Unit 16
Reading I: The Open Economy
When people from one society trade with people from another, it means – they do open their economy. What does the special term “ open economy ” mean? When an economy is open, this basically means that it imports and exports goods and services. There are some benefits from doing this. First of all, if you trade with other economies, you can import goods that do not exist in your economy. These may be products that your economy can’t manufacture, but they may also be raw materials. Having a wider range of raw materials, an economy is able to use its capital and labour to produce a wider range of products. So, importing can help an economy to grow. What’s more, if you allow imports from other countries, then you will have trading partnerships. This means that you can export to these countries. And your economy will grow faster, if you have customers all over the world.
Open economies are also good for consumers. There will be a greater variety of goods available locally, if the economy allows imports from abroad. In this case, imports of the same products should help to keep prices down and quality high, because local companies will have to compete with foreign companies, and more competition always means better quality and greater value for money.
Imports and exports of material products could be described as visible and invisible. You can see and touch the so called visible products. Examples of visibleexports and imports are food and fruits, furniture and electronic equipment. Invisible exports and imports are mainly services, but they can include all sorts of things. They are, for example, insurance products, banking services, educational courses and tourism.
Opening up economies can, however, bring problems. One of the main difficulties is keeping a good balance of trade. Every time a country manages to sell a product or service abroad, this means that money will flow into the economy. On the contrary, money flows out of the country every time someone buys from abroad. Over time, if the flow of money out of the economy is greater than the flow of money into the economy, then there is a trade deficit. In such situation the challenge for governments is to keep the flow of trade equal in both directions. Or, possibly, to achieve a trade surplus, when total exports are greater than total imports.
When countries trade with each other a change in the exchange rate of the national currency can affect the whole economy.
Vocabulary society – общество
exist – существовать manufacture – производить wider range – широкий спектр allow – позволять
trading partnership – торговое партнерство from abroad – из-за границы
greater variety – большое разнообразие available – доступный
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quality – качество describe – описывать visible – видимый, явный furniture – мебель equipment – оборудование insurance – страхование
manage to – справляться (с ч-л.), ухитряться flow – течь
trade deficit – дефицит торгового баланса achieve – достигать; выполнять
trade surplus – положительное сальдо торгового баланса exchange rate – обменный или валютный курс
Assignment 1
Answer the questions, according to the text.
1. What is “open economy”?
2. What are its benefits for the economy?
3. What are its benefits for consumers?
4. What does the term “visible exports” mean?
5. How do you understand “invisible exports”?
6. Opening up economies can bring problems, can’t it?
7. What are these problems?
8. Explain the term “trade surplus”, please.
9. What can you say about the exchange rate of the national currency?
Assignment 2
Suggest the Russian equivalents for the expressions and word-combinations given below.
The economy imports and exports goods and services; some benefits from doing this; if you trade with other economies, you can import goods that do not exist in your economy; products that your economy can’t manufacture; with a wider range of raw materials; an economy is able to use its capital and labour to produce a wider range of products; if you allow imports from other countries, then you will have trading partnerships; your economy will grow faster, if you have customers all over the world; if the economy allows imports from abroad, there will be a greater variety of goods available locally; it helps to keep prices down and quality high; local companies will have to compete with foreign companies; more competition always means better quality and greater value for money; examples of visible exports and imports; invisible exports and imports are mainly services; insurance products and educational courses; one of the main difficulties is keeping a good balance of trade; a country manages to sell a product or service abroad; money flows out of the country every time someone buys from abroad; there is a trade deficit; the challenge for governments is to keep the flow of trade equal in both directions; to achieve a trade surplus; change in the exchange rate of the national currency.
Assignment 3
Translate the sentences into Russian:
1. Export and import of goods is defined as “visible” in contrast to the “invisible” export and import of services.
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2. The balance of trade is an integral part of the balance of payment. If import exceeds export, a country has a trade deficit. In the opposite situation the country achieves a trade surplus.
3. Almost every country in the world has its national currency. The 13 European Union member countries, though, share a common currency.
4. An exchange rate is the price of a currency, and like any price, it is decided by supply and demand in the market.
5. The rate of exchange is the equilibrium between demand for the currency and its supply.
6. A change in the exchange rate of the currency always has an impact on the country’s economy.
7. If the rate of exchange rises, the country’s goods get more expensive and demand for them abroad falls. As a result the country’s exports may decrease.
Assignment 4
Match the definitions with the words and phrases given below:
1. People, companies or countries, that do business together;
2. Financial protection;
3. Goods and services a country buys from abroad;
4. The case when you receive less money than you pay out;
5. A big variety;
6. The difference between the total amount of exports and imports for a country in one year;
7. When something is worth the amount you pay for it.
[deficit, balance of trade, insurance; imports, trading partnerships, wide range; value for money]
Assignment 5
Do you like to go abroad? Do you agree that each time you go abroad for a holiday you create an invisible export for your country? Can the exchange rate effect your decision to travel abroad?
Reading II: International Trade
International trade has existed for thousands of years long before there were nations with specific boundaries. Foreign trade means the exchange of goods and services between nations, but speaking strictly, international trade today is not between nations, but – between producers and consumers (or between producers in different parts of the world). Nations do not trade, only economic units such as industrial, agricultural, and service enterprises can participate in trade. So, they exchange goods.
Goods can be defined in several ways, they are: 1) finished products; 2) intermediate goods; 3) agricultural products and foodstuff. International trade enables a nation to specialize in those goods, which can be produced most cheaply and efficiently, and it is one of the greatest advantages of trade. Trade also enables a country to consume more than it can produce if it depends only on its own resources. It expands the potential market for the goods of a particular economy. What is more, trade has always been the major factor ensuring good economic relations among nations.
