Financial Markets and Economic Development

This assignment provides an in-depth examination of financial markets, focusing on the challenges faced by Brazil due to trade policies governed by the government and industrialization. It also discusses the importance of capital allocation in the development process and improving domestic economies, such as that of the UK.

INTERNATIONAL
TRADE, FINANCE &
INVESTMENT

TABLE OF CONTENTS
Executive Summary.........................................................................................................................1
TASK...............................................................................................................................................1
Background of financial markets............................................................................................1
Capital allocation within domestic economy.........................................................................2
Capital allocation within international markets......................................................................4
Evaluation of emerging economy...........................................................................................5
Evaluation of challenges that country faces due to industrialisation and trade policies........6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

Executive Summary
All companies which are working on global level will always need finance and
investment for trading with other companies of world. International trade financing is required to
get the funds in way of carrying out the trade operations depending upon the transactions
globally (Antras and Foley, 2015). With the support of this process company will build their
image or high position in marketplace better than another. This report is based on financial
markets and capital allocation system that in the growth of domestic economy of UK. It
emphasizes background of financial markets and also discusses importance or role of capital
allocation in international markets. Furthermore, it will discuss one of the emerging economy or
country and challenges which they are facing due to trade policies and industrialization that
make barriers in it developed procedure.
TASK
Background of financial markets
Financial market is a marketplace where people trade financial derivatives and securities
such as futures and options at less transaction costs. Securities include bonds and stocks and
precious metals. It is a wide term that describe any marketplace where trading of security
includes bonds, equities and currencies. Some fiscal markets are midget with few activities,
while some of like New York stock exchange trade trillions of dollars of securities every day.
Financial markets are basically defined by having transparent prices, costs and fees, basic
regulations on trading and market forces determine prices of safety that trade. This is as sort of
market which help in bringing people together through buying and selling of securities or capital.
There are number of financial assets which could be traded into financial markets like shares,
bonds and foreign exchange as well. It creates a regulated and open program for organizations to
acquire huge amounts of capital, which is done through bond and stock markets. They permit
businesses to offset risk and they carry this with foreign exchange present and future contracts,
commodities and other derivatives. Capital markets, commodity, futures, spot etc, are the types
of financial markets (Foley and Manova, 2015). The main purpose of this markets is to facilitate
transfer of economic assets from lenders to eventual borrowers. It plays important role in
contribution to efficiency and health of any countries' economy. There are the strong positive
relation between economic growth and financial market development. For example, Legal &
General is British Financial Services Company that provide life assurance, pensions, general
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insurance and investment management services. They operate their business in US and UK with
investing management businesses in Asia, Gulf and Europe. Organization is the one of the
biggest investment management company in the world by AUM. In this term money market is
termed to as short term loan between bank and financial institutions which are traded into
marketplace. These are having higher liquidity and short term maturities as are used for
borrowing and lending short term securities. Some of the examples are like that of commercial
papers, US T bills and banker’s acceptance. Capital market on the other hand is termed to as that
market which is used for long term especially over a year tradable securities (Badarinza,
Campbell and Ramadorai, 2016). These are the channels for wealth saver who are putting money
on long term productive use like that of governments and investments. While derivatives market
will be known to as financial market for future contracts and options as well. These are other
form of assets which are dealt by companies or individuals in 2 types like over-the-counter and
treaded derivatives. There are majorly 4 principal market into UK which are operated by London
Stock Exchange (LSE) whose work is to list securities.
In UK there are many institutions and organizations in private and public sectors are sell
securities on capital market in order to raise profit or funds that help to run their business.
Financial market costs not point out true intrinsic value of stock due to small economic forces
like taxes. It found in every nation in the world where small only few participants have. Capital,
money, spot or cash market and derivatives market are the types of financial market. Capital
market is one in which institutions and individuals trade financial securities. Any corporation and
government needed funds to finance its management and operations that help to gain profits. To
do this process any organization raise its funds through sale of securities- bonds and stocks in
firm name.
Capital allocation within domestic economy
Capital allocation is a program of distributing funds or financial assets to different sectors
in UK or other countries to increase efficiency and maximize probability more than others. It is a
goal of any management to modify capital allotment so that it brings as much profit as possible
for its shareholders. It is very complicated system that effect on organization functions and
activities. There are many options to consider that need evaluation of each feasible and its impact
on all over firm. When organizations realize higher profits more than expectation, management
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work to allocate the additional funds in manner and appropriately that will give the best
outcomes.
The financial market will be helping into trading of securities where buyers and sellers
will participate into exchange of bond, currencies and equities as well. It is of 3 types’ capital,
money and foreign exchange market. The major role will be linking investors and money savers
so that this will help into allocating and mobilizing saving effectively and efficiently as well.
