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 (or 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.218—236).

V. Answer the following questions:

1. What are imports?

2. What are exports?

3. When will there be an incentive to import the commodity?

4. When will there be an incentive to export the commodity?

5. What role does money play in international transactions?

6. What is a foreign exchange market?

7. What is the foreign trade balance?

VI. Define the terms:

transportation costs import

reciprocal wants rate

exchange rate barter

coincident wants incentive