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SEDE TEMUCO2013
ADVANCED ENGLISH APPLIED TO FINANCES
UNIT 4: INTERNATIONAL TRADE
Text 1
1.1. Pre-reading activities
1.1.1. An acronym is a word made up from the first letters of the name of something, especially an organization.
e.g.: NATO : North Atlantic Treaty Organization
What do you think the following acronyms stand for? Can you translate them into Spanish? Can you explain them?
ENGLISHACRONYM
SPANISHACRONYM
EXPLANATION / TRANSLATION
NATO North Atlantic Treaty OrganizationUNIMFWHO OMSBBCFBIICC CCIUKOAS Organization of American StatesFDAFAOWTO OMCRAMVAT IVAFAQ
2.1.1.2. What are the main exports of the following countries?
COUNTRY PRODUCT (English) PRODUCT (Spanish)
ArgentinaBrazilChile vino, cobreCubaFranceGermanyItalyJapan
MalaysiaNew Zealand dairy productsPortugalSpainIndia TeaTaiwanVenezuela
2.1. Reading
In the text below, a general description of international trade is given. Read the text paying special attention to the explanations of the main technical concepts in it.
International Trade
Economic transactions can be traced back to prehistoric times. At the beginning,
human groups established self-sufficient economies that provided them with everything
they needed. As time went on, human settlements became aware of the fact that there
were groups that had greater amounts of some resources and less or not enough of
others.
Consequently, they started trading the goods they needed without any exchange of
money. This is known as barter. Since then, trade between groups grew wider, more
complex and far-reaching.
In general, natural resources are distributed randomly all over the world; besides, some
nations have developed technologies and services. All of these are subject to be
imported (bought from another country) and exported (sold to another country). This is
known as international trade, which can be defined as the exchange of goods (visible
trade) and services (invisible trade) between different countries.
Each nation manages its export-import activities in order to balance its economy; in
fact, governments try to maintain a favourable balance of trade, that is to say, to export
more than they import. The opposite condition is to have an unfavourable balance of
trade – they import more than they export.
The earnings from exports and the spending on imports make up the balance of
payments, which is a record of the nations transactions. When there is a deficit in the
balance of payments, governments can correct it in a number of ways. Two of the most
common measures that nations can take are quotas (maximum quantity of imported
goods) and tariffs (taxes on imported goods). When these measures are applied, they
tend to protect locally-made products since they increase the price of imported goods.
In addition, as foreign trade became so widespread and complex, countries agreed
upon some mechanisms to regulate the activity, thus they created some international
organisations such as GATT (General Agreement on Tariffs and Trade), which was
replaced by the WTO (World Trade Organization), and ICC (International Chamber of
Commerce), among others. The purpose of these international bodies is to regulate
tariffs and to reduce trade restrictions between member countries.
The European community was established in 1957 to create a common market in order
to minimize and eventually eliminate protectionist measures. This initiative has
continued gaining ground to form a growing single European market without technical
restrictions. It has thus become one of the world’s largest trading blocks, serving over
300 million people.
2.2. Reading Comprehension
2.1.3.1 Match the concepts below with their corresponding definitions.
Concepts Definitionsa. visible trade the ratio between money earned and spent by a
country.b. Export the proportion between imports and exports.c. balance of
paymentsthe exchange of goods and services between countries.
d. Import taxes on imported goods.e. balance of trade the amount of some product that is allowed to be
imported.f. international trade transactions of products between countries.g. Quotas a system used to favour domestic industry and trade.h. Tariffs the purchase of goods from another country.i. invisible trade a common market constituted by most European
countries.j. protectionism the selling of goods to another country.k. European
Communityinternational trade of services
2.1.3.2. Answer the following questions?
a) What does the acronym WTO stand for?
___________________________________________________________
b) What do the initials ICC mean?
___________________________________________________________
c) What does the abbreviation EC stand for?
___________________________________________________________
d) What is the main objective of the EC?
___________________________________________________________
e) What is the importance of the EC?
