International trade

SPECIALIZATION AMONG NATIONS

Read the text and practice exercises:

International trade is essential for the maintenance and growth of prosperity in all countries.

One of the major reasons why international trade takes place is that of economic advantage. International trade creates value. It increases the efficiency of resource allocation worldwide, reduces production costs, lowers input costs and through the international division of labour, lowers prices paid by consumers and increases product variety and availability.

Nations are usually better off if they specialize in certain products or commercial activities. By doing what they do best they are able to exchange products not needed domestically for foreign-made goods that are needed. This allows a higher standard of living than would be possible if the country tried to produce everything itself.

The concepts of absolute advantage and comparative advantage play a critical role in international trade.

A country has an absolute advantage in the marketing of a product if it has a monopolistic position or if it produces the item at the lowest cost. Examples of absolute advantage are rare, because few countries are sole suppliers and because economic conditions rapidly alter production costs.

A more practical approach to international specialization is that of comparative advantage. A country has a comparative advantage in an item if it can supply that item more efficiently and at a lower cost that it can supply other products. Nations usually produce and export those goods in which they have the greatest comparative advantage or the least comparative disadvantage. Countries tend to import those items in which they have the least comparative advantage or the greatest comparative disadvantage.

For example, American exports tend to be those in which the US has a comparative advantage over its trading partners. Being a highly industrialized nation with good natural and agricultural resources, the US tends to export manufactured items (aircraft parts), food products (grain, wheat), and some natural resources (coal). By contrast, countries with low-cost labour often specialize in products that require significant amount of labour, such as shoes and clothing.

Some countries refuse to specialize their productive efforts because they want to be self-sufficient. Other countries subscribe to (he self-sufficiency viewpoint only for commodities that they regard as strategic to their long-run development.

In most cases countries who seek to be self-sufficient do so for reasons of military preparedness, fear of economic reprisal from other countries and nationalism. They see noneconomic advantages as being more important to the national welfare than the economic advantages of specialization. Israel and South Africa are examples of countries that seek to be self-sufficient.

Notes:

better off - краще забезпечений

the least comparative - найменші відносні збитки

disadvantage

refuse to specialize their - відмовляються від спеціалізацп

productive efforts в галузі виробництва

subscribe to the self- дотримуються точки зору само-

sufficiency viewpoint забезпеченості

economic reprisal - економічні санкціі

Exercises

Exercise1. Study the following definitions. Make sure you understand them and can reproduce them from memory:

production costs - costs of making a product;

input costs - the resources which are employed to allow production of goods and services to take place;

international division of labour - countries' specialization in the production of some goods and their trade with other countries;

absolute advantage - situation in which a country has a monopolistic position in the marketing of a product or produces it at the lowest cost;

comparative advantage - a country's ability to supply a particular item more efficiently and at a lower cost than it can supply other products

Exercise 2. Find the following words and phrases in the text and translate the sentences containing them into Ukrainian

Growth of prosperity; economic advantage; value; to reduce; production costs; better off; to exchange products; a monopolistic position; sole suppliers; to supply an item; to export goods; the least comparative advantage; to be self-sufficient; long-run development; to specialize productive forces; national welfare.

Exercise 3. Find words in the text opposite in meaning to the following:

disadvantage, to decrease, to agree, poverty, highest, usual, slowly, unimportant.

Exercise 4. Match the words in column A with their synonyms in column B:

A B

essential	merchandise
welfare	purchaser
commodity	important
consumer	prosperity
to reduce	to manufacture
to alter	to lower
to produce	to change
advantage	effectiveness
efficiency	benefit

Exercise 5. Translate the following sentences paying a special attention to economic terms in bold type with different word-building elements:

1. Investors watch the rate of economic growth closely.

2. That car burns so much gasoline that it is not economical.

3. Economics is at the center of most governmental concerns.

4. She is an economist who works for the government.

5. He lost his job, so he has to economize by not buying expensive things.

6. The national economy is strong now.

7. He economized by using buses instead of taking taxies.

8. In the long run it is an economy to buy good quality goods.

9. She sold her house at an economic price.

10. She cooks very economically.

11. Despite the efforts of the government, the black economy continues to grow.

12. The government should stop making candle-end economies which only annoy the public.

Exercise 6. Make a proper selection:

value	a primary product, such as coffee, copper, cotton, tin;
w elfare	a condition in which a person or community is doing well financially;
advantage	producing enough food or raw materials to satisfy its own requirements;
commodity	the worth of something to its owner;
consumer	health, comfort and prosperity;
self-sufficient	something that puts you in a better position than other people;
prosperity	factors of production - resources used in the process of production such as land, labour, capital;
inputs	a person who buys goods and services for his or her own use or consumption

Text 3.

