ACADEMY OF FINANCE

Tran Thi Thu Nhung - Dr.

Nguyen Thu Giang - Dr.

LECTURES ON ESP READING

For Advanced Bachelor Education Program

FINANCE PUBLISHING HOUSE

HANOI, 2020
 Preface
For the purpose of helping students at the Academy of Finance
(AOF) improve their foreign language competence, Foreign
Language Department, Foreign Language Faculty, AOF was
assigned to design “Lectures on ESP reading for advanced
bachelor education program”
”.
This Lectures was written to meet the needs of the
students of Advanced Bachelor Education Program who are
intending to study business at the Academy of Finance. It is also
suitable for students of English anywhere whose primary reason
in learning English is for the purpose of conducting business.
Many business professionals who need to conduct negotiations in
English will find this textbook useful for learning business
terminology and concepts. In addition, it can be used by an
individual studying on his own or by an instructor as a classroom
textbook.
“Lectures on ESP reading for advanced bachelor
education program” consists of ten Units which is suitable for
the syllabus of 8 credits.
The topics which were selected deal with basic areas of
business: economics, finance, banking, accounting and so on, so
that the Lectures are ideally suitable and useful for students of
different majors at the AOF. The topics are common to many
introductory textbooks on business, and therefore, a student who
has completed this text will have an introduction to some of the
material he will study later along with an understanding of the
terminology of the field. There is a variety of topics which
should be of interest to the businessman who is involved in
finance, banking, accounting, international trade and
negotiations.
2
 The Lectures emphasize several skills which both the
student and professional need to develop if they are to conduct
business in English. First, there are several types of vocabulary
exercises. Emphasis is placed on developing the ability to learn
meanings from the context. Next, reading exercises teach the
student to grasp what a writer has said by analyzing the passages
to find the main ideas, to note details and to make inferences. In
addition, language focus exercises help the student to be more
standard in writing academic English. Developing these skills
will benefit the user of the book, no matter what type of business
decisions he is called upon to make.
The variety and scope of the exercises, together with the
information given in the reading selections, should further
develop both English language skills and student comprehension
of the basic elements of business. This book not only provides a
good foundation for continuing a more specialized study in the
field, it also illustrates techniques that will be useful to the
professional in understanding and writing up presentations in the
world of business.
Hanoi, June 2020
GROUP OF AUTHORS

3
 Acknowledgement
We would like to thank the Administration of the Academy of
Finance who provides us the great opportunity and much
encouragement for designing the textbook. We also thank the
Department of Scientific Project Management, the AOF for
giving us suggestions for formats and procedures.
Special thank is given to the groups of authors of English
Department, the Faculty of Foreign Language at the Academy of
Finance who joined with us to provide reading texts and
exercises for designing the textbook. The group of authors
consists of:

1. Le Thi Huong Giang 7. Vu Quynh Nga

2. Nguyen Xuan Huong Giang 8. Vu Thi Phuong
3. Nguyen Thi Hong Hanh 9. Pham Thi Tam
4. Nguyen Thanh Huyen 10. Pham Thi Thu
5. Nguyen Thi Thuy Huong 11. Bui Thi Bich Thuy
6. Dang Phuong Mai

Finally, we have to thank the students at AOF who usually send

us their good appreciation and from whom we are much
motivated to try our best to design a good product.

4
 TABLE OF CONTENTS

UNIT 1 MICROECONOMICS & 9

MACROECONOMICS
1. The concepts of microeconomics
2. Themes of microeconomics
3. Macroeconomics
4. Differences between Microeconomics and
Macroeconomics
UNIT 2 PUBLIC FINANCE 29
1. The concepts of public finance
2. The Government’s revenue
3. The Government spending
4. The Government’s borrowing
UNIT 3 FISCAL POLICY 48
1. The concept of a fiscal policy
2. Deficit spending: harmful or helpful?
3. Expansionary fiscal policy and Contractionary
fiscal policy
4. Factors influencing decisions on fiscal policy
UNIT 4 MONETARY POLICY 62
1. The concept of a monetary policy
2. The instruments of monetary policy
3. Expansionary and restrictive monetary policy
4. Objectives of monetary policy
UNIT 5 FINANCIAL MARKETS 89
1. Overview of financial markets
2. Classification of financial markets
 Money market and Capital market
 Debt market and Equity market
5
  Primary market and Secondary market
 Stock Exchange and OTC market
UNIT 6 MONEY, BANKING AND CENTRAL 97
BANKING
1. Money and its functions
2. Types of banks
3. Banking services
4. The role of the Central banks
UNIT 7 TAXATION 127
1. Different types of taxes:
2. Functions of taxes
3. Tax avoidance and tax evasion
4. Direct and indirect taxes
5. Progressive taxes and regressive taxes
UNIT 8 ACCOUNTING AND FINANCIAL 149
STATEMENTS
1. Accounting process and accounting books
2. Financial statements (balance sheets, income
statements, cash-flow statements)
3. Types of accounting information (financial
accounting, management accounting, tax
accounting)
4. Functions of Auditing (auditor’s reports) (KPMG)
(Consolidated financial statements)

UNIT 9 FINANCIAL ANALYSIS 169

1. Sources of data for financial analysis
2. Analyzing methods
3. Financial ratios and their interpretation
ROA, ROE, ROI, marginal profits

6
UNIT 10 INTERNATIONAL TRADE 183
1. Advantages and disadvantages of world trade
2. Theory of absolute advantage and theory of
comparative advantage
3. Trade barriers and their justifications
4. Measures of international trade (balance of trade,
balance of payments)

7
 MICROECONOMICS &
UNIT 1
MACROECONOMICS

PREVIEW

Choose the best answer A, B, C or D to each question.

1. Which of the following is an accurate description of the
primary theme of microeconomics?
A. Studying how individuals and firms make themselves as
well off as possible given conditions of scarcity.
B. Analyzing tradeoffs.
C. A set of constrained optimization problems.
D. All of these.
2. What is a model?
A. A full description of a particular economic phenomenon.
B. Any description of the relationship between two or more
economic variables.
C. An empirical study that analyzes how a certain part of the
economy works.
D. A description of an economic phenomenon that makes no
extra assumptions.
3. What is the key assumption in microeconomics?
A. Firms maximize profits.
B. Firms maximize sales.
C. Individuals maximize utility and firms maximize profits.
D. Individuals maximize their income.
4. What is the distinction between empirical and theoretical
economics?
A. Theoretical economics analyzes long-term phenomena
and empirical economics analyzes short-term.
8
 B. Theoretical economics builds models, and empirical
economics test them.
C. Theoretical economics analyzes individuals and empirical
economics analyzes firms.
D. Theoretical economics tests models, and empirical
economics builds them.
5. Which of the following statements represents normative,
rather than positive analysis?
A. Since the supply of gems is limited, their price is very
high.
B. People should not be allowed to purchase bodily organs,
because it allows the rich access to a life-saving
procedure that the poor may not have access to.
C. The demand for organ transplants currently far exceeds
the supply.
D. Since the supply of water is very large, the price of water
is very low.
6. What determines the price and quantity of a good in a
perfectly competitive market?
A. The position of the demand curve.
B. The presence or absence of substitute goods.
C. The government.
D. The intersection of the supply and the demand curve.
7. Assume that people enjoy eating either apples or oranges.
What happens in the market for oranges when the price of
apples goes up?
A. The demand curve shifts right.
B. The supply curve shifts left.
C. There is no change in the demand curve.
D. The demand curve shifts left.

9
8. Now, assume there is a frost in Florida that destroys part of
the orange crop. What happens to the market for oranges in
this case?
A. The supply curve shifts up.
B. The supply curve shifts down.
C. There is no shift in the demand or supply curves.
D. The demand curve shifts right.
9. The government imposes a minimum wage for workers.
Which of the following phenomena is NOT a consequence
of this policy change?
A. Decreased demand for labor by employers.
B. Increased supply of labor by workers.
C. Unemployment.
D. A decline in the average wage paid.
10. What is a potential cost of disequilibrium in a market?
A. Cost of determining allocation for goods that are highly
demanded.
B. Efficiency loss (trades that don’t get made).
C. Cost of waiting for people queuing for a good that is in
demand.
D. All of these.

10
 READING 1

THE THEMES OF MICROECONOMICS

The Rolling Stones once said: “You can’t always get what you
want.” This is true. For most people (even Mick Jagger), that
there are limits to what you can have or do is a simple fact of life
learned in early childhood. For economists, however, it can be an
obsession.
The first important them of microeconomics is about
limits – the limited incomes that consumers can spend on goods
and services, the limited budgets and technical know-how that
firms can use to produce things, and the limited number of hours
in a week that workers can allocate to labor or leisure. But
microeconomics is also about ways to make the most of these
limits. More precisely, it is about the allocation of scarce
resources. For example, microeconomics explains how
consumers can best allocate their limited incomes to the various
goods and services available for purchase. It explains how
workers can best allocate their time to labor instead of leisure, or
to one job instead of another. And it explains how firms can best
allocate limited financial resources to hiring additional workers
versus buying new machinery, and to producing one set of
products versus another.
In a planned economy such as that of Cuba, North Korea,
or the former Soviet Union, these allocation decisions are made
mostly by the government. Firms are told what and how much to
produce, and how to produce it; workers have little flexibility in
choice of jobs, hours worked, or even where they live; and
consumers typically have a very limited set of goods to choose

11
from. As a result, many of the tools and concepts of
microeconomics are of limited relevance in those countries.
In modern market economies, consumers, workers, and
firms have much more flexibility and choice when it comes to
allocating scarce resources. Microeconomics describes the trade-
offs that consumers, workers and firms face, and shows how
these trade-offs are best made.
The idea of making optimal trade-offs is an important
theme in microeconomics. Let’s look at it in more detail.
Consumers
Consumers have limited incomes, which can be spent on a wide
variety of goods and services or saved for the future. Consumer
theory describes how consumers, based on their preferences,
maximize their well-being by trading off the purchase of more of
some goods with the purchase of less of others. We will also see
how consumers decided how much of their incomes to save,
thereby trading off current consumption for future consumption.
Workers
Workers also face constraints and make trade-offs. First, people
must decide whether and when to enter the workforce. Because
the kinds of jobs – and corresponding pay scales – available to a
worker depend in part on educational attainment and
accumulated skills, one must trade off working now (and earning
an immediate income) with continued education (and the hope of
earning higher future income). Second, workers face trade-offs in
their choice of employment. For example, while some people
choose to work for large corporations that offer job security but
limited potential for advancement, others prefer to work for
small companies where there is more opportunity for
advancement but less security. Finally, workers must sometimes

12
decide how many hours per week they wish to work, thereby
trading off labor for leisure.
Firms
Firms also face limits in terms of the kinds of products that they
can produce, and the resources available to produce them. The
Ford Motor Company, for example, is very good at producing
cars and trucks, but it does not have the ability to produce
airplanes, computers, or pharmaceuticals. It is also constrained in
terms of financial resources and the current production capacity
of its factories. Given these constraints, Ford must decide how
many of each type of vehicle to produce. If it wants to produce a
larger total number of cars and trucks next year or the year after,
it must decide whether to hire more workers, build new factories
or do both. The theory of the firm describes how these trade-offs
can be best made.
A second important theme of microeconomics is the role
of prices. All of the trade-offs described above are based on the
prices faced by consumers, workers and firms. For example, a
consumer trades off beef for chicken based partly on his/her
preferences for each one, but also on their prices. Likewise,
workers trade off labor for leisure based in part on the “price”
that they can get for their labor – i.e., the wage. And firms decide
whether to hire more workers or purchase more machines based
in part on wage rates and machine prices.
Microeconomics also describes how prices are
determined. In a centrally planned economy, prices are set by the
government. In a market economy, prices are determined by the
interactions of consumers, workers and firms. These interactions
occur in markets – collections of buyers and sellers that together
determine the price of a good. In the automobile market, for

13
example, car prices are affected by competition among Ford,
General Motors, Toyota, and other manufacturers, and also by
the demands of consumers. The central role of markets is the
third important theme of microeconomics.

COMPREHENSION QUESTIONS

1. In a planned economy, who makes decisions on the

allocation of scarce resources?
2. Why are many microeconomic tools and concepts of
limited relevance in Cuba and North Korea?
3. What does the term “trade-offs” mean?
4. What can you learn from the consumer theory?
5. Give some examples explaining the trade-offs made by
consumers.
6. Give some examples explaining the trade-offs made by
workers.
7. Give some examples explaining the trade-offs made by
firms.
8. What limits or constraints does the Ford Motor Company
have to face?
9. What does the theory of the firm indicate?
10. What are three important themes of microeconomics?

VOCABULARYEXERCISES
VOCABULARY EXERCISES
1. Complete the summary of Microeconomics with
suitable words.
a) Microeconomics is concerned with the (1) ___________
made by small economic units – consumers, workers, (2)
___________, owners of (3) ___________, and business
14
 firms. It is also concerned with the (4) ___________ of
consumers and firms to form markets and industries.
b) Microeconomics relies heavily on the use of (5)
___________, which can (by simplification) help to
explain how economic units behave and predict what
behavior will occur in the future. Models are
mathematical representations of theories that can help in
this explanation and prediction process.
c) Microeconomics is concerned with positive questions that
have to do with the explanation and prediction of the
phenomena. But microeconomics is also important for
normative analysis, in which we ask what (6)
___________ are best – for a firm or for society as a
whole. Normative analyses must often be combined with
individual value judgments because issues of equity and
fairness as well as of economic efficiency may be
involved.
d) A (7) ___________ refers to a collection of buyers and
sellers who interact, and to the possibility for sales and
(8) ___________ that results from that interaction.
Microeconomics involves the study of both perfectly (9)
___________ markets, in which no single buyer or seller
has an impact on price, and noncompetitive markets, in
which individual entities can affect price.
e) To eliminate the effects of inflation, we measure (10)
___________ (or constant-dollar) prices, rather than (11)
___________ (or current-dollar) prices. Real prices use
an aggregate price index, such as the CPI, to correct for
inflation.

15
 1. Identify different sectors of the economy.
We generally describe the economy as consisting of three
sectors:
 The primary sector: agriculture, and the extraction of
raw materials from the earth;
 The secondary sector: manufacturing industry, in which
raw materials are turned into finished products (although
of course many of the people working for manufacturing
companies do not actually make anything, but provide a
service – administration, law, finance, marketing, selling,
computing, personnel, and so on);
 The tertiary sector: the commercial services that help
industry produce and distribute goods to the final
consumers, as well as activities such as education, health
care, leisure, tourism, and so on.
2. Identify which sector does each of these following
activities belong to?

advertising assembling building

calculating prices cutting metal digging iron ore

distributing added value laying cables maintenance

marketing products milling metal mining coal

packaging products pressing metal pumping oil

smelting iron transportation welding metal

16
LANGUAGE
LANGUAGEFOCUS
FOCUS
Study the sentences from the reading text:
- Consumers have limited incomes, which can be spent on
a wide variety of goods and services, or saved for the
future.
- For example, while some people choose to work for large
corporations that offer job security but limited potential
for advancement, others prefer to work for small
companies where there is more opportunity for
advancement but less security.

RELATIVE CLAUSES
A clause that generally modifies a noun or noun phrase and is
introduced by a relative pronoun (which, that, who, whom,
whose), a relative adverb (where, when, why), or a zero relative.
Also known as an adjective clause.
A relative clause is a post-modifier--that is, it follows the noun or
noun phrase it modifies.
Relative clauses are traditionally divided into two types:
restrictive and nonrestrictive.
 A restrictive element, or defining clause:
A piece of information that is crucial to the meaning of a
sentence. The mistake of marking it out with commas would
signal its status as additional rather than essential information,
leading to confusion and inaccuracy. Consider the different
meanings implied in the two versions of this sentence:
- 'The two students, who were found guilty of plagiarism,
failed the course'
- 'The two students who were found guilty of plagiarism
failed the course.'
17
In the first version, the fact that the students were guilty of
plagiarism is not signaled as the reason for their failure. This is
presented as additional information and as such may be just a
coincidence. In the second version, the plagiarism is presented as
a restrictive element: it is crucial information and thus indicates
that it is the reason why the students failed the course. (Tory
Young, Studying English Literature: A Practical Guide.
Cambridge Univ. Press, 2008)
 Nonrestrictive clause
A word, phrase, or dependent clause that provides added (though
not essential) information to a sentence but does not limit (or
restrict) the element it modifies. A nonrestrictive element is
usually set off with commas. Contrast with restrictive element.

PRACTICE
Complete the following sentences with suitable relative
pronouns: which, who, whom, that, …
1. "It is not the employer ___________ pays the wages.
Employers only handle the money. It is the customer
___________ pays the wages." (Henry Ford)
2. "Animals, ___________ we have made our slaves, we do
not like to consider our equal." (Charles Darwin)
3. "Peace is not merely a distant goal ___________ we seek,
but a means by___________ we arrive at that goal."
(Martin Luther King, Jr.)
4. "I like to keep a bottle of stimulant handy in case I see a
snake, ___________ I also keep handy."
(W.C. Fields)

18
5. "The essence of childhood, of course, is play, _______my
friends and I did endlessly on streets / that we reluctantly
shared with traffic." (Bill Cosby)
6. "Titmice, ___________ had hidden in the leafy shade of
mountains all summer, perched on the gutter." (Annie
Dillard, Pilgrim at Tinker Creek, 1974)
7. "Every generation imagines itself to be more intelligent
than the one ___________ went before it, and wiser than
the one ___________ comes after it." (George Orwell)
8. "The Hon Freddie belonged to the class of persons
___________ move through life with their mouths always
restfully open." (P.G. Wodehouse, Something Fresh,
1915)
9. "She was a small, hunched old lady with hair that was
still jet black; it was held flat with tortoise-shell combs
from ___________ it crinkled and bucked like something
powerful."
(Anne Tyler, Morgan's Passing. Random House, 1980)
10. "She had given Laura a ten-dollar tip, far and away the
biggest ___________ she'd ever received--and Laura had
split it the next day with Billy, ___________almost never
got tipped because people knew he was simple and had
no real concept of money."
(Antoinette Stockenberg, A Month at the Shore. St.
Martin's, 2003)

19
 READING 2

Macroeconomics provides us with a bird’s eye view of

country’s economic landscape. Instead of looking at behavior of
individual businesses and consumers – called microeconomics –
the goal of macroeconomics is to look at overall economic
trends such as employment levels, economic growth, balance
of payments, inflation and so on.
Just as the speed of an engine is regulated by its supply of
fuel, macroeconomics is influenced mainly by macroeconomics
policies, including monetary policy and fiscal policy. Monetary
policy which controls a nation’s money supply is supervised by
each country’s Central Bank, while fiscal policy which controls a
government’s revenue and spending is in the hand of the
Ministry of Finance. The basic objectives of these two main
macroeconomic policies are to promote economic growth and to
keep inflation under control.
Just as a driver uses the accelerator to speed up or slow
down a vehicle, central banks control the economy by increasing
or decreasing the money supply. By carefully regulating the
supply of money to fuel economic growth, a central bank works
to keep the economy from overheating or slowing down too
quickly.
Monetary policy is essentially a guessing game. There is
no one statistic to tell us how fast an economy is growing, and
there is nothing that tell us how quickly the economy will
respond to changes that may take months or years to implement.
Central banks try to keep one eye on unemployment, resulting
from economic slowdowns and one eye on inflation resulting
from an overheated economy.

20
 The economy at large can also be controlled by
regulating fiscal policy, government revenue and spending.
Taxation and government spending greatly influence a country’s
economic growth. Just as a family’s economic health is
influenced by a parents’ earning and spending habits, a nation’s
economic health is influenced by governmental fiscal policies,
such as taxation, spending and government borrowing.
What's the difference between macroeconomics and
microeconomics?
Microeconomics is generally the study of individuals and
business decisions, macroeconomics looks at higher up country
and government decisions. Macroeconomics and
microeconomics, and their wide array of underlying concepts,
have been the subject of a great deal of writings. The field of
study is vast; here is a brief summary of what each covers:
Microeconomics is the study of decisions that people and
businesses make regarding the allocation of resources and prices
of goods and services. This means also taking into account taxes
and regulations created by governments. Microeconomics
focuses on supply and demand and other forces that determine
the price levels seen in the economy. For example,
microeconomics would look at how a specific company could
maximize it's production and capacity so it could lower prices
and better compete in its industry.
Macroeconomics, on the other hand, is the field of
economics that studies the behavior of the economy as a whole
and not just on specific companies, but entire industries and
economies. This looks at economy-wide phenomena, such as
Gross National Product (GDP) and how it is affected by changes
in unemployment, national income, rate of growth, and price

21
levels. For example, macroeconomics would look at how an
increase/decrease in net exports would affect a nation's capital
account or how GDP would be affected by unemployment rate.
While these two studies of economics appear to be
different, they are actually interdependent and complement one
another since there are many overlapping issues between the two
fields. For example, increased inflation (macro effect) would
cause the price of raw materials to increase for companies and in
turn affect the end product's price charged to the public.

COMPREHENSION QUESTIONS
COMPREHENSION
1. Answer the following questions according to the text.
a) What are two major macroeconomic policies?
b) What are the main tools of monetary policy?
c) What are the main tools of fiscal policy?
d) What are the main objectives of these two policies?
e) What is the difference between microeconomics and
macroeconomics?
f) Why is it said that microeconomics and macroeconomics
are interdependent and complement one another?
2. According to the text, choose the best answer A, B, C
or D.
a) Macroeconomics does not study:
A. the behavior of individual businesses and
consumers
B. overall economic trends
C. the world economy
D. interactions among economic factors in the whole
economy

22
b) Macroeconomics is influenced mainly by:
A. monetary policy
B. fiscal policy
C. open door policy
D. answers A & B
c) Which one is not an economic policy?
A. monetary policy
B. insurance policy
C. fiscal policy
D. open door policy
d) The purpose of regulating the money supply by the
central bank is to:
A. keep inflation under control
B. promote economic growth
C. keep the economy from overheating or slowing
down too quickly
D. all the answers above
e) Fiscal policy deals with:
A. government’s revenue and spending
B. taxation
C. government’s borrowing
D. all the answers above

23
 VOCABULARY EXERCISES

a) Match the words or phrases in column A with their

definitions in column B.
A B
1. unemployment rate A. the percentage rate per year that
2. inflation rate is paid by borrowers to lenders
3. productivity B. the total value of goods and
4. interest rate services produced in a country in a
5. government budget single year in constant prices
deficit C. the number of jobless individuals
6. foreign trade deficit who are actively looking for work
7. nominal gross divided by total of those employed
domestic product (GDP) and unemployed
8. real GDP D. the excess of the nation’s imports
of goods and services over its
exports of goods and services
E. the total value of goods and
services produced in a country in a
single year in current (actual) prices
F. the average amount of output
produced per employee or per hour
of work
G. the excess of government
expenditures (on goods, services and
transfer payments) over the
government’s tax revenues
H. the percentage rate of increase in
the economy’s average level of
prices

24
 WRITING

Outlining a Reading
An outline helps a reader understand the topic of a reading by
looking at the organization of the details in the passage.
One sample like this:
Main Idea Gardens
A. Major Supporting Detail A. Vegetable
i. Minor Supporting Detail i. In-ground gardens
ii. Minor Supporting Detail ii. Potted gardens
B. Major Supporting Detail B. Flower
i. Minor Supporting Detail i. Raised beds
ii. Minor Supporting Detail ii. Natural
C. Major Supporting Detail C. Water
i. Minor Supporting Detail i. Fountains
ii. Minor Supporting Detail ii. Ponds

Example:
Review the short reading and notice how it can be outlined to
show the major details and the main idea, using both formal
and informal outlines.
Building Your Own Backyard Pond
Building your own pond takes significant planning.
Before you begin, you will need to make some important
decisions about what type of pond you want, where you want it,
and how much time you have to dedicate to its care and
maintenance. Once planned and built, your pond will be a source
of beauty that can last for many years.
The first item you must consider is what type of pond you
want. Do you want a small bubbling fountain? Perhaps you
25
would like a pond to showcase different plants. You may also
desire a fishpond, maybe with a waterfall or stream. Different
types of ponds require different construction, so knowing what
you are looking for will help you when making your pond plans.
Next, you should think about where you want to place your
pond. Do you have a large or small yard? Will your pond be the
focal point of your yard or do you want to place it in a corner
where it will be out of the way? Your pond should fit the design
of your yard, so look around at the design of your space. Ask
yourself how your pond will fit in with the landscaping you
already have; or if you are designing your yard around your
pond, ask yourself what type of environment you are trying to
create.
Finally, before constructing your pond, you need to
decide how much time you have to care for it. Maintaining a
pond involves cleaning it, changing the filter, and using the
correct products to maintain the water and the health of the
plants and fish (if any). This maintenance can require a good
amount of work, but if you know in advance what you want, you
can create the best pond for you.
Ponds make a wonderful addition to any backyard. The
sound of bubbling water and the presence of wildlife can create a
peaceful place for all lovers of the outdoors. Get started planning
your own backyard retreat today!

