Unit 23: The Business Cycle: Section 1: Reading Pre-Reading Tasks Discussion - Pair Work [PDF]

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Unit 23: THE BUSINESS CYCLE SECTION 1: READING PRE-READING TASKS Discussion – Pair work 1. How well is the global economy doing at the moment? 2. How well is the economy doing in your country? 3. When was the last significant change to the economy, and what was the most probable cause? 4. When do you expect the economic situation to change, and why? 5. What are the main causes of the alternate periods of growth and contraction of the business cycle? Vocabulary preparation ➢ Before reading about the business cycle, match up the words and the definitions below. balance of payments

consumption

gross domestic product (GDP)

demand save

downturn supply

expectations upturn

1. a decline in economic activity 2. an increase in economic activity 3. beliefs about what will happen in the future 4. purchasing and using goods and services 5. the difference between the funds a country receives and those it pays for all international transactions 6. the total market value of all the good and services produced in a country during a given period 7. the willingness and ability of consumers to purchase goods and services 8. the willingness and ability of businesses to offer goods and services for sale 9. to put money aside to spend in the future ➢ Complete each sentence with appropriate words from the previous exercise. 1. The ……………… were higher than we expected by our investor. We proceeded to work overtime to meet their challenging demands. 2. The company increased its production of the new sneaker after a recent advertising campaign made the ……………… for the product soar. 3. The finance ministers were under a lot of pressure to improve the country’s economic situation and, for that reason, they focused on their nation’s ……………… and how they could improve it.

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4. When you put out a new product and everyone likes it you must increase your ……………… to handle the demand. 5. When companies have rivals that offer a better product at the same or better price, they often experience a ……………… in their stock market profile. 6. A small naturalistic pharmacy created the perfect medicine for colds. It became a popular drug. A larger company got involved with them causing a great ……………… of their product. The product was taken remade and renamed, but it never worked the same again. 7. A stock market is in ……………… when it changes from a bear market to a bull market. 8. Small changes can make a big difference to your bank balance. Change one thing you do regularly and you could ……………… money. For example, you can share gardening tools and equipment with your neighbours rather than each buying one of everything. 9. If you want to know how much your company has spent through the year you will need to look through your ……………… WHILE-READING TASKS Reading 1: WHAT CAUSES THE BUSINESS CYCLE? Vocabulary Review ▪

Contract /kənˈtrækt/ (v)= make/ become smaller/ shorter

▪

A trough /trɒf/ = a low point in a regular series of high and low points

▪

Bottom out (V) = reach the lowest point in a changing situation before any improvement begins

▪

Anticipate /ænˈtɪs.ɪ.peɪt/ (v)= to imagine or expect that something will happen.

▪

Endogenous /enˈdɒdʒ.ɪ.nəs/ = (economics) inside a particular system, rather than outside that system

▪

Exogenous /ɪkˈsɒdʒ.ɪ.nəs/ = coming from outside something, for example a system

▪

Radical /ˈrædɪkəl/ (adj) = relating to the most important parts

➢ Read the text and fill in the gaps with words from the 1st task of vocabulary preparation. The business cycle or trade cycle is a permanent feature of market economies: (1) ……………… alternately grows and contracts. During an (2) ………………, parts of the economy expand to the point where they are working at full capacity, so that production, employment, business investments, profits, prices, and interest rates all tend to rise. A long period of expansion is called a boom. But at some point there will inevitably be a (3) ………………. The economy will hit a peak and start to contract again, the demand for goods and services will decline and the economy will begin to work at below its potential. Investment, output, employment, profits, commodity and share prices, and interest rates will generally fall. A downturn that lasts more than six months is called a recession; one that lasts for a year or two is CÙNG BELL QUA MÔN TIẾNG ANH

