Inflation

Inflation is a steady rise in the average price and wage level. The rise in wages being high enough to raise costs of production, prices grow further re­sulting in a higher rate of inflation and, finally, in an inflationary spiral. Peri­ods when inflation rates are very large are referred to as¹ hyperinflation.

The causes of inflation are rather complicated, and there is a number of theories explaining them. Monetarists, such as Milton Friedman, say that inflation is caused by too rapid increase in money supply and the correspond­ing excess demand for goods.

Therefore, monetarists consider due government control of money supply to be able to restrict inflation rates. They also believe the high rate of unem­ployment to be likely to restrain claims for higher wages. People having jobs accept the wages they are being paid, the inflationary spiral being kept under control. This situation also accounts for rather slow increase in aggregate demand.

On the other hand, Keynesians, that is, economists following the theory of John M. Keynes, suppose inflation to be due to processes occurring in money circulation. They say that low inflation and unemployment rates can be ensured by adopting a tight incomes policy.

Incomes policies, though, monetarists argue, may temporarily speed up the transition to a lower inflation rate but they are unlikely to succeed in the long run².

The costs of inflation depend on whether it was anticipated and on the extent to which the economy’s institutions allow complete inflation adjustment.

The longer inflation continues, the more the economy learns to live with it. Indexation is a means to reduce the costs of some inflation effects. In­dexed wages or loans mean that the amount to be paid or repaid will rise with the price level. Indexation has already been introduced in countries that had to live with inflation rates of 30 or 40 percent for years. And the more coun­tries adjust their economies to cope with inflation, the closer they come to hyperinflation. Indexation means that high rates of inflation are much more likely to continue and even to increase.

Пояснения к тексту

1. are referred to as — называются
2. in the long run — в долгосрочный период, т.е. достаточно длительный для того, чтобы фирма могла изменить все факторы производства

 

Ответьте на вопросы к тексту Inflation.

1. What situation is described as an inflationary spiral? By what means can it be kept under control?
2. Which two schools of thought are mentioned in the text? What is the difference between them?
3. What do monetarists think to be effective in restraining inflation rates?
4. Why is aggregate demand low?
5. Do Keynesians consider incomes policies to be a good means of coping with inflation in the long run?
6. What do the costs of inflation depend on?
7. By what means can the costs of inflation be reduced?
8. Does indexation help to cope with inflation?

 

Foreign Trade

What is now called international trade has existed for thousands of years long before there were nations with specific boundaries. Foreign trade means the exchange of goods and services between nations, but speaking in strictly economic terms, international trade today is not between nations. It is between producers and consumers or between producers in different parts of the globe. Nations do not trade, only economic units such as agricultural, industrial, and service enterprises can participate in trade.

Goods can be defined as finished products, as intermediate goods used in producing other goods, or as agricultural products and foodstuffs. In­ternational trade enables a nation to specialize in those goods it can pro­duce most cheaply and efficiently and it is one of the greatest advantages of trade. On the other hand, trade also enables a country to consume more than it can produce if it depends only on its own resources. Finally, trade expands the potential market for the goods of a particular economy. Trade has always been the major force behind the economic relations among nations.

Different aspects of international trade and its role in the domestic economy are known to have been developed by many famous economists. International trade began to assume¹ its present form with the establish­ment of nation-states in the 17th and 18th centuries, new theories of eco­nomics, in particular of international trade, having appeared during this period.

In 1776 the Scottish economist Adam Smith, in The Wealth of Na­tions, proposed that specialization in production leads to increased out­put and in order to meet a constantly growing demand for goods it is necessary that a country’s scarce resources be allocated efficiently. Ac­cording to Smith’s theory, it is essential that a country trading interna­tionally should specialize in those goods in which it has an absolute ad­vantage — that is, the ones it can produce more cheaply and efficiently than its trading partners can. Exporting a portion of those goods, the country can in turn² import those that its trading partners produce more cheaply. To prove his theory Adam Smith used the example of Portuguese wine in contrast to English woolens³.

Half a century later, having been modified by the English economist Dav­id Ricardo, the theory of international trade is still accepted by most mod­ern economists. In line with the principle of comparative advantage, it is im­portant that a country should gain from trading certain goods even though its trading partners can produce those goods more cheaply. The comparative advantage is supposed to be realized if each trading partner has a prod­uct that will bring a better price in another country than it will at home. If each country specializes in producing the goods in which it has a compara­tive advantage more goods are produced, and the wealth of both the buying and the selling nations increases.

