods and services abroad than it buys from other countries. In this case, the country has a trade deficit (net exports are negative). And if exports and imports are equal, the country has balanced trade (net exports are zero). The government regulates international trade. The objectives of state regulation are the protection of economic interests and the sovereignty of the country, economic security and the promotion of economic activity. As a rule government uses two different types of foreign trade policy in combination: liberalization (free trade policy) and protectionism. The free trade policy is the minimum of state interference in foreign trade, which developed on the basis of market forces of supply and demand. Free international trade increases variety for consumers, allows firms to take advantage of economies of scale, makes markets more competitive, and facilitates the spread of technology. However, there are some negative consequences, in particular for some domestic industries: businesses will have more competition from foreign companies; employees of uncompetitive domestic businesses are put out of work etc. 182

The protectionism is the state policy, which provides the protecting of the domestic market from foreign competition. The protectionism policy leads to the development of new industries in the country, unemployment reduction, defending national security. But this policy has some disadvantages. Without competition, domestic companies won't innovate and improve their products, reduces the interest in the implementation of scientific and technological progress; deteriorates the quality of domestic products. Consumers have to pay more for a lower quality product than they would get from foreign competitors. The main tools of trade policy are: 1. Tariff – a tax on imported goods. 2. Quotas – putting limits on how much of a good can be imported or exported. 3. Non-tariff restrictions – different types of standards, first of all, health and safety standards. The active use of these tools leads to a reduction in trade. Thus, free trade policy and protectionism have their own advantages and disadvantages. Economists believe that free trade is usually the better policy. 3. Globalization of the economy: conditions, factors and consequences. Globalization is a process in which the world is transformed into a single global system. The question of globalization became very relevant in the 1990s, although various aspects of this process were seriously discussed by scientists, starting from the 1960s-1970s. The phenomenon of globalization goes beyond a purely economic framework and exerts a noticeable influence on all major spheres of public activity – politics, ideology, culture. It will undoubtedly play a decisive role in the world economy of the 21st century, giving a powerful impetus to the formation of a new system of international economic and political relations. First, globalization is caused by objective factors of world development, the deepening of the international division of labor, scientific and technological progress in the field of transport and 183

communications, which reduces the so-called economic distance between countries. The second source of globalization - trade liberalization and other forms of economic liberalization, which caused a restriction of protectionism and made world trade more free. As a result, tariffs were substantially reduced; many other barriers to trade in goods and services were eliminated. The third source of the internationalization process and one of the main sources of globalization has become the phenomenon of transnationalization, within which a certain proportion of the country's production, consumption, exports, imports and income depends on the decisions of international centers outside the state. As the leading forces here are transnational companies (TNCs), which themselves are both the result and the main actors of internationalization. Globalization affects the economy of all countries. It affects the production of goods and services, the use of labor, investment, technology and their distribution from one country to another. All this ultimately affects the efficiency of production, labor productivity and competitiveness. It is globalization that has exacerbated international competition. Modern transnational corporations (they are still called global corporations), unlike previous TNCs of the production type, operate mainly in the information and financial markets. There is a planetary unification of these markets, a single world financial and information space is being formed. Accordingly, the role of TNCs and closely related supranational economic structures and organizations (such as the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, etc.) is growing accordingly. Some aspects of the impact of globalization on the national economy deserve special mention. First of all, we note the extremely high growth rates of foreign direct investment, far exceeding the growth rates of world trade. These investments play a key role in the transfer of technology, industrial restructuring, and the formation of global enterprises, which has a direct impact on the national economy. The second aspect concerns the impact on technological innovation. New technologies, as already noted, are one of the driving 184

forces of globalization, but it, in turn, strengthening competition, stimulates their further development and distribution among countries. Finally, as a result of globalization, there is an increase in trade in services, including financial, legal, managerial, and informational and all kinds of «invisible» services, which are becoming a major factor in international trade relations. The result of deepening the internationalization process is the interdependence and interaction of national economies. This can be interpreted as the integration of states into a structure that is close to a single international economic system. Although the bulk of the global product is consumed in producing countries, national development is increasingly linked to global structures and is becoming more multilateral and diverse than it was in the past. The process of globalization takes place in a highly polarized world system in terms of economic power and capabilities. This situation is a potential source of risks, problems and conflicts. Several leading countries control a significant part of production and consumption without even resorting to political or economic pressure. Their internal priorities and value orientations leave an imprint on all the largest spheres of internationalization. The vast majority (85-90%) of all TNCs is based in developed countries, but such corporations have also been established in developing countries in recent years. It is worth mentioning one more important feature of the globalization of the world economy: the rapid development of financial markets in the last years of the 20th century. The new role of financial markets (currency, stock, credit) in recent years has dramatically changed the architecture of the world economy. A few decades ago, the main goal of financial markets was to ensure the functioning of the real sector of the economy. In recent years, the world financial market has become self-sufficient. As a result, today we see an increase in the volume of this market at times, which was the result of a wide range of speculative operations caused by the liberalization of economic relations. In a word, the process of obtaining money from money has become much simpler due to the exclusion from it of the actual production of any product or services. Production replaced speculative operations with various derivative financial instruments, such as futures and options, as well as playing on the difference in the rates of world currencies. 185