Outline:
Main idea: Planning a Pond
A. Type of Ponds
i. Plant pond
ii. Fish pond

26
 B. Location of Pond
i. Size of yard
ii. Landscaping considerations
C. Maintaining a Pond
i. Cleaning
ii. Changing the filter
iii. Using products

PRACTICE
Now read the READING 1 and READING 2, make an outline
for each reading text.

Outline for reading 1 Outline for reading 2

_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________
_________________________ _______________________

27
UNIT 12 PUBLIC FINANCE
UNIT 2

PREVIEW

1. Whole-class discussion
a) What is public
finance concerned
with?

b) Where does the government’s revenue come from?

3. What is “deficit spending’?
4. How can the government raise more money apart from its
revenue to finance the deficit?
2. Match the words or phrases from a - j with their
definitions from 1 – 10.
a. redeem f. floating debt
b. treasury bills g. consoles
c. perpetual loans h. transfer
d. national debt i. obligation
e. budget j. maturity

1. Debts that are payable for a period of time that has no

fixed end
2. The movement of money from one person or group of
persons to another, or from one place or country to
another
3. Consisting mainly of short-term bills, or money borrowed
at call

28
 4. The date on which a bill of exchange, promissory note,
debenture or loan stock becomes due for payment or
repayment
5. The relation between debtor and creditor
6. Interest-bearing securities or bonds having no maturity
date
7. The total amount of money borrowed by the central
government of a country on which it has to pay interest.
8. An account of probable income and expenditure during a
stated period.
9. To pay off, esp. loan stock, debentures and preference
shares or stock.
10. Short-term government securities, sold at a discount,
bearing no interest rate.

READING 1
Where Does the Money Come From?
The federal government raises trillions of dollars in tax revenue
each year, though there are many different kinds of taxes. Some
taxes fund specific government programs, while other taxes fund
the government in general. When all taxes for a given year are
insufficient to cover all of the government’s expenses—which is
often the case— the U.S. Treasury borrows money to make up
the difference.
Total federal tax revenues in fiscal year 2014 are projected to be
$3 trillion. These revenues come from three major sources:
income taxes paid by individuals, accounting for 46 percent of
all tax revenues; payroll taxes paid jointly by workers and
employers, accounting for 34 percent; and corporate income
taxes paid by businesses, making up 11 percent. There are also a
29
handful of other types of taxes like customs duties and excise
taxes that make up much smaller portions of federal revenue.
Customs duties are taxes on imports, paid by the importer, while
excise taxes are taxes levied on specific goods, like gasoline.
This pie chart below shows how much each of these revenue
sources are expected to bring in during fiscal year 2014.

Once they are paid into the Treasury, income taxes and corporate
taxes are designated as federal funds, while payroll taxes become
trust funds. Federal funds are general revenues, meaning
Congress and the president can decide to spend them on just
about anything when they conduct the annual appropriations
process. But trust funds can be used only to pay for very specific
programs. The vast majority of trust fund revenues pay for Social
Security and Medicare.
Borrowing

30
In most years, the federal government spends more money than it
takes in from tax revenues. To make up the difference, the
Treasury borrows money by issuing bonds. Anyone can buy
Treasury bonds, and, in effect, lend money to the Treasury by
doing so. According to the Congressional Budget Office, the
federal government is expected to borrow $616 billion in fiscal
2014. Borrowing constitutes a major source of revenue for the
federal government. Down the road, however, the Treasury must
pay back the money it has borrowed and pay interest as well.
How Does the Federal Government Borrow?
To finance the debt, the U.S. Treasury sells bonds and other
types of securities. (Securities is a term for a variety of financial
assets.) Anyone can buy a bond or other Treasury security
directly from the Treasury through its website,
treasurydirect.gov, or from banks or brokers. When a person
buys a Treasury bond, she effectively loans money to the federal
government in exchange for repayment with interest at a later
date.
Most Treasury bonds give the investor—the person who buys the
bond—a pre-determined fixed interest rate. Generally, if you buy
a bond, the price you pay is less than what the bond is worth.
That means you hold onto the bond until it matures; a bond is
mature on the date at which it is worth its face value. For
example, you may buy a $100 bond today and pay only $90.
Then you hold it for five years, at which time it is worth $100.
You also can sell the bond before it matures.
If the Federal Government Has Lots of Debt, Who Does It Owe
Money To?
The federal debt is the sum of the debt held by the public—that’s
the money borrowed from regular people like you and from

31
foreign countries—plus the debt held by federal accounts. Debt
held by federal accounts is the amount of money that the
Treasury has borrowed from itself. That may sound funny, but
recall from above that trust funds are federal tax revenues that
can only be used for certain programs. When trust fund accounts
run a surplus, the Treasury takes the surplus and uses it to pay for
other kinds of federal spending. But that means the Treasury
must pay that borrowed money back to the trust fund at a later
date. That borrowed money is called “debt held by federal
accounts;” that’s the money the Treasury effectively lends to
itself. One-third of the federal debt is debt held by federal
accounts, while two-thirds of the federal debt is held by the
public.
Debt Held by the Public
Debt held by the public is the total amount the government owes
to all of its creditors in the general public. That includes
Americans as well as foreign individuals and the governments of
foreign countries.
Approximately half—the largest portion—of debt held by the
public is held internationally by foreign investors and central
banks of other countries who buy our Treasury bonds as
investments. In 2010, these countries included China, which held
the most ($1.1 trillion), followed by Japan ($800 billion), Middle
Eastern countries ($173 billion), Russia ($168 billion), Brazil
($164 billion) and Taiwan ($152 billion).
The next largest portion is held by domestic investors, which
includes regular Americans as well as institutions like private
banks. (A bank may invest some of its own assets in Treasury
bonds.) This portion constitutes over a third of the federal debt.

32
The U.S. Federal Reserve Bank and state and local governments
hold the remainder of the federal debt. (The Federal Reserve's
share of the federal debt is not counted as debt held by federal
accounts, because the Federal Reserve is considered independent
of the federal government. The Federal Reserve buys and sells
Treasury bonds as part of its work to control the money supply
and set interest rates in the U.S. economy.)

COMPREHENSION QUESTIONS
1. What does the U.S. Treasury do when revenue from taxes
is not enough to cover all of the government’s
expenditures?
2. How much is the Federal government going to collect in
tax revenues in fiscal year 2014?

33
 3. What type of taxes contributes the largest proportion of
tax revenues?
4. What are federal funds?
5. For what purpose are these funds used?
6. What are trust funds?
7. For what purpose are these funds used?
8. By what way does the Treasury borrow money?
9. Who does the Federal Government owe money to?

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

Exercise 1: Match the words or phrases from a - j with their

definitions from 1 – 10
a. redeem f. floating debt
b. treasury bills g. consoles
c. perpetual loans h. transfer
d. national debt i. obligation
e. budget j. maturity

1. Debts that are payable for a period of time that has no

fixed end.
2. The movement of money from one person or group of
persons to another, or from one place or country to
another.
3. Consisting mainly of short-term bills, or money borrowed
at call.
4. The date on which a bill of exchange, promissory note,
debenture or loan stock becomes due for payment or
repayment.
5. The relation between debtor and creditor.

34
 6. Interest-bearing securities or bonds having no maturity
date.
7. The total amount of money borrowed by the central
government of a country on which it has to pay interest.
8. An account of probable income and expenditure during a
stated period.
9. To pay off, esp. loan stock, debentures and preference
shares or stock.
10. Short-term government securities, sold at a discount,
bearing no interest rate.
Exercise 2: Choose the word that best completes the sentence.
1. Government securities with terms of more than one year are
called:
A. government bonds. B. bills of exchange.
C. Treasury bills. D. capital bills.
2. Money that a government has required to be accepted in
settlement of debts is:
A. currency value. B. legal tender.
C. barter money. D. commodity money.
3. Which of the following activities is one of the responsibilities
of the Bank of England to the banking system?
A. Assisting banks that are in a difficult financial position.
B. Loaning money to other countries that are friendly to the
UK.
C. Issuing new bonds to finance the PSBR.
D. Auditing the various agencies and departments of the
government.
4. The difference between a bank's actual reserves and its
required reserves is its:
A. required reserve ratio B. net worth
35
 C. profit margin D. excess reserves
5. If the quantity of money demanded exceeds the quantity of
money supplied, then the interest rate will:
A. change in an uncertain direction B. fall
C. rise D. remain constant
6. Which of the following events will lead to an increase in the
demand for money?
A. An increase in the supply of money.
B. A decrease in the price level.
C. An increase in the level of aggregate output.
D. An increase in the interest rate.
7. Which of the following events will lead to a decrease in the
equilibrium interest rate?
A. A decrease in the price level.
B. An increase in the discount rate.
C. A sale of government securities by the central bank
D. An increase in the level of aggregate output.
8. The motive for holding money that encourages investors to
hold bonds when interest rates are low, with the hope of
selling them when interest rates are high, is the:
A. precautionary motive. B. peculation motive.
C. s profit motive. D. transactions motive.
9. The opportunity cost of holding money is determined by:
A. the inflation rate. B. the interest rate.
C. the discount rate. D. the level of aggregate output.
10. The demand for money represents the idea that there is:
A. a positive relationship between the interest rate and the
quantity of money demanded.
B. a negative relationship between the price level and the
quantity of money demanded.

36
 C. a negative relationship between the level of aggregate
output and the quantity of money demanded.
D. a negative relationship between the interest rate and the
quantity of money demanded.

LANGUAGE FOCUS

Study the following sentences from the reading text:

- Customs duties are taxes on imports, paid by the
importer, while excise taxes are taxes levied on specific goods,
like gasoline.
- The federal debt is the sum of the debt held by the
public—that’s the money borrowed from regular people like you
and from foreign countries—plus the debt held by federal
accounts.
The phrases in bold in the above sentences are “participle
phrases”.
Participle phrases
 Relative clauses can have a continuous verb form (with
an –ing ending) or a passive verb form (with an –ed
ending).
- The people who are making the real decisions are all at
Head Office.
- Food which is sold in supermarkets needs a relatively
long shelf-life.
In this case, we can simplify the sentences by leaving out both
the relative pronoun and the verb “be”. The phrases reduced
from relative clauses are called participle phrases.
- The people making the real decisions are all at Head
Office.

37
 - Food sold in supermarkets needs a relatively long shelf-
life.
 Most participle phrases are derived from two sentences or
clauses with the same subject. Participle phrases contain
no subject, so the subject in these sentences is understood
to be the noun in the main clause nearest the participle
phrase.
- These are the technologies classified as traditional.
- The law creating an extension service was passed in
1898.

PRACTICE
Exercise 1: Put an –ing ending or an –ed ending for the verbs
in brackets.
1. The products ___________ (attract) most interest were
smaller and lighter models.
2. There’s a lot of noise from the builders ___________
(work) next door.
3. This is a new drug ___________ (develop) at our
Cambridge laboratories.
4. I was talking to a man ___________ (go) to the same
conference as us.
5. The “assets” include everything ___________ (own) by
the company.
6. LVMH fought a battle with Gucci ___________ (run) by
Domenico De Sole.
7. Tom took me to the restaurant ___________ (call)
“Noodle Heaven”.
8. The train ___________ (go) to Brussels leaves from here.

38
 9. This model ___________ (launch) last year is selling
very well.
Exercise 2: Make up complex sentences using participle
phrases from two sentences with the same subject.
1. The share of federal tax revenue is paid by corporations.
That share of federal tax revenue has declined
substantially over time.
______________________________________________
______________________________________________
2. Debt is held by federal accounts. That debt is the debt
that the federal government has borrowed from itself.
______________________________________________
______________________________________________
3. Medicare is a federal program. That program provides
health care coverage for senior citizens and the disabled.
______________________________________________
______________________________________________
4. The debt ceiling is the limit. The Congress sets that limit
on the total amount that the U.S. Treasury can borrow.
______________________________________________
______________________________________________
5. Some people consider deficit spending to be a hindrance
to the government and the economy. They argue that a
deficit only shifts the burden to future generations
because it must be paid for eventually, just like any other
loan.
______________________________________________
______________________________________________
______________________________________________
______________________________________________
39
 READING 2

Government spending
Government spending (or public spending) and in Britain, it
takes up over 45% of GDP. Spending by the public sector can be
broken down into three main areas:
• Transfer Payments:
These are welfare payments made available through the social
security system including the Jobseekers’ Allowance, Child
Benefit, State Pension, Student Grants, Housing Benefit, Income
Support and the Working Families Tax Credit
The main aim of transfer payments is to provide a basic floor of
income or minimum standard of living for low income
households. And they allow the government to change the final
distribution of income. In 2010-11 the UK government spent
£196bn on welfare benefits, equivalent to 13.4% of GDP
• Current Government Spending:
i.e. spending on state-provided goods & services that are
provided on a recurrent basis - for example salaries paid to
people working in the NHS and resources for state education and
defense. The NHS is the country’s biggest employer with over
one million people working within the system!
• Capital Spending:
Capital spending includes infrastructure spending such as new
Motorways, roads, hospitals, schools and prisons. This
investment spending adds to the economy’s capital stock and can
have important demand and supply side effects in the long term.
The main items of UK government spending are shown in the pie
chart below- the data is taken from the March 2011 UK Budget
Statement available from the HM Treasury website. Social

40
protection is the biggest single component of departmental
spending and includes the many welfare benefits paid to
recipients including the state pension, the jobseekers’ allowance,
income support and housing benefit.

1. British Government’s expenditure normally accounts

for………………………
A. nearly a half of its GDP B. over a half of its GDP
C. below 45% of its GDP D. most of its GDP
2. Which is not included in the social security system?
A. unemployment benefit B. child benefit
C. pension for retired people D. workers’ allowance
3. The transfer payment aims at ………………………
A. paying more income for low income state employees
B. promoting the economic growth rate.
C. accelerating the equality of the income.
D. increasing the living standard.
4. Which of the following expenses is NOT included in
current government spending?
A. salaries for state employees
B. spending on public education
C. expenses on state defense
D. service industry
5. What does “NHS” in line ………………stand for?
A. North High School B. National Health Service
C. National Historic Site D. Niels Husted & Son
6. Which of the following statements is not “True” about
Capital Spending?
A. Capital spending includes the capital used to construct
infrastructure.
B. Capital expenditure is spending on national assets.
41
 C. Capital expenditure has short-term effects on the
economy.
D. Capital expenditure has a lasting impact on the
economy and helps provide a more efficient and
productive economy.
7. What did the UK spend the most on in the fiscal year
2011-2012?
A. Education B. Health
C. Social protection D. Other
8. What did the UK spend the least on in the fiscal year
2011-2012?
A. Housing and Environment
B. Industry, agriculture and employment
C. Public Order and Safety
D. Personal social service

WRITING

How to write a summary?

What is summarizing?
Summarizing reduces a text to its main idea and necessary
information. Summarizing differs from paraphrasing in that
summary leaves out details and terms.
Why is summarizing important?
Summarizing helps you understand and learn important
information by reducing information to its key ideas. Summaries
can be used for annotation and study notes as well as to expand
the depth of your writing.
How is summarizing different from paraphrasing?

42
To the untrained eye, a summary and a paraphrase may look
alike. However, there are differences.
o A summary is shorter than the original text.
o A paraphrase can be shorter or longer than the original.
o A summary eliminates details, examples, and supporting
points.
o A paraphrase describes the original text in different
words. It does not leave out details.

Write an Accurate Summary

Read the article and organize the information.
1. Preview the text. Gather the information needed to focus
and set goals.
2. Read, think about, and understand the text. Review the
material to make sure you know it well. Use a dictionary
or context clues to find the meanings of any important
words.
3. Read for the thesis, main idea, and evidence. Annotate as
you usually do. If necessary, map or outline part or all of
the text to find the thesis, main ideas and evidence.
4. Identify and paraphrase the thesis or topic sentence
(which contains the main idea), or compose one if the
topic sentence is implied. The main idea is the most
important information or concept in a text. The statement
that you write should mention the underlying meaning of
the article, not just the surface details.
5. Group the details (minor details). Organize your evidence
by grouping the article into sections.
Not all information is equal: some of the information is clearly
more important than the rest.

43
Topic Sentence:
Evidence:
#1:
#2:
#3:
6. Within your groups of information, write a word or
phrase that can replace a list of items (avoid using the
word “things”) or individual parts of an action. You can
do this in the margin.
For example: rose, daisy, and mum becomes “flowers.”
7. Use basic signal words. ASK YOURSELF:
Who? What? Where? When? Why? How?
(subject) (action) (location) (time) (reason) (procedure)
8. Change the words but never the meaning. A summary
uses paraphrased sentences, with only occasional quotes
from the original text.

Write the summary

1. Begin your summary with statement of the thesis. Begin with
an introductory sentence that mentions the author, title, and
thesis.
2. Write the main idea of each section in one well-developed
sentence. Make sure that what you include in your sentences are
key points, not minor details.
3. Follow the order of ideas in the original text. After stating the
thesis, you should mention the first main idea that you come
across and then major details that back it up. Then you would
mention the second main idea and so on.
4. The amount of detail you include, if any, depends on your
purpose for writing the summary. For example, if you are

44
writing a summary of a magazine article for research paper, it
might be more detailed than if you were writing it to jog your
memory for class discussion.
5. Summary should be no more than ¼ the original text. It can
be one sentence, one paragraph or multiple paragraphs
depending on the length of the original and your purpose for
writing the summary.
6. Do not include unnecessary or material that says the same
thing as another part of the passage.
7. Do not use phrasing such as “This article is about” or “In this
paragraph the author says …”
8. Do not plagiarize or bring in your personal opinion.
Summarizing is about restating what the author says. Save your
own ideas for another time.
9. Make sure that your summary includes the meaning of the
original passage and does not change the author’s purpose or
tone. Identify the main idea and double check that your
summary does not change or add to it.
10. Read and revise the content.
 Have you captured the main point of the article?
 Have you included the most important details?
o Make sure that you have included all the
supporting details or mentioned all of the events,
however briefly.
o Group these details as outlined previously; do
not omit key information that
was in the original passage.

o Check for an accurate topic sentence and the five

Ws and an H.
11. Read over your summary edit for grammatical and spelling
45
errors.
 Is the verb tense consistent?
 Are all names spelled correctly and capitalized?
 Have you avoided writing run-on sentences and
sentence fragments?
 Is there sentence variety?
 Have you avoided writing short, choppy sentences? Are
there transitional words and phrases to connect ideas?

PRACTICE
Now read the READING 1 and write a summary of READING 1
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
46
UINT 8 FISCAL POLICY
UNIT 3

PREVIEW

Match the words or phrases from a - j with their definitions

from 1 – 10.
a. macroeconomic policy f. interest rate
b. trade policy g. government spending
c. public sector h. government revenue
d. monetary policy i. money supply
e. fiscal policy j. inflation

1. includes cash, coins and balances held in checking and

savings.
2. includes all government consumption and investment but
excludes transfer payments made by a state.
3. includes all amounts of money (i.e. taxes and/or fees)
received from sources outside the government entity.
4. aimed at the aggregate economy, usually to promote the
macro goals of full employment, stability, and growth.
5. The part of the economy concerned with providing basic
government services as the police, military, public roads,
and so on.
6. a progressive increase in the general level of prices
brought about by an expansion in demand or the money
supply or by autonomous increases in costs.
7. a government's policy controlling foreign trade.
8. the percentage of a sum of money charged for its use
9. the process by which the monetary authority of a country
controls the supply of money, often targeting a rate of
47
 interest for the purpose of promoting economic growth
and stability.
10. the use of government expenditure and revenue collection
to influence the economy.

READING 1

Government spending and taxation directly affect the

overall performance of the economy. For example, if the
government increases spending to build a new highway,
construction of the highway will create jobs. Jobs create income
that people spend on purchases, and the economy tends to grow.
The opposite happens when the government increases taxes.
Households and businesses have less of their income to spend,
they purchase fewer goods, and the economy tends to shrink.
When the government spends more than it receives, it
runs deficit. Governments finance deficits by borrowing money.
Deficit spending – that is, spending funds obtained by borrowing
or printing instead of taxation – can be helpful for the economy.
For example, when unemployment is high, the government can
undertake projects that use workers who would otherwise be idle.
The economy will then expand because more money is being
pumped into it. However, deficit spending also can harm the
economy. When unemployment is low, a deficit may result in
rising prices, or inflation. The additional government spending
creates more competition for scarce workers & resources and this
inflates wages and prices.
Fiscal policy is a government policy related to taxation
and public spending. Fiscal policy and monetary policy, which is
concerned with money supply, are the two most important
components of a government’s overall economic policy, and the
48
government uses them in an attempt to maintain economic
growth, high employment, and low inflation.
Fiscal policy can be either expansionary or
contractionary. It is expansionary or loose when taxation is
reduced or public spending is increased with the aim of
stimulating total spending in the economy, known as aggregate
demand. Expansionary policy might occur, when a government
feels its economy is not growing fast enough or unemployment is
too high. By increasing spending or cutting taxes, the
government leaves individuals and businesses with more money
to purchase goods or invest in new equipment. When individuals
or firms increase their purchases, they raise demand, which
requires additional production, creating jobs, generating more
spending. The result is higher employment and a growing
economy.
On the other hand, fiscal policy is contractionary or tight
when taxation is increased, or public spending is reduced in
order to restrict demand and slow down the economy. A tight
fiscal policy is more likely when inflation is high. A
contractionary fiscal policy reduces the amount of money in the
economy available for purchasing goods, thus decreasing
spending, demand, and ultimately, pressure on prices.
To determine its fiscal policy, a government must make
judgments about a number of factors, including the level of
economic growth or unemployment likely in the future. These
factors will affect the amount of revenue raised through taxes
and the amount of money required for government programs.
Once these determinations are made, the government can decide
how to raise revenue and how to allocate it. Revenue is generated
through a combination of different taxes – for example income

49
tax, sales tax, or customs duties – and can be allocated to build
new roads, fund government programs, or to pay expenses such
as government employees’ salaries.
Another important decision a government must make
regarding fiscal policy is whether or not to run a budget deficit
by spending more money than the government raises. Deficits
can be financed in two ways – borrowing or printing more
money. If the government borrows money, it will decrease the
supply of money available in the economy for lending, and the
cost of borrowing money, the interest rate, may rise. If the
government prints more money, it will increase the supply of
money in the economy, without a corresponding increase in
available goods; prices – and inflation – are likely to rise.
Decisions on fiscal policy are inevitably influenced by
political considerations, such as beliefs about the size of the role
that governments should play in the economy, or the likely
public reaction to a particular course of action. Few governments
will find it easy to raise taxes or to decrease funding for
programs that have strong support from the public, such as social
security or defense. Fiscal policy decisions can be influenced by
other outside factors as well. In today’s global economy, a
government also needs to consider the fiscal policies of other
countries, which may tempt companies to relocate by offering
them generous tax programs or other government – controlled
benefits. Some countries may find their fiscal policy decisions
constrained by the requirements of the International Monetary
Fund (IMF), which often grants aid packages subject to
conditions relating to fiscal policy.

50
 COMPREHENSION QUESTIONS

1. In what way do government spending and taxation affect

the economy? Give examples.
2. What is deficit spending? Is it useful or harmful for the
economy? Why?
3. What are the government’s major economic policies
mentioned above?
4. What are they aimed at?
5. Under what circumstances can fiscal policy be
expansionary? Why?
6. Under what circumstances can fiscal policy be
contractionary? Why?
7. What factors should be considered in making decisions
on the fiscal policy?
8. Why should the government consider the fiscal policies
of other countries?

VOCABULARY
VOCABULARYEXERCISES
EXERCISES

Complete the following text using the words or phrases from

the box.
actions expansionary declines solvency revenues
benefits correction spending contractionary fiscal
deficits

The global crisis that had its roots in the 2007 meltdown in the
U.S. mortgage market is a good case study in fiscal policy. The
crisis hurt economies around the globe, with financial sector
difficulties and flagging confidence hitting private consumption,
51
investment, and international trade (all of which affect output,
GDP). Governments responded by trying to boost activity
through two channels: automatic stabilizers and fiscal stimulus—
that is, new discretionary (1) ___________ or tax cuts.
Stabilizers go into effect as tax (2) ___________ and expenditure
levels change and do not depend on specific (3) ___________ by
the government. They operate in relation to the business cycle.
For instance, as output slows or falls, the amount of taxes
collected (4) ___________ because corporate profits and
taxpayers’ incomes fall, particularly under progressive tax
structures where higher-income earners fall into higher-tax-rate
brackets. Unemployment (5) ___________ and other social
spending are also designed to rise during a downturn. These
cyclical changes make fiscal policy automatically (6)
___________ during downturns and (7) ___________ during
upturns.