FOREIGN DIRECT INVESTMENT

Read the text and practice exercises:

Foreign investment may be divided into two components: portfolio investment, which is the purchase of stocks and bonds solely for the purpose of obtaining a return on the funds invested, and direct investment, by which the investors participate in the management of the firm in addition to receiving a return on their money.

Foreign Direct Investment (FDI) is a complex form of international business. It involves ownership and control of a company in a foreign country by an organization based in another country.

Controrary to portfolio investments, foreign direct investments mean a long-term commitment where capital funds will be tied up for a long time.

Although a direct investment usually is acquired by transferring capital from one country to another, capital is not usually the only contribution made by the investor or the only means of gaining equity. The investment firm may supply technology, personnel and markets in exchange for an interest in a firm located abroad.

Companies engage in direct investment abroad for the same reasons they pursue international trade:

1. To expand markets by selling abroad

1. To acquire foreign resources (e.g. raw materials, production efficiency, and knowledge).

Financial considerations are also the most important and sometimes decisive factors. What is the expected return on an investment? What are interest rates? What are the sources of working capital?

When governments are involved in direct investment, an additional motive may be to attain some political advantage.

Although a direct investment may be a substitute for trade it also may stimulate trade through sales of components, equipment etc.

Since most direct investments are intended for selling the output in the country, where the investments are located, governmental restrictions that prevent the effective importation of goods are probably the most compelling force causing firms to establish their direct investments.

Direct investment sometimes has chain effects: when one company makes an investment, some of its suppliers follow with investments of their own, followed by investments by their suppliers, and so on.

One explanation for direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go. The advantage is due to the ownership of some resource that is unavailable at the same price or terms to the local firm. The resource may be in the form of access to markets, patents, management skills, or the like. Because of the greater cost usually incurred by transferring resources abroad and the perceived greater risk of operating in a different environment, the firm will not move unless it expects a higher return than at home.

In many countries there is resistance to foreign direct investment. Some strategic industries (such as food, computers, nuclear reactors, and energy) will find it increasingly difficult to expand abroad. But direct investment is likely to continue its adventurous course in many areas. The economic integration of the US, Europe, and Japan will stimulate its development.

Notes:

the compelling force - спонукаюча сила

... has chain effects - ... має ланцюговий ефект

Exercises

Exercise 1. Study the following definitions Make sure you understand them and can reproduce them from memory:

direct investment - the purchase of sufficient stock in a firm to obtain significant management control;

portfolio investment - the purchase of stocks and bonds to obtain a return on the funds invested;

equity - the value of the shares issued by a company;

capital – funds that finance the operation of a business;

management – the art and science of directing the business of an organization;

purchase – an act of buying;

return – a profit from a business deal;

interest rate – the price an individual or business pays for borrowing money;

the price that is being paid for the use of that money

Exercise 2. Find the following words and phrases in the text and translate the sentences containing them:

Foreign investment; ownership and control of a company; long-term commitment; gaining equity; in exchange for an interest; pursue international trade; the expected return; to attain political advantage; to stimulate trade; governmental restrictions; to make an investment; to perceive a monopoly advantage; unavailable; access to markets; cost

Exercise 3. Find words in the text opposite in meaning to the following:

indirect, buying, disadvantage, ineffective, different, available

Exercise 4. Match the words in column A with their synonyms in column B:

A B

to stimulate	to force
to cause	to encourage
return	duty
to transfer	to make smth. happen
to compel	to move smth. from one place to another
ownership	approach
access	possession
output	staff