___________________________________________________________
f) Do you know what countries the EC is constituted by?
___________________________________________________________
2.3. Text 3
2.3.1. Reading
Operations in the field of international trade require careful handling of a number of documents. The letter of credit is one of them. Below is a description of the way in which a letter of credit is arranged.
Read the following text. Pay special attention to the expressions that refer to the documents which are necessary for the operation described.
The Letter of Credit
A letter of credit is a payment document widely used by banks in international trade
operations; it is an instrument that facilitates business transactions between exporters
and importers.
Letters of credit used in international transactions are governed by the International
Chamber of Commerce Uniform Customs and Practice for Documentary Credits.
A commercial letter of credit is a contractual agreement by which a bank (the issuing
bank), on behalf of one of its customers, authorizes another bank (the advising or
confirming bank) to make payment to the beneficiary. The issuing bank, on the request
of its customer, opens the letter of credit. The beneficiary is normally the provider of
goods.
The issuing bank’s role is a) to provide a guarantee to the seller that, if compliant
documents are presented, the bank will pay the seller the amount due, and b) to
examine the documents, and only pay if these documents comply with the terms and
conditions set out in the letter of credit. A letter of credit is usually negotiable i.e. the
instrument is passed freely from one party to another almost in the same way as
money.
The most common type of letter of credit is the irrevocable letter of credit, which may
not be revoked or amended without the agreement of the issuing bank, the confirming
bank, and the beneficiary. Therefore, it is crucial that the importer and the
advising/confirming bank make sure that the beneficiary (the exporter) is in a good
financial position before advising the credit.
All letters of credit require the beneficiary to present a draft and specified documents in
order to receive payment. A draft is a written order by which the party creating it orders
another party to pay money to a third party. A draft is also called a bill of exchange.
There are two types of drafts: sight and usance. A sight draft is payable as soon as it is
presented for payment. A usance draft is not payable until the ending of the time period
stated on the draft. The issuing bank is obligated to accept drafts and pay them at
maturity. Accepted drafts can usually be discounted by the sellers if they do not want
to wait until the due dates for their money.
Typically, the documents requested, called shipping documents, will include a
commercial invoice, a transport document, such as a bill of lading or airway bill, and an
insurance document, among others.
a. A commercial invoice is the billing for the goods. It includes a description of
merchandise, price, origin, and name and address of buyer and seller. The buyer and
seller information must correspond exactly to the description in the letter of credit.
Invoicing can occur under two main agreement conditions: CIF terms and FOB terms.
On C.I.F. terms (Cost Insurance and Freight), the exporter bills for the cost of the
merchandise, the insurance policy, and shipping charges; correspondingly, the
importer pays for customs clearance and other costs and risks. On F.O.B. terms (Free
on Board), the exporter invoices only for the cost of the merchandise and insurance
charges until the merchandise is officially received for shipment. From that moment on,
the importer has to cover the charges for freight and other costs and risks.
b. A bill of lading is a shipping document evidencing the receipt of goods for shipment
and issued by a freight carrier engaged in the business of transporting goods. They
also serve as a receipt for the merchandise shipped and as evidence of the carrier's
obligation to transport the goods to their proper destination.
c. An insurance policy is a guarantee of payment in case of partial or total loss of
merchandise due to a specified set of accidents that may occur during the transport.
2.3.2. Reading Comprehension
2.3.2. Reading Comprehension
2.3.2.1. Mark the following statements T (true) or F (false) according to the information from the text.
1. A letter of credit is an instrument used for payment.
2. The regulations for a letter of credit are established by each country.
3. The bank that opens the letter of credit is also the bank that confirms the
beneficiary about the credit.
4. The issuing bank is the bank that finally pays the exporter.
5. A letter of credit can only be revoked with the approval of the exporter’s bank
and the importer’s bank.
6. A bill of exchange is not exactly the same as a draft.
7. Both sight and usance credits must be paid by the issuing bank.
8. FOB and CIF terms differ mainly in the payment responsibilities of importers
and exporters.