Fiscal deficits and public debt ratios (the ratio of debt to GDP)
have expanded sharply in many countries because of the effects
of the crisis on GDP and tax revenues as well as the cost of the
fiscal response to the crisis. Support and guarantees to financial
and industrial sectors have added to concerns about the financial
health of governments. Many countries can afford to run
moderate (8) ___________ for extended periods, with domestic
and international financial markets and international and bilateral
partners convinced of their ability to meet present and future
obligations. Deficits that grow too large and linger too long may,
however, undermine that confidence. Aware of these risks in the
present crisis, the IMF in late 2008 and early 2009 called on
governments to establish a four-pronged fiscal policy strategy to
help ensure (9) ______________: stimulus should not have
52
permanent effects on deficits; medium-term frameworks should
include commitment to fiscal (10) ___________ once conditions
improve; structural reforms should be identified and
implemented to enhance growth; and countries facing medium-
and long-term demographic pressures should firmly commit to
clear strategies for health care and pension reform. Even as the
worse effects of the crisis recede, fiscal challenges remain
significant, particularly in advanced economies in Europe and
North America and this strategy remains as valid as ever.

(Written by:
- Mark Horton - Division Chief in the IMF’s Middle East and
Central Asia Department, and - Asmaa El-Ganainy - Economist
in the IMF’s Fiscal Affairs Department.)

LANGUAGE FOCUS

Study the following sentences from the reading text:

- Households and businesses have less of their income to
spend, they purchase fewer goods.
- When the government spends more than it receives, it
runs deficit
- The additional government spending creates more
competition for scarce workers and resources and this
inflates wages and prices.
Comparing nouns
We can compare quantities and amounts by using more, less,
fewer, (not) as much as, (not) as many as, etc. The correct word

53
depends on whether the noun in question is countable or
uncountable.
 Countable
The board decided that the company needed more/fewer retail
outlets.
Our Paris office doesn’t employ as many people as our Munich
office.
The R&D Department has the most/fewest people working for it.
 Uncountable
I spent more/less time on the project than I had expected.
We didn’t make as much money on the deal as we had hoped.
Of all our surveys, this produced the most/least information.

PRACTICE
Exercise 1: Complete the sentences with more, less, much,
many or fewer.
1. Eurotunnel may never make a profit because the tunnel
cost substantially ___________ money to build than they
had expected.
2. Because of ATMs, banks don’t have as ___________
branches as they used to.
3. They made 2,000 staff redundant, so now they employ
___________ people than they did last year.
4. Now that I’m in management, I don’t spend as
___________ time at home.
Exercise 2: Answer the questions comparing the present with
five years ago. Use more than, less than, fewer than, not as
much as, not as many as in your answers. You can use these
phrases without a noun if the context is clear.

54
 1. Do you do a lot of work at the weekends?
I don’t do as much work as I used to, or I don’t do as much as I
used to.
2. Do you have a lot of free time?
______________________________________________
______________________________________________
3. Do you go to a lot of parties?
______________________________________________
______________________________________________
4. Do you listen to a lot of music?
______________________________________________
______________________________________________
5. Do you get a lot of sleep?
______________________________________________
______________________________________________
6. Do you buy a lot of books?
______________________________________________
______________________________________________

WRITING

IELTS Writing task 1

The 3 pie charts below show the total school spending in in all
three years (1981, 1991 and 2001) in the UK.

Summarize the information by selecting and reporting and

reporting the main features, and make comparisons where
relevant.

55
 READING 2

Read the following text and translate into Vietnamese.

Fiscal policy is a tool the federal government uses to keep

unemployment and inflation as low as possible. Inflation means
that prices of the things you want to buy keep rising. The
government uses fiscal policy to influence spending, which, in
turn, influences prices. How does fiscal policy work?
____________________________________________________
____________________________________________________
56
____________________________________________________
____________________________________________________
____________________________________________________

You already know that supply and demand affect prices. When
prices go up, people must spend more to get what they want or
need. Workers need increased wages to buy what they want. If
they get wage increases, it drives up prices because producers
add their increased wage costs to their selling prices in order to
protect their profits. This leads to a wage-price spiral. Higher
wages lead to higher prices, causing inflation.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

There are four different areas of spending. Consumption is the

spending done by all the people in the economy. It does not
include anything that a business purchases and resells to another
business or individual. When you buy a loaf of bread at the store,
the amount you spend is part of our nation's consumption for the
year. That amount gets added to the GDP. When a miller buys
wheat from a farmer, a baker buys flour from a miller, or a store
buys bread from a baker, these purchases are not part of
consumption and do not get added to the GDP.
____________________________________________________
____________________________________________________
____________________________________________________
57
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Investment is what businesses produce but do not sell to people.

Investment includes the value of buildings, machinery, and
things on store shelves at the end of the year that have not been
sold. Buildings and machinery are capital resources. They can be
used over and over to make more products. Things on store
shelves that have not been sold are the business's inventory.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Government spending is the money that all governments-

federal, state, and local-spend to pay employees and to buy
things for their own use like paper clips, fire engines, and
military weapons.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

A net export is the difference between the dollar amounts of

imported and exported goods. Almost every year since 1983, the
58
United States has bought more goods from businesses in foreign
countries than it has sold to foreign countries. When imports are
bigger than exports, the GDP is reduced. No country likes to
import more than it exports for very long. The balance of trade is
referred to as a trade surplus when more goods are exported than
imported or as a trade deficit or trade gap when there are more
imports than exports.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

One thing that affects the balance of trade is the exchange rates
of the monies involved. If the dollar is strong, the U.S. can buy
more goods abroad for its money. If the dollar is weak against
other currencies, fewer goods can be bought for the same amount
of money.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

The federal government uses fiscal policy-the way it taxes

citizens and businesses and the way it spends money-to influence
consumption, investment, and net exports. For example, the more
money people have, the more they will be able to spend. So the
59
government can influence consumption by changing the amount
of money people have to spend. If people have more money, the
government cannot force people to spend it, but they will usually
spend at least part of it.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

60
 MONETARY POLICY
UNIT 4

PREVIEW
PREVIEW

1. Match up the words below into pairs that mean the

same.
boost companies flexible firms expenditure
expenses production raise increase mistake
output variable error excess stimulate
surplus costs reduce spending lower

2. Match up the words below into pairs of opposites.

boom depression flexible growth increase
demand sluggish stimulate supply deflate
saving consuming contraction cut rigid
buoyant

READING 1

Monetary policy is a central bank's actions and communications

that manage the money supply. That includes credit, cash,
checks, and money market mutual funds. The most important of
these forms of money is credit. It includes loans, bonds, and
mortgages.
Monetary policy increases liquidity to create economic growth. It
reduces liquidity to prevent inflation. Central banks use interest
rates, bank reserve requirements, and the amount of government

61
bonds that banks must hold. All these tools affect how much
banks can lend. The volume of loans affects the money supply.
A. Three Objectives of Monetary Policy
Central banks have three monetary policy objectives. The most
important is to manage inflation. The secondary objective is to
reduce unemployment, but only after controlling inflation. The
third objective is to promote moderate long-term interest rates.
The U.S. Federal Reserve, like many other central banks, has
specific targets for these objectives. It wants the core inflation
rate to be between 2% and 2.5%. It seeks an unemployment rate
below 6.5%. Beyond that, it prefers a natural rate of
unemployment of between 4.7% and 5.8%. The Fed's overall
goal is healthy economic growth. That's a 2% to 3% annual
increase in the nation's gross domestic product.
B. Quantitative Tools of Monetary Policy
 Reserve requirement
By law, the Fed (the Federal Reserve System) controls the
percentage of deposits banks keep in reserve by controlling the
reserve requirements of all US banks. The percentage of deposits
the Fed sets as the minimum amount of reserves as bank must
have is called the reserve requirements. The amount banks must
keep in reserve depends on the Fed requirements and partly on
how much banks feel they need for safety (the cash they need to
keep on hand at any time to give depositors who claim some of
their deposits in the form of cash). The amount most banks need
for safety is much smaller than what the Fed requires. For them,
it’s the Fed’s reserve requirements that determines the amount
they hold as reserves. Thus, the reserve requirements play a
central role in how much money banks have to lend out. By
changing the reserve requirements, the Fed can increase or
62
decrease the money supply. If the Fed increases the reserve
requirement, it contracts the money supply; banks have to keep
more in reserve so they have less money to lend out.
 Discount rate
A second tool of monetary policy concerns other alternative
banks have if they are short of reserves. A bank can go to its
bank (the Fed, the banker’s bank) and take a loan. The discount
rate is the rate of interest the Fed charges for those loans. An
increase in the discount rate makes it more expensive for banks
to borrow from the Fed. A discount rate decrease makes it less
expensive for banks to borrow. Therefore changing the discount
rate is the second way the Fed can expand or contract the money
supply.
 Open market operations
Changes in discount rate and reserve requirement are not used in
day-to-day Fed operations. They are used mainly for major
changes. For day-to-day Fed operations, the Fed used a third
tool: open market operations – the Fed’s buying and selling
government securities (the only type of asset the Fed is allowed
by law to hold in any appreciate quantity). These open market
operations are the primary tool of monetary policy. When the
Fed sells Treasury bonds, it collects back some of its IOUs,
reducing banking system reserves and decreasing the money
supply. Thus, to expand the money supply, the Fed buys bonds.
To contract the money supply, the Fed sells bonds.
C. The central bank’s control over the supply of money
The central bank’s control over the supply of money is the key
mechanism of monetary policy. By making more or less money
available, the central bank can shift aggregate demand. The

63
resulting shifts can alter the rate of output, the price level, and
the number of available jobs.
We earlier saw how fiscal policy can help bring about the desired
expansion. Were the government to increase its own spending,
aggregate demand would shift to the right. A tax cut would also
stimulate aggregate demand by giving consumers and business
more disposable income to spend.
 Expansionary monetary policy
Monetary policy may be used to shift aggregate demand as well.
If the central bank lowers reserve requirements, drops the
discount (bank) rate, or buy more bonds, it will increase bank
lending capacity. The banks in turn will try to use that expanded
capacity and make more loans. By offering lower interest rates or
easier approvals, the banks can encourage people to borrow and
spend more money. In this way, an increase in the money supply
will result in a rightward shift of the aggregate demand curve.
 Restrictive monetary policy
Monetary policy may be used to cool an overheating economy.
Excessive aggregate demand may put too much pressure on our
production capacity. As market participants bid against each
other for increasingly scarce goods, prices will start rising.
The resulting inflation will redistribute real incomes (perhaps
unfairly) and may disrupt investment and consumption plans.
The goal of monetary policy in this situation is to reduce
aggregate demand. To do this, the central bank can reduce the
money supply by (1) raising reserve requirements, (2) increasing
the discount rate, or (3) selling bonds in the open market. All of
these actions will reduce bank lending capacity. The competition
for this reduced pool of funds swill drive up interest rates. The
combination of higher interest rates and lessened loan

64
availability will curtail investment consumption, and even
government expenditure.

COMPREHENSION QUESTIONS

1. What is monetary policy?

2. What does the money supply include?
3. What are objectives of monetary policy?
4. How does the Fed control the percentage of deposits
banks keep in reserve?
5. What is called reserve requirement?
6. What determines the amount banks hold as reserves?
7. What is the central role of the reserve requirements?
8. What is the second tool of monetary policy?
9. What is the discount rate?
10. How can the central bank shift aggregate demand?
11. How can the banks encourage people to borrow and
spend more money?
12. What are objectives of expansionary monetary policy?
13. What are objectives of restrictive monetary policy?
14. What can the central bank do to reduce aggregate
demand?
15. When might the central bank want to reduce the money
supply?

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

1. Match up the following words and definitions.

1. supply A. a state of balance, for example
2. demand when supply meets demand

65
 3. market forces B. government or central bank
4. equilibrium measures concerning the rate of
5. fiscal policy growth of the money supply (the
6. monetary amount of money in circulation)
policy C. government measures concerning
taxation, public expenditure, and so
on
D. supply and demand
E. the willingness and ability of
consumers to purchase goods and
services
F. the willingness and ability to offer
goods and services for sale

2. Complete the text below using these words or phrases.

deflation inflation tools intended
government required discount rate restricting
bonds

Monetary Policy
Central banks typically have used monetary policy to either
stimulate an economy or to check its growth. By incentivizing
individuals and businesses to borrow and spend, monetary policy
aims to spur economic activity. Conversely, by (1) ___________
spending and incentivizing savings, monetary policy can act as a
brake on (2) ___________ and other issues associated with an
overheated economy.
The Federal Reserve, also known as the "Fed," frequently has
used three different policy (3) ___________ to influence the

66
economy: opening market operations, changing reserve
requirements for banks, and setting the (4) ___________. Open
market operations are carried out on a daily basis when the Fed
buys and sells U.S. (5) ___________ to either inject money into
the economy or pull money out of circulation. By setting the
reserve ratio, or the percentage of deposits that banks are (6)
___________ to keep in reserve, the Fed directly influences the
amount of money created when banks make loans. The Fed also
can target changes in the discount rate (the interest rate it charges
on loans it makes to financial institutions), which is (7)
___________ to impact short-term interest rates across the entire
economy.
Monetary policy is more of a blunt tool in terms of expanding
and contracting the money supply to influence inflation and
growth and it has less impact on the real economy. For example,
the Fed was aggressive during the Great Depression. Its actions
prevented (8) ___________ and economic collapse but did not
generate significant economic growth to reverse the lost output
and jobs.
Expansionary monetary policy can have limited effects on
growth by increasing asset prices and lowering the costs of
borrowing, making companies more profitable.

67
 LANGUAGE FOCUS
Word formation
- The amount banks must keep in reserve depends on the Fed
requirements and partly on how much banks feel they need
for safety (the cash they need to keep on hand at any time
to give depositors who claim some of their deposits in the
form of cash). The amount most banks need for safety is
much smaller than what the Fed requires.
There are lots of word groups like this in English. Verbs can be
made into nouns and vice versa, and nouns can be made into
adjectives and adverbs, by adding suffixes.

Examples:

Verbs Nouns Adjectives Adverbs

Analyze Analysis Analytic analytically
Capitalize capital capitalist
capitalist

PRACTICE
Exercise 1: Complete the table below, then mark the stressed
syllable in each word. Some boxes will contain several words.

Verbs Concrete and Nouns for Adjectives Negative

abstract nouns people or adjectives
organizations

deposit

68
 determination

unemployed

consumer

expansionary

Operate

non-
governmental

discount

supplier

Inflationary

Exercise 2: Complete the sentences below, using the correct

forms of the words in the table above.
1. Monetary policy refers to the measures ___________ by
___________ to influence economic activity, specifically
by manipulating the ___________ of money and credit
and by altering rates of interest.
2. ___________ trends after World War II, however, caused
governments to adopt measures that reduced inflation by
restricting growth in the money supply.

69
 3. The Fed uses three main instruments in regulating the
money supply: open-market _________________, the
___________ rate, and reserve requirements.
4. ______________ monetary policy, increases aggregate
spending on goods and services — by ___________
businesses, governments, and foreigners.
5. To ___________ its fiscal policy, a government must
consider a number of factors, including the level of
economic growth or unemployment likely in the future.
6. FDIC (Federal _____________ Insurance Corporation)
insurance covers all deposit accounts, including checking
and savings accounts, money market deposit accounts
and certificates of deposit. The standard insurance
amount is $250,000 per ___________, per insured bank,
for each account ownership category.
Exercise 3. Complete the sentences below, using the correct
forms of the words in brackets.
1. The (consult) ___________ believed that the company
needed stricter financial (manage) _______________ and
suggested withdrawing (profit) ___________ product
lines.
2. The newly (industry) ___________ countries still need a
lot of (invest) ___________.
3. The investigators talked to the chief (account)
___________ who gave them some (value) ___________
information.
4. It would be (advice) _______________ to (consult)
___________ a lawyer before talking to the investigators.

70
 5. The raiders thought the large company had become
(manage) ____________. The managers accused the
raiders of being (profit) ___________.
6. A company’s (manage) ____________ are (account)
___________ to the shareholders.
7. In (account) ___________, there are various ways of
(value) ___________ assets.
8. For years I thought my investment (advice) ___________
was absolutely (value) ___________. But then he told me
to buy some dot.com stocks which soon became totally
(value) ___________.

WRITING

How to Write a Good Paragraph

Writing well composed academic paragraphs can be tricky. The
following is a guide on how to draft, expand, refine, and explain
your ideas so that you write clear, well-developed paragraphs
and discussion posts:
Step 1: Decide the Topic of Your Paragraph
Before you can begin writing, you need to know what you are
writing about. First, look at the writing prompt or assignment
topic. As you look at the prompt, note any key terms or repeated
phrases because you will want to use those words in your
response. Then ask yourself:
• On what topic am I supposed to be writing?
• What do I know about this topic already?
• If I don’t know how to respond to this assignment,
where can I go to find some answers?
71
 • What does this assignment mean to me? How do I relate
to it?
After looking at the prompt and doing some additional reading
and research, you should better understand your topic and what
you need to discuss.

Step 2: Develop a Topic Sentence

Before writing a paragraph, it is important to think first about the
topic and then what you want to say about the topic. Most often,
the topic is easy, but the question then turns to what you want to
say about the topic. This concept is sometimes called the
controlling idea.
Strong paragraphs are typically about one main idea or topic,
which is often explicitly stated in a topic sentence. Good topic
sentences should always contain both (1) a topic and (2) a
controlling idea.
The topic – The main subject matter or idea covered in the
paragraph.
The controlling idea – This idea focuses the topic by providing
direction to the composition.
Read the following topic sentences. They all contain a topic (in
orange) and a controlling idea (in purple). When your paragraphs
contain a clearly stated topic sentence such as one of the
following, your reader will know what to expect and, therefore,
understand your ideas better.
Examples of topic sentences:
• People can avoid plagiarizing by taking certain
precautions.
• There are several advantages to online education.
• Effective leadership requires specific qualities that
anyone can develop.
72
Step 3: Demonstrate Your Point
After stating your topic sentence, you need to provide
information to prove, illustrate, clarify, and/or exemplify your
point.
Ask yourself:
• What examples can I use to support my point?
• What information can I provide to help clarify my
thoughts?
• How can I support my point with specific data,
experiences, or other factual material?
• What information does the reader need to know in order
to see my point?
Here is a list of the kinds of information you can add to your
paragraph:
• Facts, details, reasons, examples
• Information from the readings or class discussions
• Paraphrases or short quotations
• Statistics, polls, percentages, data from research studies
• Personal experience, stories, anecdotes, examples from
your life
Sometimes, adding transitional or introductory phrases like: for
example, for instance, first, second, or last can help guide the
reader. Also, make sure you are citing your sources
appropriately.

Step 4: Give Your Paragraph Meaning

After you have given the reader enough information to see and
understand your point, you need to explain why this information
is relevant, meaningful, or interesting.
Ask yourself:
• What does the provided information mean?
73
 • How does it relate to your overall point, argument, or
thesis?
• Why is this information important/significant/
meaningful?
• How does this information relate to the assignment or
course I am taking?

Step 5: Conclude
After illustrating your point with relevant information, add a
concluding sentence. Concluding sentences link one paragraph to
the next and provide another device for helping you ensure your
paragraph is unified. While not all paragraphs include a
concluding sentence, you should always consider whether one is
appropriate. Concluding sentences have two crucial roles in
paragraph writing:
First, they draw together the information you have presented to
elaborate your controlling idea by:
• Summarizing the point(s) you have made.
• Repeating words or phrases from the topic sentence.
• Using linking words that indicate that conclusions are
being drawn (e.g., therefore, thus, resulting).
Second, they often link the current paragraph to the following
paragraph. They may anticipate the topic sentence of the next
paragraph by:
• Introducing a word/phrase or new concept which will
then be picked up in the topic sentence of the next
paragraph.
• Using words or phrases that point ahead (e.g., the
following, another, other).

Step 6: Look Over and Proofread

74
The last step in good paragraph writing is proofreading and
revision. Before you submit your writing, look over your work at
least one more time. Try reading your paragraph out loud to
make sure it makes sense.
Also, ask yourself these questions:
• Does my paragraph answer the prompt and support my
thesis?
• Does it make sense? Does it use the appropriate
academic voice?

PRACTICE
Write paragraphs about the following topics:
1. Objectives of monetary policy
2. Tools of monetary policy
3. Expansionary monetary policy
4. Restrictive monetary policy
5. Differences between monetary policy and fiscal policy.

How to Write a Paragraph

Co-authored by Megan Morgan, PhD
Updated: March 29, 2019

Explore this Article

Planning Your Paragraph
Writing Your Paragraph
Reviewing Your Paragraph
Show 1 more...
Article Summary
Questions & Answers
Related Articles
References
75
The practice of writing paragraphs is essential to good writing.
Paragraphs help to break up large chunks of text and makes the
content easier for readers to digest. They guide the reader
through your argument by focusing on one main idea or goal.
However, knowing how to write a good, well-structured
paragraph can be little tricky. Read the guidelines below and
learn how to take your paragraph writing skills from good to
great!

Part 1
Planning Your Paragraph

Image titled Write a Paragraph Step 1

Decide what the main topic of the paragraph is going to be.
Before you begin writing your paragraph, you must have a clear
idea of what the paragraph is going to be about. This is because a
paragraph is essentially a collection of sentences that all relate to
one central topic. Without a definite idea of what the main topic
is, your paragraph will lack focus and unity. In order to pin down
the exact topic of your paragraph, you should ask yourself a
number of questions:
What is the prompt I have been given? If you are writing a
paragraph as a response or answer to a particular prompt, such as
"You have decided to donate money to charity. Which charity do
you choose and why?" or "Describe your favorite day of the
week," you will need to think carefully about that prompt and
make sure you are directly addressing it, rather than going off
topic.
What are the main ideas or issues that I need to address? Think
about the topic you are being asked or have decided to write
about and consider what the most relevant ideas or issues relating
76
to that topic are. As paragraphs are usually relatively short, it is
important that you try to hit on all of the main ideas, without
going off topic.
Who am I writing for? Think about who the intended readership
of this paragraph or paper is going to be. What is their prior
knowledge? Are they familiar with the topic at hand, or will it
require a number of explanatory sentences?
If your paragraphs are part of a larger essay, writing an essay
outline can help you define the major ideas or goals of each
paragraph.

Image titled Write a Paragraph Step 2

Write down information and ideas relating to that topic. Once
you have a clearer idea of what you want to address in your
paragraph, you can start organizing your thoughts by writing
down your ideas on a notepad or word document. There's no
need to write out full sentences just yet, just jot down some key
words and phrases. Once you see everything on paper, you may
get a clearer idea of which points are essential to include in your
paragraph, and which points are superfluous.
At this point, you may realize that there's a gap in your
knowledge and that it will be necessary to look up some facts
and figures to support your argument.
It's a good idea to do this research now, so you will have all the
relevant information easily at hand when it comes to the writing
stage.

Image titled Write a Paragraph Step 3

Figure out how you want to structure your paragraph. Now that
all of your thoughts, ideas, facts and figures are laid out clearly
in front of you, you can start to think about how you want to
77
structure your paragraph. Consider each of the points you wish to
address and try to arrange them in a logical order - this will make
your paragraph more coherent and easier to read.
This new order may be chronological, may put the most
important information first, or may just make the paragraph
easier and more interesting to read - it all depends on the topic
and style of the paragraph you wish to write.
Once you have decided where you want everything to go, you
can rewrite your points according to this new structure - this will
help to make the writing process a lot faster and more
straightforward.

Part 2
Writing Your Paragraph

Image titled Write a Paragraph Step 4

Write a topic sentence. The first sentence of your paragraph
needs to be the topic sentence. A topic sentence is an
introductory line that addresses what the main idea or thesis of
the paragraph is going to be. It should contain the most important
and relevant point you wish to make regarding your topic, thus
summarizing the paragraph as a whole. [2] Don't: use an obvious
fact as your topic sentence.
Do: feel free to start with a vague idea if you feel stuck, and
improve it once you've finished the paragraph.
Every other sentence you write should support the topic sentence
and provide further detail and discussion of the issues or ideas it
raises. If any sentence you write cannot be directly related to the
topic sentence, it should not be included in this particular
paragraph.

