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INTERNATIONAL MARKETS FOR COMMODITIES AND CURRENCIES

I. Read and memorize the following words, word-combinations and word-groups:

transportation costs

e.g. Transportation costs are low.

domestic market

e.g. Domestic markets for goods and services are often affected by either foreign supply or by foreign demand.

international market

e.g. For many commodities there are international rather than domestic markets.

import ,

e.g. What are the chief imports of your country?

export ,

e.g. Last year exports exceeded imports in value.

barter ,

e.g. According to the contract, they should barter wheat for machinery.

coincident wants ,

e.g. Money solves the problem of coincident wants.

reciprocal wants

e.g. What phenomenon solves the problem of reciprocal wants?

international transaction

e.g. Money can be used in international transactions.

conversely

e.g. Conversely, domestic firms want to be paid with money useful in the domestic economy.

foreign currency

e.g. The person receiving payment in the foreign currency will want to exchange it for a domestic currency.

domestic currency

e.g. The person making payment in a foreign currency will have to exchange the domestic currency for the foreign currency in order to make the payment.

foreign exchange market

e.g. A foreign exchange market is a market where one kind of money is traded for a different kind of money.

rate ,

e.g. What is the rate of exchange for one American dollar? exchange rate e.g. Exchange rate has recently raised.

foreign trade balance

e.g. The difference between the value of imports and exports is the foreign trade balance.

 

II. Give English equivalents of the following:

,

 

III. Fill in the blanks with appropriate words:

1. Domestic markets for goods and an incentive to import services are often affected by either direct barter

... or by .... a foreign exchange

2. If the world price of a commodity market

is below the domestic price, there coincident or reciprowill be ... the commodity. cal wants

Most international trade does not foreign supply occur through .... international

Money once again solves the transactions problem of ... . foreign demand

As long as money can be used in deficit

... exporters and importers do not the foreign trade

need to be the same individuals. balance

6. ... is a market where one kind of supply and demand money is traded for a different kind

of money.

Changes in ... in these markets change the rate at which one currency will be exchanged for
another currency.

The difference between the value of exports and imports is ... .

If the value of imports exceeds the value of exports then trade balance is ... .

 

IV. Read and translate the text:

When transportation costs are low and governments do not interfere much in transactions that cross national boundaries, firms and individuals frequently look across those boundaries for opportunities to buy or sell. Indeed, for many commodities there are international rather than domestic markets, and for most commodities there are international effects on markets.

Commodities that are produced in a foreign economy, but which are consumed by individuals within a domestic economy, are imports, while commodities which are produced within a domestic economy, but which are consumed by individuals in a foreign economy, are exports.

If the world price of commodity is below the domestic price, there will be an incentive to import the commodity, purchasing it from foreign producers.

Money once again solves the problem of coincident or reciprocal wants: individuals or firms who want to import a commodity can make the exchange using money, while those individuals or firms who want to export do so in exchange for money. As long as money can be used in international transactions (as well as within an economy), exporters and importers do not need to be the same individuals. The complexity arises because foreign firms usually want to be paid in money useful in their own economy. Conversely, domestic firms who want to export usually want to be paid with money useful in the domestic economy, while foreigners to whom they must sell if they are to export usually want to pay for the commodities using money from their own economy.

When the money used in the international exchange is different from that used in the domestic economy, the person receiving payment in the foreign currency will want to exchange it for a domestic currency.

Hence, international trade creates markets for different kinds of money. Such markets are called foreign exchange or foreign currency markets.

A foreign exchange market is a market where one kind of money is traded for a different kind of money.

Changes in supply and demand in these markets change the rate at which one currency will be exchanged for another currency. As a consequence, the price of goods that are traded will change either because of a change in the price in the economy where they are produced or because of a change in the exchange rate.

The difference between the value of exports and imports is the foreign trade balance. If the value of imports exceeds the value of exports then trade balance is deficit (pp.218236).

 

V. Answer the following questions:

What are imports?

What are exports?

When will there be an incentive to import the commodity?

When will there be an incentive to export the commodity?

What role does money play in international transactions?

What is a foreign exchange market?

What is the foreign trade balance?

 

VI. Define the terms:

transportation costs import

reciprocal wants rate

exchange rate barter

coincident wants incentive

 

VII. Translate into English:

1, , , . 2. , , . 3. - , . 4. , , , . 5. , , , , , . 6. , . 7. . 8. г . 9. , .

 

VIII. Read and dramatize the following dialogue:

D.; Why do foreigners hold U.S. dollars?