9. Invoices, bills of lading, and insurance documents can be classified as shipping
documents.
1. ___ 2. ___ 3. ___
4. ___ 5. ___ 6. ___
7. ___ 8. ___ 9. ___
2.3.2.2. Here is a sample of a letter of credit. Put the labels provided in their corresponding places according to the information from the document.
Insurance paymentGOODSDOCUMENTS TO BE PRESENTED BY THE BENEFICIARYPresentation of documents
BENEFICIARYAPPLICANT Latest shipping dayAMOUNTADVISING BANK
BLUE GLOBE BANKPost Office Box 432X
London, England, 345X Court Road Av.
November 1, 2004
Irrevocable Negotiation CreditCONFIRMING OUR CABLE OF TODAYCREDIT NUMBER: IMP-6400-0000765XEXPIRY: January 30, 2005 in SANTIAGO, CHILE.
IDENTIFICATIONBoxport Inc. 439 Farina, Santiago Banco Banco ForeschileAndrea Acevedo, Santiago, Chile.$ 40.000.000 (Chilean pesos)
Credit available and FREELY NEGOTIABLE BY ANY BANK by negotiation against presentation of the documents detail herein and of your drafts drawn at 60 days SIGHT drawn on THE AMSTERDAM BANK at 100% OF INVOICE COST.
WOODEN FURNITURE PER PURCHASE ORDER No 4537X C&F London
Invoices in triplicates indicating import license no. IL (8-CC) E (22-23)
Special customs invoice in duplicate Full set of clean in board ocean bills of
lading consigned to Blue Globe Bank, London, Freight Prepaid and notify XXX Customs Services.
OTHER TERMS AND INSTRUCTIONSJanuary 10, 2005by the buyer.within 21 days after the date of issuance of shipping documents but not later than expiry.
2.3.3 Grammar
2.3.3.1 DefinitionDefining is saying what something is. Thus, the typical question to elicit a definition is "What is X?"e.g. What is a commercial letter of credit?
A commercial letter of credit is a contractual agreement by which a bank authorizes another bank to make payment to a beneficiary.
A formal definition explains the meaning of an expression by assigning it to a class and, then, differentiating it from the other members of that class.
e.g. - What is a commercial letter of credit?
A commercial letter of credit is a contractual agreement by which a bank authorizes another bank to make payment to a beneficiary.
a) class - contractual agreementb) differentiation - by which a bank authorizes another bank to make
payment to a beneficiary
- What is an invoice?
An invoice is a shipping document which describes the goods and the price.
a) class - shipping documentb) differentiation - description of the goods and the price
2.3.3.1 Compose the definitions of the items below by pairing the right expressions from columns A and B.
A Ba. A loan is an amount of money in case of partial or total loss of merchandise due
to a specified set of accidents that may occur during the transport.
b. A bill of exchange is a written order to pay money to a particular person when demanded.
c. A promissory note is a written and signed promise
which is lent and then returned after a specified time with additional payment for its use.
d. insurance policy is a guarantee of payment
on which a usance bill falls due for payment.
e. A letter of credit is a contractual agreement
made by a borrower to repay money with interest at a certain date.
f. A bill of lading is a shipping document
evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of transporting goods.
g. Maturity is the date by which a bank, on behalf of one of its customers, authorizes another bank to make payment to the beneficiary.
2.3.3.2 Translate the following definitions into Spanish.
a) A cheque is a written order to a bank, usually made on a specially printed sheet of paper supplied by the bank, to pay a certain sum of money from one's bank account to another person.
________________________________________________________________________________________________________________________________________ ____________________________________________________________________
b) Inflation is the rise in prices which is caused by increases in the costs of production.
____________________________________________________________________
c) Stock is the money which is owned by a company, divided into shares.
____________________________________________________________________ ___________________________________________________________________
d) Market is the series of activities by which goods are supplied, advertised, and sold.
