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The International Financial World

Economic activity began with the caveman, who was economically self-sufficient. He did his own hunting, found his own shelter, and provided for his own needs. As primitive populations grew and developed, the principle of division of labor evolved. One person was more able to perform some activity than another, and therefore each person concentrated on whathe did best. While one hunted, another fished. The hunter then traded his surplus to the fisherman, and thus each benefited from the variety of diet.

In today’s complex economic world, neither individuals nor nations are self-sufficient. Nations have utilized different economic resources; people have developed different skills. This is the foundation of world trade and economic activity.As a result of this trade and activity, international finance and banking have evolved.

For example, the United States is a major consumer of coffee, yet it does not have the climate to grow any of its own. Consequently, the United States must import coffee from countries that grow coffee sufficiently. On the other hand, the United States has large industrial plants capable of producing avariety of goods, such as chemicals and airplanes, which can be sold to nations that need them. If nations traded item for item, such as one automobile for 10,000 bags of coffee, foreign trade would be extremely cumbersome and restrictive. But instead of barter, which is the trade of goods without an exchange of money, the United States receives money in payment for what it sells. It pays forBrazilian coffee with dollars, which Brazil can then use to buy wool from Australia, which in turn can buy textiles from Great Britain, which can then buy tobacco from the United States.

Foreign Trade, the exchange of goods between nations, takes place for many reasons. The first, as mentioned above, is that no nation has all the commodities that it needs. Raw materials are scattered around theworld. Large deposits of copper are mined in Chile and Zaire, diamonds are mined in South Africa, and petroleum is recovered in the Middle East. Countries that could not have these resources within their own boundaries must buy from countries that export them.

Foreign trade also occurs because a country often does not have enough of a particular item to meet its needs. Although the UnitedStates is a major producer of sugar, it consumes more than it can produce internally, and thus must import sugar.

Third, one nation can sell some items at a lower cost than other countries, Japan has been able to export large quantities of radios and television sets because it can produce more efficiently than other countries. It is cheaper for the United States to buy these from Japan than producethem domestically. According to economic theory, Japan should produce and export those items from which it derives a comparative advantage. It should also buy and import what it needs from those countries that have a comparative advantage in the desired items.

4) Finally, foreign trade takes place because of innovation of style. Even though the United States produces more automobiles thanany other country, it still imports large quantities of cars from Germany, Japan, and Sweden, primarily because there is a market for them in the United States.

For most nations imports and exports are the most important international activity. When nations export more than they import, they are said to have a favorable balance of trade. When they import more than they export, an unfavorablebalance of trade exists. Nations try to maintain a favorable balance of trade, which assures them of the means to buy necessary imports. Some nations, such as Great Britain in the 19th century, based their entire economy on the concept of importing raw material; processing them into manufactured goods, and then exporting the finished goods. The subsequent profits enabled these nations to import...
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