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Essay on International Trade

   

Added on  2021-05-28

8 Pages2145 Words140 Views
Essay on international tradeFinanceFinance is the lifeblood or the power source of growth for international trade. Also, afinancial market is a marketplace in which people trading of securities and it plays a vitalrole in the smooth operation of capitalist economies (LSBF staff, 2018). Under the financialmarket, several types of small market work which are like money market, derivative market,stock market, capital market, etc. the prime motive of authoring this report as a juniorconsultant was to develop the alertness of the clients about international trade, finance,and investment to improve their knowledge. This report consists of two major parts wheredifferent things are to be explained. The first part proves the background of the financialmarket and how it allocates capital allocation among domestic as well as internationaleconomy. Capital allocation and international market economy is the important feature foreconomy growth, On the other hand, it can be affected due to several factors which wediscussed in the report. Towards allocating capital within domestic market and internationalmarket, it requires to be aware of how financial market works, as well as I, will discuss thevarious theories, models, interest rate, foreign exchange rate, foreign direct investment,and money market. Apart from this, the second part of the report shows the evaluation ofthe emerging economy. Furthermore, at the time of industrialisation and preparing tradepolicies, problems faced by India are discussed in the report. At the end of the report, thereport concludes by summarising the key finding and makes recommendation accordinglyby applying constant use of academic models to explain the proposed suggestion andrecommendation. Financial markets background A financial market refers to a market where people exchange or trade financial securitiesinclude the bond market, Forex market, derivative market, and stock market. Also, it plays asignificant role in promoting the smooth operation of capitalist economies by distributingresources and generating liquidity for companies and businesspeople (Will Kenton, 2020).The world financial market is a broad concept, but it can link with many varied factors whichare beyond the definitions. The financial market has three economic functions such as: Price discovery- In a financial market, it means that the transactions between a seller andthe buyer of financial securities figure out the price of traded assets. However, at the sametime, the return from the investment's funds is decided by the participants. The marketpromotes efficient information distribution and allows a participant to classify the prices atwhich agreements can be bought or sold.

Liquidity- This function allows investing to sell financial instruments since it is referred to asa measure of the ability to sold assets at a trustworthy cost. Without this economic factor,an investor would be forced to hold financial security till the conditions become clear to sellit. Reduction of transaction costs- This function is implemented when the members of thefinancial market are charged the cost of trading financial securities. In market economies,the economic basis for the existence of institutions and instruments are related totransaction costs, so, the surviving institutions and instruments are those that have thecheapest costs.Capital and money markets are the two major types of financial markets which will beexplained below: A capital market is a place where long-term debts are bought and sold. Let's look at twomain types of capital market. The word "market" can have a different meaning. The primarymarket is a market where new securities are built and sell stocks and bonds for the first totheir public. The secondary market is where investors traded the securities they alreadyown. The secondary market is commonly known as the stock market for buying equities; thisinvolves the new stock exchange (NYSE), NASDAQ, and all major exchanges all over theworld. In the secondary market, investors trade previously issued securities withoutcompany involvement. Let's take an example- If you want to buy Amazon (AMZN) stock, youneed to only deal with other investors who own shares in amazon. Amazon is not involvedwith the transaction directly (Brain Beers, 18 Sep 2020). The money market is a part of an economy that gives short term funds. It performs aprimary role in the financial system of a country, by influencing it through the country'smonetary authority. The money market divided into four distinct parts: Interbank market,Primary market, Secondary market, and Derivatives market.Followings are the key roles of the financialmarket: The financial market provides a secure place to store money and earn interest. The financial market gives an intermediary between borrowers and investors. The financial market allows businesses to raise new equity to fund their capital investment.The financial market eases the final exchange of goods and services such as contactlesspayments, foreign exchange, etc. Furthermore, it allows agents to insure against pricevolatility.

Capital Allocation The word "capital Allocation" is the method of distributing and investing a company'sfinancial resources with the motive of increasing long term stability (Will Kenton, 2020).Capital allocation is the major factor for the success of any economy. To carry out this,capital needs to be invested in that sector which can provide a high rate of returns. Alldecisions of capital allocation are taken by the management and the company's board.These decisions will provide a footstep of growth and the prospect profile of the businessand may have an extreme effect on long term investment returns for its shareholders. Themanagement looks to distribute the capital in that way which will create wealth forshareholders as much as possible. The effects of interest rate on capital Allocation LOWER INTEREST RATE An existing interest rate allows the borrowers to spend money instead of waiting to save themoney. Lower the interest rate can influence people to borrow money to make bigpurchases. When people pay less interest, it will give more money to spend, which creates aripple effect of increased spending across the entire economy. Also, a lower interest ratecan be beneficial for business people and farmers because it encourages them to buy largeequipment due to the low cost of borrowing. Thus, this creates a situation where theproductivity of the economy increases. HIGHER INTEREST RATE A high-interest rate means that people do not have left as much disposable income in theirpocket, so they need to cut back on their spending. When a higher interest rate isintegrating with an increased lending level, this will not only affect the public but also affectthe business people and the farmers who need to cut back on their spending for buyingpieces of equipment. Thus, this creates a situation where the productivity of an economyreduces.

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