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generally called a depression or a slump. Eventually the economy will bottom out, and there will be a recovery or an upturn. The most probable cause of the business cycle is people’s spending or (4) ……………… decisions, which in turn are based on (5) ………………. A country’s output, investment, unemployment, (6) ………………, and so on, all depend on millions of decisions by consumers and businesses on whether to spend, borrow or (7) ……………… When economic times are good or when people feel confident about the future, they spend, and run up debts. At a certain point, spending has to slow down and debts have to be paid. If interest rates unexpectedly rise, a lot of people find themselves paying more than they anticipated on their mortgage or rent, and so have to consume less. Similarly, if people are worried about the possibility of losing their jobs in the near future they tend to start saving money and consuming less, which leads to a fall in (8) ………………, and consequently a fall in production and employment. Investment is closely linked to consumption, and only takes place when demand is growing. As soon as demand stops growing, investment in new factories, machines, etc. falls, which contributes to the downturn. But if (9) ……………… exceeds demand, prices should fall, and encourage people to start buying again. Eventually the economy will reach a trough or bottom out, and there will be a recovery or an upturn. This is the internal (or endogenous) theory of the business cycle; there are also external (or exogenous) theories, which look for causes outside economic activity, such as scientific advances, natural disasters, elections or political shocks, demographic changes, and so on. The economist Joseph Schumpeter believed that the business cycle is caused by major technological inventions (e.g. the steam engine, railways, automobiles, electricity, microchips), which lead to periods of ‘creative destruction’ during which radical innovations destroy established companies or industries. ➢ Answer these questions 1. In general, what are the causes of the business cycle? ……………………………………………………………….. ……………………………………………………………….. 2. What are the two possible causes of a fall in consumption? ………………………………………………………………………. ………………………………………………………………………. ➢

Fill in each box with one suitable word to make up a flowchart of the business cycle

UPTURN

➢ Complete the following sentences. 1. A downturn begins when … 2. People spend, and borrow money, when … 3. People tend to spend less when … 4. When interest rates rise … 5. Companies only invest while … 6. Creative destruction means that …

➢ What does the underlined part refer to? 1. ‘one that lasts for a year or two is generally called a depression or a slump’ (Para. 1) ……………………………………………………………………………………………………………… 2. ‘during which radical innovations destroy established companies or industries’ (Para. 3) ……………………………………………………………………………………………………………… ➢ Go back to the text. Find prepositions to complete the following phrases and write them in the blanks. Paragraph 1 1. a permanent feature …………………. market economies 2. parts of economy expand …………………. the point where they are working …………………. full capacity 3. the demand …………………. goods and services 4. one that lasts …………………. a year or two Paragraph 2 5. which …………………. turn are based …………………. expectations 6. all depend …………………. millions of decisions by consumers and businesses …………………. whether to spend 7. feel confident …………………. the future 8. people are worried …………………. the possibility …………………. losing their jobs …………………. the near future 9. a fall …………………. production and employment CÙNG BELL QUA MÔN TIẾNG ANH

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10. closely linked …………………. consumption 11. which contributes …………………. the downturn Paragraph 3 12. lead …………………. periods of ‘creative destruction’

VOCABULARY 2: FISCAL AND MONETARY POLICY ➢ Before reading about the government and the economy, match up the following words and definitions. 1. equilibrium

A. an amount of money that is smaller than is needed (e.g when spending exceeds revenues)

2. deficit

B. an excess: a quantity that is larger than is needed

3. surplus

C. a state of balance, for example when supply is the same as demand

4. fiscal policy

D. government or central bank actions concerning the rate of growth of the money in circulation

5. monetary policy

E. government actions concerning taxation and public expenditure

6. money supply

F. the economic theory that government monetary and fiscal policy should stimulate business activity and increase employment in a recession

7. Keynesianism

G. the total amount of money available in an economy at a

/ˈkeɪn.zi.ənizəm/

1

2

particular time

3

4

5

6

7

➢ Match up the words below into pairs with similar meanings. boost – decrease – depression – excess – expand – expenditure – grow – output – production – recovery – reduce – slump – spending – stimulate – surplus – upturn ……………………………………………………………………………………………………………… ……………………………………………………………………………………………………………… ➢ Match up the words below into pairs with opposite meanings. boom – contract – demand – depression – endogenous – expand – exogenous – peak – save – spend –supply – trough ……………………………………………………………………………………………………………… ………………………………………………………………………………………………………………