78
More experienced writers can include their topic sentence at any
point in the paragraph; it doesn't necessarily need to be the first
line. However, writers who are new or less comfortable with
paragraph writing should stick with having the topic sentence
first, as it will help to guide you throughout the rest of the
paragraph.[2]
Your topic sentence should not be too broad or too narrow. If
your topic sentence is too broad you will not be able to discuss
its ideas adequately in your paragraph. If it’s too narrow, you
won’t have enough to discuss.

Image titled Write a Paragraph Step 5

Fill in the supporting details. Once you have written and are
happy with your topic sentence, you can start to fill in the rest of
your paragraph. This is where the detailed, well-structured notes
you wrote earlier will come in handy. Make sure that your
paragraph is coherent, which means that it is easy to read and
understand, that each sentence connects with the next and that
everything flows nicely as a whole. To achieve this, try to write
clear, simple sentences that express exactly what you want to
say.
Link each sentence with transition words which form a bridge
between one sentence and the next. Transition words can help
you compare and contrast, show sequence, show cause and
effect, highlight important ideas, and progress smoothly from
one idea to the next. Such transition words include
"furthermore", "in fact" and "in addition to". You can also use
chronological transitions, such as "firstly", "secondly" and
"thirdly".
The supporting sentences are the meat of your paragraph, so you
should fill them with as much evidence to support your topic
79
sentence as possible. Depending on the topic, you can use facts,
figures, statistics and examples or you can use stories, anecdotes
and quotes. Anything goes, as long as it is relevant.
In terms of length, three to five sentences will usually be enough
to cover your main points and adequately support your topic
sentence, but this will vary greatly depending on the topic and
the length of the paper you are writing. There is no set length for
a paragraph. It should be as long as it needs to be to adequately
cover the main idea.

Image titled Write a Paragraph Step 6

Write a concluding sentence. The concluding sentence of your
paragraph should tie everything together. A good concluding
sentence will reinforce the idea outlined in your topic sentence,
but now it has all the weight of the evidence or arguments
contained in your supporting sentences behind it. After reading
the concluding sentence, the reader should have no doubt as to
the accuracy or relevance of the paragraph as a whole. Don't
disagree with your own evidence: Despite these comments, the
report was a failure.
Do qualify the conclusion if it transitions to the next paragraph:
These quotes prove the report had major support, but this does
not mean it led to major change.
Don’t just reword the topic sentence. Your concluding sentence
should acknowledge the discussion that has come before it and
remind your reader of the relevance of this discussion.
For example, in a paragraph dealing with the topic "Why is
Canada a great place to live?" The concluding sentence might
look something like "From all the evidence provided above, such
as Canada's fantastic health care provisions, its top-notch

80
education system and its clean, safe cities, we can conclude that
Canada is indeed a great place to live."
Image titled Write a Paragraph Step 7
Know when to move on to a new paragraph. Sometimes it can be
difficult to tell where one paragraph should end and another
begin. Luckily, there are a number of guidelines you can follow
which can make the decision to move on to a new paragraph an
obvious one. The most basic guideline to follow is that every
time you start to discuss a new idea, you should move on to a
new paragraph. Paragraphs should never contain more than one
central idea. If a given idea has multiple points or facets, then
each individual aspect of the idea should be given its own
paragraph.
A new paragraph is also used each time you are contrasting two
points or presenting each side of an argument. For example, if
your topic is "should civil servants receive lower salaries?" one
paragraph would deal with the arguments supporting lower pay
for civil servants, while the other paragraph would provide
arguments against it.
Paragraphs make a piece of writing easier to comprehend and
give readers a "break" between new ideas in order to digest what
they have just read. If you feel that the paragraph you are writing
is becoming too complex, or contains a series of complex points,
you may want to think about splitting it up into individual
paragraphs.
When writing a paper, the introduction and conclusion should
always be given their own paragraphs. The introductory
paragraph should define the aim of the paper and what it hopes to
achieve, while also giving a brief outline of the ideas and issues
it will go on to discuss. The concluding paragraph provides a

81
summary of the information and arguments contained in the
paper and states in clear terms what the paper has shown and/or
proven. It may also introduce a new idea, one that opens the
reader's mind to the questions raised by the paper.
If you’re writing fiction, you need to start a new paragraph in
dialogue to show a new speaker.

Part 3
Reviewing Your Paragraph
Image titled Write a Paragraph Step 8
Check your paragraph for spelling and grammar. Once you have
finished writing, it is essential that you re-read your paragraph
two or three times to check it for misspelled words and poor
grammar. Spelling mistakes and bad grammar can significantly
impact the perceived quality of your paragraph, even if the ideas
and arguments it contains are of a high quality. It is very easy to
overlook small mistakes when writing, so don't skip this step,
even if you're in a rush.
Ensure that each sentence has a subject and that all proper nouns
are capitalized. Also make sure that all of the subjects and verbs
agree with each other and that you use the same tense across the
entire paragraph.
Use a dictionary to double-check the spelling of words that you
are unsure about, don't just assume that they are correct.
Check your paragraph for the proper use of punctuation, making
sure that you use marks such as commas, colons, semicolons and
ellipses in the correct context.

Image titled Write a Paragraph Step 9

Check your paragraph for coherency and style. Not only should
the technical aspects of your writing be spot on, but you should
82
also try to achieve clarity in your writing, as well as stylistic
flow. You can do this by varying the length and format of your
sentences and by using transitional words and a varied
vocabulary.[2] Don't: use long words or "thesaurus finds" for
their own sake.
Do: use well-known synonyms to vary your writing rather than
repeat the same word many times.
The point of view of your writing should remain consistent
throughout the paragraph, and indeed, the entire paper. For
example, if you are writing in the first person (e.g., "I believe
that...") you should not switch to a passive voice ("it is believed
that") halfway through.
However, you should also try to avoid beginning every sentence
with "I think..." or "I contend that..." Try to vary the format of
your sentences, as this will make the paragraph more interesting
for the reader and help it to flow more naturally.
For beginner writers, it is better to stick to short, to-the-point
sentences which clearly express your point. Long, rambling
sentences can very quickly become incoherent or fall victim to
grammatical errors, so try to avoid them until you gain more
experience as a writer.

Image titled Write a Paragraph Step 10

Decide if your paragraph is complete. Once you have re-read the
paragraph and fixed any grammatical or stylistic errors, you
should have one more glance over it to determine whether it is
complete. Try to look at the paragraph objectively and decide
whether it sufficiently supports and develops your topic
sentence, or whether it needs a few more details or additional
evidence to back up your claims.[3]Don't: get bogged down in
minor edits before you've finished your essay.
83
Do: make sure your point is crystal clear before you move on.
If you feel that the main claim of your topic sentence is
sufficiently supported and well-developed by the contents of the
rest of your paragraph, then your paragraph is probably
complete. However, if any important aspect of the topic remains
unexplored or unexplained or if the paragraph is shorter than
three sentences, it probably needs a little more work.[3]
On the other hand, you may decide that your paragraph is too
long and contains superfluous or tangential content. If this is the
case, you should edit the paragraph so it contains only the most
relevant information.
If you feel that all of the content is necessary to your point, but
the paragraph is still too long, you should think about breaking it
up into several smaller, more specific paragraphs.

Paragraph Template
Make sure your paragraph has 3 distinct parts.
1. Topic sentence:
This sentence is the first sentence of a paragraph and summarizes
the main idea of the paragraph.
All of the following sentences will add information that expands
upon or supports the idea stated here.
2. Supporting sentences:
The second sentence identifies the first major supporting detail.
The third sentence brings up a second supporting detail.
Similarly, the fourth sentence mentions a third supporting detail.
Additional sentences can be added here for additional supporting
details or to divide one lengthy supporting detail into separate,
easier-to-read sentences.
3. Conclusion:

84
The last sentence of your paragraph is your concluding sentence,
which quickly ties your supporting thoughts together.
It also might restate your first topic sentence using different
terms.

Sample Persuasive Paragraph

The benefits of social networking websites have the potential to
outweigh the dangers of such websites. While social networking
does curb real life interaction with one's peers, it also provides
shy, introverted, or socially awkward youth with a new avenue of
communication that often makes it easier to connect and form
relationships. A sharp increase in cyberbullying is an unfortunate
result of social networking, but sites like Facebook also give
people the opportunity to build a larger network of support.
Additionally, while unmonitored teens and young adults may
post photographs and information that could damage their futures
and make them less desirable to potential employers, responsible
and well-guided youth have the chance to build working
relationships and create a stronger presence in the working
world. Even though there are a large number of risks and
downfalls associated with social networking, when the tool is
used correctly and the youth are instructed on correct usage, it
offers considerable positives.

TRANSLATE INTO VIETNAMESE

What Is a Money Market Fund?
A money market fund is a kind of mutual fund that invests only
in highly liquid instruments such as cash, cash equivalent
securities, and high credit rating debt-based securities with a
short-term, maturity—less than 13 months. As a result, these
funds offer high liquidity with a very low level of risk.
85
While they sound highly similar, a money market fund is not the
same as a money market account (MMA). The former is an
investment, sponsored by an investment fund company, and
hence carries no guarantee of principal. The latter is an interest-
earning saving account offered by financial institutions, with
limited transaction privileges and insured by the Federal Deposit
Insurance Corporation (FDIC).
How a Money Market Fund Works?
Also called money market mutual funds, money market funds
work like any mutual fund. They issue redeemable units or
shares to investors and are mandated to follow the guidelines
drafted by financial regulators, like those set by the U.S.
Securities and Exchange Commission (SEC).
A money market fund may invest in the following types of debt-
based financial instruments:
Bankers' Acceptances (BA)—short term debt guaranteed by a
commercial bank
Certificates of deposit (CDs)—bank-issued savings certificate
with short-term maturity
Commercial paper—unsecured short-term corporate debt
Repurchase agreements (Repo)—short-term government
securities
U.S. Treasurys—short-term government debt issues
Returns from these instruments are dependent on the applicable
market interest rates, and therefore the overall returns from the
money market funds are also dependent on interest rates.

TRANSLATE INTO ENGLISH

Quỹ tương hỗ đầu tư vào các công cụ nợ ngắn hạn, như giấy
chấp nhận thanh toán, trái phiếu kho bạc, thương phiếu và
chúng chỉ tiền gửi khả nhượng. Hầu hết các quỹ đều đầu tư vào
86
những chứng từ có chất lượng cao, mặc dù một số quỹ đã mua
vào những chứng khoán có xếp hạng không đầu tư đem lại lợi
suất tốt hơn. Những quỹ thị trường tiền tệ, được quản lý bởi
những công ty đầu tư có đăng ký với Ủy ban giao dịch và
Chứng khoán, thường mua chúng từ có giá với kỳ đáo hạn là 60
ngày hoặc ngắn hơn. Một quỹ bá cổ phần cho đầu tư nhận các
khoản chi trả tiền lãi đều đặn. Số tiền lãi mà các nhà đầu tư thu
được phụ thuộc vào một số yếu tố, bao gồm mức lãi suất chung,
chi phí quản lí, hoặc hoa hồng tính bởi người quản lý quỹ, và có
thể có phí khi mua lại hoặc không. Cơ cấu phí trong quỹ hỗ
tương của thị trường tiền tệ và đặc điểm đầu tư của danh mục
đầu tư được nêu trong bản báo cáo bạch của quỹ.

87
 THE FINANCIAL MARKETS
UNIT 5

PREVIEW

Quiz: How much do you know about the stock market?

By Walter Hamilton
January 29, 2013, 5:04 p.m.
1. How many stocks are in the Dow?
A. 10 B. 30 C. 50 D. 100
2. What percentage of Americans own stocks?
A. 26% B. 31% C. 42% D. 46%
3. When was the last peak in the Dow Jones industrial
average?
A. December 1999 C. October 2006
B. January 2006 D. October 2007
4. When was the last trough in the Dow Jones industrial
average?
A. March 2007 C. March 2009
B. March 2008 D. March 2010
5. How much did the Dow plunge from peak to trough?
A. 54% B. 59% C. 63% D. 78%
6. Which country had the best-performing stock index last
year?
A. U.S. (Dow) C. China (Shanghai)
B. Germany (DAX D. Greece (Athex)

88
 READING 1

STRUCTURE OF FINANCIAL MARKETS

Now that we understand the basic function of financial markets,
let's look at their structure. The following descriptions of several
categorizations of financial markets illustrate essential features
of these markets.

Debt and Equity Markets

A firm or an individual can obtain funds in a financial
market in two ways. The most common method is to issue a debt
instrument, such as a bond or a mortgage, which is a contractual
agreement by the borrower to pay the holder of the instrument
fixed dollar amounts at regular intervals (interest and principal
payments) until a specified date (the maturity date), when a final
payment is made. The maturity of a debt instrument is the
number of years (term) until that instrument's expiration date. A
debt instrument is short-term if its maturity is less than a year
and long-term if its maturity is ten years or longer. Debt
instruments with a maturity between one and ten years are said to
be intermediate-term.
The second method of raising funds is by issuing
equities, such as common stock, which are claims to share in the
net income (income after expenses and taxes) and the assets of a
business. If you own one share of common stock in a company
that has issued one million shares, you are entitled to 1one-
millionth of the firm's net income and 1 one-millionth of the
firm's assets. Equities often make periodic payments (dividends)
to their holders and are considered long-term securities because
they have no maturity date. In addition, owning stock means that

89
you own a portion of the firm and thus have the right to vote on
issues important to the firm and to elect its directors.
The main disadvantage of owning a corporation's equities
rather than its debt is that an equity holder is a residual claimant;
that is, the corporation must pay all its debt holders before it pays
its equity holders. The advantage of holding equities is that
equity holders benefit directly from any increases in the
corporation's profitability or asset value because equities confer
ownership rights on the equity holders. Debt holders do not share
in this benefit, because their dollar payments are fixed.
The total value of equities in the United States has
typically fluctuated between $4 and $20 trillion since the early
1990s, depending on the prices of share. Although the average
person is more aware of the stock market than any other financial
market, the size of the debt market is often larger than the size of
the equities market: The value of debt instruments was $41
trillion at the end of 2005, while the value of equities was $18
trillion at the end of 2005.

Primary and Secondary Markets

A primary market is a financial market in which new
issues of a security, such as a bond or a stock, are sold to initial
buyers by the corporation or government agency borrowing
funds. A secondary market is a financial market in which
securities that have been previously issued can be resold.
The primary markets for securities are not well known to
the public because the selling of securities to initial buyers often
takes place behind closed doors. An important financial
institution that assists in the initial sale of securities in the
primary market is the investment bank. It does this by

90
underwriting securities: It guarantees a price for a corporation's
securities and then sells them to the public.
The New York and American stock exchanges and
NASDAQ (National Association of Securities Dealers
Automated Quotation System), in which previously issued stocks
are traded, are the best-known examples of secondary markets,
although the bond markets, in which previously issued bonds of
major corporations and the U.S. government are bought and sold,
actually have a larger trading volume. Other examples of
secondary markets are foreign exchange markets, futures
markets, and options markets. Securities brokers and dealers are
crucial to a well-functioning secondary market. Brokers are
agents of investors who match buyers with sellers of securities;
dealers link buyers and sellers by buying and selling securities at
stated prices.
When an individual buys a security in the secondary
market, the person who has sold the security receives money in
exchange for the security, but the corporation that issued the
security acquires no new funds. A corporation acquires new
funds only when its securities are first sold in the primary
market. Nonetheless, secondary markets serve two important
functions. First, they make it easier and quicker to sell these
financial instruments to raise cash; that is, they make the
financial instruments more liquid. The increased liquidity of
these instruments then makes them more desirable and thus
easier for the issuing firm to sell in the primary market. Second,
they determine the price of the security that the issuing firm sells
in the primary market. The investors who buy securities in the
primary market will pay the issuing corporation no more than the
price they think the secondary market will set for this security.

91
The higher the security's price in the secondary market, the
higher the price that the issuing firm will receive for a new
security in the primary market, and hence the greater the amount
of financial capital it can raise. Conditions in the secondary
market are therefore the most relevant to corporations issuing
securities. It is for this reason that books like this one, which deal
with financial markets, focus on the behavior of secondary
markets rather than primary markets.

Exchanges and Over-the-Counter Markets

Secondary markets can be organized in two ways. One is
to organize exchanges, where buyers and sellers of securities (or
their agents or brokers) meet in one central location to conduct
trades. The New York and American stock exchanges for stocks
and the Chicago Board of Trade for commodities (wheat, corn,
silver, and other raw materials) are examples of organized
exchanges. The other method of organizing a secondary market
is to have an over-the-counter (OTC) market, in which dealers
at different locations who have an inventory of securities stand
ready to buy and sell securities “over the counter” to anyone who
comes to them and is willing to accept their prices. Because
over-the-counter dealers are in computer contact and know the
prices set by one another, the OTC market is very competitive
and not very different from a market with an organized
exchange.
Many common stocks are traded over-the-counter,
although a majority of the largest corporations have their shares
traded at organized stock exchanges such as the New York Stock
Exchange. The U.S. government bond market, with a larger
trading volume than the New York Stock Exchange, is set up as
an over-the-counter market. Forty or so dealers establish a
92
“market” in these securities by standing ready to buy and sell
U.S. government bonds. Other over-the-counter markets include
those that trade other types of financial instruments such as
negotiable certificates of deposit, federal funds, banker’s
acceptances, and foreign exchange.

Money and Capital Markets

Another way of distinguishing between markets is on the
basis of the maturity of the securities traded in each market. The
money market is a financial market in which only short-term
debt instruments (generally those with original maturity of less
than one year) are traded; the capital market is the market in
which longer-term debt (generally those with original maturity of
one year or greater) and equity instruments are traded. Money
market securities are usually more widely traded than longer-
term securities and so tend to be more liquid. In addition, as we
will see in Chapter 4, short-term securities have smaller
fluctuations in prices than long-term securities, making them
safer investments. As a result, corporations and banks actively
use the money market to earn interest on surplus funds that they
expect to have only temporarily. Capital market securities, such
as stocks and long-term bonds, are often held by financial
intermediaries such as insurance companies and pension funds,
which have little uncertainty about the amount of funds they will
have available in the future.

COMPREHENSION QUESTIONS

1. What is the main function of financial markets?

2. How many categorizations of financial markets are
mentioned in the text?
93
 3. What is the debt market?
4. What is the equity market?
5. What is a debt instrument?
6. Do shareholders of a corporation receive fixed dollar
amounts at regular intervals?
7. In which type of financial markets are fresh shares issued
and sold?
8. Why are the primary markets for securities not well
known to the public?
9. What are two ways of organizing secondary markets?
10. What are differences between Exchanges and OTC
markets?
11. On the basis of the maturity of the securities traded in
each market, what are financial markets classified into?

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

Exercise 1: Match the words or phrases in the box with their

definitions (1-10).
bankruptcy bubble collateral institutional investors
raise capital bears bulls day traders
issue shares

1. a name for investors who buy shares because they expect

their price to rise
2. a name for shareholders who sell because they expect the
price to fall
3. a period of rapidly rising shares, followed by a quick
collapse
4. assets a borrower uses to secure or guarantee a loan
94
 5. certificates representing part-ownership of a company
6. financial organizations that own a lot of shares
7. people who buy and re-sell shares in a very short time,
often just a few hours
8. to get money from investors with which to run a business
9. to offer securities for sale, to financial institutions and the
public
10. when you have no money to pay your debts, so you have
to sell your assets
Exercise 2: There is a logical connection among three of the
four words in each of the following groups. Which is the odd
one out, and why?
1. annual report – external auditors – financial statements –
stockbroker
2. blue chip – defensive stock – growth stock – rights issue
3. bonus issue – dividend – over-the-counter – shareholder
4. creditor – market-maker – shareholder – stockbroker
5. debt – equity – share – stock
6. face value – market value – nominal value – par value
7. float – liquidation – share issue - underwriter
8. institutional investor – insurance company – liabilities –
pension fund
9. mutual fund – portfolio – risk – underwriter

95
 MONEY, BANKING AND
UNIT 6
CENTRAL BANKING

PREVIEW
PREVIEW
Match the terms in column A with their definitions in
column B.
1. a share-draft A. It is responsible for providing its
account nation's economy with funds when
commercial banks cannot cover a
2. Open market
supply shortage.
operations
B. The foremost monetary institution in
3. the money a market economy, often owned by
supply the government.
C. the entire stock of currency and other
4. a "NOW
liquid instruments circulating in a
account".
country's economy as of a particular
5. the lender of time.
last resort D. the percentage of the bank’s deposits
that the central bank requires other
6. A demand
banks to keep as a reserve.
deposit
E. a version of a checking account,
7. the reserve offered by a credit union instead of a
requirement bank.
F. an interest-earning bank account with
8. A time deposit
which a customer is permitted to
9. the central write drafts against money held on
bank deposit.
G. the buying and selling of government
10. trust account
securities in order to expand or

96
 contract the amount of money in the
banking system.
H. A savings account established under
a trust agreement whereby a trustee
administers the funds for the benefit
of one or more beneficiaries.
I. an account from which deposited
funds can be withdrawn at any time
from the depository institution
J. an interest-bearing bank deposit
account that has a specified date of
maturity, such as a savings account
or certificate of deposit (CD)

READING 1

THE BANKING SYSTEM IN THE ECONOMY

THE CENTRAL BANK
The foremost monetary institution in a market economy
is the central bank. These are usually government owned
institutions, but even in countries where they are owned by the
nation’s banks (such as US and Italy), the responsibility of the
central bank is for the national interest.
Most central banks in the present-day world perform one
of the following functions: (1) they serve as the government’s
banker, (2) they act as the banker of the banking system, (3) they
regulate the monetary system for both domestic and international
policy goals, and (4) they issue the nation’s currency.

97
 As banker to the government the central bank collects
and disburses government income, manages the issues and
redemption of government debts, advises the government on all
matters pertaining to financial activities, and makes loans to the
government. As banker to the nation’s banks, the central bank
holds and transfers banks’ deposits, supervises their operations,
acts as a lender of last resort, and provides technical and
advisory services. Monetary policy for both domestic and foreign
purposes is implemented and, in many countries, and decided by
the national banking authorities, using a variety of direct and
indirect controls over the financial institutions. Coins and notes
that circulates as the national currency are usually the liability of
the central bank.
Central banks affect economic growth by controlling the
liquidity in the financial system. They have three monetary
policy tools to achieve this goal.
First, they set a reserve requirement. A reserve
requirement, also known as the cash reserve ratio, represents the
minimum percentage of customer deposits that a bank should
hold as a reserve. The central bank can lower the reserve
requirement, for example, in order to enact expansionary
monetary policy and encourage economic growth. The reduction
makes banks free to lend more of their deposits to other bank
customers and earn interest. These customers in turn deposit the
loan proceeds in their own bank accounts, and the process
continues indefinitely. This increase in the supply of available
funds lowers the price of those funds (i.e., the lending rate),
making debt cheaper and more enticing to borrowers.
Second, they use open market operations to buy and sell
securities from member banks. It changes the amount of cash on

98
hand without changing the reserve requirement. They used this
tool during the 2008 financial crisis. Banks bought government
bonds and mortgage-backed securities to stabilize the banking
system. The Federal Reserve added $4 trillion to its balance
sheet with quantitative easing. It began reducing this stockpile in
October 2017.
Third, they set targets on interest rates they charge their
member banks. That guides rates for loans, mortgages, and
bonds. Raising interest rates slows growth, preventing inflation.
That's known as contractionary monetary policy. Lowering rates
stimulates growth, preventing or shortening a recession. That's
called expansionary monetary policy. The European Central
Bank lowered rates so far that they became negative.
Monetary policy is tricky. It takes about six months for
the effects to trickle through the economy. Banks can misread
economic data as the Fed did in 2006. It thought the subprime
mortgage meltdown would only affect housing. It waited to
lower the fed funds rate. By the time the Fed lowered rates, it
was already too late.
But if central banks stimulate the economy too much,
they can trigger inflation. Central banks avoid inflation like the
plague. Ongoing inflation destroys any benefits of growth. It
raises prices for consumers, increases costs for businesses, and
eats up any profits. Central banks must work hard to keep
interest rates high enough to prevent it.