Trade based on comparative advantage still exists: France and Italy are known for their wines, and Switzerland maintains a reputation for fine watches Alongside this kind of trade, an exchange based on a competitive advantage began late in the 19th century. Several countries in Europe and North America having reached a fairly advanced stage of industrialization, competitive advantage began to play a more important role in trade. With relatively similar economies countries could start competing for customers in each other’s home markets. Whereas comparative advantage is based on location, competitive advantage must be earned by product quality and cus­tomer acceptance. For example, German manufacturers sell cars in the United States, and American automakers sell cars in Germany, both coun­tries as well as Japanese automakers competing for customers throughout Europe and in Latin America.

Thus, international trade leads to more efficient and increased world production, allows countries to consume a larger and more diverse amount of : goods, expands the number of potential markets in which a country can sell its goods. The increased international demand for goods results in greater production and more extensive use of raw materials and labour, which means the growth of domestic employment. Competition from international trade can also force domestic firms to become more efficient through moderniza­tion and innovation.

It is obvious that within each economy the importance of foreign trade vanes. Some nations export only to expand their domestic market or to aid economically depressed sectors within the domestic economy. Other nations depend on trade for a large part of their national income and it is often im­portant for them to develop import of manufactured goods in order to supply the ones for domestic consumption. In recent years foreign trade has also been considered as a means to promote growth within a nation’s economy. Developing countries and international organizations have increasingly emphasized such trade.

 

Пояснения к тексту

1. to assume — зд. принимать
2. in turn — в свою очередь
3. woolens — шерстяные ткани

 

Ответьте на вопросы к тексту Foreign Trade.

1. What does foreign trade mean in economic terms?
2. What are the three main advantages of trade?
3. How did Adam Smith explain the role of foreign trade?
4. What is the main principle of Ricardo’s theory of international trade?
5. What examples of comparative and competitive advantages of trade can you think of?
6. Why did trade based on competitive advantage appear as late as in the 19th century?
7. What is the role of international trade nowadays?
8. Are developing or developed nations more interested in for trade?

 

 

Assets and Liabilities

The term «asset» means anything of value that is owned by a company and can be expressed in terms of money. Economic resources that provide a poten­tial future service to the organization are called assets in accounting. A com­pany’s total assets include such items as cash, buildings, equipment, any oth­er property and accounts receivable, that is, money owned by its customers.

Assets are usually classified as current and long-term, both types consist­ing of tangible as well as of intangible items. Current tangible assets including cash, accounts receivable, stock-in-trade are usually converted into cash within one year and sometimes can be used as a means of payment. On the other hand, current intangible assets consist of short-term investments in stocks and bonds.

Long-term intangible assets are not really visible and include such items as goodwill, patents, trademarks, copyrights, these assets often being the most important factor for obtaining future incomes. For example, goodwill means an intangible asset which takes into account the value added to a business as a result of its reputation which cannot be really calculated. In contrast, the real estate (such as farm land, machinery, buildings and other physical ob­jects) belongs to long-term tangible assets.

Liabilities are obligations that a company owes to another organization, to an individual (such as creditors and employees) or to the government. Like assets, liabilities are divided into current and long-term ones. Current liabilities are usually amounts that are paid within one year, including accounts payable, taxes on income and property, short-term loans, salaries and wages, and amounts of money owed to suppliers of goods and services. Noncurrent liabilities often called long-term are usually debts, such as bonds and long-term loans.

The amount by which the total assets exceed total liabilities is known as the net worth which is usually called the equity for companies. When the company is a corporation, the equity means the investment interest of the owners (that is, the stockholders) in the organization’s assets. The owners’ equity can be increased either by investing more money in the company or by earning a profit and can be decreased because of the company’s losses.

All companies keep proper accounting system in order to know whether or not they are operating profitably, each of the assets and the liabilities and the equity being shown in a company’s accounts separately. The balance sheet prepared by the company’s accountant is one of the important financial re­ports showing the value of the total assets, total liabilities and equity on a given date. The relationship of these main categories is represented by the fundamental accounting equation: assets (everything that is owned) are equal to liabilities (owed) plus equity (clear of debt).