This is the most complex and most advanced in terms of internationalization process, which is the result of deepening financial ties between countries, liberalizing prices and investment flows, creating global transnational financial groups. In terms of growth rates, the volume of loans in the international capital market in the preceding 10-15 years exceeded by 60% the volume of foreign trade and 130% of the world's gross product. The number of international investor organizations is increasing. In the globalization of finance, they often see the reason for the growth of speculation and diversion from the speculative goals of capital from production and creation of new jobs. The process of financial globalization is concentrated in the following main centers of the world economy: the USA, the EU, Japan, Russia, and China. Financial speculation goes far beyond the boundaries of these centers. The global turnover in the currency market daily reaches 0.9-1.1 trillion US dollars. The influx of speculative capital can not only exceed the needs of a country, but also destabilize its position. The rapid globalization of finance remains the most important reason for the vulnerability of the world economy. Integration of financial markets increases the risk of system failures. 4. Kazakhstan in the world economy Liberalization of foreign economic activity contributes to the process of opening the Kazakh economy to the world market. Kazakhstan is increasingly included in the system of the international division of labor. However, having entered the path of state independence and market reforms, the republic has a heavily deformed economy. It is characterized by: – high specific gravity of traditional types of products with low technical level and uncompetitive in the conditions of the market; – dominant position of heavy industry and almost no knowledge-intensive industry; – a deep disparity between the production of raw materials, intermediate products, on the one hand, and final products, on 186

the other, between the raw materials and manufacturing industries; – moral obsolescence and physical depreciation of the main body of the production apparatus; – imbalance between financial, material and technical resources; – the monopolistic position of many industries, the lack of a competitive environment. To overcome these problems, it is necessary to pursue an active structural policy, based on the priority development of priority industries with the aim of active participation of the republic in the international division of labor system, improving the economy and integrating it into the world economic system. In this regard, major economic reforms are underway, in particular, the transition from the production of predominantly raw materials to the production of mainly high-quality, competitive in the domestic and world markets of the final products of a high degree of readiness; Ensuring the accelerated development of progressive industries, as well as the formation of modern infrastructure sectors that create scientific and technical prerequisites for a breakthrough in the long run to the stage of industrial and post-industrial development based on the production of science-intensive products. In the opinion of many experts, Kazakhstan has a number of specific features, advantages that allow it to be optimally integrated into the world economy, to occupy a proper place in the IER system. These features include: 1. Favorable economic and geographical position. The geoeconomic position of Kazakhstan is assessed ambiguously by experts. Some consider it unsuccessful, because Kazakhstan has no access to the world's oceans and, therefore, the most economical type of international transport – sea transport - is not available to it. Others, on the contrary, believe that the country occupies a convenient position in the center of the Eurasian continent and can derive tangible economic benefits from this position. Kazakhstan even without access to the world ocean has a solid transit potential in international rail, road, air and pipeline transportation and communication services. 187

2. High staff potential. Despite the fact that Kazakhstan is one of the most sparsely populated countries in the world, a high educational and professional-qualified level of the population is considered to be a positive factor for economic development. 3. Presence of unique natural resources. To overcome the gap that separates Kazakhstan from world leaders and effective inclusion in the world economy, it is necessary: 1) development and improvement of the market mechanism of management; 2) attraction and effective use of foreign investment by creating a favorable investment climate; 3) conducting an active foreign trade policy, combining exportoriented production with import substitution; 4) stimulating economic development along the path of scientific and technological progress. Kazakhstan during its independence passed its own unique path, which enabled it to enter the path of sustainable economic growth and to date create market institutions recognized by the world community. Kazakhstan, which carried out market reforms, took place as a sovereign state and an equal participant in world economic and trade processes. Control questions: 1. Present the main forms of modern international economic relations. 2. What is the role, structure and characteristics of international trade? 3. Describe the conditions, factors and consequences of globalization of the economy. 4. Formulate and justify the global problems of our time. Basic terms and concepts: World economy International economic relations Globalization Globalization of the economy International Monetary Fund International Bank for Reconstruction and Development International Finance Corporation Internationalization of economic processes Trans nationalization 188