____________________________________________________________________
Text 2
3.1.1 Pre-reading activities.
3.1.1.1 a) Which expressions on the scrambled list below, do you think, match other expressions on the same list
bank(2) – bill(3) – bills – business(2) – charges(2) – clean – clearance - clearing - collection(2) – credit – customer – customs - department – document - documentary drawee – duty export – import – insurance - international – letter– organization –procedures – title - trade
__________________ __________________ ___________________________________ __________________ ___________________________________ __________________ ___________________________________ __________________ ___________________________________ __________________ _________________
b) Can the expressions you have formed be found in the text? If they can, what do you think they mean.
__________________ __________________ ___________________________________ __________________ ___________________________________ __________________ ___________________________________ __________________ ___________________________________ __________________ _________________
3.1.2 Reading
The text below is a description of the process of collecting bills as conducted by banks. Read the text carefully paying special attention to the words and expressions that refer to this process directly.
Bills for Collection
In banking, a collection is a negotiable instrument presented to a bank for
payment. This instrument is drawn by an individual or a business organization. The
bank it is presented to is the drawee bank. Depending on their scope, collections can
be national or international. In turn, international collections can be either clean, when
no documents are attached to the negotiable document, or documentary, where title
documents accompany the draft.
International collections differ from letters of credit in that the drawee bank is
only an agent acting on the basis of instructions and does not provide financing or
credit. In fact, there is an important degree of mutual responsibility acting between
customers and banks and between banks themselves in the case of documentary
collections. In other words, the documentary collection is an interesting alternative to
the letter of credit when financing from the bank is not necessary and/or there have
been previous transactions between the parties involved.
Certain conditions are required for proper handling of collections. For example,
in the case of an export/import operation, the bills departments at both the exporter's
and the importer's banks must be familiar with the procedures related to such a
transaction: import, customs and clearance ones, among others. In this context,
instructions between banks become particularly important. Thus, prompt payment for or
acceptance of documents cause effective progress and completion of the operation in
question; in contrast, non-payment or non-acceptance implies rigorous application of
the instructions.
Charges are another case in point. In the field of international business,
customs duty, clearing and insurance charges tend to be high. If instructions sent to the
importer's bank are unclear or untimely, there is a risk of hurried or delayed action for
want of suitable instructions. This can cause an increase in charges or even a loss of
value when stored goods are auctioned. In both cases the importer's bank may be held
responsible.
It can, then, be said that clear instructions ensure the realization of the
responsibilities existing between the parties involved.
3.1.3 Reading Comprehension
3.1.3.1 Fill in the blanks in the sentences below with suitable ideas from the text and the corresponding vocabulary.
a) The collection is presented to the _____________ bank.
b) Attached documents are necessary for ____________ collections.
c) Documentary collections require ________________ documents.
d) Both the exporter’s and the importer’s bank must be familiar with import, customs and clearance __________________.
e) Stored goods can be _______________ if instructions are not clear.
f) Increased ____________ may be the responsibility of the importer’s bank.
3.1.3.2 Answer the following questions in Spanish with information from the text.
a) How do collections differ from letters of credit? (two ideas)
____________________________________________________________
____________________________________________________________
b) When is it better to use collections rather than letters of credit?
____________________________________________________________
____________________________________________________________
c) What procedures must both the exporter’s bank and the importer’s bank be familiar with? ____________________________________________________________
____________________________________________________________
d) Why are clear instructions indispensable in the case of collections? ____________________________________________________________
____________________________________________________________
3.2 Grammar
3.2.1 Identificationa. To identify is to prove or show the identity of, that is, to specify who or what a particular person or thing is in order to prevent any sort of ambiguity. Thus, a possible question to elicit some sort of identification is: "Which / What X are you talking about?". X stands for the person or thing that needs to be identified.
e.g. A: Have you read the report?B: The report? Which one?A: The branch's monthly report we received yesterday.
b. Accurate identification can be expressed by means of a Nominal Group (NG); the more detailed the NG, the more precise the identification. Below is the typical order of the elements in a NG, that is to say, the order in which the information is recorded in the mind and in which it is expressed.
