Investment and increasing consumption. However, reducing investment is likely to reduce standards

of living from what they might otherwise have been in the future. As with defence, the proportion

of national income being devoted to investment will affect the standard of living of the population

both now and in the future.

11.7.1.2. Read the text “Investment” and translate it into Russian without a dictionary.

Investment

Private investment aims at gaining profit only. National investment is exercised with the purpose

of developing economy. Let us try to understand what is implied by two aspects of investment.

Firstly, investment is a real capital formation, such as the production or the maintenance of machinery,

or the construction of dwellings, that will produce a stream of goods and services for future

consumption. Investment involves the sacrifice of current consumption and the production of investment

goods which are used to produce commodities (producer goods) and includes the accumulation

of inventories. In the national accounts (social accounting) investment is the sum of gross fixed

capital formation and the physical change in stocks and work in progress. Investment contributes to

higher output. Investment may be stimulated by changes in demand or technology, by high profits or

by low interest rates (since much investment expenditure is financed by borrowing). The theory of

Income determination shows how savings and investment are brought into equilibrium.

Secondly, investment, in common usage, is expenditure on the acquisition of financial or real

assets. To the economist this is not investment, but simply a shift of savings from one form (cash) to

another.

11.7.1.3. Read the text “The Debt Crisis of Developing Countries” and make an annotation of it.

The Debt Crisis o f Developing Countries

Developing countries, particularly those in Latin America and Africa, carry large amounts of

external debt — debt owed to banks beyond their borders. The total amount of the so-called Third

World or developing countries debt is estimated to be in excess of $ 1,5 trillion. For example, Brazil

has an external debt of about $120 billion, which represents a third of its GNP. Mexico has over

$100 billion of external debt, which represents over 60 percent of its GNP. Chile’s external debt of

$20 billion represents 100 percent of its GNP.

Some observers argue that the crushing weight of interest payments on such large external debt

will forever prevent debt-burdened countries from developing. They call for the IACs’ private banks

to forgive much of the developing countries’ external debt.

Several observations are in order. First, much of the external debt that was incurred by developing

countries has not been productively used. Therefore, it is accurate to state that the interest

owed on this debt represents a tremendous burden to most of these countries since they are not

enjoying rates of return on the investments they made, that are anywhere near the rates of interest

that they have to pay on money borrowed for those investments.

However, if private banks in the IACs, subsidized perhaps by their own governments, are forced

to forgive most or even a significant part of the Third World debt, there will be less lending to those

countries in the future. After all, the cliche “Once burned, twice shy” is appropriate. Private banks

will be extremely reluctant to loan to nations whose previous loans they have had to write off.

One more statistic must be mentioned. In many developing countries with crushing extemaldebt