ASSETS = LIABILITIES + EQUITY

As all three factors are expressed in terms of money, they are limited to items that can be given a monetary value. The accounting equation should always be in balance, so that one side must equal the other.

 

Ответьте на вопросы к тексту Assets and Liabilities.

1. What does the term «asset» mean?
2. How can the company’s assets be classified?
3. How can «goodwill» increase the company’s profits?
4. What liabilities does the company usually have? How are they classi­fied?
5. How is the net worth calculated?
6. What accounts should be kept by the company?
7. What is the main accounting equation?
8. Why is it important to keep the proper accounting system?

 

 

Depreciation of Assets

In accounting, the process of allocating in a systematic and rational manner the cost of certain items of the assets (these are mainly capital assets) over the period of its useful life is known as depreciation. There are three main types of depreciation causing the decrease in value of an asset: 1) physical depreciation, 2) moral depreciation, 3) deterioration (порча, повреждение, износ).

In the process of production the capital assets gradually wear out, thus after a definite period of time they have to be replaced. This is known as their physical depreciation.

However, capital assets are also subject to moral depreciation, that is after serving for some period of time, they may become obsolete (устаревший) before they are physically worn out and have to be replaced by more up-to-date means of production. Such obsolescence (изношенность) of the assets is caused by technological changes and by the introduction of new and better machinery and methods of production. Obsolescence can also be caused by the commodity produced by the asset, for example, if it goes out of fashion. In the latter case, the degree of obsolescence will depend on the specific na­ture of the asset. Sometimes assets can be easily adapted to alternative uses while others may have only one application.

Deterioration means a change in value of an asset because of the effects of nature, for example, for machinery this might be rust (ржавчина), for build­ings it is connected with decadence (ухудшение), for farm lands it is caused by erosion.

In accounting, it is important to know depreciation of the capital assets as it increases the company’s expenses, so two main methods are used by ac­countants in calculating periodic depreciation. The most widely used is the straight-line method (метод равномерного исчисления износа), in which the rate of depreciation is constant for the entire working life of the capital assets. According to the second method known as accelerated depreciation method (ускоренный метод исчисления износа), the depreciation rate in the first years of asset use is greater than in the later years.

 

Используя текст, закончите следующие предложения:

1. Most capital assets have a limited life due to …
2. Depreciation results from such causes as …
3. In the case of machinery one should take into account…
4. Obsolescence can be caused either …
5. The effects of nature decrease the value of capital assets because of…
6. The choice of depreciation method is particularly important…
7. In practice we often use the following methods of calculating depreci­ation …

 

 

Bookkeeping as Part of Accounting Cycle

For management of any company to be efficient, extensive and accurate information concerning receipts and payments, assets and liabilities, depre­ciation of assets and other data about company status are required. Such information being obtained mainly from different records, additional funds time should be invested in bookkeeping and accounting system.

In general, accounting and bookkeeping mean identifying measuring recording economic information about any business, bookkeeping being considered the preliminary stage and part of the larger field of accounting.

The task of a bookkeeper is to ensure the record-keeping aspect of ac­counting and therefore to provide the data to which accounting principles are applied in the preparation of financial statements. Bookkeeping provides the basic accounting data by systematical recording such day-to-day financial information as income from the sale of products or services, expenses of busi­ness operations such as the cost of the goods sold and overhead expenses¹ such as a rent, wages, salaries.

Accounting principles determine which financial events and transactions should be recorded in the bookkeeper’s books. The analysis and interpretation of these records is the primary function of accounting. The various financial statements produced by accountants then provide managers with the basis for future financial planning and control, and provide other interested parties (in­vestors, the government) with useful information about the company.

Modern accounting system is considered to be a seven-step cycle. The first three steps fall under the bookkeeping function, such as: 1) the systemat­ic recording of financial transactions; 2) the transferring of the amounts from various journals to general ledger (also called «posting step»); 3) the drawing up of the trial balance.

Record keeping of companies is based on a double-entry system, due to which each transaction is recorded on the basis of its dual impact² on the company’s financial position. To make a complete bookkeeping record of every transaction in a journal, one should consider interrelated aspects³ of every transaction, and entries must be made in different accounts to keep the ins (receipts) and outs (payments) balanced.

A typical account is known to have two sides: the items on the left side are called debits, while the items on the right side are credits.