Determiner Enumerators Characteristics NUCLEUS Additional information
Article
Ordinal /Cardinal Evaluative / Descriptive X Prepositional / Verbal Possessive Demonstrative Quantifier Dual
b.1 Determiners
Articles: a/an the
Possessive: Singular: my your his/her/its the bank's Plural: our your their the banks' Demonstrative: Singular: this that Plural: these those
Quantifiers: some any every no
Dual: both either neither
b.2 Enumerators
Ordinal: first (1st) second (2nd) third (3rd) fourth (4th)fifth (5th) sixth (6th) seventh (7th) eighth (8th)twelfth (12th) hundredth (100th) --- th
next following comingother last
Cardinal: one (1) ten (10) twelve (12) sixteen (16) twenty (20)sixty (60) one hundred (100) two thousand (2000)
few several many
b.3 Characteristics (Adjectives)
Evaluative: important difficult interesting nicecomplex
Descriptive: financial scientific philosophical economic customs credit import company
The words underlined are basically nouns (names), but they refer to a characteristic if they are placed right before the nucleus in a NG.
e.g. customs procedures = procedimientos aduaneros credit problems = problemas crediticiosimport bills = documentos de importacióncompany organization = organización de la compañíathe Tokyo branch = la sucursal en Tokyothe London office = la oficina de Londres
b.4 NUCLEUS: the entity which is identified or specified (X)
e.g. a delicate financial situation the first question discussed at the meetingexport bills for collectionthe bank's technical specifications for the operation
b.5 Additional information
Prepositional: Prepositions are expressions of connection
on at to of with about between before after without in connection within relation to etc.
e.g. a conflict with the workersa discussion about financial problemssome serious problems in relation to the regulations
Verbal: Verbs refer to action or non-action
Action: invest discuss discount work Non-action: understand consist belong like
e.g. the conflict which was solved by the uniona serious problem negotiated with the customerthe regulations which organize the employees' activitiesthe manager who objected to the operation
3.2.1.2 Write the expressions of identification below in their correct order. Translate your expressions into Spanish.
a. complicated / procedures / recruitment / the company's
_______________________________________________________________________
b. instrument / presented to the drawee / negotiable / the company’s
_______________________________________________________________________
c. the enterprise's / sophisticated / equipment / technological
_______________________________________________________________________
d. to the operation / serious / management's / objections
_______________________________________________________________________
e. transactions / business / some / negotiated in 2000 / important
_______________________________________________________________________
f. clear / for the customer / instructions / the exporter’s
_______________________________________________________________________
g. which were issued by our bank / of credit / the / two /letters / first
_______________________________________________________________________
h. charges / clearance / that agent's / expensive
_______________________________________________________________________
i. complex / these customers' / which took up our time / collections / unpaid
_______________________________________________________________________
j. professional / defined in the regulations / the executives' / important / responsibilities
_______________________________________________________________________
3.2.1.3 Translate the following expressions of identification into Spanish.
a. the completion of the operation
_______________________________________________________________________
b. export bills for collection
_______________________________________________________________________
c. the branches' documents which have not been paid
_______________________________________________________________________
d. the country’s complex clearance procedures
_______________________________________________________________________
e. the company's unsuccessful strategies that should be corrected
_______________________________________________________________________
f. both Heads of Department involved in the operation
_______________________________________________________________________
g. this organization's difficult customs and clearance procedures which determined the expensive charges
_______________________________________________________________________
Text 3
3.2.1 Reading
INTERNATIONAL TRADING CONTRACT TERMS (INCO Terms)
Over the last decades, international trade has increased in quality and quantity. As a
direct result of the growing number of customs-free zones, the extended use of
electronic communications, and the improvement in transport systems, each day more
countries are exchanging a greater variety of goods and services to more countries all
over the world. The field of international commerce is becoming more complex than
ever before.
