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international trade function

WHEN THE SWISS export chocolate to Honduras, they can use the money they earn to import Honduran bananas-or they can use it to pay for Saudi Arabian oil or vacations in Hawaii. The basic idea of international trade and investment is simple: each country produces goods or services that can be either consumed at home or exported to other countries. The money earned from these exports can then be used to pay for imports of goods and services.

The main difference between domestic trade and international trade is the use of foreign currencies. Goods crossing international borders can be paid for in the local currency or any other internationally accepted currency.

Although global trade is often added up in U.S. dollars, the trading itself can involve a myriad of currencies. In Paris, an imported Japanese CD player is first purchased from a Tokyo exporter with yen, but then sold for French francs on the Champs Elysee. In Seattle, French designer sunglasses are sold for U.S. dollars, but purchased from the Paris exporter in French francs. Brazilian coffee, American films, and German automobiles are sold around the world in currencies as diverse as Danish kroner and Malaysian ringgits.

Whenever a country imports or exports goods and services, there is a resulting flow of funds: money returns to the exporting nation, and money flows out of the importing nation. Trade and investment is a two-way street. Money flowing to



Tokyo doesnt just sit around collecting dust. It is usually invested in other countries, or used to purchase other imported goods and services.

With a minimum of trade barriers, international trade and investment usually make everyone better off. In a truly interlinked global economy, consumers are given the opportunity to buy the best products at the best prices. By opening up markets, a government allows its citizens to export those things they are best at producing, and to import the rest, choosing from the best the world has to offer.

Some trade barriers will always exist as long as any two countries have different sets of laws. However, when a country decides to protect its economy by erecting artificial trade barriers, the result often damages everyone, including those people the barriers were originally meant to protect.

The Great Depression of the 1930s, for example, spread around the world when the United States decided to erect trade barriers to protect local producers. As other countries retaliated, trade plummeted, jobs were lost, and the world entered a long period of economic decline.



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10 RANDY CHARLES EPPING

5. what are trade surpluses and deficits!

JUST LIKE ANY BUSINESS, a country has to keep track of its inflow and outflow of goods, services, and payments. At the end of any given period, each country has to look at its bottom line and add up its international trade and investments.

The narrowest measure of a countrys trade, the merchandise trade balance, looks only at visible goods such as motorcycles, wine, and videocassette recorders. Trade in visible goods is often referred to in the press as the trade balance even though it includes only those tangible goods that can actually be loaded on a ship, airplane, or other means of transport used to move goods from one country to another.

But what about the trade in services such as Hollywood movies and Japanese video-game software? The current account gives a comprehensive picture of international trade because it includes a countrys exports and imports of services, in addition to its visible trade. It may not be obvious, but many countries make a lot of money exporting invisibles such as banking, movies, and tourism. A tourist abroad, for example, buys hotel and restaurant services in the same way a consumer at home would buy an imported appliance.

By looking at its current account, we can tell which countries have been profitable traders-running a surplus, with money in the bank at the end of each year-and which countries have been unprofitable traders, spending more than theyve earned. A country cant run a current account deficit for too



long before it is forced to start spending money to support its currency on the international markets. The decline of the U.S. dollar in the mid-1990s, for example, was directly linked to the fact that the United States was consistently running huge trade deficits.

Trade deficits and surpluses have to be balanced by payments that make up the difference. A country with a current account surplus, for example, can use the extra money to invest abroad, or it can put it in its cookie jar of foreign currency reserves. On the other hand, a country running a current account deficit has to look abroad for loans or investments, or maybe even dip into its own reserves to pay for its excessive imports. All these payments and transfers of funds are included in a countrys capital account.

The widest measure of a countrys trade is called its balance of payments. It includes not only payments abroad, but all of the goods, services, and transfers of funds that cross international borders. The balance of payments adds up everything in a countrys current account and capital account. Since all of a countrys trade in goods and services is balanced by the international transfers of funds, the balance of payments should add up to zero at the end of the accounting period. Every banana, every automobile, every investment, and every payment that crosses a countrys borders is included in the final tally of international trade and investment-the balance of payments.



6. how does foreign ownership affect a countrys economy!

IT IS OFTEN SAID that the only thing worse than being talked about is not being talked about. Countries with open economies could likewise complain that the only thing worse than foreign investment is no foreign investment.

When Americans criticize the Japanese for buying up America, with large parcels of U.S. real estate in Japanese hands, or when the French criticize the Americans for buying up France, with many French companies and even Euro Disneyland under American control, they choose to ignore one of the basic components of international trade: the need to invest abroad.

Basically, foreign investments are the result of trade surpluses. When a hardworking country exports more than it imports, it ends up with money to invest in the global economy. This money can be used abroad to buy anything from foreign government bonds to real estate and whole companies. The United States, for example, has a long history of investing in other countries whenever it runs trade surpluses. However, when the United States began running trade deficits in the 1980s, the billions of dollars spent by Americans on foreign goods returned as foreign investments in the U.S. economy. Despite the criticism these investments received, they did help to keep the American economy running on track and created many new jobs for local workers.

Because there is a natural fear of strategic industries



falling into foreign hands, most countries-including the United States-have laws that prohibit foreign ownership of vital hightech industries and military suppliers. This is usually accomplished without limiting foreign investment in other sectors of the economy.

Countries with trade deficits can often benefit from foreign challenges to make their industries more competitive on the international markets. By the mid-1990s, U.S. car makers had succeeded in increasing their sales abroad, mainly because Japanese competition in the U.S. market forced them to make higher-quality automobiles at competitive prices. In the long run, competition forces everyone to do a better job. If a country chooses to restrict foreign investment, jobs and needed capital are often lost to other countries with more open economies.