Financial system will surely help into economic development of all countries as it is very good
saving and investment process like that of capital formation. This will be helping into effective
allocation of capital and then helping into success of overall economy as well as in UK about
90% of GDP to outstanding credit to non-financial. The financial sector of UK is very good
promoter and helping into development of social and domestic market both into short of long
run. The infrastructure of UK will also be enhancing into economic growth with better financial
sector like bank and markets. All the function and tradition of financial market will be focusing
in formulation of modern capital market so that investment could be done in proper manner. As
capital allocation would be helpful into stimulating economic development with an important
alternative source of long term finance.
Capital allocation provide the best platform to domestic economy of UK for running their
businesses effectively and for economic development. It provides level to investors for trading
the financial securities such as stocks, bonds etc. Legal & General company give life assurance
services to people in UK that help to secure their life and usually give funds for investment
management. This is essential for economic improvement and growth of country. Capital market
play important role into growth of economy, its development and alternative source of long term
as well. They give resources to the organizations and many other institutions that help to develop
business more than the others and also contribute in country development. Capital market
provide alternative source to companies and resource of long term finance which support to gain
desired goals and longer time productive investments. They give equity and infrastructure capital
to companies or sector to maximize socio-economic benefits such as, energy, roads,
telecommunication and public transport etc. Capital market offer investment opportunities to
people that encourage them for saving its money for investing, national saving and investment
ratios are increase through encouragement of people for save money that is important for faster
industrialization and growth of domestic economy.
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Capital allocation within international markets
Capital allocation system give financial sources to different sectors to maximize profit
margin rather than others. This will contribute in the growth of domestic economy of UK, and
also for international markets (Melvin and Norrbin, 2017). Financial market seem to improve
capital allocation across 65 countries. They provide funds or resources those who have
developed financial markets position in country and increase investment rather than in
developing industries and avoid investment more in decrease industries, especially decline
investment those undeveloped countries. They purported to be invested in sectors foreseen to
have high returns and recede from poor prospects sectors. Development tasks and international
trade will get capital influx form financial markets where profit had as standalone investments or
as optimal part of bigger portfolio strategy. They allocate capital in those countries who have
already built their high financial image in market such as Japan, Germany, US, UK etc. Their
main purpose is to gain profit and increase probability more than the others. Mostly financial
market avoid investing or allocate capital where country alien under development and have low
financial market. These types of country do not return high profit which is one of the biggest risk
factors in capital allocation system.
According to Government dominated program countries do not invest investment in
growing industries because they have poor allocation of capital. Rather than they increase
investment much in declining industries which do not give them tough competition. Most of the
countries who are not working under the government dominated program they gain more
benefits of privatization around the world and have permitted with capital allocation. Financial
capital market allocate capital within international markets by investing or lending money to
international projects. In the world there are many countries who are allocated their capital in
emerging industries of another country that give them return benefits as increasing shares and
profit margin more than now. Capital market focus on longer term financing activities, it always
refers to market that exists of more than year financial activities. Investing and financing are two
basic functions of capital market which used by the organizations who want to invest their shares
in another rising industry that is very beneficial for them.
The second function is pricing functions, it refers to decide price of stock. Capital is the
expression of stock, which means the costs of shares is the price of capital that present by
securities. Both demand and supply sides in international market decide pricing of securities.
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Share suppliers and demanders are related by competitive relations because of the procedure of
stock market. The result of this competitor relations will generate high return investment or
profit and maximize demand of international market and also raise stock prices more than now.
Mergers & acquisitions is one of the best method of capital allocation that used by any
organization for increasing its revenue (Cavalcante and et.al., 2016). Under this process company
elect to merge with another company in other country that build its image at international market
and generate high cash flow that put it wells. Because of additive risk assumed through
acquisitions, there is large divide among investors as to effective of Acquisitions and merge as
growth strategy. Allocate capital was a fundamental job of economy that have high returns
through emerging industries. Japan, Germany is one the countries who have high financial
market and great capital that build their position in commercial world more than another.
Evaluation of emerging economy
Emerging economy means those countries which do not have economy like US or
Canada but these countries are growing highly by applying new technologies, social, financial,
environmental cultures. There are four emerging economies called as BRIC. It stands for Brazil,
Russia, India and China.
Below study emphasize on Brazil. It is one of emerging economies.
Brazil economy is eighth largest in terms of nominal GDP by purchasing power parity.
Brazil economy has gross domestic product (GDP) of $6.559 trillion estimated by international
monetary fund (IMF). It ranks 65th in world in terms of GDP per capita. In 2017, It produces
$3.2 trillion in goods and services. Brazil growth rate slowed by 7.5% in 2010 to 3.6% in
2016. GDP of Brazil in second quarter of 2018 was still 6% below than 2014 (Ajmi and et.al.,
2014). GDP was divided in following sectors:
 Agriculture- 10%
 Industry- 19%
 Services-71%
Therefore, Brazil economy depends on importing services to stand in economic growth.