COMMERCIAL BANKS
A great deal of the money in circulation is created by
commercial banks (NOW accounts) in savings banks and share
drafts in credit unions are now considered to be part of a nation’s
money supply). You will recall that most of the money in
99
circulation consists of demand deposits or “checkbook money”.
Demand deposits are commonly known as checking accounts.
Demand deposits are a form of money because they can be used
to pay for goods and services. The ability of commercial banks to
maintain and create demand deposits by loans and investments
influences the supply of money in a nation’s economy.
Banking is a business in which the main product offered
for sale is money. As in other businesses, the incentive in
commercial banking is to earn profits. As for the case of
commercial banking, a substantial amount of business of
commercial banks comes from loans made to businesses. When a
business firms borrows a sum of money, the bank places it on the
deposit in the firm’s checking account. The business withdraws
the money as it needs it.

OTHER FINANCIAL INSTITUTIONS AND THEIR

FUNCTIONS
In addition to the most commonly known financial
institutions such as the commercial banks and the central bank
mentioned above, there are many other types of financial
institutions which exists in a market economy. Here are some of
them.
Savings institutions
There are three main forms of saving institutions: mutual
savings banks, savings and loans (or building and loan)
associations, and savings department in commercial banks.
These institutions take the money for which people have no
immediate need and place it in personal savings deposits.
Savings institutions may request that depositors give notice of
intent to withdraw funds, although they do not often do so.
Because of this requirement, savings accounts are called time
100
deposits so as to distinguish them from demand deposits
(checking accounts), from which money may be withdrawn at
the depositor’s will.
Personal trusts
Trust companies and the trust departments of commercial
banks invest the funds of people with financial security who
want to provide income for their families. The money deposited
in these institutions is invested in many different types of
securities providing an assured return; speculative securities are
usually avoided. It is important to note that these personal trusts
must not be confused with industrial trusts.
Insurance companies
The purpose of insurance companies is to allow people to
pool their resources in order to minimize the risk associated with
accident, sickness, death, and other unpredictable circumstances.
Although the money these companies collect must be paid out at
some time, they control huge sum of money, most of which is
placed in long term investments. A large portion is put into
bonds and mortgages, although significant investments are made
in real estates and stocks.

Read the text and choose the best answer A, B, C or D for

each question.
1. What do you think is the main idea of the reading text?
A. The different functions of the central bank
B. The roles of commercial banks and other financial
institutions
C. Banking and financial institutions
D. The supervision of the central bank on all other banks
2. What is NOT the functions of the central banks?

101
 A. They print money and pump into the circulation.
B. They make investments in other banks.
C. They make loans to other banks.
D. They regulate the monetary policy tools.
3. As a banker to the government, what does the central
bank do?
A. The central bank makes uses of government income.
B. The central bank deals with government debts
C. The central bank makes loan to the government.
D. All of the above
4. As a banker to the nation’s bank, what does the central
bank do?
A. The central bank holds and transfers banks’ reserves.
B. The central bank supervises operations of other banks
in the economy.
C. The central bank makes loans to other banks and
charges discount rates for theses loans.
D. All of the above
5. What is NOT the tool of monetary policy?
A. Government securities
B. Reserve requirements
C. Open market operations
D. Interest rates
6. What is the main function of commercial banks?
A. To accept deposits and give loans.
B. To make issuance of the nation’s currency.
C. To regulate the money supply in the economy.
D. To regulate interest rates.
7. What do a bank’s deposits consist of?
A. Savings accounts and time deposits

102
 B. Demand deposits and checking accounts
C. Time deposits and demand deposits
D. NOW accounts and current accounts
8. From what type of deposits do depositors withdraw their
money at any time?
A. Savings deposits
B. Demand deposits
C. Time deposits
D. Fixed deposits

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

Fill in the gaps in the sentences using words/ phrases in the

box.

float Bill of Exchange clearing simple interest

(B/E)
stabilize Letter of credit legal money compound
(L/C) interest
borrowers lenders exchange demand deposit
rate
sight draft time draft transactions

1. As a national monopolist in issuing ___________, the

central bank is the banker’s bank that controls and that is
the creditor of all financial institutions in a nation.
2. __________ are commonly known as checking accounts.
3. The primary function of a bank today is to act as an
intermediary between depositors and ___________.
4. Bank often cooperate with government in efforts to
___________ economy and prevent inflation.
103
 5. A ___________ is an order sent by the drawer(the person
asking for money) to the drawee (the person paying)
stating that the drawee will pay unconditionally on
demand or at a specified time the amount shown on the
bill.
6. A ___________ is an agreement in which a customer
(applicant for L/C) asks a bank (L/C issuing bank) to
make a commitment to pay or accept the bill in favour of
a third party (beneficiary) when he/she presents the
issuing bank the correct documents.
7. Interest is usually paid only on the principal, that is, on
the sum of money loaned, and it is called ___________.
8. In many circumstances, central bank intervention will
have the desired effect of establishing or restoring
___________.
9. When the government allows its currency to __________,
the central bank might still intervene to buy or sell its
currency, if the government considers that the exchange
rate for the currency has appreciated or depreciated to an
unjustifiable or undesirable level.
10. ___________ has become essential to banks because it
makes payment between banks or branches simpler,
cheaper and more efficient.

WRITING

I. Match the terms in column A with their definitions in

column B.
1. cash dispenser A. An arrangement by which a customer
(ATM) can withdraw more from a bank

104
2. home banking account than has been deposited in it,
up to an agreed limit, interest on the
3. standing order or
debt is calculated daily.
direct debit
B. A card which guarantees payment for
4. overdraft goods and services purchased by the
cardholder, who pays back the bank
5. mortgage
or finance company at a later date.
6. deposit account C. A computerized machine that allows
(GB) or time or bank customers to withdraw money,
notice account check their balance, and so on.
(US) D. A fixed sum of money on which
interest is paid lent for a fixed
7. credit card period, and usually for a specific
8. cash card purpose.
E. An instruction to a bank to pay fixed
9. loan sum of money to certain people or
organization at stated time.
10. current account
F. A loan, usually to buy property,
(GB) or
which serves as a security for the
checking account
loan
(US)
G. A plastic card issued to bank
customers for use in cash dispensers.
H. Doing banking transactions by
telephone or from one’s own
personal computer
I. One that generally pays little or no
interest, but allows the holder to
withdraw his or her cash without any
restrictions
J. One that pays interest, but usually

105
 can’t be used for paying cheques
(GB) or checks (US) and on which
notice is often required to withdraw
money.

II. Read the following text and write a summary.

Commercial banking
Commercial or retail banks are businesses that trade in money.
They receive and holds deposits, pay money according to
customers’ instructions, lend money, offer investment advice,
exchange foreign currencies, and so on. They make a profit from
the difference (known as a spread or a margin) between the
interest rates they pay to lenders or depositors and those they
charge to borrowers. Banks also create credit, because the money
they lend, from their deposits, is generally spent (either on goods
or services, or to settle debts), and in this way transferred to
another bank account often by way of a bank transfer or a cheque
(check) rather than the use of notes or coins from where it can be
lent to another borrower, and so on. When lending money,
bankers have to find a balance between yield and risk, and
between liquidity and different maturities.
Investment banking
Investment banks, called merchant banks in Britain, raise funds
for industry on the various financial markets, finance
international trade, issue and underwrite securities, deal with
takeovers and mergers, and issue government bonds. They also
generally offer stockbroking and portfolio management services
to rich corporate and individual clients. Investment banks make

106
their profits from the fees and commissions they charge for their
services.
Universal banking
In some European countries (notably Germany, Switzerland and
Austria) there have always been universal banks combining
deposit and loan with share and bond dealing and investment
services, but for much of the 20th century, American legislation
enforced a strict separation between commercial and investment
banks. The Glass-Stegall Act, passed during the Depression in
1934, prevented commercial banks from underwriting securities.
The act was repealed in 1999. The Japanese equivalent was
abolished the previous year, and the banking industry in Britain
was also deregulated in the 1990s, and financial conglomerates
now combine the services previously offered by banks,
stockbrokers, and insurance companies.
Interest rates
A country’s minimum interest rate is usually fixed by the central
bank. This is the discount rate, at which the central bank makes
secured loans to commercial banks. Banks lend to blue chip
borrowers (very safe large companies) at the base rate or the
prime rate; all other borrowers pay more, depending on their
credit standing (or credit rating, or creditworthiness): the lender’s
estimation of their present and future solvency. Borrowers can
usually get a lower interest rate if the loan is secured or
guaranteed by some kind of asset, known as collateral.

107
 READING 2

MONEY AND ITS FUNCTIONS

The concept of money:

Money is a commodity
accepted by general consent
as a medium of economic
exchange. It is the medium
in which prices and values
are expressed. It circulates
from person to person and
country to country, then
facilitating trade, and it is
the principal measure of
wealth.
The functions of money: All modern societies use
money. With money people can easily trade goods and services
with one another. That is money promotes trade. Money serves
as a medium of exchange, a measure of or a unit of account, a
store of value and a standard of deferred payments. We discuss
each of these functions of money in turn.
Money as a Medium of Exchange: Workers exchange
labour services for money.
People buy or sell goods in exchange for money. Money is a
medium through which people exchange goods and services.
What is a medium of exchange? A medium of exchange is
anything that is widely accepted in payment for goods and
services and in settlement of debts. Money is the most common
medium of exchange.

108
 Money as a Measure of Value: The second function of
money is as a measure of
value. Just as we need measurements for distances, weights, and
energy, so we need measurements for the value of things offered
at the market. Money measures value in its units of accounts.
The unit of account is the unit in which prices are quoted and
account are kept. In Britain, prices are quoted in pound sterling.
In the United States dollar, and in Vietnam VND. The use of
such units helps simplify the exchange of goods.
Money as a Store of value: Money also functions as a
store of value. Money is a store
of value because it can be used to make purchases in the future.
This means that if we choose not to buy with our money today,
we can save it to buy in the future. If money were a perfect store
of value, we could buy the same items next year as we could
today with the same amount of money. But money does function
poorly as a store of value when there is inflation in the economy.
Money as a Standard of Deferred Payments: The last
function of money is a standard
of deferred payments or unit of account aver time. When you buy
something but do not pay for it immediately, your payment is
expressed in terms of money to be paid in the future. With the
wide use of installment buying, this function of money has
become increasingly important.
Different kinds of money: The most important types of
money are commodity money, and token money.
Commodity Money: Commodity Money is a useful good that
serves as a medium of exchange. As a result, the value of
commodity money is about equal to the value of the material

109
contained in it. The principal materials used for this type of
money have been gold, silver and copper.
In ancient times various articles made of these metals, as
well as of iron and bronze, were used as money, while among
primitive people such commodities as shells, beads, elephant
tusks, furs, skins, and livestock served as medium of exchange.
The gold coins in circulation in the US before 1933 were
examples of commodity money.
Token Money: Token money is a means of payment whose
value or purchasing power as money greatly exceeds its cost of
production or value in uses other than as money. A $10 note is
worth far more as money than as a 3x6 inch piece of high quality
paper. Similarly, the monetary value of the most coins exceeds
the amount you would get by melting them down and selling off
the metal they contain.

COMPREHENSION QUESTIONS

1. What is the concept of “money”?

2. What are the functions of money?
3. What is a medium of exchange?
4. How is money used as a medium of exchange?
5. How is money used as a unit of account? / a store of
value and as a standard of deferred payment?
6. What do you think is the most important function of
money? And Why?
7. What are two main types of money?
8. Give some types of token money?
9. What are some main differences between commodity
money and token money?
110
VOCABULARY
VOCABULARYEXERCISES
EXERCISES

1. Complete the following passage with suitable words.

Economists say that the invention of money belongs in the same
category as the great inventions of ancient times, such as the
wheel and the inclined plane, but how did money develop? Early
forms of money were often (1) ___________ money-money that
had value because it was made of a substance that had value.
Examples of commodity money are gold and silver coins. Gold
coins were valuable because they could be used in (2) ________
for other goods or services, but also because the gold itself was
valued and had other uses. Commodity money gave way to the
next stage-representative money.
Representative money is a certificate or (3) ___________
that can be exchanged for the underlying commodity. For
example, instead of carrying the gold commodity money with
you, the (4) ___________ might have been kept in a bank vault
and you might carry a paper certificate that represents-or was
“backed”-by the gold in the vault. It was understood that the
certificate could be (5) ___________ for gold at any time. Also,
the certificate was easier and safer to carry than the actual gold.
Over time people grew to trust the paper certificates as much as
the gold. Representative money led to the use of fiat money-the
type used in modern economies today.
Fiat money is money that does not have (6) ___________ value
and does not represent an asset in a vault somewhere. Its value
comes from being declared “legal tender”-an acceptable form of
(7) ___________ -by the government of the issuing country. In
this case, we accept the value of the money because the
government says it has value and other people value it enough to
(8) ___________ it as payment. For example, I accept U.S.
111
dollars as income because I’m confident I will be able to
exchange the dollars for goods and services at local stores.
Because I know others will accept it, I am comfortable accepting
it. U.S. (9) ___________ is fiat money. It is not a commodity
with its own great value and it does not represent gold-or any
other valuable commodity-held in a vault somewhere. It is
valued because it is legal tender and people have faith in its use
as money.
There have been many (10) ___________ of money in history,
but some forms have worked better than others because they
have characteristics that make them more useful. The
characteristics of money are durability, portability, divisibility,
uniformity, limited supply, and acceptability.
2. Choose the best answers.
Question 1: Which of the following is not a function of money?
A. Measure of value.
B. Store of value.
C. Inflation stopper.
Question 2: When is money created?
A. When a bank customer signs the loan documents and the
bank credits the customer's account with the amount of
the loan.
B. When, at the end of the month, a company pays the
salaries of its employees using a cash transfer.
C. When a customer repays a loan to the bank.
Question 3: Which body issues all the banknotes and coins in
Finland?
A. The Finnish parliament.
B. Commercial banks.
C. Bank of Finland.
112
 D. None of the above. All the banknotes and coins in Europe
are issued exclusively by the European Central Bank.

Question 4: You are about to purchase your first flat and need to
take out a bank loan for the purpose. When you take out a loan,
the equivalent amount of money is created. Later, when you
repay your debt to the bank in full, a slightly larger amount of
money than originally created will cease to exist. Explain why.
A. Before you have repaid the loan in full, you have decided
to buy a slightly bigger flat for which you have had to
take a new loan.
B. Because of the interest charged by the bank, the sum of
euro that you pay back to the bank is slightly higher than
the loan received, and therefore the amount of money
destroyed bigger.

Question 5: When does the bank have a debt to you?

A. When you withdraw banknotes from an ATM.
B. When you deposit money into your own account.
C. When you pay your electricity bill with a cash transfer.

Question 6: What does central bank money consist of?

A. Banknotes and banks' deposits with the central bank.
B. The public's deposits with commercial banks.
C. The gold in the possession of the central bank.

Question 7: Which is higher overall: the amount of debts or the

amount of receivables?
A. The amount of debts is always higher.
B. The amount of receivables is slightly higher.
C. Both exist in equal amounts.

113
 WRITING

I. Translate two previous reading texts into Vietnamese.

II. Translate the following texts into English.

7 CHỨC NĂNG CHÍNH CỦA NGÂN HÀNG THƯƠNG MẠI
Các chức năng chính của ngân hàng thương mại là nhận tiền gửi
từ công chúng và cho vay vay. Tuy nhiên, bên cạnh các chức
năng này, có nhiều chức năng khác mà các ngân hàng này thực
hiện. Tất cả các chức năng này có thể được chia thành các tiêu
mục sau:
1. Nhận tiền gửi
2. Cho vay
3. Dịch vụ thấu chi
4. Chiết khấu hóa đơn hối đoái
5. Đầu tư Quỹ
6. Chức năng đại lý
7. Chức năng khác
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
114
1. Nhận tiền gửi:
Chức năng quan trọng nhất của các ngân hàng thương mại là
nhận tiền gửi từ công chúng. Các thành phần kinh tế khác nhau
trong xã hội, căn cứ theo nhu cầu và điều kiện kinh tế của họ, gửi
tiền tiết kiệm của họ vào các ngân hàng.
Ví dụ, những người có thu nhập cố định và thu nhập thấp gửi
tiền tiết kiệm của họ với số lượng nhỏ dựa trên quan điểm đảm
bảo an toàn và có thêm thu nhập. Mặt khác, thương nhân và
doanh nhân gửi tiền tiết kiệm của họ vào ngân hàng để thuận tiện
cho việc thanh toán.
Vì vậy, nắm bắt được nhu cầu và lợi ích của các thành phần kinh
tế khác nhau của xã hội, các ngân hàng xây dựng các chương
trình tiền gửi khác nhau. Nói chung, có ba loại tiền gửi như sau:
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
115
(i) Tiền gửi vãng lai:
Người gửi tiền của các khoản tiền gửi như vậy có thể rút tiền và
gửi tiền bất cứ khi nào họ muốn. Vì các ngân hàng phải luôn
luôn giữ số tiền gửi bằng các tài khoản tiền mặt, những tài khoản
này không sinh lãi hoặc lãi suất rất thấp. Các khoản tiền gửi này
được gọi là Tiền gửi theo yêu cầu do các khoản tiền gửi này có
thể được người gửi tiền yêu cầu hoặc rút tiền bất kỳ lúc nào họ
muốn.
Các tài khoản tiền gửi này rất hữu ích cho các thương gia và các
công ty kinh doanh lớn bởi vì họ phải thanh toán và nhận thanh
toán nhiều lần trong ngày.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
116
(ii) Tiền gửi cố định:
Đây là những khoản tiền gửi được gửi trong một khoảng thời
gian nhất định. Thời gian này thường không dưới một năm và do
đó, đây được gọi là tiền gửi dài hạn. Các khoản tiền gửi này
không thể rút trước khi hết thời gian quy định và do đó, các
khoản tiền gửi này cũng được gọi là tiền gửi có kỳ hạn.
Các khoản tiền gửi này thường mang lại lãi suất cao hơn vì các
ngân hàng có thể sử dụng các khoản tiền gửi này trong một thời
gian nhất định mà không sợ bị rút tiền.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

117
(iii) Tiền gửi tiết kiệm:
Với các khoản tiển gửi này, tiền lên tới một mức nhất định có thể
được gửi và rút một hoặc hai lần trong một tuần. Lãi suất tính
trên các khoản tiền gửi này rất ít. Mục tiêu chính của loại tiền gửi
này là để huy động các khoản tiết kiệm nhỏ. Những khoản tiền
gửi này thường do những người được trả lương và những người
có thu nhập cố định và ít gửi tiền.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

III. Translate the following texts into Vietnamese.

2. Giving Loans:
The second important function of commercial banks is to
advance loans to its customers. Banks charge interest from the
borrowers and this is the main source of their income.
Banks advance loans not only on the basis of the deposits of the
public rather they also advance loans on the basis of depositing
the money in the accounts of borrowers. In other words, they
create loans out of deposits and deposits out of loans. This is
called as credit creation by commercial banks.

118
Modern banks give mostly secured loans for productive
purposes. In other words, at the time of advancing loans, they
demand proper security or collateral. Generally, the value of
security or collateral is equal to the amount of loan. This is done
mainly with a view to recover the loan money by selling the
security in the event of non-refund of the loan.
At limes, banks give loan on the basis of personal security also.
Therefore, such loans are called as unsecured loan. Banks
generally give following types of loans and advances:
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
119
(i) Cash Credit:
In this type of credit scheme, banks advance loans to its
customers on the basis of bonds, inventories and other approved
securities. Under this scheme, banks enter into an agreement
with its customers to which money can be withdrawn many times
during a year. Under this set up banks open accounts of their
customers and deposit the loan money. With this type of loan,
credit is created.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
(ii) Demand loans:
These are such loans that can be recalled on demand by the
banks. The entire loan amount is paid in lump sum by crediting it
to the loan account of the borrower, and thus entire loan becomes
chargeable to interest with immediate effect.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
120
(iii) Short-term loan:
These loans may be given as personal loans, loans to finance
working capital or as priority sector advances. These are made
against some security and entire loan amount is transferred to the
loan account of the borrower.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

3. Over-Draft:
Banks advance loans to its customers up to a certain amount
through over-drafts, if there are no deposits in the current
account. For this banks demand a security from the customers
and charge very high rate of interest.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
4. Discounting of Bills of Exchange:
This is the most prevalent and important method of advancing
loans to the traders for short-term purposes. Under this system,
banks advance loans to the traders and business firms by
121
discounting their bills. In this way, businessmen get loans on the
basis of their bills of exchange before the time of their maturity.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

5. Investment of Funds:
The banks invest their surplus funds in three types of securities—
Government securities, other approved securities and other
securities. Government securities include both, central and state
governments, such as treasury bills, national savings certificate
etc.
Other securities include securities of state associated bodies like
electricity boards, housing boards, debentures of Land
Development Banks units of UTI, shares of Regional Rural
banks etc.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

122
6. Agency Functions:
Banks function in the form of agents and representatives of their
customers. Customers give their consent for performing such
functions. The important functions of these types are as follows:
(i) Banks collect cheques, drafts, bills of exchange and dividends
of the shares for their customers.
(ii) Banks make payment for their clients and at times accept the
bills of exchange: of their customers for which payment is made
at the fixed time.
(iii) Banks pay insurance premium of their customers. Besides
this, they also deposit loan installments, income-tax, interest etc.
as per directions.
(iv) Banks purchase and sell securities, shares and debentures on
behalf of their customers.
(v) Banks arrange to send money from one place to another for
the convenience of their customers.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
123
7. Miscellaneous Functions:
Besides the functions mentioned above, banks perform many
other functions of general utility which are as follows:
(i) Banks make arrangement of lockers for the safe custody of
valuable assets of their customers such as gold, silver, legal
documents etc.
(ii) Banks give reference for their customers.
(iii) Banks collect necessary and useful statistics relating to trade
and industry.
(iv) For facilitating foreign trade, banks undertake to sell and
purchase foreign exchange.
(v) Banks advise their clients relating to investment decisions as
specialist
(vi) Bank does the under-writing of shares and debentures also.
(vii) Banks issue letters of credit.
(viii) During natural calamities, banks are highly useful in
mobilizing funds and donations.
(ix) Banks provide loans for consumer durables like Car, Air-
conditioner, and Fridge etc.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
124
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

125
UNIT 10 TAXATION
UNIT 7

PREVIEW

Match the terms in column A with their definitions in

column B.
1. Income tax A. Multinational companies often set up
their head offices in low-tax countries
2. Progressive
such as Liechtenstein, Monaco, the
tax
Cayman Islands, and the Bahamas
3. Indirect taxes B. Property taxes, sales taxes, customs
duties on imports, and excise duties on
4. VAT (Value
tobacco, alcoholic drinks, petrol, etc.
added tax)
C. Bringing forward capital expenditure
5. Capital gain (on new factories, machines, and so
tax on) so that at the end of the year all
the profits have been used up
6. Capital
D. The tax on wages and salaries (and
transfer tax
business profits in the US)
7. Tax avoidance E. Making false or no declarations to tax
authorities
8. Making a tax
F. A tax liable to profits made from the
loss
sale of assets
9. Tax evasion G. A tax that is levied at a higher rate on
higher incomes
10. Tax havens
H. Reducing the amount of tax you pay to
a legal minimum
I. A tax collected at each stage of
production, excluding the already-
126
 taxed costs from previous stages
J. A tax levied on gifts and inheritances
over a certain value

READING 1

TAXATION
The primary function of taxation is, of course, to raise
revenue to finance government expenditure, but taxes can also
have other purposes. Income taxes in most countries are
progressive, and are one of the ways in which governments can
redistribute wealth. Governments can also encourage capital
investment by permitting various methods of accelerated
depreciation accounting that allow companies to deduct more of
the cost of investments from their profits, and consequently
reduce their tax bills. Indirect excise duties, for example, can be
designed to dissuade people from smoking, drinking alcohol, and
so on. Varying justifications and explanations for taxes have
been offered throughout history. Early taxes were used to support
ruling classes, raise armies and build defenses. Later
justifications have been offered across utilitarian, economic or
moral considerations. Proponents of progressive levels of
taxation on high-income earners argue that taxes encourage a
more equitable society. Higher taxes on specific products and
services, such as tobacco or gasoline, have been justified as a
deterrent on consumption. Advocates of public goods theory
argue taxes may be necessary in instances in which the private
provision of public goods is considered sub optimal, such as with
public transportation or national defense.

127
 What are different common types of taxation? As
mentioned above, taxation applies to all different types of levies.
These can include (but are not limited to):
 Income tax: Governments impose income taxes on
financial income generated by all entities within their
jurisdiction, including individuals and businesses.
 Corporate tax: This type of tax is imposed on the profit
of a business.
 Capital gains: A tax on capital gains is imposed on any
capital gains or profits made by people or businesses
from the sale of certain assets including stocks, bonds, or
real estate.
 Property tax: A property tax is asses by a local
government and paid for by the owner of a property. This
tax is calculated based on the property and land values.
 Inheritance: A type of tax levied on individuals who
inherit the estate of a deceased person.
 Sales tax: A consumption tax imposed by a government
on the sale of goods and services. This can take the form
of a value-added tax (VAT), a goods and services tax
(GST), a state or provincial sales tax or an excise tax.