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Different aspects of international trade and its role in the domestic economy are known to have been developed by many famous economists.
Adam Smith, the Scottish economist proposed in his famous work (The Wealth of Nations, 1776) that specialization in production leads to increased output. So, inorder to meet a constantly growing demand for goods it is necessary that a country’s scarce resources have been allocated efficiently. According to Smith’s theory, it is essential that a trading country should specialize in goods which it has absolute advantage in. What does it mean? It means, the country is able to producethese particular goods more cheaply and efficiently than its trading partners can. Exporting a portion of those goods, the country can, in turn, import those ones that its trading partners produce more cheaply.
Half a century later the theory of international trade was modified by the English economist David Ricardo, but it is still accepted by most modern economists. According to the principle of comparative advantage, it is important that a country should gain from trading certain goods, even though its trading partners can produce those goods more cheaply. The comparative advantage is supposed to be realized if each trading partner has a product that will bring a better price in another country than at home, for example, France and Italy are well known for their wine. If each country specializes in producing the goods in which it has a comparative advantage, more goods will be produced, and the wealth of both (the buying and the selling) nations will increase.
Late in the 19th century, an exchange based on a competitive advantage began. It was not based on location like comparative advantage, but must be earned by product quality and customer acceptance. This way, American automakers sell cars in Germany, and German ones do the same in the USA, and both of them are competing for customers in Europe and other parts of the Globe.
It is understandable that the importance of foreign trade varies within each economy. Some countries depend on it for a larger part of their national income,
others export only to expand their domestic market. But, this or that way, international trade leads to more efficient and increased world production. It expands the number of potential markets in which a country can sell its goods. It allows countries a larger and more diverse amount of the goods. The increased international demand for goods results in greater production and more extensive use of raw materials and labour, which means the growth of domestic employment. Foreign trade is able to promote growth within a nation’s economy, and competition from such trade can force domestic firms to become more efficient through modernization and innovation.
Vocabulary
international trade – международная торговля
boundaries – границы
exchange – обмен, обмениваться
participate – участвовать (в ч-л.)
enable – давать возможность (сделать ч-л.)
major – важный, значительный
ensure – обеспечивать; гарантировать
relations – отношения
expand – расширять, увеличивать в объеме
propose – предлагать; предполагать
allocate – размещать; распределять
according to – согласно, в соответствии с
absolute advantage – абсолютное преимущество
cheap – дешевый
comparative advantage – сравнительное преимущество
competitive advantage – преимущество, основанное на конкуренции
acceptance – одобрение, принятие
depend (on) – зависеть (от)
diverse – разный, разнообразный
promote – способствовать, содействовать
Assignment 1
Answer the questions, according to the text.
1. What does “foreign trade” mean in economic terms?
2. What are the most important advantages of the trade?
3. What were Adam Smith’s thoughts about international trade?
4. What is the main principle of David Ricardo’s theory of foreign trade?
5. What does the principle of a comparative advantage say?
6. How do you understand an exchange based on a competitive advantage?
7. When did such exchange begin? Why not earlier?
8. Does the importance of foreign trade vary within each economy?
9. What is the role of international trade nowadays?
Assignment 2
Suggest the Russian equivalents for the expressions and word-combinations given below.
Specific boundaries; foreign trade means the exchange of goods and services; international trade today is trade between producers and consumers; industrial and agricultural enterprises; goods which can be produced most cheaply and efficiently; one of the greatest advantages of trade; trade enables a country to consume more than it can produce; expand the potential market for the goods of a particular economy; the major factor ensuring good economic relations among nations; role of international trade in the domestic economy; that specialization in production leads to increased output; to meet a constantly growing demand; it is necessary that a country’s scarce resources have been allocated efficiently; it is essential that a trading country should specialize in goods which it has absolute advantage in; to produce goods more cheaply and efficiently than trading partners; according to the principle of comparative advantage; a country should gain from trading certain goods; advantage is supposed to be realized; more goods will be produced, and the wealth of both nations will increase; an exchange based on a competitive advantage began. it must be earned by product quality and customer acceptance; some countries export only to expand their domestic market; international trade leads to more efficient and increased world production; it allows countries a larger and more diverse amount of the goods; international demand for goods results in greater production and more extensive use of raw materials and
labour; promote growth within a nation’s economy; to become more efficient through modernization and innovation.
Assignment 3
Translate the sentences into Russian:
1. It is recommended that trade should be in balance and the foreign exchange market should be in equilibrium, each country having a comparative advantage in at least one good.
2. According to economic theory there always exists an exchange rate that will allow the country to produce at least one good more cheaply than other countries when all goods are valued in common currency.
3. Economists say it is desirable that the share of country’s imports should not exceed its exports.
4. They expect that the government restrictions should be imposed on foreign trade in some situations to protect national interests.
5. Exports of manufactured goods produced in less developed countries to industrial countries have led to complaints in developed countries that jobs are being threatened by competition from cheap foreign labour.
6. It is important for the US economy to promote trade in two main areas such as agriculture and services, and European countries seem to be willing to open their markets to American companies.
7. Through international exchange countries supply the world economy with the commodities that they produce relatively cheaply and demand from the world economy the goods that are made relatively cheaply elsewhere.
8. For poor countries it is advisable that different incentives should be provided for domestic producers who will use the country’s scarce resources in their business.
9. It has been proved that comparative advantage leads to specialization of different countries in different brands within the same industry, a country importing or exporting a good but not both.
Assignment 4
Do you think that developed countries are more interested in international trade than developing ones? Why do you think so?