Transnational companies Liberalization of foreign economic activity Structural policy Foreign investments Export Orientation Import substitution Test tasks: 1. Trade policy refers to the: a) manipulation of government spending and taxes b) actions taken by a central bank c) an perfectly equitable distribution of income d) using tariffs, quotas or other barriers on imports e) maintain competition 2. Foreign trade a) increases the scarcity of resources. b) allows a country to have a greater variety of products c) makes a country more equitable. d) allows a country to have products at a lower cost than if it tried to produce everything at home. e) allows a country to avoid trade-offs. f) allows each trading partner to specialize more fully in the production of those things that it does best. 3. An economy that interacts with other economies is known as a) anopeneconomy b) anexporteconomy c) a friendlyeconomy d) a deficiteconomy e) animporteconomy 4. The main tools of trade policy are a) taxation b) Tariff c) government expenditures d) Export subsidies e) reserve requirements f) the discount rate g) Import quotas 5. Advantages of protectionism policy a) domestic businesses will have less competition from foreign companies. b) increase of domestic employment

189

c) Without competition, domestic companies won't innovate and improve their products d) lower quality of domestic product e) protection of new industries 6. Disadvantages of protectionism policy a) domestic businesses will have less competition from foreign companies. b) increase of domestic employment; c) Without competition, domestic companies won't innovate and improve their products d) lower quality of domestic product e) consumers will pay more for a lower quality product than they would get from foreign competitors. 7. Advantages of free trade policy a) lower prices for consumers b) consumers have a wider choice of goods c) Increased competition forces all producers to innovate d) domestic businesses will have more competition from foreign companies. e) Employees of uncompetitive domestic businesses are put out of work 8. When a nation’s net exports are equal to zero, it has a a) balanced trade. b) exports equal to imports c) deficit in trade. d) surplus in trade. e) shortage in trade. f) the sale of goods to a foreign country equals to the purchase of foreign manufactured goods