The higher the tax rates, the more people are tempted to cheat,
but there is a substantial 'black' or 'underground' economy nearly
everywhere. Tax evasion applies to both the illegal nonpayment
as well as the illegal underpayment of taxes. Unlawful attempt to
minimize tax liability through fraudulent techniques to
circumvent or frustrate tax laws, such as deliberate under-
statement of taxable income or willful non-payment of due taxes.
Whereas tax evasion is an offense (punishable by both civil and

128
criminal penalties), tax avoidance is not. In Italy, for example,
self-employed people - whose income is more difficult to control
than that of company employees - account for more than half of
national income. Lots of people also have undeclared, part-time
evening jobs (some people call this 'moonlighting') with small
and medium-sized family firms, on which no one pays any tax or
national insurance.
Tax avoidance is the use of legal methods to modify an
individual's financial situation to lower the amount of income tax
owed. This is generally accomplished by claiming the
permissible deductions and credits. This practice differs from tax
evasion, which uses illegal methods, such as underreporting
income to avoid paying taxes. Most taxpayers use some form of
tax avoidance. Even though it may seem negative, it really isn't.
In fact, tax avoidance is a legal way for people or other entities to
minimize their tax liability. These can be in the form of
deductions or credits used to their advantage to lower their tax
bills.
To reduce income tax liability, some employers give highly-paid
employees lots of 'perks' (short for perquisites) instead of taxable
money, such as company cars, free health insurance, and
subsidized lunches. Legal ways of avoiding tax, such as these,
are known as loopholes in tax laws. Life insurance policies,
pension plans and other investments by which individuals can
postpone the payment of tax, are known as tax shelters.
Donations to charities that can be subtracted from the income on
which tax is calculated are described as tax-deductible.
Individuals who contribute to employer-sponsored retirement
plans with pre-tax funds are engaging in tax avoidance because
the amount of taxes paid on the funds when they are withdrawn

129
in retirement is usually less than the amount the individual would
owe. Furthermore, retirement plans allow taxpayers to defer
paying taxes until a much later date, which allows their savings
to grow at a faster rate.
Companies have a variety of ways of avoiding tax on
profits. They can bring forward capital expenditure (on new
factories, machines, and so on) so that at the end of the year all
the profits have been used up; this is known as making a tax loss.
Multinational companies often set up their head offices in
countries such as Liechtenstein, Monaco, the Cayman Islands,
and the Bahamas, where taxes are low; such countries are known
as tax havens. Criminal organizations, meanwhile, tend to pass
money through a series of companies in very complicated
transactions in order to disguise its origin from tax inspectors -
and the police; this is known as laundering money.

I. According to the text, are the following statements are

TRUE or FALSE? Give the evidences.
1. The same amount of money can only be taxed once.
2. One of the ways for governments to redistribute wealth in
society is to allow companies to deduct more of the cost
of investments from their profits
3. Progressive taxes may encourage investments or persuade
people to work extra hours.
4. To reduce the amount of tax, some bosses give highly-
paid employees subsidies or benefits.
5. Property tax is a type of tax levied on individuals who
inherit the estate of a deceased person.
6. “Tax shelters” are a common form of tax evasion.

130
 7. If you pay a lot of your income into a pension fund or a
life insurance policy you never have to pay tax on it.
8. A company that makes an unusually large profit during a
tax year might quickly decide to spend it, for example, on
a new factory or equipment.

II. Find words in the text that mean the following.

1. reducing the value of a fixed asset, by charging it against
profits
2. something which discourages an action
3. an adjective describing a tax that is proportionally higher
for people with higher money
4. A person who advocates a theory or a proposal
5. working for yourself, being your own boss
6. the process of creating appearance the large money
obtained from criminal activity comes from a legitimate
source.
7. non-financial benefits or advantages of a job
8. a way to delay the payment of tax to a later time
9. an adjective describing expenditures that be taken away
from taxable income or profits
10. a country offering very low tax rates to foreign
businesses

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

Fill in the gaps in the text using words/ phrases in the box.

income tax avoiding investments salary calculated

varies liability earnings methods profit

131
 In the 21st Century, the number of different taxes that we
are obliged to pay has reached record levels which means as a
society we are even less willing to pay them. As well as income
tax we are exposed to many other taxes including corporation
tax, capital gain tax, consumption tax and property taxes. All of
this can be too much to handle for an SME so accountants are
often used to try to minimize the tax (1) ___________ of a
company.
Certain taxes are unavoidable though. As a registered
business entity you will have to pay a consumption tax, which
would either be sales tax in the US or value added tax in the rest
of the world. Sales tax is levied against the consumer, which
means that the company has no liability other than the act of
collecting the tax which is (2) ___________ on the sale price of a
product. This tax is held by the company until a determined time
when it is paid to the appropriate governmental department. As
there is no tax due from the production of the goods, sales tax
does not affect the (3) ___________ of an organization, unlike
VAT which is levied on both the consumer and the producer.
Capital gains tax, which is basically a tax on the sale of a
non-inventory asset that has increased in value since purchase.
The difference in value is then treated as a taxable source of
income and thus has tax levied against it. The rate of taxation (4)
___________ depending on the income tax bracket of the
individual or corporation selling the asset and whether it is a
short or long-term gain. Short term gains are anything up to one
year. As any accountant dealing with capital gains tax knows, it
is advisable to wait for over 12 months after the point of
purchase before selling the asset so that long-term capital gains

132
tax is due at a lower rate. Tax due on both short and long-term
gains can be deferred by a variety of (5) ___________.
Corporation tax is the taxation method for taxing the
income of a business entity classified as a corporation; the tax
rate is dependent on the taxable (6) ___________ of that
corporation. As with income tax, the tax due may be reduced
with the aid of tax credits.
Tax credits are offered to businesses for a variety of
reasons with the most common of these being, encouragement to
invest in alternative energies, encouragement to employ certain
individuals, disaster relief or on earnings outside the US. These
credits are then offset against the tax liability reducing the tax
due.
Even individuals are confronted by an often confusing
array of taxes. The most common of these taxes is (7) ________,
which taxes our earnings. People are often unaware how much
income tax they pay as it is dealt with by the employer who,
while calculating the wages for an employee also calculates the
income tax due and deducts this from the pay packet.
The PAYE system in England is the system of paying
wages and appropriate taxes and insurances on the cost of
employees. This system allows employers to withhold any
deductions due on an employee’s (8) ___________, while
calculating the correct payments for statutory sick and maternity
pay.
Tax affects everyone from an employee to the CEO of the
largest corporation but if you are in the position where you
employee a good accountant, you can actually lower your
liability by exploiting loopholes in the anti-avoidance
registration.

133
 A common method of (9) ___________ income tax is for
an employee in the higher tax bracket to channel their wages
through a shell company, thus changing the type of taxation from
income to corporation. Then drawing the maximum salary while
remaining on the lower tax bracket, after a certain number of
years the shell company is then liquidated.
Accountants can also advise on the best type of (10)
___________ so as to receive tax credits from the government.
There is an old expression: “Only two things in life are certain,
death and taxes.” Well, we can’t do anything about the former,
but a good accountant can help with the latter.

READING 2

Read the following text and choose the best answer A, B, C or

D
A tax is an amount of money that governments require to
be paid to support the government. Taxes have been around for a
long time. In fact, there is a very old saying that in this world
nothing is certain but death and taxes. Many centuries ago people
were already paying taxes. Six-thousand-year-old clay tablets
were found, in what is now modern day Iraq, containing the
earliest known tax records.
The early Greeks paid taxes like those that are still
enforced today, taxes on what people owned and sold. Roman
taxes are mentioned in the Bible, and the fall of the Roman
Empire is said to be in part due to the huge burden of taxes
Romans imposed on the people. In ancient times, the Chinese
civilization had a form of taxation that required that one-tenth of

134
each person's land and what was earned from it belonged to the
government.
Where there were taxes there always seemed to be the
question of whether the taxes were fair. During the Middle Ages,
there were many taxes. Every adult had to pay a poll tax, a tax
just for being there, and existing as a person. There were
also property taxes, even if one did not own property, and part
of every person's work or what they grew must go to the Church.
Nobles revolted against King John in 1215 because he
asked for payment of new taxes, made current taxes greater, and
tried to tax people to pay for a war effort. King John's leadership
was not trusted by the people who felt they had no obligation to
pay to support this war.
During the Colonial Period settlers went to new lands and
these lands became new sources of taxes. Taxes were especially
needed to pay for wars. In 1779, the first income tax, a tax on
employment income, was used by Great Britain to pay for wars
against Napoleon.
The American Revolution was in part caused by what the
colonists in America considered unfair taxation. The colonists
had to pay taxes to England but were not represented in the
English government. Their battle cry was, 'No taxation without
representation.'
When the United States was first established there were
few taxes. There was not much need as times were peaceful and
there was little need to pay for an army. The government was
also small and had no great need for extra money.
However, as the country grew there was a greater need
for taxes. Citizens who earned a certain amount of money were
taxed to pay for the Civil War. This was the first federal income

135
tax. It lasted until the 1870's when it was withdrawn, but
new federal taxes, taxes imposed by the national government,
went into effect again in 1894.
Today some of our taxes go for protecting our country,
helping those in need, keeping us healthy, paying off debts our
country owes, and taking care of those who have fought in our
wars. Without taxes, governments could not exist. But as history
shows us, it is always important for each one of us to make sure
that taxes are just, fair and necessary.
1. Which of the following defines taxes?
A. Extra costs of things
B. Part of what people owe
C. Money people don't want to pay
D. Money that goes to support the government
2. How long have taxes been in existence?
A. 200 years
B. Six thousand years
C. 500 years
D. Since the Middle Ages
3. Which of the following tells why the nobles revolted
against King John?
A. He took their land
B. He made them pay taxes they hated
C. He didn't give them enough freedom
D. He wouldn't fight in any wars
4. Which of the following was the battle cry of the
American Revolution?
A. Down with Britain
B. No tea for me
C. No taxation without representation
136
 D. One if by land, two if by sea
5. Which of the following was the first war paid for by taxes
in the United States?
A. The Spanish-American War
B. The Civil War
C. The Revolutionary War
D. The French and Indian War
6. Which of the following years was the first income tax
imposed by Great Britain?
A. 1215
B. 1870
C. 1750
D. 1776

WRITING

I. Write about the following topics:

1. What are different functions of taxation?
2. What is tax evasion? How do individuals and firms evade
taxes?
3. What is tax avoidance? How do individuals and firms
avoid paying taxes?

II. Translate the following text into Vietnamese.

Today we will examine the different types of tax which
are in effect today. There are many kinds of tax, each with a
different mechanism of when and how the tax is due. In business,
it is vital to understand when and how each of these taxes are
calculated.

137
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Let's start with sales tax. In the US, this tax is often is often used
as a method for states to generate revenue. Purchases at
the retail level (not wholesale) are subject to sales tax, which is a
percentage of the sales price. Sales tax is not standardized, as
individual states can set the applicable rates - these rates
generally vary depending on the product. Sales tax is an indirect
tax, as the taxes are collected by the merchant who then, at the
appropriate time pays the tax to the appropriate organ. Sales tax,
is also referred to as consumption tax.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Moving on to capital gains tax. Capital gains tax, is the tax

which is levied against any profits from the sale of an asset
138
which was sold for more than it was bought. This could be, for
example, profit made when selling your house, a car, or any
stocks. This is a per annum tax which means that loss from a sale
later in the year can be offset against the profit from an earlier
sale. The great thing about this tax is it only taxes people with
enough excess income to actually invest. In other words, it's a tax
the poor don't have to think about.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Like most taxes, property tax is self-explanatory. It's a tax based

on the value of an asset. The most common occurrence of this is
tax on your home, but it could also include your car and anything
else the government wishes to tax. Interestingly, the focus of
property tax is on private assets in public view, such as your
home or car. But if you lend a work of art to a museum it can
now be subject to the property tax, as this piece of art in now in
the public eye. Similar to the capital gains tax, property tax
139
generally generates revenue from people who earn enough to
have assets worth taxing.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Income tax, needs no introduction. Everyone of us is aware of

this tax and aware of how much it costs. It taxes the financial
income of individuals and companies alike. Most countries
operate a bracketed income tax system, so a person making
$25,000 a year will pay a lower percentage of their income than
someone making $80,000 a year. People are taxed on gross
income, while companies generally are taxed on net income.
____________________________________________________
____________________________________________________
____________________________________________________
140
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Value Added Tax is another consumption tax, similar to sales tax

in the US but with a key difference. It's more complicated as it's
applicable at every point in the supply chain. Generally, each
step in the chain of a product being converted from raw
materials to something worth buying, has value added to it. So in
the gas industry you might have 3 steps. The first group pumps
oil and sells it to the refiner - tax. The refiner converts the oil to
gasoline and sells it to gas station - tax. You pump the gas and
pay the station - tax. This system is also considered the most fair,
since everyone gets taxed based on the contribution they make to
the economy.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
141
You will probably be familiar with most of the taxes talked about
today, but there are some other terms in taxation that you have
probably not heard about or don't understand either what they are
or why they exist.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Regressive tax is a tax that is less strenuous on the rich than it is

on the poor. Sales taxes like that used in the US and the VAT in
Europe are regressive taxes as everyone will have to pay an
amount of this tax, but it will be easier for a richer person to do
so. Income tax is the opposite in that it is a progressive tax; the
more you earn, the larger your tax burden is.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

II. Translate the following texts into English.

Thuế được định nghĩa là các khoản thanh toán bắt buộc
của những người đóng góp vào ngân sách và cho các quỹ ngoài

142
ngân sách theo số tiền được pháp luật xác định và trong thời hạn
quy định.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Các chức năng của thuế biểu hiện mục đích xã hội về
phân phối dựa trên giá trị và phân phối lại thu nhập. Mỗi chức
năng được thực hiện bởi các công cụ thuế là một biểu hiện của
một tính năng nội bộ hoặc một chỉ số kinh tế.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Căn cứ theo các hoạt động của chính phủ, thuế có thể có
một số chức năng như sau:
a. Tăng nguồn thu cho chính phủ
Chính phủ có thể tăng nguồn thu từ việc cung cấp hàng hóa
và dịch vụ. Những mặt hàng này thuộc hai loại - hàng hóa
công và hàng hóa công ích. Hàng hóa công, chẳng hạn như
quốc phòng và an ninh xã hội được tiêu dùng chung và mọi
công dân đều được hưởng nếu anh ta muốn. Những hàng hóa
này phải do chính phủ cung cấp. Các hàng hóa công ích, như
giáo dục và chăm sóc y tế, có thể do tổ chức tư nhân cung cấp
nhưng thường không đạt mức thỏa mãn nhu cầu của xã hội
143
và do đó các chính phủ có thể trợ giá sản xuất một số hàng
hóa nhất định. Điều này có thể được thực hiện vì nhiều lý do
nhưng chủ yếu là do thị trường có thể không phản ánh chi
phí thực tế và lợi ích của việc sản xuất hàng hóa. Ví dụ, công
chúng có thể được trợ cấp vì thị trường không tính đến tất cả
các chi phí và lợi ích của hệ thống giao thông công cộng.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

b. Ổn định kinh tế
Thuế được áp đặt để duy trì sự ổn định kinh tế trong nước.
Trong thời kỳ lạm phát, chính phủ áp đặt nhiều thuế hơn để
ngăn cản các chi phí không cần thiết của các cá nhân. Trong
thời kỳ giảm phát, thuế được giảm để cho phép các cá nhân
144
chi nhiều tiền hơn. Bằng cách này, việc tăng hoặc giảm giúp
kiểm soát những biến động lớn về giá cả và duy trì sự ổn
định kinh tế.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

c. Phân phối lại thu nhập hợp lý

Một chức năng chính của thuế là mang lại phân phối lại thu
nhập. Thứ nhất, nguồn thu từ thuế mang lại cho các nhóm người
có thu nhập thấp hơn những lợi ích bằng tiền và hiện vật. Thứ
hai, các nhóm người có thu nhập cao hơn, thông qua một hệ
thống thuế lũy tiến, nộp một phần thu nhập cao hơn cho thuế so
với các thành viên kém may mắn của xã hội.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
145
d. Trả lãi cho nợ quốc gia
Chính phủ đánh thuế để trả lãi cho nợ quốc gia.
e. Phân bổ nguồn lực tối ưu
Thuế cũng được áp dụng để phân bổ nguồn lực của quốc gia để
sử dụng tối ưu các tài nguyên này. Số tiền thu được của Chính
phủ từ thuế được chi cho các dự án mang lại hiệu quả cao hơn.
Điều đó có nghĩa là các nguồn lực được phân bổ để đạt được sản
lượng tối đa có thể trong các trường hợp nhất định.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

f. Chính sách bảo hộ

Thuế cũng được áp dụng để bảo hộ những hàng hóa được sản
xuất trong nước. Do đó chính phủ áp đặt thuế nặng vào việc nhập
khẩu các mặt hàng đó từ các nước khác. Các loại thuế này xui
khiến các cá nhân mua sản phẩm địa phương.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
146
g. Phúc lợi xã hội
Chính phủ áp đặt thuế đối với việc sản xuất những mặt hàng có
hại cho sức khỏe con người, ví dụ: thuế tiêu thụ đặc biệt đối với
rượu vang, thuốc lá, v.v.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

147
 ACCOUNTING AND FINANCIAL
UNIT 8
STATEMENTS

PREVIEW
Match the words or phrases from a - j with their definitions
from 1 – 10.
a. The income statement f. Beginning merchandise
b. The balance sheet inventory
c. Drawings made by the g. Gross profit
owner h. Statement of financial position
d. Financial statements i. The accounting period
e. The cost of sales j. Highly skilled employees

1. would not have any effect on the income statement.

2. refer to the report on the results of operations and
changes in financial position.
3. provides information about the results of the business
operation.
4. provides information about the resources acquired by the
firm, including where the resources come from.
5. is the excess net sales over cost of goods sold for a
period.
6. refers to price paid for the goods sold
7. is the cost of unsold merchandise at the beginning of the
period
8. is another term for balance sheet
9. is not reported in a company’s financial statements
10. may best be described as the time span covered by the
income statement.
148
 READING 1

ACCOUNTING PROCESS AND ACCOUNTING BOOKS

Accounting is the process of identifying, measuring,
recording, classifying, summarizing, analyzing, interpreting and
communicating the financial transactions and events. Accounting
helps in keeping systematic records to ascertain financial
performance and financial position of an entity and to
communicate the relevant financial information to interested user
groups. Transactions and events recorded by suitable account
headings are analyzed in term of debit and credit; and thus, assets
become equal to equity and liabilities. Accounts are classified as
personal, real and nominal types. Transactions and events are
first journalized, then posted to suitable ledgers accounts and all
accounts are balanced at the end of year. Generally, balances of
the nominal accounts are transferred to profit and loss account
for determination of profit or loss and balance of personal and
real accounts are carried to balance sheet.
The process of accounting, depicting how information
flows from the source documents up to the stage where final
accounts are prepared, can be shown as:

Source Documents
d Represent all documents in business which
contains financial records and act as evidence
of the transactions which have taken place.
Book of Original
Entry
These are books which are used in recording
the transactions for the first time. The books

149
b
 are maintained for memorandum purpose
only and will not form part of the double
entry system. Examples include: Purchase
day book, Cash book, Sales day book and
purchases return day book.
Ledger Accounts
These form part of double entry system and
used to record the transactions for the period.
These are accounts where information
relating to a particular asset, liability, capital,
income and expenses are recorded.

Trial Balance
Contains the totals from various ledger
accounts and act as a preliminary check on
accounts before producing final accounts.

Final Accounts
Financial Statements are produced to show
the financial performance and financial
position of a business entity.

BASIC ACCOUNTING PROCEDURES – JOURNAL

ENTRIES
1. Double entry system
Double entry system of book-keeping has emerged in the process
of evolution of various accounting techniques. It is the only
scientific system of accounting. According to it, every
transaction has two-fold aspects – debit and credit and both the

150
aspects are to be recorded in the books of accounts. For example,
if a business acquires something then either it must have been
given by someone or it must have been acquired by giving up
something. On purchase of furniture either the cash balance will
be reduced or a liability to the supplier will arise. This has been
made clear already, the Double Entry System is so named since it
records both the aspects. We may define the Double Entry
System as the system which recognizes and records both the
aspects of transactions. This system has proved to be systematic
and has been found of great use for recording the financial affairs
for all institutions requiring use of money.
2. Advantages of Double Entry System
This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting
work can be established, through the device of the trial
balance.
(ii) The profit earned of loss suffered during a period can be
ascertained together with details.
(iii) The financial position of the firm or the institution
concerned can be ascertained at the end of each period,
through preparation of the balance sheet.
(iv) The system permits accounts to be kept in as much details
as necessary and, therefore affords significant
information for the purposes of control etc.
(v) Result of one year may be compared with those of
previous years and reasons for the change may be
ascertained.
It is because of these advantages that the system has been used
extensively in all countries.

151
3. Accounts
Accounts are financial records of an organization that register all
financial transactions, and must be kept at its principal office of
business. The purpose of these records is to enable anyone to
appraise the organization's current financial position with
reasonable accuracy. Firms present their annual accounts in two
main parts: the balance sheet, and the income statement (profit
and loss account). The annual accounts of a registered or
incorporated firm are required by law to disclose a certain
amount of information, and to be certified by an external auditor
that they present a 'true and fair view' of the firm's financial
affairs.
This is an example for illustration:
A person starts his business with, say, $10,000. Transactions
entered into by the firm will alter the cash balance in two ways,
one will increase the cash balance and other will reduce it.
Payment for goods purchased, for salaries and rent, etc., will
reduce it; sales of goods for cash and collection from customers
will increase it.
We can change the cash balance with every transaction, but this
will be cumbersome. Instead it would be better if all the
transactions that lead to an increase are recorded in one column
and those that reduce the cash balance in another column; then
the net result can be ascertained. If we add all increases to the
opening balance of cash and then deduct the total of all
decreases, we shall know the closing balance. In this manner,
significant information will be available relating to cash.
The two columns which we referred above are put usually in the
form of an account, called the “T” form. This is illustrated below
by taking imaginary figures:
152
 CASH
Increase Decrease
(Receipt) (Payment)

$ $
Opening 10,000 1,000
Balance
2,500 300
2,000 200
50 500
1,350
400 Total 2,000
New or Closing 14,300
Balance
16,300 16,300

What we have done is to put the increase of cash on the left -

hand side and the decrease on the right - hand side; the closing
balance has been ascertained by deducting the total payments,
$2,000 from the total of the left – hand side. Such a treatment of
receipts and payment of cash is very convenient.
The proper form of an account is as follows:

ACCOUNT
Dr.
Cr.
Date Particulars Ref. Amount Date Particulars Ref. Amount
$ $

153
The columns are self-explanatory except that the column for
reference (Ref.) is meant to indicate the sources where
information about the entry is available.

COMPREHENSION QUESTIONS

1. How is accounting defined?

2. What is difference between book-keeping and
accounting?
3. In daily operations, which book are transactions of a
business firstly recorded in?
4. For what purpose is this book maintained?
5. What does “double entry bookkeeping” mean?
6. Which book forms part of double entry bookkeeping?
7. What are advantages of double entry system?
8. What are accounts?

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

Exercise 1: Choose the best answers.

1. Which one of the following is not a short-term asset?
A. Cash reserves of the organization
B. Machinery
C. Funds collected from debtors
D. Inventories
2. Which of the following equations cannot be derived from
the basic accounting equation?
A. Assets – Liabilities = Owners’ Equity
B. Liabilities = Assets – Owner’s Equity
C. Owners’ Equity = Liabilities – Assets
D. Assets – Owners’ Equity = Liabilities
154
3. Which of the following transactions causes ‘total assets to
increase by $10,000’?
A. Purchasing an automobile for $10,000 cash.
B. Purchasing $10,000 of office furniture on account.
C. Collecting a $10,000 account receivable
D. Paying a $10,000 liability.
4. If assets are $4,000 ……………….
A. Stockholders’ equity must be $4,000.
B. Liabilities must be $4,000.
C. Stockholders’ equity plus liabilities must be $4,000.
D. None of the above.
5. In the balance sheet equation, an increase in an asset……
A. May be accompanied by an increase in a liability.
B. May be accompanied by a decrease in an asset.
C. May be accompanied by an increase in revenues.
D. All of the above.
6. Purchased office supplies for inventory on account.……..
A. Increase in one asset, decrease in another asset.
B. Increase in an asset, increase in a liability.
C. Increase in an asset, increase in stockholder’s equity.
D. Decrease in an asset, decrease in a liability.
7. Paid rent for October in September………………………
A. Increase in one asset, decrease in another asset.
B. Increase in an asset, increase in a liability.
C. Increase in an asset, increase in stockholder’s equity.
D. Decrease in an asset, decrease in a liability.
8. Earned service revenue, receiving cash………………….
A. Increase in one asset, decrease in another asset.
B. Increase in an asset, increase in a liability.
C. Increase in an asset, increase in stockholder’s equity.

