In studying any problem or segment of the economy, the economist must first gather the relevant facts. These facts must then be systematically arranged, interpreted, and generalized upon. These generalizations are useful not only in explaining economic behaviour, but also in predicting and therefore controlling future events.

All sciences are empirical. All sciences are based upon facts, that is, upon observable and verifiable behaviour of certain data or subject matter. In the physical sciences the factual data are inorganic. As a social science, economics is concerned with the behaviour of individuals and institutions engaged in the production, exchange, and consumption of goods and services.

The first major step, then, in investigating a given problem or a specific segment of the economy is to gather the facts. This can be an infinitely complex task. The world of reality is cluttered with a myriad of interrelated facts. The economist therefore must use discretion in fact gathering. One must distinguish economic from non-economic facts and then determine which economic facts are relevant and which are irrelevant for the particular problem under consideration. But even when this sorting process has been completed, the relevant economic facts may appear diverse and unrelated.

A conglomeration of facts is relatively useless; mere description is not enough. To be meaningful, facts must be systematically arranged, interpreted, and generalized upon. This is the task of economic theory or analysis. Principles and theories – the end result of economic analysis - bring order and meaning to a number of facts, by tying these facts together, putting them in correct relationship to one another, and generalizing upon them: "Theories without facts may be barren, but facts without theories are meaningless."

The interplay between the levels of fact and theory is rather complex. Principles and theories are meaningful statements drawn from facts but facts, in turn, serve as a constant check on the validity of principles already established. Facts – how individuals and institutions actually behave in producing, exchanging, and consuming goods and services change with time. This makes it essential that economists continuously check existing principles and theories against the changing economic environment.

The creation of specific policies designed to achieve the broad economic goals of our society is no simple matter. A brief examination of the basic steps in policy formulation is in order.

1.The first step is to make a clear statement of goals. If we say that we have “full employment”, do we mean that everyone between, say, 16 and 65 years of age has a job? Or do we mean that everyone who wants to work has a job?

2.Next, we must state and recognize the possible effects of alternative policies designed to achieve the goal. This entails a clear-cut understanding economic impact, benefits, costs, and political feasibility of alternative programs. Thus, for example, economists currently debate the relative merits and demerits of fiscal policy (changing government spending and taxes) and monetary policy (altering the supply of money) as alternative means of achieving and maintaining full employment.

3.We are obligated to both ourselves and future generations to look back upon our experiences with chosen policies and evaluate their effectiveness; it is only through this type of evaluation that we can hope to improve policy applications. Did a given change in taxes or the supply of money alter the level of employment to the extent originally predicted? If not, why not?


A. Translate into Russian.

Economic Theory and Models

Economic theories simplify reality to allow us to understand basic economic forces and how individuals cope with the problems of scarcity. We can observe actions and their consequences. Observation and description are not sufficient for understanding and ultimately predicting actions. Theory establishes relationships between cause and effect. We use it to interpret actions and outcomes so we can explain the process by which the actions were undertaken and the outcomes achieved. The purpose of theory in all scientific analyses is to explain the causes of phenomena we observe. To conduct economic analyses we frequently need to engage in abstraction. This involves making assumptions about the economic environment and human motivation that simplify the real world enough to allow us to isolate forces of cause and effect. Any theory is a simplification of actual relationships.

An economic model is a simplified way of expressing how some sector of the economy functions. An economic model contains assumptions that establish relationships among economic variables. We use logic, graphs, or mathematics to determine the consequences of the assumptions. In this way we can use the model to make predictions about how a change in economic conditions results in changes in decisions affecting economic variables. Economists often use the term “model” as a synonym for theory.

B.Translate into English.

Экономика – это общественная наука, изучающая поведение в сферах производства, потребления, распределения и обмена. Экономисты анализируют происходящие в этих сферах процессы и исследуют их последствия для физических лиц, организаций, например фирм, и общества в целом. В экономической науке существует много конкурирующих между собой направлений, однако основным делением является деление на классическую и неоклассическую школы.

В систему экономических наук входят науки, которые изучают функциональные аспекты развития экономики (финансы и кредит, ценообразование, экономика труда, материально-техническое обеспечение, планирование экономического и социального развития и др.) или ее отраслевые особенности (экономики промышленности, сельского хозяйства, транспорта и др.).


Listen to the interview with Denis Mac Shane, a British Member of Parliament for the Labour Party and answer the following questions.

1. Why does MacShane think that manufacturing has a future?

2. Why does MacShane think that manufacturing has a future in the advanced countries?

3. Why, however, is this manufacturing unlikely to solve the problem of unemployment?

4. What does MacShane mean by “in theory there should be no more manufacturing in Switzerland?” (It is this theory that makes many people argue that manufacturing must move to “less-developed” countries.)

5. Why does he say it is surprising for a British company to be buying Swiss goods?

6. What is the reason he gives for the United States still being the richest nation in the world?