This exercise is from English, Economics & Management, a book which  is an adaptation by Prof Rajiva Wijesinha of the original volume by Gartney and Stroup that presented basic economic principles simply. The principles are essentially liberal, but their universality will be clear in the context of the development of social and economic theories all over the world in the last few decades. 

I am grateful to Michael Walker of the Canadian Fraser Institute for encouraging me to use this text for English Teaching. The book should be used in conjunction with A Handbook of English Grammar (Foundation Books, Cambridge University Press, India). The full text of English, Economics & Management, as well as other  English books and materials that can be downloaded to enhance your English knowledge, can be found on the website of the Liberal Party of Sri Lanka. 


Voluntary exchange is productive because it promotes social cooperation and helps us get  more of what we want. However, exchange is also costly. The time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs. Transaction costs are an obstacle to the creation of wealth. They limit both our productive capacity and the realization of gains from mutually advantageous trading.

Transaction costs are sometimes high because of physical obstacles, such as oceans, rivers, marshes, and mountains. In these cases, investment in roads and improvements in transportation and communications can reduce the costs. In other instances, transaction costs may be high because of man-made obstacles, such as taxes, licensing requirements, government regulations, price controls, tariffs, or quotas. But regardless of whether the road-blocks are physical or man-made, high transaction costs reduce the potential gains from trade. Conversely, reductions in transaction costs increase the gains from trade and thereby promote economic progress.

People who provide trading partners with information and services that help them arrange trades and make better choices are providing something valuable. Such specialists or middle-men include real estate agents, stockbrokers, automobile dealers, publishers of classified ads, and a wide variety of merchants. Often, people believe that middlemen are unnecessary—that they merely increase the price of goods without providing benefits to either the buyer or the seller. Once we recognize that transaction costs are an obstacle to trade, it is easy to see that this view is wrong.

Consider the grocer who, in essence, provides middleman services that make it cheaper and more convenient for producers and consumers of food products to deal with each other. Think of the time and effort that would be involved in preparing even a single meal if shoppers had to deal directly with farmers when buying fruits or vegetables, or with fishermen if they wanted to serve fish.

Grocers make these contacts for consumers, arrange for the transport and sell all the items in a convenient shopping location, and maintain reliable inventories. The services of grocers and other middlemen reduce transaction costs and make it easier for potential buyers and sellers to realize gains from trade. These services increase the volume of trade and thereby promote economic progress.


Grammar and Sentence Structure

  1. Rewrite the first three paragraphs in the past tense. Remember that you do not need to change the tense of verbs that are used in apposition.
  2. Identify the main verbs of every clause in the first three paragraphs, ie the verbs of which you changed the tense. Also identify the complements of the linking verbs and the objects of the transitive verbs.
  3. Identify the relative clauses in the third and fourth paragraphs, and the pronouns that link them to other clauses. To what do those pronouns refer?
  4. Identify the prepositions in the last two paragraphs and use them in sentences of your own.


  1. Give in your own words the meanings of the highlighted words. Find nouns and verbs related to these (more than one each where possible), and use them in sentences of your own.
  2. Find five nouns in this passage that are used as adjectives. Find verbs related to at least three of these and use them in sentences of your own.
  3. Find words that are similar in meaning to the italicized verbs. Find nouns that are related to these and use them in sentences of your own.


  1. What are the two types of transaction costs mentioned? How can these be reduced?
  2. How do middlemen reduce transaction costs?
  3. Can you think of how you have benefited recently from the services of a middleman, apart from a grocer?