155
 D. Decrease in an asset, decrease in a liability.
9. Business obligation
A. Asset
B. Liability
C. Capital
D. None of the above
10. Which of the following is not a current liability?
A. Unearned rent
B. Notes payable
C. Mortgage payable
D. None of the above

Exercise 2: Fill in the gaps in the following passage with

suitable words.
FOUR PHASES OF ACCOUNTING
Based on the definition, there are four phases of accounting.
(1) __________: This is technically called bookkeeping. Some
people confuse bookkeeping and accounting as one and the (2)
__________. However, bookkeeping is only a part of accounting
– the recording phase. In this phase, business (3) __________ are
recorded systematically and chronologically in the proper
accounting books. There are two kinds of bookkeeping: the
single-entry bookkeeping and the (4) ____________ entry
bookkeeping. Single entry bookkeeping does not show the two-
fold effects of business transactions. It shows only the debit or
the credit of each transaction. The double entry bookkeeping,
however, reflects the two-fold effects of business transactions. It
has a (5) __________ and a credit.
(6) __________: In this phase, items are sorted and grouped.
Similar items are classified under the same name. They may be

156
classified as asset accounts, liability accounts, capital accounts,
revenue accounts and (7) ________ accounts. This classification
is useful to the needs of management.
(8) __________: After each accounting period, data recorded are
summarized through financial statements. These reports are
submitted to the management at the (9) __________ of each
accounting period or as the need arises.
Interpreting. Usually, due to the technicality of accounting
reports, the accountant’s interpretation on the financial statement
is needed. In this case, (10) __________ reports are submitted
together with the financial statements.

READING 2

FINANCIAL STATEMENTS
There are four main financial statements. They are: (1)
balance sheets; (2) income statements; (3) cash flow statements;
and (4) statements of shareholders’ equity. Balance sheets show
what a company owns and what it owes at a fixed point in time.
Income statements show how much money a company made and
spent over a period of time. Cash flow statements show the
exchange of money between a company and the outside world
also over a period of time. The fourth financial statement, called
a “statement of shareholders’ equity,” shows changes in the
interests of the company’s shareholders over time.
Let’s look at each of the first three financial statements in
more detail.
Balance Sheets
A balance sheet provides detailed information about a
company’s assets, liabilities and shareholders’ equity.
157
 Assets are things that a company owns that have value.
This typically means they can either be sold or used by the
company to make products or provide services that can be sold.
Assets include physical property, such as plants, trucks,
equipment and inventory. It also includes things that can’t be
touched but nevertheless exist and have value, such as
trademarks and patents. And cash itself is an asset. So are
investments a company makes.
Liabilities are amounts of money that a company owes to others.
This can include all kinds of obligations, like money borrowed
from a bank to launch a new product, rent for use of a building,
money owed to suppliers for materials, payroll a company owes
to its employees, environmental cleanup costs, or taxes owed to
the government. Liabilities also include obligations to provide
goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth.
It’s the money that would be left if a company sold all of its
assets and paid off all of its liabilities. This leftover money
belongs to the shareholders, or the owners, of the company.
The following formula summarizes what a balance
sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets have to equal, or "balance," the sum of its
liabilities and shareholders' equity.
A company’s balance sheet is set up like the basic
accounting equation shown above. On the left side of the balance
sheet, companies list their assets. On the right side, they list their
liabilities and shareholders’ equity. Sometimes balance sheets

158
show assets at the top, followed by liabilities, with shareholders’
equity at the bottom.
Assets are generally listed based on how quickly they
will be converted into cash. Current assets are things a company
expects to convert to cash within one year. A good example is
inventory. Most companies expect to sell their inventory for cash
within one year. Noncurrent assets are things a company does not
expect to convert to cash within one year or that would take
longer than one year to sell. Noncurrent assets include fixed
assets. Fixed assets are those assets used to operate the business
but that are not available for sale, such as trucks, office furniture
and other property.
Liabilities are generally listed based on their due dates.
Liabilities are said to be either current or long-term. Current
liabilities are obligations a company expects to pay off within the
year. Long-term liabilities are obligations due more than one year
away.
Shareholders’ equity is the amount owners invested in the
company’s stock plus or minus the company’s earnings or losses
since inception. Sometimes companies distribute earnings,
instead of retaining them. These distributions are called
dividends.
A balance sheet shows a snapshot of a company’s assets,
liabilities and shareholders’ equity at the end of the reporting
period. It does not show the flows into and out of the accounts
during the period.

Income Statements
An income statement is a report that shows how much
revenue a company earned over a specific time period (usually
for a year or some portion of a year). An income statement also
159
shows the costs and expenses associated with earning that
revenue. The literal “bottom line” of the statement usually shows
the company’s net earnings or losses. This tells you how much
the company earned or lost over the period.
Income statements also report earnings per share (or
“EPS”). This calculation tells you how much money
shareholders would receive if the company decided to distribute
all of the net earnings for the period. (Companies almost never
distribute all of their earnings. Usually they reinvest them in the
business.)
To understand how income statements are set up, think of
them as a set of stairs. You start at the top with the total amount
of sales made during the accounting period. Then you go down,
one step at a time. At each step, you make a deduction for certain
costs or other operating expenses associated with earning the
revenue. At the bottom of the stairs, after deducting all of the
expenses, you learn how much the company actually earned or
lost during the accounting period. People often call this “the
bottom line.”
At the top of the income statement is the total amount of
money brought in from sales of products or services. This top
line is often referred to as gross revenues or sales. It’s called
“gross” because expenses have not been deducted from it yet. So
the number is “gross” or unrefined.
The next line is money the company doesn’t expect to
collect on certain sales. This could be due, for example, to sales
discounts or merchandise returns.
When you subtract the returns and allowances from the
gross revenues, you arrive at the company’s net revenues. It’s
called “net” because, if you can imagine a net, these revenues are

160
left in the net after the deductions for returns and allowances
have come out.
Moving down the stairs from the net revenue line, there are
several lines that represent various kinds of operating expenses.
Although these lines can be reported in various orders, the next
line after net revenues typically shows the costs of the sales. This
number tells you the amount of money the company spent to
produce the goods or services it sold during the accounting
period.
The next line subtracts the costs of sales from the net
revenues to arrive at a subtotal called “gross profit” or sometimes
“gross margin.” It’s considered “gross” because there are certain
expenses that haven’t been deducted from it yet.
The next section deals with operating expenses. These are
expenses that go toward supporting a company’s operations for a
given period – for example, salaries of administrative personnel
and costs of researching new products. Marketing expenses are
another example. Operating expenses are different from “costs of
sales,” which were deducted above, because operating expenses
cannot be linked directly to the production of the products or
services being sold.
Depreciation is also deducted from gross profit.
Depreciation takes into account the wear and tear on some assets,
such as machinery, tools and furniture, which are used over the
long term. Companies spread the cost of these assets over the
periods they are used. This process of spreading these costs is
called depreciation or amortization. The “charge” for using these
assets during the period is a fraction of the original cost of the
assets.

161
 After all operating expenses are deducted from gross
profit, you arrive at operating profit before interest and income
tax expenses. This is often called “income from operations.”
Next companies must account for interest income and
interest expense. Interest income is the money companies make
from keeping their cash in interest-bearing savings accounts,
money market funds and the like. On the other hand, interest
expense is the money companies paid in interest for money they
borrow. Some income statements show interest income and
interest expense separately. Some income statements combine
the two numbers. The interest income and expense are then
added or subtracted from the operating profits to arrive at
operating profit before income tax.
Finally, income tax is deducted and you arrive at the
bottom line: net profit or net losses. (Net profit is also called net
income or net earnings.) This tells you how much the company
actually earned or lost during the accounting period. Did the
company make a profit or did it lose money?
Earnings Per Share or EPS
Most income statements include a calculation of earnings
per share or EPS. This calculation tells you how much money
shareholders would receive for each share of stock they own if
the company distributed all of its net income for the period.
To calculate EPS, you take the total net income and divide it by
the number of outstanding shares of the company.

Cash Flow Statements

Cash flow statements report a company’s inflows and
outflows of cash. This is important because a company needs to
have enough cash on hand to pay its expenses and purchase
assets. While an income statement can tell you whether a
162
company made a profit, a cash flow statement can tell you
whether the company generated cash.
A cash flow statement shows changes over time rather
than absolute dollar amounts at a point in time. It uses and
reorders the information from a company’s balance sheet and
income statement.
The bottom line of the cash flow statement shows the net
increase or decrease in cash for the period. Generally, cash flow
statements are divided into three main parts. Each part reviews
the cash flow from one of three types of activities: (1) operating
activities; (2) investing activities; and (3) financing activities.
Operating Activities
The first part of a cash flow statement analyzes a
company’s cash flow from net income or losses. For most
companies, this section of the cash flow statement reconciles the
net income (as shown on the income statement) to the actual cash
the company received from or used in its operating activities. To
do this, it adjusts net income for any non-cash items (such as
adding back depreciation expenses) and adjusts for any cash that
was used or provided by other operating assets and liabilities.
Investing Activities
The second part of a cash flow statement shows the cash
flow from all investing activities, which generally include
purchases or sales of long-term assets, such as property, plant
and equipment, as well as investment securities. If a company
buys a piece of machinery, the cash flow statement would reflect
this activity as a cash outflow from investing activities because it
used cash. If the company decided to sell off some investments
from an investment portfolio, the proceeds from the sales would

163
show up as a cash inflow from investing activities because it
provided cash.
Financing Activities
The third part of a cash flow statement shows the cash
flow from all financing activities. Typical sources of cash flow
include cash raised by selling stocks and bonds or borrowing
from banks. Likewise, paying back a bank loan would show up
as a use of cash flow.

Exercise 1: Choose the best answers A, B, C or D.

1. Which of the following statements is correct?
A. Beginning retained earnings + net income – dividends
= ending retained earnings
B. Beginning retained earnings - net income + dividends
= ending retained earnings
C. Beginning retained earnings + net income + dividends
= ending retained earnings
D. Beginning retained earnings - net income – dividends
= ending retained earnings
2. The declaration and payment of a cash dividend is
reported in the
A. Income statement as an expense
B. Statement of cash flows as a source of cash
C. Statement of retained earnings as a subtraction from
beginning retained earnings
D. None of the above
3. A business that prepares quarterly financial statements….
A. Must close its accounts quarterly
B. Must adjust its accounts at least quarterly
C. May not issue annual financial statements
D. Must obtain special permission from the IRS
164
4. Why is cash flow more important than accounting
income?
A. Cash can be used to buy finished goods from
suppliers
B. Cash can be used to buy raw materials and make into
finished goods
C. Accounting methods recognize income at times other
than when cash is actually received or spent.
D. Cash has more liquidity
5. What does cash flow from operation include?
A. Depreciation
B. Net income
C. Increase in current asset
D. Decrease in liabilities
6. The change statements explain changes in a company’s
position from one date to another. The change statements
include …………………
A. Income statement, statement of cash flows, and
retained earnings statement.
B. Balance sheet, earnings statement, and statement of
cash flows.
C. Income statement, position statement, and statement
of cash flows.
D. Income statement, balance sheet, and retained
earnings statement.
7. Preparation of financial statements will be made easier
with the aid of a…………..
A. Trial balance
B. Worksheet
C. Ledger

165
 D. None of the above
8. The cost of merchandise bought for the period is……….
A. Sales
B. Merchandise
C. Purchase
D. None of the a bove
9. The balance sheet is a statement showing……………….
A. The rights and things of value owned by the business
B. The amounts owed by the business
C. The financial interest of the owner in the assets of the
business
D. All of the above
10. The difference between the sales and the cost of the sales
is………………..
A. Net sales C. Net profit
B. Net purchases D. None of the above

Exercise 2: Fill in the gaps in the following passage with

suitable words.
RELATIONSHIPS BETWEEN FINANCIAL
STATEMENTS
In a technical sense, the income statement is subordinate to the
(1) __________ sheet. This is because it shows in some detail the
items that collectively account for most of the period’s net
change in only one balance sheet item, (2) __________ earnings.
Nevertheless, the information on the income statement is
regarded by many to be more important than (3) __________ on
the balance sheet. This is because the income statement reports
the (4) __________ of operations and indicates reasons for the
entity’s (5) __________ (or lack thereof). The importance of the

166
income statement is illustrated by this fact: In situations where
accountants in recording an event must choose between a
procedure that distorts the balance sheet or one that distorts the
income statement, they usually choose not to (6) __________ the
income statement.
The balance sheet and income statement are said to articulate
because there is a definite (7) __________ between them. More
specifically, the amount of net income reported on the income
statement, together with the amount of dividends, explains the
change in retained earnings between the two balance sheets
prepared as of the beginning and the end of the accounting
period.
Although many consider the balance sheet to be the most
fundamental financial statement, the income statement is also
very important because it indicates the profitability of the
business. As you will learn, if a company repeatedly shows a net
(8) __________, when expenses exceed revenues, the company
will not be able to survive unless owners or creditors are willing
to provide more resources.
The retained earnings statement explains the changes that
occurred in the retained earnings portion of stockholder’s (9)
__________ during a period of time due to business operations
(net income) and payments made to owners in the form of
dividends which are returns to stockholders for their investment
in the business. Retained earnings are only shown in statements
prepared by corporations.
The statement of cash flows classifies the three major types of
business activities – investing, financing, and (10) __________ –
and shows where the cash came from during a period, how the
cash was used, and the resulting cash balance.

167
 FINANCIAL ANALYSIS
UNIT 9

PREVIEW
PREVIEW
Discussion:
1. Who do you think need financial analysis?
2. For what purposes do they need financial analysis?
3. What are the sources of data needed for financial
analysis?

READING 1

1. Financial analysis
Financial analysis is the selection, evaluation, and interpretation
of financial data, along with other pertinent information, to assist
in investment and financial decision-making. Financial analysis
may be used internally to evaluate issues such as employee
performance, the efficiency of operations, and credit policies,
and externally to evaluate potential investments and the credit-
worthiness of borrowers, among other things.
The analyst draws the financial data needed in financial analysis
from many sources. The primary source is the data provided by
the company itself in its annual reports and required disclosures.
The annual report comprises the income statement, the balance
sheet, and the statement of cash flows, as well as footnotes to
these statements. Certain business are required by securities laws
to disclose additional information.
Besides information that companies are required to disclose
through financial statements, other information is readily

168
available for financial analysis. For example, information such as
the market prices of securities of publicly-traded corporations
can be found in the financial press and the electronic media
daily. Similarly, information on stock price indices for industries
and for the market as a whole is available in the financial press.
Another source of information is economic data, such as the
Gross Domestic Product and Consumer Price Index, which may
be useful in assessing the recent performance or future prospects
of a company or industry. Suppose you are evaluating a company
that owns a chain of retail outlets. What information do you need
to judge the company’s performance and financial condition?
You need financial data, but it does not tell the whole story. You
also need information on consumer spending, producer prices,
consumer prices, and the competition. This economic data that is
readily available from government and private sources.
Besides financial statement data, market data, and economic
data, in financial analysis you also need to examine events that
may help explain the company’s present condition and may have
a bearing on its future prospects. For example, did the company
recently incur some extraordinary losses? Is the company
developing a new product? Or acquiring another company? Is the
company regulated? Current events can provide information that
may be incorporated in financial analysis.
The financial analyst must select the pertinent information,
analyze it, and interpret the analysis, enabling judgments on the
current and future financial condition and operating performance
of the company.
2. Classification of financial ratios
In financial analysis, a broad category of ratios are used. A ratio
is a mathematical relation between one quantity and another.
169
Suppose you have 200 apples and 100 oranges. The ratio of
apples to oranges is 200/100, which we can more conveniently
express as 2:1 or 2. A financial ratio is a comparison between
one bit of financial information and another. Consider the ratio
of current assets to current liabilities, which we refer to as the
current ratio. This ratio is a comparison between assets that can
be readily turned into cash – current assets – and the obligations
that are due in the near future – current liabilities. A current ratio
of 2:1 or 2 means that we have twice as much in current assets as
we need to satisfy obligations due in the near future.
Ratios can be classified according to the way they are
constructed and their general characteristics. By construction,
ratios can be classified as a coverage ratio, a return ratio, a
turnover ratio, or a component percentage.
 A coverage ratio is a measure of a company’s ability to
satisfy particular obligations.
 A return ratio is a measure of the net benefit, relative to
the resources expended.
 A turnover ratio is a measure of the gross benefit, relative
to the resources expended.
 A company percentage is the ratio of a component of an
item to the item.
When we assess a company’s operating performance, we want to
know if it is applying its assets in an efficient and profitable
manner. When we assess a company’s financial condition, we
want to know if it is able to meet its financial obligations.
There are six aspects of operating performance and financial
condition we can evaluate from financial ratios:
 A liquidity ratio provides information on a company’s
ability to meet its short-term, immediate obligations

170
  A profitability ratio provides information on the amount
of income from each dollar of sales.
 An activity ratio relates information on a company’s
ability to manage its resources (that is, its assets)
efficiently.
 A financial leverage ratio provides information on the
degree of a company’s fixed financing obligations and its
ability to satisfy these financing obligations.
 A shareholder ratio describes the company’s financial
condition in terms of amounts per share of stock.
 A return on investment ratio provides information on the
amount of profit, relative to the assets employed to
produce that profit.


COMPREHENSION QUESTIONS

1. What is financial analysis?

2. For what purpose is financial analysis used?
3. What are sources of data available for financial analysis?
4. What is a ratio?
5. What is a financial ratio?
6. By construction, what can financial ratios be classified
into?
7. According to general characteristics, what can financial
ratios be classified into?

171
 VOCABULARY EXERCISES
Task 1. Match the words in the box with their definitions
from 1 to 15.
GDP Market price Current assets

Data Profitability Annual reports

Liquidity Leverage Credit policy

Acquire Price index Current liabilities

Prospects Credit- Publicly-traded

worthiness corporations

1. Debts that must be paid within a year or during the

current business cycle
2. The chances of being sucessful in the future
3. A financial report that a company must by law present
each year to its shareholders
4. The decisions a business has made about the way it will
lend money or give credit.
5. Facts or information, especially when examined and used
to find out things or to make decisions.
6. The amount of loan capital that a company has in relation
to its share capital.
7. The state of owning cash or things of value that can
easily be exchanged for cash in order to pay debts.
8. Assets that a company holds for a short period of time,
including cash or something that can easily provide cash,
such as products to be sold.

172
 9. The ability of a business to produce a return on an
investment based on its resources.
10. Corporations offers their securities such as stocks or
bonds for sale to the general public.
11. The reputation that a person or organization has for
paying their debts.
12. A figure that shows the change in the price of something
over a period of time.
13. The total final outputs of goods and services produced
within an economy for any given year by both residents
and non residents.
14. The price that a product or service will currently sell for.
15. To buy a company or to buy shares in a company

Task 2: Complete the sentences with words in the box.

profit generation sustaining qualitative
management analysis decision ratios
profitability current liabilities quantitative numerical
research figure outstanding

1. Financial analysis can be applied in a wide variety of

situations to give business managers the information they need to
make critical ______________.
2. Financial analysis also involves using the ____________ data
contained in a company’s statements.
3. When looking at a specific company, a financial analyst
conducts _____________ by focusing on the income statement,
the balance sheet and cash flow statement.
4. The process of financial analysis provides the information
about the ability of a business entity to earn income while
_______________ both short-term and long-term growth.
173
5. One of the most common ways to analyze financial data is to
calculate ____________ from the data to compare against those
of other companies or against the company’s own historical
performance.
6. If a company has to sell off fixed assets to pay for its
_______________, this usually means that the company isn’t
making enough profits to support its operations.
7. Ratio analysis is a tool that was developed to perform
_______________ analysis on numbers found on financial
statements.
8. Return on assets is a common ratio used to determine how
efficient a company is at using its assets and as a measure of
_______________.
9. Because the difference between cash _______________ and
cash payments, businesses should maintain a certain ratio of
current assets to current liabilities in order to ensure adequate
liquidity.
10. In mature companies, low levels of liquidity can indicate
poor _______________ or a need for additional capital.

WRITING

Task 1: Translate into Vietnamese.

There are four critical areas of a company’s business which can
be analyzed by applying ratio. These are liquidity, capital
structure, activity and efficiency, and profitability.
Measurements of liquidity should answer the question: Can a
company pay its short-term debts? There are two ratios
commonly used to answer this question. Firsly, the current ratio,
which measures the current against the current liabilities. In most
174
cases, a healthy company would show a ratio above 1, in other
words more current assets than current liabilities. Another
method of measuring liquidity is the so-called quick ratio – this
is particularly appropriate in manufacturing industries where
stock levels can disguise the company’s true liquidity. The ratio
is calsulated in the same way as above but the stocks are
deducted from the current assets.
The balance sheet will also reveal the gearing of the company –
this is an indicator of the company’s capital structure and its
ability to meet its long-term debts. The ratio expresses the
relationship between shareholder’s funds and loan capital.
Income gearing is also important and shows the ratio between
profit and interest paid on borrowings. Relatively high
borrowings would indicate vulnerability to an interest rate rise.
Highly geared companies generally represent a greater risk for
investors.
The balance sheet and the profit and loss account can be used to
assesss how efficiently a company manages its assets. Basically,
sales are compared with investment in various assets. For
example, in the retail sector, an important ratio which indicates
efficiency is sales divided by stock – the resulting figure should
be much higher than in manufacturing factor where stock tends
to show a much slower turnover. Another example of efficiency
measurement is to calculate the average collection period on
debts. This is found by dividing debtors by sales per day. This
can vary tremendous from industry to industry. In the retail
sector, it may well be as low as one or two days, whereas in the
heavy manufacturing and service sectors it can range from thirty
to ninety days.

175
Finally, profitability ratios show the manager’s use of the
company’s resources. The profit margin figure (profit before tax
divided by sales and expressed as a percentage) indicates the
operational day-to-day profitability of the business. Return on
capital employed can be calculated in a number of ways. One
common method is to take profit before taxes and divided by the
total assets – this is a good indicator of the use of all the assets of
the company. From a shareholder’s point of view, the return on
owner’s equity will be an important ratio; this is calculated by
dividing the profit before taxes by the owner’s equity and
expressing it as a percentage. If the company does not earn a
reasonable return, the share price will fall and thus make it
difficult to attract additonal capital.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

176
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

177
Task 2: Write a summary of the reading text.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Task 3: Translate into English.

Tỷ lệ doanh thu hàng tồn kho là thước đo hữu ích để đánh giá
liệu có tồn kho hay không, cho thấy rằng một công ty gặp khó
khăn khi bán sản phẩm của mình. Tỷ lệ này được tính là chi phí
bán hàng chia cho số dư hàng tồn kho trung bình trong một năm.
Đôi khi, các nhà phân tích sử dụng doanh thu hàng năm thay vì
chi phí bán hàng cho mục đích tính toán. Từ năm 2009 đến năm
2017, tỷ lệ doanh thu của Nissan dao động trong khoảng từ 13,2
năm 2009 đến 19,18 năm 2013 và tỷ lệ trung bình là 15,7. Từ
năm 2013 đến năm 2017, tỷ lệ doanh thu hàng tồn kho đã giảm
nhẹ và đạt 16,2 năm 2017. Theo tiêu chuẩn ngành công nghiệp,
doanh thu hàng tồn kho của Nissan cao hơn nhiều so với các đối

178
thủ gần nhất. Năm 2017, tỷ lệ doanh thu hàng tồn kho của
Toyota là 10.83, trong khi General Motors có tỷ lệ doanh thu
hàng tồn kho là 10. 27.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

179
Phân tích tỷ lệ là một công cụ để đánh giá báo cáo tài chính
nhưng cũng dựa trên các con số trong báo cáo tài chính được
công bố được sử dụng làm tỷ lệ so sánh theo thời gian hoặc giữa
các công ty. Báo cáo tài chính được sử dụng như một cách để
biết được tình hình tài chính và kết quả tài chính của một doanh
nghiệp. Trừ một vài ngoại lệ, chẳng hạn như tỷ lệ liên quan đến
giá cổ phiếu, phần lớn dữ liệu được sử dụng trong phân tích tỷ lệ
đến từ báo cáo tài chính.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Trước khi tính toán các tỷ lệ tài chính, báo cáo tài chính được
công bố thường được các nhà phân tích điều chỉnh để làm cho
các tỷ lệ tài chính phù hợp hơn khi so sánh theo thời gian hoặc
giữa các công ty. Về mặt đánh giá các báo cáo tài chính, các nhà
phân tích có thể điều chỉnh số thu nhập tăng hoặc giảm khi họ

180
nghi ngờ dữ liệu được báo cáo không chính xác do các vấn đề
như quản lý thu nhập.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

Việc đánh giá phân tích báo cáo tài chính của một công ty là một
dạng phân tích cơ bản từ chi tiết đến tổng thể. Trong khi phân
tích triển vọng của một công ty có thể bao gồm một số yếu tố,
bao gồm hiểu biết tình hình kinh tế hoặc ngành công nghiệp hoặc
cảm nhận về công ty hoặc sản phẩm của công ty, phân tích tỷ lệ
của một công ty dựa vào kết quả tài chính của công ty cụ thể.