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Reading 2: KEYNESIANISM AND MONETARISM

➢ Read the following text and decide which paragraphs could be given these headings: A. Countercyclical policies don’t work until too late B. Keynesianism returns C. The Keynesian argument D. The lesson of the 1930s E. The monetarist argument ……… The great depression of the 1930s demonstrated that, at least in the short term, the market system does not automatically lead to full employment. John Maynard Keynes argued that market forces could produce a durable equilibrium with high unemployment, fewer goods being produced, fewer people employed, and reduced rates of income and investment. Classical economic theory stated that in the long run, excess savings would cause interest rates to fall and investment to increase again; Keynes famously riposted that ‘In the long run, we are all dead.’ ……… He therefore recommended governmental intervention in the economy, to counteract the business cycle. During an inflationary boom, governments could decrease their spending or increase taxation. During a recession, on the contrary, they could increase their expenditure, or decrease taxation, or increase the money supply and reduce interest rates, so as to boost the economy and increase output, investment, consumption and employment. ……… In the 1950s and 1960s, monetarist economists, most notably Milton Friedman, began to argue that Keynesian fiscal policy had negative effects in the long term. They insisted that money is neutral, meaning that in the long run, increasing (or inflating) the money supply will only change the price level (lead to inflation) and have no effect on output and employment. They argued that governments should abandon the attempt to manage the level of demand in the economy. On the contrary, they should try to make sure that there is constant and non-inflationary growth in the money supply. ……… Monetarists and believers in free markets argue that since governments aren’t able to foresee a coming recession any more quickly than the companies that make up the economy, their fiscal measures usually only begin to take effect when the economy is already recovering, and simply make the next swing in the business cycle even greater. ……… By the beginning of the 21st century, the argument that free markets and competition are efficient, and should be allowed to operate with a minimum of governmental intervention, seemed to be dominant. But when the subprime crisis occurred in 2008, and financial institutions and large automobile companies began to go bankrupt, Keynesianism suddenly came back into fashion.

Governments around the world poured huge amounts of money into the economy. Monetarists were outnumbered, but continued to argue that this would inevitably lead to massive inflation in the future.

➢ Check your comprehension: Match up the following half-sentences. 1. Keynes argued that left to itself, the free market system

investment fall, excess savings should argue

interest

rates

to

fall

and

investment to increase again.

2. In classical theory, if consumption and

3. Keynesians

A. cause

that

during

an

B. decrease their spending or increase taxation C. does not guarantee full employment.

inflationary boom governments should 4. Keynesians

argue

economic

that

downturn

during

an

governments

D. In 2008, when major financial institutions began to go bankrupt.

should 5. Monetarists argue that in the long run,

E. increase their spending or the money supply.

6. Monetarists also believe that Keynesian fiscal measures

leads to inflation.

7. There was a revival in Keynesian policies and government intervention

1.

2.

F. increasing the money supply merely

3.

G. only begin to take effect too late, when an upturn is already beginning

4.

5.

6.

7.

POST-READING TASKS Vocabulary review

➢ Fill in each blank with the correct form of the given word. Consumption 1. The new telephone rates will affect all …………………. including businesses. 2. He disliked Christmas and its rampant (extreme) …………………. 3. Our high living standards cause our present population to …………………. 25 percent of the world’s oil. Contribute 1. She didn’t make much of a …………………. at today’s meeting, did she? 2. The company offers a …………………. pension scheme. (one to which both the employee and employer pay money). CÙNG BELL QUA MÔN TIẾNG ANH

