Comprehension:

1. What is international business characterized by?

2. What does the concept of international business include?

3. What is the difference between merchandise exports and merchandise imports?

4. Describe services that comprise international business.

5. Give the definition of a joint venture.

6. Is there any difference between portfolio investment and direct investment?

7. What are the main factors that cause changes in the world trade?

Summarizing.

Complete the following sentences to summarize the text above:

1. International business is characterized by…

2. Companies can engage in international business through…

3. Exports and imports are …

4. Travel, tourism and transportation,… comprise international business.

5. Foreign investment is …

6. There are many factors that cause changes in the world trade: economic conditions,…

True-false questions:

International business is characterized by all business transactions that involve two or more countries and may be of governmental or private character.	
A company can engage in international business through various means: exporting and/or importing merchandise and services, direct and portfolio investment, and strategic alliances with other companies.	
Merchandise imports are tangible goods sent out of the country.	
International business doesn’t comprise performance of activities abroad.	
Portfolio investment doesn’t differ from direct investment.	
Economic conditions, technology, wars and political relationships are the main factors causing changes in the world trade and investment patterns.	

Viewpoint:

As part of international business, does tourism play an important role in the economy of our country?

30. International trade

Lead-in: Why do most countries exchange goods and services? Key words and phrases to merit special attention – заслуговувати особливої уваги to impose restrictions – накладати обмеження currency – валюта, гроші comparative costs – порівняльні витрати demand and supply – попит та пропозиція terms of trade – умови торгівлі average price – середня ціна foreign demand – зовнішній попит domestic inflation – внутрішня інфляція deterioration of trade – погіршення торгівлі

International trade merits special attention because it differs in several crucial respects from the exchanges of goods and services that take place within a country. First, there are more obvious “barriers” to trade between countries than to trade within countries. These can be simply the result of differences in economic structure, tradition, language or natural resources, or they can be restrictions imposed by governments on the movement of imports, exports, labour and capital. Secondly, different countries use differ­ent currencies, and trade is only possible where the currency of one country can be exchanged for the currency of another one. This fact alone is of little consequence where the relationship between currencies is fixed, but in practice the relative values of currencies often change, presenting us with a whole series of additional economic problems. Finally, economic conditions and government policies normally vary more significantly between countries than between regions of a country. Thus buoyant demand in the UK might cause the purchase of more goods and services from abroad than foreigners buy from the UK, resulting in balance of payments problems in the UK.

Terms of trade

We have seen that gains from trade are possible when comparative costs differ, and that the size of the overall gain and how it is distributed between countries will depend on the prices at which trade takes place. These prices (the terms of trade) will depend on the demand and supply for products of international trade. The country with the most highly desired goods on offer will receive the most advantageous terms of trade.

We define a country’s terms of trade as the quantity of that country’s exports that have to be sold per unit of imports. The terms are expressed as an index, and they are estimated by comparing the average price of exports with the average price of imports. Thus:

T =px x 100 pm

Where T = terms of trade, px = an index of the average price of exports and pm = an index of the average price of imports.

An ‘improvement’ in the terms of trade means that the country is able to obtain more imports for a given quantity of exports than before. This appears to be a good thing, but a country’s export prices can be driven up either by strong foreign demand or by domestic inflation. The former reason is wholly beneficial and can be regarded as a genuine improvement in that country’s external position. However, if prices are running ahead of other countries’ export prices, the benefits to be gained from the ‘improving’ terms of trade will be short-lived.

Conversely, a ‘deterioration’ in the terms of trade means that a country is able to buy less imports per unit of exports. A deterioration can be organised deliberately by a policy of currency depreciation which lowers the price of exports and raises the price of imports. Exports are therefore encouraged and imports discour­aged sufficiently.

Comprehension:

1. Why does international trade merit special attention?

2. What do the terms of trade depend on?

3. What does “deterioration” in the terms of trade mean?

4. How can we characterize improvement in terms of trade?