7. what is money!

CONTRARY TO POPULAR belief, money does not really make the world go around: the global economy runs on the trade of goods and services. But without money, trade would be a very difficult undertaking indeed.

Imagine trying to send strawberries to France and waiting to be paid with the next shipment of cheese. Or imagine having too many strawberries one year and trying to save them to ship later. And how many strawberries is a piece of cheese worth anyway?

These issues can be resolved by using something that rep-



resents value. Lets call it money. A mark, a yen, a buck, or a pound-the name is not important. These pieces of metal and paper serve to facilitate trade in three ways: they serve as a medium of exchange, allowing strawberries to be sold for money instead of cheese; they allow value to be stored from one year to the next-unlike strawberries, currencies dont rot; and they serve as a unit of account, telling us how much strawberries are worth in something that is universally understood.

The earliest money, shells and beads, served the same role that paper, credit cards, and electronic transfers serve today. Money makes trade more manageable. When a product is sold for money, this money can then be used to buy other products. By serving as a medium of exchange, money acts as a go-between for all transactions of goods and services that make up the world economy.

By using money to store value, a producer can avoid a warehouse full of rotting goods. After selling a product for money, a producer can sit back and wait for the best time to purchase other goods and services. During this time, the money can be put under a mattress or it can be invested to earn interest. This allows the stored money to keep pace with inflation-or even outpace it.

Finally, by using money as a unit of account, goods and services can be evaluated by using a common measure. Money not only tells us how many strawberries a piece of cheese is worth, but how many apples it takes to buy an airline ticket or how many hamburgers it takes to buy a haircut. Money allows for all goods and services to be expressed in terms of a standardized unit, and worldwide trade is made immeasurably easier.



major currencies around the world

Country

Currency

Value (

IN UNITS PER U.S. DOLLAR)

1985

1990

1995

Africa

Kenya

shilling

14.7

24.0

44.9

Morocco

dirham

Senegal

CFA franc

378.0

254.4

534.1

South Africa

rand

The Americas

Argentina

peso

0.8* 5,583

1.0*

Brazil

real

10,400

170.0*

0.8*

Canada

dollar

Mexico

peso

457.5

2,941

5.07

United States

dollar

Asia/Pacific

Australia

dollar

China

yuan (renminbi)

Hong Kong

dollar

India

rupee

12.1

17.8

31.4

Japan

201.0

135.6

100.0

New Zealand

dollar

Europe

Austria

schilling

17.3

10.5

10.9

Belgium

franc

50.4

31.0

31.8

Britain

pound

Denmark

krone

European Community

0.82

Finland

markka

France

franc

Germany

mark

Greece

drachma

148.2

156.3

24I.S

Italy

lira

1,683

1,128

1,621

Netherlands

guilder

Norway

krone

Portugal

escudo

158.7

132.3

159.8



J. ✓

Country

Currency

Value (in

units per u.s. dollar)

1985

1990

1995

Europe (cont)

Spain

peseta

154.5

95.2

132.4

Sweden

krona

Switzerland

franc

Middle East

Egypt

pound

Iraq

dinar

Israel

shekel 1

,484

2.1*

1,729

Saudi Arabia

riyal

Turkey

lira

579.1

2,874

40,390

Readjusted in a currency revaluation program.

8. what are the worlds major currencies:

THE CURRENCIES OF the worlds major economies have names-and backgrounds-that are as diverse as the countries themselves.

The name dollar, used in many countries, including the United States, Canada, and Australia, comes from a silver coin minted during the Middle Ages in a small valley, or Thai, in Bohemia called Joachimsthal. Just as a sausage from Frankfurt came to be called a frankfurter, the coins from Joachimsthal were called Joachimsthaler or simply Thaler, and came to be called dollar in English.

The pound, used in Britain, Egypt, and Lebanon, among other countries, refers to the weights used in minting the cur-



rency, originally one Roman pound (12 ounces) of silver. The word penny has the same origin as the word pawn, found in terms such as pawn shop, and originally meant to pledge. A penny, like any currency, is a pledge of value.

In Italy and Turkey, the currency is called the lira. The word is based on the Latin libra, meaning pound, and refers to the weight of the original coins.

In Spanish, the word meaning weight, peso, is used to describe the coins that were based on a certain weight of gold or silver. Originally, there were gold coins called peso de oro and silver ones called peso de plata. In Spain, the currency is called peseta, meaning small peso. The word peso is used to describe the currency in many Spanish-speaking countries of Latin America.

In Denmark, Norway, and Sweden, the word for crown- krone in Denmark and Norway, krona in Sweden-is used to describe the currency that was originally minted by the king or queen, with royal crowns stamped on the original coins. Today, the crown has been replaced by other symbols, but the name remains.

The franc, used in France, Switzerland, Belgium, and other countries and territories, is based on the early coins used in France that bore the Latin inscription franconium rex, meaning king of the Franks. The coin, as well as the country of France, took its name from one of the tribes that originally settled in the area, the Franks.

The German mark and Finnish markka derive their names from the small marks that were cut into coins to indicate their precious metal content. The German mark, or deutsche mark, is often called by its shortened name, the D-mark.

The riyal, in Saudi Arabia and Qatar, and the rial in Iran, are based on the Spanish word real-which was derived from the Latin regal(is), referring to earlier royal coins.



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