190

ANSWERS TO TEST TASKS: 1 Chapter 1 2 a, f, g b

3 c

4 a

5 c

6 b, d, h

7 a, c, e

8 d

2 Chapter 1 2 c, f, h d

3 d

4 b, f, g

5 c

6 b, e

7 a

8 d

3 Chapter 1 2 b, e, f a, b, c 4 Chapter 1 b

3 b, d, e

4 e

2 c

3 b

5 Chapter 1 2 b, d a, d, f

3 c, e

6 Chapter 1 2 c c 7 Chapter 1 2 b e

5 b, e, g 4 d, f 4 c

8 d

5 a, d

5 b

6 b, d, e

9 c, d, e 6 d

6 a, d

4 b 4 c

7 d

5 a, b

5 a

3 b 3 a, b, d

6 d, e

7 b, f

7 c, f

8 a, d, f

6 b, d

7 a, b

7 d, e

8 d

10 a, b

9 b, f

9 f, g 8 b, d, g

10 a, d

11 c, f

8 Chapter 1 2 a a, e

3 b, d, g

4 a, d, e

5 b, e

6 a, d, f

7 b, c, f

8 b, e

9 c

9 Chapter 1 2 b, d a, e

3 c, f

4 b, f

5 a

6 e

7 a, d

8 b, c, d

9 e

5

6

10 Chapter 1 2

3

4

191

7

8

9

10

11

b, c

c

e

b, f, g

11 Chapter 1 2 b b, d, e 12 Chapter 1 2 d b

3 b, e 3 e

5 b, f

3 a, c 3 a, b, e

b

4 a, c 4 a

13 Chapter 1 2 b, f, g d 14 Chapter 1 2 a, b, f c

b, e, f

a, e

5 b

6 c, g

6 c

7 a, e, g

4 b, f 4 b

a

a, d

7 a, d, e 8 b

5 c

5 b, f, g

a, e

9 c, f

6 a, b, e

6 a

7 e

8 b

c

8 a, c, f 10 e

7 b, d, e 9 d

15 Chapter 1 2 b, g b, c, f

3 b

4 e

5 b, f, h

6 b

7 a, b, c

8 b, d, e

16 Chapter 1 2 d b, d, f

3 a

4 b, d, g

5 a, b, e

6 c, d, e

7 a, b, c

8 a, b, f

192

REFERENCES The Main Literature: 1. Gary S. Becker. Economic Theory. – Routledge, 2 edition. – 2011. – 241 p. 2. Blaug M. Economic Theory in Retrospect. – Cambridge University Press, 6th edition. – 2013. – 752 p. 3. Курс экономической теории: учебник под ред. М.Н. Чепуринa, Е.A. Киселевой. – Киров: AСA, 2014. – 846 с. 4. Экономическaя теория: учебник / Под ред. Г.П. Журaвлевой. – М., 2014. – 557 с. 5. Экономическaя теория: учебник / Под ред. A.И. Добрынинa, Л.С. Тaрaсевичa. – М., 2009. – 542 с. 6. N. Gregory Mankiw. Principles of Economics, 7th Edition, 2014. Additional Literature: 1. Хaйек Ф. Пaгубнaя сaмонaдеянность. – М., 1992. – С. 162. 2. Коуз Р. Фирмa, рынок и прaво. – М., 1993. – С. 87-94. 3. Demsetz, Harold. Efficiency, competition, and policy, vol. I-II. Oxford, 1988. 4. Armen A. Alchian. – Property Rights. – http://www.econlib.org/library /Enc/ PropertyRights.html. 5. Елемесов Р.Е. Очерки по методологии экономических нaук: учебное пособие. – Aлмaты, 2013. 6. Экономическaя теория: основные понятия, тесты и зaдaчи: учебно-методический комплекс. Издaние второе, стереотипное / Под общ. ред. В.И. Кушлинa, Г.Ю. Ивлевой. – М.: Изд-во РГAС, 2010. 7. Қaзaқстaн Республикaсының кәсіпкерлік кодексі http://adilet.zan.kz/ kaz/docs/K1500000375#z23

193

CONTENTS INTRODUCTION ..................................................................................... 3 Chapter 1. THE SUBJECT AND METHOD OF ECONOMIC THEORY. ...................................................................... 5 1. The emergence and stages of the formation of economic theory. .......... 5 2. The subject of economic theory and its structure. .................................. 12 3. Methods of cognition of economic phenomena and processes. ............. 15 Control questions ....................................................................................... 18 Basic terms and concepts ........................................................................... 18 Test tasks ................................................................................................... 19 Chapter 2. PUBLIC PRODUCTION ......................................................... 21 1. Production and its role in the life of society........................................... 21 3. Resources and factors of production. ..................................................... 24 4. The problem of choice in conditions of limited resources. The production capacity............................................................................. 29 Control questions ....................................................................................... 31 Basic terms and concepts ........................................................................... 31 Test tasks ................................................................................................... 32 Chapter 3. OWNERSHIP AND ECONOMIC SYSTEMS ........................ 34 1. Property as an economic category. Subjects and objects of ownership. ............................................................................................. 34 2. Bundles of property rights. .................................................................... 36 3. Economic systems: essence and typology. ............................................. 38 Control questions ....................................................................................... 45 Basic terms and concepts ........................................................................... 45 Test tasks ................................................................................................... 45 Chapter 4. FORMS OF PUBLIC ECONOMY. COMMODITY AND MONEY. ................................................................ 48 1. Main forms of the economy. .................................................................. 48 2. The commodity and its properties. ......................................................... 53 3. Money: the essence, the origin of money. Functions of money. ............ 55 4. Tenge in the economy of Kazakhstan: socio-economic consequences and prospects. ............................................ 58 Control questions ....................................................................................... 59 Basic terms and concepts ........................................................................... 60 Test tasks ................................................................................................... 60 Chapter 5. MARKET. STRUCTURE AND INFRASTRUCTURE OF THE MARKET.................................................................................... 62 1. The essence and types of the market. ..................................................... 62 194