In this world of interconnected business, one of the crucial issues related to
international trade has been the way buyers and sellers establish clearly their
corresponding responsibilities in their trading agreements. The situation is that the
terms in which a contract is established between an exporter and an importer can very
easily be misinterpreted by one or the other simply because they are people from
different cultures and they may not be aware of the different trading practices in each
other’s countries.
Confusion can arise in the establishment of many types of contract that are
needed to carry out any international transaction, such as contracts of sale, carriage,
insurance, and financing. The issue here is that these contracts must express, in a
shared language, what the obligations of each party involved in an operation are and,
at the same time, reduce the risk of legal complications as much as possible.
Some problems of interpretation are related to the use of ambiguous
terminology. For example, in a sale contract, the person known as the shipper can
actually be two different people: the one who hands over the goods for carriage or the
one who makes the contract with the carrier. Other problems may arise with terms
which are sometimes too vague, for instance, when deciding what a reasonable period
of time is for the delivery of goods or the presentation of documents. A further kind of
confusion can arise from the absence of explicit indications in the contract in relation to
the parties’ reciprocal obligations, as it is when contracts indicate that “the seller must...
and the buyer must...” giving thus the impression that every important obligation is
reciprocal, which is not necessarily so.
For some relevant aspects of sale contracts, the International Chamber of
Commerce established a set of rules for the interpretation of the most commonly used
terms in foreign trade, thus providing a valuable universal reference that saves time
and money to exporters and importers who have no need to negotiate every aspect of
this transaction but rather agree on a particular Incoterm.
Incoterms like FOB, CFR, CIF, or FAS are widely used and understood by the
majority of international traders, who can then solve problems like the mentioned
above. For example, in Incoterms, a shipper will always be the person who hands over
the goods for carriage under FOB terms; the word usual is preferred over the vague
reasonable, because it can be referred to the habitual activities of sellers and buyers;
finally, the inclusion of the expression no obligation, where necessary, will indicate that
a party does not owe an obligation to the other party.
Although Incoterms is a valuable tool for the trade activity, it does not provide
for all types of contract, only for contracts of sale and even within these, it does not
account for all the duties which parties may wish to include in a contract of sale. The
need for universal terms of agreement remains to be satisfied with well-developed sets
of definitions.
3.2.2. Reading Comprehension
3.2.2.1 Mark the alternative that best completes the following statements according to the text.
1.International commerce has become more complex because…
a) tax conditions in many countries are becoming stricter.b) communications are very difficult to establish between trading countries.c) the amount of countries that are commercially related is now bigger.d) there is a small number of transport possibilities.
2.The responsibilities between exporter and importer are…
a) universally established.b) different from one country to another.c) impossible to negotiate.d) unknown to the two parties.
3.The language of a contract can reduce the risk of legal complications by…
a) explaining cultural differences between seller and buyer.b) explaining the meaning of every technical expression used in it.c) using English as the main language.d) specifying the parties’ obligations in terms understood by both of them.
4.The case of the word reasonable is provided as an example of…
a) an Incoterm.b) ambiguous expression.c) specific expression.d) vague expression.
5.In a sale contract, Incoterms can save time to seller and buyer because…
a) it is a very short document.b) it provides a simple system to negotiate commercial terms.c) they do not need to negotiate specific contractual conditions.d) it is written in English, which as a widely-used language.
6.In Incoterms, a condition of a contract marked with the expression no obligation is used to show that…
a) the seller or buyer has no obligation to comply with that condition.b) the seller or buyer has no obligation for that condition in relation to the other party.c) the seller or buyer must not comply with that condition.d) that specific condition is never considered an obligation in Incoterms.
7.The fact that Incoterms are only applicable to sale contracts means that…
a) it can only be used by a few countries.b) it is not really useful.
c) it only works for a limited number of operations.d) it is an incomplete document.