M..' It is not clear why they have chosen to hold some dollars rather than exchanging all dollars for commodities produced within the U.S. or for their domestic currency. It is important

to emphasize that the choice to hold dollars is one that foreigners, not U.S. citizens or the U-5. government, make.

D.: Would you explain some reasons for it?

.: O.K. I'll briefly note a few reasons why foreigners may want to hoid dollars. First, the U.S. dollar is used as a kind of international money. For example, the Japanese producer of Hondas may require that British or French importers of Hondas pay for them in U.S. dollars instead of British pounds or French francs. To the degree that the U.S. dollar is used in these kinds of transactions, there will be a greater demand for dollars than simply the demand necessary to purchase exports from the U.S.

D.: Of course, if the dollar is the dominant currency in world trade, with the increasing volume of trade there will be an increase in the demand for the dollar.

M.: Well, you are quite right. Second, to the degree that the U.S. economy and political system are more stable than other economies or political systems, holding U.S. dollars may provide security in a world of turmoil. Similarly, if investments in one's own economy are highly risky (because of either economic or political instability) and the U.S. is viewed as more stable foreigners may want to invest in U.S. assets such as bank accounts, bonds, stocks or real estate.

D.: It seems to me that to make these kinds of investments, foreigners need U.S. dollars rather than their own currency and the demand for dollars will, once again, be greater than that which would occur because of exports alone. Are there any other reasons?

M.: Certainly. The third reason is that the U.S. government may pursue policies that make it more attractive for foreigners to hold U.S. dollars or assets rather than the domestic currency or assets. For example, if U.S. banks are paying 10 percent interest while a bank in a foreign economy is only paying 5 percent, under certain circumstances it will be advantageous for foreigners to have accounts in U.S. banks rather than in domestic banks.

D.: This will increase the demand for dollars in foreign exchange markets. Or the U.S. may have a lower or less erratic rate of inflation. I suppose, the fourth reason is the fact that a foreign government may consciously pursue policies that encourage exports to the U.S. but discourage imports from the U.S. Such policies will produce a U.S. trade deficit. These kinds of policies, however, can only

lead to persistent trade deficits for the U.S. if the foreign government also pursues policies that increase the demand for U.S. dollars by foreigners (for example, the government might itself intervene in the foreign exchange market as a demander of dollars).

M.: For each of these reasons the demand for U.S. dollars (or the supply of a foreign currency) will be substantial and may increase even though the U.S. may be running a trade deficit.

D.: To cut a long story short, the result is: the U.S. runs a persistent trade deficit and the U.S. dollar does not depreciate at all or by enough in foreign exchange markets to bring exports into balance with imports.

 

IX. Make up your own dialogue using the following expressions:

commodities to be produced

domestic price to be paid

to exchange a currency foreign currency market

trade deficit value of exports

international transaction exchange rate

 

X. Change the following sentences using the Present Subjunctive II in the subordinate clauses:

Model: If the world price of the commodity is below the domestic price, there will be an incentive to import the commodity.

If the world price of the commodity were below the domestc price, there would be an incentive to import the commodity.

1. If an economy is importing a commodity and world price increases, less will be imported. 2. If transportation costs are low and governments do not interfere much in transactions that cross national boundaries, firms and individuals frequently look across those boundaries for opportunities to buy or sell. 3. If the world price of the commodity is above the domestic price, there will be an incentive to export the commodity, selling it to foreign consumers. 4. If he has much money, he will produce this commodity within a domestic economy. 5. If the money used in the international exchange is different from that used in the domestic economy, the person receiving payment in the foreign currency will want to exchange it for a domestic one. 6. If the value of imports exceeds the value of exports then the trade balance will be deficit.

 

XI. Paraphrase the following sentences:

Model: It's a pity he has no incentive to barter machinery

for wheat.

I wish he had an incentive to barter machinery for

wheat.

1. It's a pity foreign firms want to be paid in money useful in their own economy. 2. Unfortunately, the economy and political system in Ukraine are less stable than other economies or political systems. 3. We are all sorry our country has a higher or more erratic rate of inflation. 4. It's a pity foreigners need U.S. dollars rather than their own currency. 5. What a pity domestic banks do not pay 10 percent interest.

 

XII. Translate into English:

1. 쳭, . 2. , ' . 3. , . 4. -, . 5. , .

 

II. Communicative situations:

Why should a government care about the foreign exchange value of its currency (that is, why not let the currency value float)? Discuss it.

Can a country run a balance-of-trade surplus or deficit? (Hint: If a country runs a surplus, what must be happening elsewhere in the world?) Discuss it.

 

Lesson 24

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