2. Competition: the concept and types. ...................................................... 65 3. Market infrastructure. Basic elements of modern market infrastructure. ................................................................................. 67 Control questions ....................................................................................... 72 Basic terms and concepts ........................................................................... 73 Test tasks ................................................................................................... 73 Chapter 6. MARKET MECHANISM AND ITS ELEMENTS. ................. 76 1. The law of demand. .............................................................................. 76 2. The law of supply. ................................................................................. 78 3. The equilibrium price. Infringement of market balance. ........................ 80 4. Elasticity of supply and demand. Coefficients of elasticity. .................. 82 Control questions ....................................................................................... 83 Basic terms and concepts ........................................................................... 83 Test tasks ................................................................................................... 83 Chapter 7. FIRM AS THE BASIS OF ORGANIZATION IN A MARKET ECONOMY. ................................................................... 86 1. Essence of entrepreneurship .................................................................. 86 2. Forms of entrepreneurship. .................................................................... 88 3. Types of entrepreneurship...................................................................... 90 Control questions ....................................................................................... 93 Basic terms and concepts ........................................................................... 94 Test tasks ................................................................................................... 94 Chapter 8. COSTS AND INCOME OF THE FIRM. ................................. 97 1. Essence of production costs. .................................................................. 97 2. Classification of production costs. ......................................................... 98 3. The essence of profit and its types. ....................................................... 100 Control questions ....................................................................................... 101 Basic terms and concepts ........................................................................... 102 Test tasks ................................................................................................... 102 Chapter 9. THE MARKET OF FACTORS OF PRODUCTION AND INCOME GENERATION. .............................. 105 1. Labor market.......................................................................................... 105 2. The essence and forms of wages. ........................................................... 109 3. The land market. Rent and its types. The price of land and rent. ........... 112 4. Capital market and interest income. ....................................................... 117 Control questions ....................................................................................... 120 Basic terms and concepts ........................................................................... 120 Test tasks ................................................................................................... 120 Chapter 10. NATIONAL ECONOMY: THE ESSENCE AND MEASUREMENT OF RESULTS. ....................... 123 1. The concept of macroeconomics. National economy and its main objectives. .............................................................................. 123 195

2. System of national accounts and measurement of the performance of the national economy. ....................................................... 126 Control questions ....................................................................................... 129 Basic terms and concepts ........................................................................... 129 Test tasks ................................................................................................... 129 Chapter 11. ECONOMIC GROWTH. CYCLICALITY OF MARKET ECONOMY. ...................................................................... 132 1. Economic growth, its factors and types. ................................................ 132 2. Cyclic economy. Characteristic of the phases of the cycle. ................... 137 3. The economic crisis. Classification and frequency of crises. ................. 138 Control questions ....................................................................................... 140 Basic terms and concepts ........................................................................... 140 Test tasks ................................................................................................... 141 Chapter 12. INFLATION AND UNEMPLOYMENT .............................. 143 1. Inflation and its types. ............................................................................ 143 2. The essence and basic forms of unemployment. .................................... 145 Control questions ....................................................................................... 15 Basic terms and concepts ........................................................................... 150 Test tasks ................................................................................................... 151 Chapter 13. THE FINANCIAL SYSTEM. ................................................ 153 1. The essence of finance and the financial system. Functions of finance................................................................................... 153 2. Taxes and their essence. Types of taxes. ................................................ 156 Control questions ....................................................................................... 159 Basic terms and concepts ........................................................................... 159 Test tasks ................................................................................................... 159 Chapter 14. MONETARY SYSTEM......................................................... 161 1.The essence and forms of credit. Principles of lending. .......................... 161 2. Structure of the modern credit system. .................................................. 164 3. Monetary policy: essence, goals, instruments. ....................................... 165 Control questions ....................................................................................... 167 Basic terms and concepts ........................................................................... 168 Test tasks ................................................................................................... 168 Chapter 15. GOVERNMENT REGULATION OF NATIONAL ECONOMY.................................................................... 170 1. The essence and purpose of state regulation in a market economy. ....... 170 2. The essence of social policy, its direction and function. ........................ 171 3. Reasons for income differentiation. ....................................................... 175 Control questions ....................................................................................... 177 Basic terms and concepts ........................................................................... 177 Test tasks ................................................................................................... 178 196

Chapter 16. ECONOMIC FUNDAMENTALS OF THE FUNCTIONING OF THE WORLD ECONOMY. ..................... 180 1. The essence and structure of the world economy................................... 180 2. International trade .................................................................................. 182 3. Globalization of the economy: conditions, factors and consequences...........183 4. Kazakhstan in the world economy. ........................................................ 186 Control questions ....................................................................................... 188 Basic terms and concepts ........................................................................... 188 Test tasks ................................................................................................... 189 ANSWERS TO TEST TASKS .................................................................. 191 REFERENCES .......................................................................................... 193

197

Educational issue

Aubakirova Zhanara Yahiyaevna Aitbembetova Aida Begalievna Kabylkairatkyzy Ryszhan Nurmanova Biken Zeinullovna

BASICS OF ECONOMICS Educational manual Typesetting and cover design: N. Bazarbaeyva The website used for front-page designing realdetroitweekly.com IS No.11762 Signed for publishing 06.03.18. Format 60x84 1/16. Offset paper. Digital printing. Volume 12,37 printer’s sheet. Edition 200. Order No.876 Publishing house «Qazaq University» Al-Farabi Kazakh National University, 71 Al-Farabi, 050040, Almaty Printed in the printing office of the «Qazaq University» publishing house

198