3.2.2.2 Complete the following chart with appropriate information from the text.
Text 4
3.3.1.Reading
International trade has increased
There are problems with the interpretation of contracts
There is a need for universal definitions for the terms of the most usual contracts
CAUSES1. ________________
2. ________________
3. Improved transport systems___
CAUSEThere are different trading practices
EXAMPLES
EXAMPLE 1Ambiguous expressions: shipper___
EXAMPLE 2_________
__________________
EXAMPLE 3___________________________
INCOTERMS INCOTERMS SOLUTIONS
SOLUTION 1_________
_____________________
SOLUTION 2Reasonable is replaced by usual
usual____
SOLUTION 3__________________
____________
ADVANTAGE
It saves time in negotiations
DISADVANTAGE
____________________________________
A Brief History of Foreign Exchange
The activity of foreign trade has historically been dynamic and has interconnected
people from all over the world; in addition, it has always been greatly affected by the
fluctuations of the market, especially, due to its close relation with the
interchangeability of national currencies: foreign exchange (FX or Forex). Financial
crisis such as the Asian Flu, the devaluation of the Mexican Peso and the recent
events in Argentina are an example of the importance of stability in international
finance markets, including the Foreign Exchange Markets.
At specific periods of time, the instability and volatile nature of foreign exchange has
made international trade particularly troublesome and risky, as it is quite vulnerable.
During the decades following 1930, the instability of national currencies was great
especially as a result of World Wars and, on the other hand, the use of restrictive trade
policies by nations. The exchange markets were scarcely regulated and the exchange
of currencies mainly depended on gold reserves held by countries.
In 1944, some 23 nations gathered in Bretton Woods New Hampshire in the United
States to design a post war strategy to stabilize exchange rates and encourage
international trade and thus, revitalize the global economy. In 1947, this agreement
forged the creation of three international organizations: The General Agreement on
Tariffs and Trade (GATT) (later known as the World Trade Organization), the
International Bank for Reconstruction and Development (IBRD) and the International
Monetary Fund (IMF).
Exchange rates were set at certain values, and permitted to fluctuate only within tight
bands around those values; these rates were determined against gold reserves. The
US dollar was not only supported by American gold reserves but officially
exchangeable for gold. In fact it was established the American dollar would be pegged
to gold at a price of $35 per ounce. The gold system operated more or less
satisfactorily until the beginning of 1970’s when it collapsed since the United States
unilaterally decided not to keep its guarantee to exchange US dollars for gold demand.
The US had accumulated a large balance of payments deficit, and was importing an
ever-larger amount of goods and services from overseas, which resulted in
accumulations of US currency in foreign countries, which the US gold reserves could
not longer support. Nations tried to correct the deficiencies of the system in subsequent
meetings but, it was unsuccessful and consequently, a new system evolved: the
floating-rate system of foreign exchange. This system is the current model and
operates subject to the law of supply and demand. This means that today the major
currencies move independently of other currencies and that the exchange rates are
calculated in accordance to the market demand for certain currencies. If demand
fluctuates, the exchange rate fluctuates too – rising when demand is greater and
decreasing when supply exceeds demand.
From 1980 on, the flow of capital was accelerated with the arrival of computers and
leading technologies that permitted to extend the trading day to the time zones of the
world making it possible to trade 24 hours a day.
3.3.2.Reading Comprehension
3.3.2.1 Which of the following expressions best expresses the relationship between the statements in the pairs below.
e.g. In other words / as a consequence / to begin with
The gold system collapsed. The floating-rate system evolved.
The gold system collapsed. As a consequence, the floating-rate system evolved.
furthermore / as a matter of fact / however / therefore /anyway / that is to say / under those circumstances
The activity of foreign trade has been dynamic;
it has always been affected by the market fluctuations.
Nations tried to correct the deficiencies of the system;
it was still unsuccessful.
The US dollar was officially exchangeable for gold;
the price of the ounce was set at $35.
Demand tends to fluctuate; the exchange rate will also fluctuate.international trade is quite vulnerable; international trade is troublesome and
risky.