Thus, double-entry bookkeeping doesn’t mean that the same transaction is entered twice, it means that the same amount of money is always debited to one account and credited to another account, each record having its own effect on the whole financial structure of the company. Certain accounts are increased with debits and decreased with credits, while other accounts are increased with credits and decreased with debits.

In the second step in the accounting cycle, the amounts from the various journals are usually monthly transferred to the company’s general ledger — a procedure called posting. Posting data to the ledgers is followed by listing the balances of all the accounts and calculating whether the sum of all the debit balances agrees with the sum of all the credit balances. This procedure known as the drawing up of a trial balance and those that follow it usually take place at the end of the fiscal year. By making a trial balance, the record-keeping accuracy can be checked. The trial balance having been successfully prepared the bookkeeping portion of the accounting cycle is completed.

The double-entry system of bookkeeping enables every company to deter­mine at any time the value of each item that is owned, how much of this value belongs to creditors, the total profit and how much belongs to the business clear of debt. Thus, one advantage of the double-entry system is that its infor­mation is complete enough to be used as the basis for making business deci­sions. Another advantage is that errors are readily detected, since the system is based on equations that must always be in balance.

 

Пояснения к тексту

1. overhead expenses — накладные расходы
2. dual impact — двойное воздействие
3. interrelated aspects — взаимосвязанные аспекты

 

Ответьте на вопросы к тексту Bookkeeping as Part of Accounting Cycle.

1. What kind of information is of great importance for proper company management?
2. What role does bookkeeping play in the accounting cycle?
3. What kind of data is collected by a bookkeeper?
4. What is the difference between bookkeeping and accounting?
5. Who is interested in obtaining accurate accounting information?
6. What is the modern concept of the accounting system?
7. What tasks should a bookkeeper solve at the first three steps of the accounting cycle?
8. What does double-entry bookkeeping mean?
9. What data are recorded in the company’s general ledger?
10. When is the bookkeeping cycle considered to be completed?
11. What are the advantages of the double-entry system?

 

 

Product management

I.

Products are like people. Each one is different. Selling a product is like finding a home for a person. Some fit in one place; others need something different. Finding homes for the company’s products is Marketing Manager’s job. Ben is a Marketing Manager. He reports directly to Dan, the Director of Marketing. Some companies have a manager for each product or type of product. Ben decides who will sell each of the company’s products to the customers who use it.

The way a product is sold to the customer who will use it is known as its channel of distribution, or distribution channel. Even though all products are kept in warehouses by the Distribution Division, there are different channels for getting the items to customers who will buy and use them. Even though the salespeople sell all the products, the products are sold to customers in different ways as it depends on how customers normally buy these items. One way that products are sold is directly to customers by the company’s salespeople. This channel of distribution is called direct distribution or selling. It is used only for customers who buy a lot of units or items. This is because of the amount of work it takes to complete an order.

For each order, a salesperson must call on or telephone the customer. The salesperson has to write the order. The order has to be checked for credit. The order has to be checked to be sure inventory is in stock. Then the items ordered must be taken from inventory and shipped to the customer. It is also necessary to write an invoice which bills the customer for the order. After that, it is necessary to collect the money owed to the company. And the salespeople have to do the same basic amount of work if the company sells one item or thousand items to a customer. It’s part of Ben’s job. The marketing manager has to figure out the best way to sell each product the company makes.

If the company sells directly to a customer, the company expects the orders to be large enough to cover the costs of all the work to be done. The company has rules for its salespeople about the size of orders which are expected from direct sales customers. These orders should be large.

For the customers who want to place smaller orders, the company has another channel of distribution – catalogue sales. A catalogue is a book or booklet with descriptions of products. Some catalogues have prices for the items. Outside salespeople use these catalogues with price lists when they call on customers. Ben’s department also has some catalogues which customers use in sending orders directly to the company. These catalogues have the prices of items. In catalogue sales salespeople do not call on or telephone the customers. Instead, the customer looks in the catalogue to see if the company has an item which is needed. If the customer finds the item needed, he writes an order and sends it to the company. Sometimes the customer is asked to send money for the item with the order. Other times, the company ships the item C.O.D. (cash on delivery). With catalogue sales, the company’s idea is to make a lot of small sales. This is different from direct selling, where the idea is to make fewer but large sales.