____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
181
 INTERNATIONAL BUSINESS
UNIT 10

PREVIEW
PREVIEW

Discussion:
1. What are your country’s
main exports?
2. What are your country’s
main imports?
3. Which countries or regions
are your country’s major
trading partners?
4. Is your country’s balance
of payment in surplus or in
deficit?

READING 1

Most countries realized the advantages of world trade.

Countries have developed their economies, increased production
of goods, and met market demands through increased world
trade. The interdependence among trading nations has provided
increased business opportunities.
International trade develops because certain countries are
able to produce some goods more efficiently than other
countries. They exchange goods to satisfy their needs and wants.
Efficient production may be the result of several factors. A
certain climate in particular country may allow that country to
grow agricultural products in abundance. For instance, the
182
climates in the United State and Canada are suitable for
production of large amount of wheat. Natural resources such as
oil or coal are abundant in other countries. Countries with a large
pool of unskilled laborers are able to produce products which are
labor intensive more cheaply than countries with highly paid,
skilled labor forces. Another factor is geographical location.
Countries like Singapore and Panama engage in banking and
trading because they are located on world trade routes.
The Scottish economist, Adam Smith (1723-1790),
theorized that in a free market, countries produce whatever they
can most efficiently grow or manufacture, or what is of the
greatest advantage to them. In other words, if they can make
more money growing cotton than making cloth, they grow cotton
and export it. Then they import cloth from a country that makes
cloth more efficiently than it grows cotton. In an uncontrolled
free market trade situation, there is international specialization
which results in the most efficient production of goods.
Therefore, competition guarantees that countries import products
which are most efficiently manufactured abroad and export
products which are most efficiently produced domestically. Price
is determined by the supply side of the market. Smith’s theory
was a theory of absolute advantage. The English economist,
David Ricardo (1772-1823), refined Smith’s theory to one of
comparative advantage. He theorized that an exporting country
does not have to be the most efficient producer of the product; it
only has to be more efficient than the country which imports the
product. Mutually beneficial trade arises when one country has a
comparative advantage.
There are several reasons why governments try to control
the imports and exports of a country. One reason is that a country

183
enjoys an advantage if it exports more than it imports. Wealth
accrues to the exporting country. Some countries have special
programs to encourage exports. They may be programs that
provide marketing information, establish trade missions,
subsidize exports and provide tax benefits or incentives.
Government subsidies allow companies to sell products cheaply.
Sometimes these subsidized companies export their products and
sell them cheaply overseas. This practice is known as dumping.
Dumping is selling on a foreign market at a price below the cost
of production.
On the other hand, governments impose taxes and quotas
to restrict imports of certain products. For example, to protect
Japanese farmers, Japan limits the amount of produce that can be
imported. Sometimes governments want to protect a domestic
industry because that industry provides employment for the
population. Not only the industries, but also the labor unions
encourage the government to enact protectionist controls.
Protectionist measures are in the form of duties which eliminate
the comparative advantage, or quotas which restrict the import of
the product altogether. There are two forms of import tariffs:
specific and ad valorem. A specific tariff is a certain amount of
tax for each unit of the product, for example $500 for each
automobile. An ad valorem tariff is based on the value of the
product, for example 5% of its value. Thus, under an ad valorem
tax a Rolls Royce imported to the United States would be taxed
more than a Datsun. The imposition of the ad valorem tax
depends upon first determining the value of the product. The
United States uses the free on board (FOB) method, which is the
cost of the product as it leaves the exporting countries. European
countries have adopted the cost insurance freight (CIF) method,

184
which adds the value of place utility to the cost of the product. A
tariff increases the price of the item, raise revenue for the
government, and controls consumption through market forces. A
quota has different effect on the market because it limits the
number of items imported.While under quota there may be a
higher price because of a limited supply, under a tariff it is the
tax that creates a higher price: the supply is not limited.
In order to import and export products, there needs to be
a system of international monetary exchange. While a few
products like oil are always priced in dollars, most products must
be paid for with the legal tender of the producing country.
International trade involves the exchange of one currency for
another. Most currencies are now exchanged on a floating rate
basis. There are no official exchange rates. The rates fluctuate
according to market forces. If large amounts of a country’s
currency are being exchanged, the exchange rate may vary
greatly because demand, and therefore, the price of a currency is
either rising or falling. Sometimes these great fluctuations in
value threaten economic stability; then cenral banks change
market forces by purchasing a foreign currency to support its
price and maintain stability.
The amount of money that goes in and out of a country is
referred to as the balance of payments. If a country is exporting
more than it imports, it is receiving foreign currency and has a
balance of trade surplus. If it is importing more than it exports, it
is sending money out of the country and has a balance of trade
deficit. Continued surpluses or deficits change the demand for
the currency of a country and cause its value to float either
upward or downward.

185
 The comparative advantage which exporting countries
enjoy sometimes changes. If transportation costs increase or
currency exchange rates change, it may become cheaper to
produce the product in the marketing country, especially if large
amounts of exports are involved. Exporting companies
sometimes set up subsidiaries in the market countries. The larger
company is referred to as the parent company. Some countries
have laws restricting the foreign ownership of factories or other
production facilities, while others encourage foreign investment.
A large company that sets up production facilities in several
different countries is referred to as a multinational. Multinational
corporations develop a global philosophy of management,
marketing and production. They choose to operate in those
countries that afford them comparative advantages.

COMPREHENSION QUESTIONS

1. How might underdeveloped countries benefit from

international trade?
2. What types of business opportunities are presented as a
result of interdependence among trading nations?
3. What four factors mentioned would contribute to a
country’s production efficiency?
4. According to the text, what is the main difference
between Smith’s theory and Ricardo’s theory?
5. Explain how exporting countries become wealthy?
6. Why would a country object to foreign countries
dumping goods?
7. Why might a government subsidize an inefficient export
industry?
8. What are two forms of protectionism?
186
 9. What is one advantage of tariffs over quotas to a
government?
10. Why do tariffs and quotas have different effects on the
market?
11. With a floating exchange rate, what would happen to the
exchange value of currency from a country that exports
more than it imports?
12. Explain why the value of the currency of a country that
imports more than it exports would tend to decrease.
13. What would be a good reason for an exporting company
to set up a subsidiary in the country that imports its
products?
14. What is a parent company?
15. Why might a country encourage foreign investment or the
establishment of subsidiaries of foreign companies?

VOCABULARY
VOCABULARY EXERCISES
EXERCISES

1. Match the words in the left column with phrases in the

right column that have the same meaning.

1 advantage ……….. A. a company with a worldwide

2 labor pool ……….. management and production
3 free market ……….. philosophy
4 division of ……….. B. excess of imports over exports
labor C. company which owns a
5 overseas ……….. subsidiary
6 domestic ……….. D. foreign
7 floating rate ……….. E. beneficial condition
8 subsidy ……….. F. without government restrictions
9 protectionism ……….. regulating trade
187
10 dumping ……….. G. worldwide
11 tariff ……….. H. group of workers
12 ad valorem ……….. I. home
tax J. tariff based on value
13 specific tax ……….. K. limit
14 quota ……….. L. trade restrictions to benefit
15 currency ……….. domestic producers
16 exchange ……….. M. below cost foreign sale
17 legal tender ……….. N. labor specialization
18 balance of ……….. O. money given to cover losses
trade deficit and assist nonprofit enterprises
19 subsidiary ……….. P. cost plus insurance plus freight
20 global ……….. Q. money value not determined
21 multinational ……….. by gold or fixed standard
22 parent ……….. R. circulating money
company S. e.g., the dollar in the U.S., the
23 market forces ……….. yen in Japan
24 CIF ……….. T. branch company
U. duty or tax
V. unit or item tax
W. supply and demand
X. convert

2. Select the answer which is consistent with the meaning of

the sentence.
1. International trade develops because certain countries are
able to produce some goods more efficiently than other
countries. They exchange these goods in order to satisfy
their needs and wants.
A. Countries import the goods which they produce
efficiently.
188
 B. Countries probably export the goods which are not
efficiently produced.
C. Countries probably exchange goods which they
produce efficiently for goods which other countries
produce efficiently
D. Efficient exchange results from international trade.
2. A certain climate in a particular country may allow that
country to grow agricultural products in abundance.
A. This country probably has a comparative advantage in
agriculture.
B. This country most likely exports farm products.
C. This country can grow food efficiently
D. All of the above.
3. In an uncontrolled free market trade situation, there
would be an international division of labor resulting in
the most efficient production of goods.
A. With trade restrictions, countries specialize in what
they produce.
B. The most efficient production is a result of a free
market.
C. Specialization in production should be left
uncontrolled.
D. Labor always favors a free market trade situation.
4. Price is determined by the supply side of the market.
A. If the demand for products increased so would the
price.
B. B. There is such an abundance of products for sale
that prices would have to increase.
C. If the supply is low, the price is low.

189
 D. Supply is more of a factor than demand in
determining the price.
5. A basis for mutually beneficial trade is the fact that one
country has a comparative advantage.
A. Both the importing country and the exporting country
benefit from trade.
B. One country’s comparative advantage can benefit
another country.
C. The comparative advantage of one country can result
in trade between countries
D. All of the above.
6. A country can accrue wealth if it exports more than it
imports.
A. This country has a balance of trade deficit.
B. Demand for this country’s currency will fall.
C. This country receives money from countries which
import its products.
D. All of the above.
7. Governments try to control imports of products to protect
domestic industries.
A. Protectionist measures take the form of import duties
and quotas.
B. Protectionist measures insure free trade.
C. Workers are always opposed to protectionism
D. All protectionist policies have the same effect on the
market.
8. Selling products abroad at prices lower than the cost of
production is known as dumping.
A. Dumping is always against government policy.

190
 B. Dumping is always beneficial to the importing
country because buyers payy lower prices.
C. Exporters dump products on foreign markets to lower
domestic employment.
D. Some reasons for dumping could be inventory
reduction, maintenance of domestic employment, and
continuation of high production levels.
9. Most currencies are now exchanged on a floating rate
basis in which there are no official exchange rates, and
rates fluctuate according to market forces.
A. If money changers want to sell dollars for yen, the
price of the dollar will decline.
B. An exporting country with a balance of payments
surplus may accumulate a lot of foreign currency for
which the demand is low, thus making their exports
more expensive.
C. The supply and demand for currencies determine the
exchange rates.
D. All of the above.
10. Multinational companies set up production facilities in
countries where production is most efficient.
A. All countries allow foreign ownership of production
facilities.
B. The larger company is called the parent company; the
production facilities are referred to as a subsidiary.
C. Subsidiary companies eliminate the problem of
worldwide competition.
D. Each subsidiary needs to consider only local market
conditions.

191
 READING 2

PROTECTIONISM AND WORLD TRADE

The majority of economists believe in the comparative
cost principle, which proposes that all nations will raise their
living standards and real income if they specialize in the
production of those goods and services in which they have the
highest relative productivity. Nations may have an absolute or a
comparative advantage in producing goods and services because
of factors of production (notably raw materials), climate, division
of labor, economies of scale, and so forth.
This theory explains why there is international trade
between North and South. But it does not explain the fact that
over 75% of the exports of the advanced industrial countries go
to other similar advanced nations, with similar resources, wage
rates, and levels of technology, education, and capital.
However, the economists who recommended free trade
do not face elections every four or five years. Democratic
governments do, which often encourages them to impose tariffs
and quotas in order to protect what they see as strategic
industries – notably agriculture – without which the country
would be in danger if there was a war, as well as other jobs.
Abandoning all sectors in which a country does not have a
comparative advantage is likely to lead to structural
unemployment in the short (and sometimes medium and long)
term.
Other reasons for imposing tariffs include the following:
* to make imports more expensive than home-produced
substitutes, and thereby reduce a balance of payments
deficit;
192
 * as a protection against dumping (the selling of goods
abroad at below cost price in order to destroy or weaken
competitors or to earn foreign currency to pay for
necessary imports);
* to retaliate against restrictions imposed by other
countries;
* to protect “infant industries” until they are large enough
to achieve economies of scale and strong enough to
compete internationally.

With tariffs, it is impossible to know the quantity that

will be imported, because prices might be elastic. With quotas,
governments can set a limit on imports. Yet unlike tariffs, quotas
provide no revenue for the government. Other non-tariff barriers
that some countries use include so-called safety norms, and the
deliberate creation of customs difficulties and delays.
The General Agreement on Tariffs and Trade (GATT), an
international organization set up in 1947, had the objectives of
encouraging international trade, of making tariffs the only form
of protectionism, and of reducing these as much as possible. The
most favored nation clause of the GATT agreement specified
that countries could not have favored trading partners but had to
grant equally favorable conditions to all trading partners. The
final GATT agreement – including services, copyright, and
investment, as well as trade in goods – was signed in Marrakech
in 1994, and the organization was superseded by the World
Trade Organization.
It took nearly 50 years to arrive at the final GATT
agreement because until the 1980s, most developing countries
opposed free trade. They wanted to industrialize in order to

193
counteract what they rightly saw as an inevitable fall in
commodity prices. They practiced import substitution (producing
and protecting goods that cost more than those made abroad) and
imposed high tariff barriers to protect their infant industries.
Nowadays, however, many developing countries have
huge debts with Western commercial banks on which they are
unable to pay the interest, let alone repay the principal. Thus,
they need to rollover (or renew) the loans, to reschedule (or
postpone) repayments, or to borrow further money from the
International Monetary Fund, often just to pay the interest on
existing loans. Under these circumstances, the IMF imposes
severe conditions, usually including the obligation to export as
much as possible.
Quite apart from IMF pressure, Third World governments
are aware of the export successes of the East Asian “Tiger”
economies (Hong Long, Singapore, South Korea and Taiwan),
and of the collapse of the Soviet economic model. They were
afraid of being excluded from the world trading system by the
development of trading blocks such as the European Union,
finalized by the Maastricht Treaty, and the North American Free
Trade Agreement (NAFTA), both signed in the early 1990s. So
they tended to liberalize their economies, lowering trade barriers
and opening up to international trade.

COMPREHENSION QUESTIONS

1. Why do most economists oppose protectionism?

2. Why may nations have an absolute or a comparative
advantage in producing certain goods and services?
3. Why do most governments impose tariffs and/or quotas?

194
 4. What is the difference between tariffs and quotas?
5. What are the objectives of GATT?
6. Why were many developing countries for a long time
opposed to GATT?
7. Why have many developing countries recently reduced
protectionism and increased their international trade?
8. What did many developing countries do to avoid being
excluded from the world trading system?

VOCABULARY
VOCABULARYEXERCISES
EXERCISES

I. Match the following definitions from 1 to 12 with the terms

in the box.

balance of
autarky quotas protectionism
payments
balance of invisible imports and
deficit tariffs
trade exports
barter or visible trade (GB) or
dumping surplus
counter-trade merchandise trade (US)
1. trade in goods
2. trade in services (banking, insurance, tourism, and so on)
3. direct exchanges of goods, without the use of money
4. the difference between what a country receives and pays
for its exports and imports of goods
5. the difference between a country's total earnings from
exports and its total expenditure on imports

195
 6. the (impossible) situation in which a country is
completely self-sufficient has no foreign trade
7. a positive balance of trade or payments
8. a negative balance of trade or payments
9. selling goods abroad at (or below) cost price
10. imposing trade barriers in order to restrict imports
11. taxes charged on imports
12. quantitative limits on the import of particular products or
commodities
II. Fill in the gaps in the text with words or phrases in the
box.

balance of trade commodities division of labor

climate factors of production imports

economies of scale quotas nations

protectionism barter taxes

(1) _______________ import some goods and services

from abroad, and export others to the rest of the world. Trade in
(2) _______________ is called visible trade in Britain and
merchandise trade in US. Services, such as banking, insurance,
tourism, and technical expertise, are invisible imports and
exports. A country can have a surplus or a deficit in its
(3)_______________, and in its difference between total
earnings from all exports and total expenditure on all (4)
_______________. Most countries have to pay their deficits with
foreign currencies from their reserves, although of course the

196
USA can usually pay in dollars the unofficial world trading
currency. Countries without currency reserves can attempt to do
international trade by way of (5) _______________ (direct
exchanges of goods without the use of money). The imaginary
situation in which country is completely self-sufficient and has
no foreign trade is called autarky.
The General Agreement on Tariff and Trade (GATT),
concluded in 1994, aim to maximize international trade and to
minimize (6) _______________. GATT is based on the
comparative cost principle, which is that all nations will raise
their income if they specialize in producing the commodities in
which they have the highest relative productivity. Countries may
have an absolute or a comparative advantage in producing
particular goods or services, because of (7) _______________
(raw materials,cheap or skilled labour, capital, etc.), weather
conditions, (8) _______________ (specialization of work into
different job), (9) _______________ (savings in unit costs
arising from large-scale production), and so forth. Yet most
governments still pursue protectionist polices, establishing trade
barriers such as tariffs charged on imports, (10)
_______________ (restrictions on the quantity of imports),
administrative difficulty, and so on.

WRITING

Write a summary for the following text.

Most countries realize the advantages of world trade.
Countries have developed their economies increased production
of goods and met market demands through increased world trade.

197
The interdependence among trading nations has provided
increased business opportunities.
International trade develops because certain countries are
able to produce some goods more efficiently than other
countries. They exchange goods to satisfy their needs and wants.
Efficient production may be the result of several factors. A
certain climate in a particular country may allow that country to
grow agricultural products in abundance. For example, the
climates in the US and Canada are suitable for production of
large amounts of wheat. Natural resources such as oil or coal are
abundant in other countries. Another factor is geographical
location. Countries like Singapore and Panama engage in
banking and trading because they are located on world trade
routes.
The Scottish economist, Adam Smith, theorized that in
free market countries produce whatever they can most efficiently
grow or manufacture, or what is of the greatest advantage to
them. It means if they can make more money growing cotton
than making cloth, they grow cotton and export it. Then they
import cloth from a country that makes cloth more efficiently
than it grows cotton. In an uncontrolled free market trade
situation, there is international specialization which results in
the most efficient production of goods. It was a theory of
absolute advantage. English economist, David Ricardo, refined
Smiths theory to one of comparative advantage. He theorized
that an exporting country does not have to be a most efficient
producer of the product; it only has to be more efficient than the
country which imports the product.
There are several reasons why governments try to control
the imports and exports of a country. One reason is that a country

198
enjoys an advantage if it exports more than it imports. Wealth
accrues to the exporting country. Some countries have special
programs to encourage exports. They may be programs that
provide marketing information, establish trade mission, subsidize
r exports, and provide tax benefits or incentives. Government
subsidies allow companies to sell products cheaply. Sometimes
these subsidized companies export their products and sell them
cheaply overseas. This practice is known as dumping. Dumping
is selling on a foreign market at a price below the cost of
production.
On the other hand, governments impose taxes and quotas
to restrict imports of certain products. For example, to protect
Japanese farmers, Japan limits the amount of produce than can
be imported. Sometimes governments want to protect a domestic
industry because that industry provides employment for the
population. Not only the industries, but also the labor unions
encourage the government to enact protectionist controls.
The comparative advantage which exporting countries
enjoy sometimes changes. If transportation costs increase or
currency exchange rates change, it may become cheaper to
produce the product in the market country, especially if large
amounts are involved. Exporting companies sometimes set up
subsidiaries in the market countries. The large company is
referred to as the parent company . some countries have laws
restricting the foreign ownership of factories or other production
facilities, while others encourage foreign investment. A large
company that sets up production facilities in several different
countries is referred to as a that sets up production facilities in
several different countries is referred to as a multinational.
Multinational corporations develop a global philosophy of

199
management, marketing and production, they choose to operate
in those countries that afford them comparative advantages.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

200
VIETNAMESE – ENGLISH TRANSLATION
Rào cản thương mại phổ biến nhất là thuế quan - thuế đánh vào
hàng hóa nhập khẩu. Thuế quan làm tăng giá hàng hóa nhập
khẩu so sánh với hàng hóa nội địa (hàng hóa được sản xuất trong
nước).
Một rào cản phổ biến khác đối với thương mại là trợ cấp của
chính phủ đối với một ngành sản xuất cụ thể trong nước. Trợ cấp
khiến cho những hàng hóa này rẻ hơn khi sản xuất ở trong nước
so với ở thị trường nước ngoài. Điều này dẫn đến giá trong nước
thấp hơn. Cả thuế quan và trợ giá đều tăng giá của hàng hóa
nước ngoài so với hàng hóa trong nước, điều này làm giảm nhập
khẩu.
Vẫn còn một rào cản khác đối với thương mại là một lệnh cấm
vận - một phong tỏa hoặc thỏa thuận chính trị nhằm hạn chế khả
năng xuất khẩu hoặc nhập khẩu của một quốc gia nước ngoài.
Các rào cản đối với thương mại thường được gọi là “bảo hộ” vì
mục đích được chỉ rõ của chúng là bảo vệ hoặc thúc đẩy các
ngành hoặc phân đoạn cụ thể của một nền kinh tế. Từ góc độ
kinh tế, mặc dù, chi phí cho nền kinh tế hầu như luôn luôn lớn
hơn những lợi ích được hưởng bởi những người được bảo vệ.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
201
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

ENGLISH – VIETNAMESE TRANSLATION

One way of financing international trade is by a letter of

credit. The foreign buyer transfers money from its bank to a
correspondent bank in the exporter’s country. This bank then
informs the exporter that a letter of credit for a a sum of money is

202
available when it presents a bill of lading (a document prepared
by the ship-owner or his agent which acknowledges that the
goods have been received on board the ship), a commercial
invoice, and an insurance certificate.
Another possibility is to pay by a bill of exchange, as in
the following example of the export of a shipment of goods from
Britain to Argentina. On receiving an order from Argentina, a
British manufacturer produces the goods. After arranging
insurance, manufacturer will send the goods to the port, with an
invoice and a bill of lading, to be loaded onto a ship. When the
goods have been shipped on board, the ship’s master signs and
return the bill of lading to the producer.
The exporter will draw up a bill of exchange requiring the
buyer to pay a certain sum of money on an agreed date, and
present the bill to a London correspondent bank of the buyer’s
bank. The London bank accepts a bill of exchange for the same
amount. It will then send the bill of lading and the bill of
exchange to Argentina.
Meanwhile, the British manufacturer can sell the bill of
exchange (at a discount) to an accepting house in London, so that
it does not have to wait for payment. When the documents arrive
in Argentine, they will be given to the importing company when
it accepts to original bill of exchange.
When the ship reaches its destination, the importer
presents the documents to the master of the ship, and collect the
goods. (If the goods do not arrive, the buyer will have to make an
insurance claim.). On the agreed date, the importer honors the
bill of exchange.
____________________________________________________
____________________________________________________

203
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________

204
 REFERENCES
Coucom, C. (2008) IGCSE and O Level Accounting. Cambridge:
Cambridge University Press.
Emmerson, P. (2007). Business English Handbook. Oxford:
Macmillan Publisher.
MacKenzie, I. (1997). English for Business Studies. Cambridge:
Cambridge University Press
Mascull, B. (2002). Business Vocabulary in Use. Cambridge:
Cambridge University Press.
Mishkin, F. S. (2007). Economics of Money, Banking and
Financial Markets - 8th Edition. Pearson Education, Inc.
French, J. T. (2000). You’re in business. (T. Y. Nguyen, Trans.)
Hochiminh city: Hochiminh city Publisher.
Yates, C. S. J. (1995). Economics. Hertfordshire: Phoenix ELT.

205