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3. At the back of the programme, there is a list of …………………. to the theatre appeal. Decision 1. The result of the election is in doubt because of a large number of …………………. voters. 2. He is criticised as a weak and …………………. leader. 3. If we had acted earlier and more …………………., the situation would have been under control. Depression 1. The story which he made up for his absence was …………………. familiar. 2. He seemed a bit …………………. about his work situation. 3. It …………………. me to think that I’ll probably still be doing exactly the same job in ten years’ time. Expansion 1. She gazed at the immense …………………. of the sea. 2. There was an …………………. view from the window. 3. If you crave minimalistic living without feeling cramped, this one-of-a-kind …………………. house supplies lots of space and modern style. Possibility 1. We need to send that letter off as soon as …………………. 2. He may …………………. decide not to come, in which case there’s no problem. 3. I can’t get it all done by Friday – it’s just …………………. Probable 1. Until yesterday, the project was just a …………………., but now it has become real (it is likely that it will happen). 2. …………………. the best thing to do is to call them before you go. 3. Transporting coal by air transportation is highly …………………. Profit 1. We did not know if we should start a business because we did not know if we would have enough …………………. when we began. 2. Over the years it has developed into a highly …………………. business. 3. Sustained periods of being …………………. can make a business go bankrupt unless new strategies are adopted to change the direction of the negative income. Discussion – Pair work 1. Which is more important, fighting inflation or unemployment? 2. In an economic crisis, should governments rescue banks that have taken too big risks, and large companies in old industries, or rather invest in new, efficient start-up companies in innovative new industries such as information technology, biotechnology, nanotechnology, wind and solar power,

etc.? 3. Which companies in your country are ‘too big to go bankrupt’? 4. Which industries should the government invest in? SECTION 2: LISTENING Listening 1: Consumption and the business cycle. Listen to Michael Kitson talking about the causes of the business cycle, and fill in the gaps below. ... Perhaps a year ago that question would have been considered (1) ………………... by many economists. The business cycle has ended, we now have nice economic growth, you know, consistent economic growth and the business cycle has ended, and inflation’s ended. Actually the reality is that (2) ………………... is still on the horizon, and the potential of a (3) ………………... in the economy. I tend to think about the major (4) ………………... of aggregate demand, and how that drives economic growth. Booms [are] particularly driven by consumption, and consumption is particularly driven when people have positive (5) ………………..., their assets are increasing, particularly housing, encourages people to spend, OK. Depressions are actually that process goes into reverse, particularly when credit becomes no longer available, (6) ………………... tend to decline in value, people tend to start saving more and consume less. I think consumption, particularly for the advanced countries, is the major driver of the business cycle, and the major driver of consumption is the (7) ………………... of credit and the (8) ………………... of assets, of which houses are the most crucial one. So I tend to think it’s very ... people spending or not spending. From what you have learnt from the talk of Michael Kitson, answer these questions. 1. What does Kitson say many economists believed a year or so previously? ……………………………………………………………………………………………………………… 2. According to Kitson, were they right? ……………………………………………………………………………………………………………… 3. What does Kitson say causes economic booms? ……………………………………………………………………………………………………………… ……………………………………………………………………………………………………………… 4. What about depressions? ……………………………………………………………………………………………………………… ………………………………………………………………………………………………………………

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Listening 2: Keynesianism. Listen to Michael Kitson talking about Keynesianism, the economic theory named after John Maynard Keynes, and fill in the gaps below. ... we still have the business cycle, OK, we can still have the (1) ……………….. problems of a downturn, which makes the argument for what I think is standard Keynesianism, the way you (2) ……………….. budget (3) ……………….. or budget (4) ……………….. depending on whether the economy’s (5) ……………….. or is in (6) ………………... OK, and the government’s golden rule in the UK is consistent with that, in general. If the economy’s turning down it may make sense for governments to have budget deficits, and to keep (7) ……………….. in the economy. That’s the Keynesianism argument about ironing out the business cycle, which I think is important because recessions can have very long-term (8) ……………….. effects.