Ответьте на вопросы к тексту Product management:

1. Why does Ben say that products are like people?
2. What is a channel of distribution?
3. What is direct distribution?
4. What are catalogue sales?
5. How does catalogue selling work?

 

II.

Another channel of distribution is to sell to wholesalers. A wholesaler is a person or company that buys large numbers or volumes of the products. Some wholesalers are called distributors. A wholesaler usually has warehouses to keep items purchased from manufacturers. Wholesale companies usually have their own salespeople who call on customers and take orders. Wholesalers usually sell the products of a number of manufactures^ wholesale company can have salespeople calling on customers for small amounts of items and still make profit, because they can build larger orders by selling more products.

Wholesalers work closely with the manufacturers whose products they sell. Salespeople for wholesale companies study the products of the manufacturers. The catalogues used in the sales offices of wholesale companies have information and pricing for each manufacturer’s product.

Usually, a wholesaler will have what is called an exclusive territory for each manufacturer. This means that no other wholesale will be allowed to sell the manufacturer’s products in the area where that wholesaler’s salespeople call on customers. It also means that the company will not take orders in that area directly from customers. In addition, an exclusive territory usually means that the wholesaler will not sell products for two manufacturers who make the same kind of items. Companies that make or sell products that do the same thing or that look alike are called competitors. Products that look alike are called competing products. Exclusive territory means that the wholesaler will not sell products of competotors and the manufacturer will not sell products in that area itself or through other wholesalers.

Another channel of distribution is the sales representative. This person is also called a manufacturer’s representative. This is a person or a company that sells products for a company without stocking them in warehouses. The job of the sales, or manufacturer’s representative is to get orders. Usually he works for two or more manufacturers who are not competitors. Sales representatives are also called «sales reps» or just ‘reps». Ben explains: «Sometimes we use reps because they sell one kind of product to customers they know well. Also some reps call on one particular kind of customer whose business they know well. Sales reps can call on these customers and get a lot of small orders for different manufacturers. We couldn’t have our own salespeople call on these same customers because we wouldn’t sell enough to each customer.»

Sales reps are different from wholesalers because reps just sell products. Wholesalers keep inventories and make deliveries. Representatives do not.

 

Ответьте на вопросы:

1. What is a wholesaler?
2. What is the meaning of an exclusive territory?
3. What is a sales representative?
4. What is the main difference between a sales rep and a wholesaler?

 

III.

Another important channel of distribution is retailers. Retailers are people or companies who run stores which sell products to customers who come in to buy them. One important thing about the way retailers sell is that customers come to the store to buy what they need.

In wholesaling and in other channels of distribution, salespeople go to the customers. A store is a place of business where items are displaced or shown for customers to look at and to buy. It is important that stores be in places that are easy to visit where customers come in regularly and easily. This is called location. Location is the place or address where a business or building is. Busy locations are places where a lot of people pass a store and look at the merchandise shown in windows.

The marketing manager Ben jokes: «There are three things a retail store needs for success — location, location, and more location.»

Inside their stores retailers display merchandise. Display means to show something so it is easy to see and we may say: «The merchandise is shown on displays.» In most retail stores, display have signs telling about the products shown and the prices. Stores often sell competitive products. When Ben and the people in his department work with retailers they try to get the best display space for their company’s products. It is important to get as much display as possible.

Stores also have inventories. They keep stocks of the products they sell. Usually, inventories are kept in the back of a store, behind the display areas. When items are sold from the displays new stocks are taken from inventory and put on display. Then the store orders more of the same product from a wholesaler or manufacturer. Sometimes retail companies have more than one store and they have the same name. These are usually called chain stores because there are many places linked together with the same name and selling the same type of merchandise. Chain stores have their own warehouses to distribute inventories to their stores. They buy large amounts of products from manufacturers. They take care of their own manufacturing companies Stores also have to watch their inventories. When items are not selling quickly enough, stores usually reduce prices to try to get people to buy them. When a store sells things for special, reduced prices, this is called a sale. Stores advertise their sales to try to get people to come in to buy things. Owners of the stores hope that people who come in to buy things on sale will also buy items at regular prices.

 

Ответьте на вопросы к тексту:

1. What kind of business is retailing?
2. What is a store?
3. What is a display?
4. Why is location important for a store?
5. Do stores have inventories?