About 26 million tons’ cement produces every year in Brazil. So it exports goods to countries
like China, USA, Netherlands, Argentina, and Germany. It imports and exports about 151 USD
billion and 218 USD billion respectively. Its inflation rate is 3.4% in 2017. Investment rate
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increases from -10.3% to -1.8% in 2017. Brazil ranks 184 out of 190 countries to pay taxes in
World Bank business.
Brazil economy is getting slow down due to debt servicing costs, poor fiscal health. This
year 2018, Brazil businessman and investors has slowed down due to which economy rate is not
increased effectively. Brazil has number of organisation which affects economy like Mercosur,
WTO, Paris Club, Cairns group, G8+5, Unasul, G20. Brazil population is increasing 2% every
year. Brazil has second largest manufacturing industry in Americas. Brazil companies are added
in list of Forbes Global 2000 in 2017 and it is one of the top countries in 2000 list. It is based on
profit, market share, sales, and assets.
Brazil has taken a step to stop importing petroleum from other nations to generate
electricity sue to which it gains sustainable growth and promotes hydroelectricity. In last decade,
domestic production in agriculture increased by 32.3% (approx 3.6% every year). Brazil has
hubs of steel, iron core, textiles, soybeans, cotton, fertilizers, coffee, various chemicals,
armaments, aircraft and ships which are responsible to increase economy speedily.
Budget of Brazil is running as 7% of GDP. Personal disposable income grew by 4.7% per
year in session of 2017 to 2017. In Brazil, debt servicing cost is high due to lending rate is too
much high. Brazil ranks 109 out of 190 countries in emerging market. It takes 1958 hours to pay
tax while Singapore take 49 hours to pay taxes. Therefore, central bank lowered the discount rate
7.25%. Forecasters predict that in 2019, market will emerge at 2.5% this year. It is expected to
improve economic market by controlling monetary and fiscal policy.
Evaluation of challenges that country faces due to industrialisation and trade policies
According to Pilbeam, (2018) Industrialization means development of industries within
nation on a large scale. It is considered by social and economic changes in industries which
affect growth, development and economy of nation. If individual labour replaced by mass
production then it makes global trade effective and efficient. For example, Brazil improves in
process of manufacture goods from agricultural ores is getting advanced which leads to
economic changes. But there are some challenges which Brazil facing for industrialization and
trade policies.
Environmental challenges- as per the view of Antras and Foley, (2015) many countries
didn't allow industries to invest in their nation due to harmful effects. If any industry pay harm to
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nation environment then, it is not allowed and it is signed in contract before. Like Brazil
furniture manufacture industries didn't invest in countries where deforestation not allowed. It is
due to License trade policy that every country follows. Industries must have license to invest
across international boundaries so that they do not harm environment.
Financial challenges- as stated by Cavalcante and et.al., (2016) Industries face challenge
in between rich and poor for global trading in terms of labour and capital. Those countries whose
economy is good can invest in rich countries to have more market share. But like Brazil which
has emerging economy such that it cannot invest in developed countries like US. So it has
disparity of income and wealth. Therefore, Brazil is focused on producing hydroelectricity rather
than thermal because in thermal, petroleum is to be imported from other nations which is
undesirable. So, to meet financial crisis, Brazil is enhancing its generating electricity network by
using hydro energy.
Social Challenge- The major problem with industrialization is to bring about general
deterioration of life of workers and many other problems for society as well. As per the view of -
Cavalcante and et.al., (2016) it could be stated that trade will plan key role into successful
development which believe that this will bring about main benefits into this area. The trade
liberalization will not be bringing benefits if the state will continue to intervene into other areas.
Legal challenges- There are some legal laws and regulation that every nation must
follow. But these laws make barriers for industries to invest or to have high market share across
international boundaries. For example, Brazil face problems in Import quota trade policy where
restrictions are made to import specified amount of goods across boundaries (Antras and Foley,
2015). It needed license over it which is a challenging task for industries to promote global trade.
Large amount of resources like organic cotton cannot be imported from UK to make dresses due
to which transportation charges increases and leads indirectly to economic barrier.
CONCLUSION
The present report discusses about financial markets activities and its importance in
domestic economy growth. Financial market gives many opportunities for economic
development that raise its position in high platform. It has been concluded that financial markets
allocate its capital to people that help to grow and generate more revenue rather than others. This
report discusses regard capital allocation within both international market and national economy.
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This study covers repurchase share methods of capital allocation that is very beneficial for
business as well as rapid growth of any country. In this study include Brazil as emerging
economy that try efforts to generate high revenue and profit more than now. Furthermore, it has
been concluded the challenges which has faced by the Brazil due to trade policies governed by
the government and industrialization. It also discusses that capital allocation is one of the best
system that help in process of development and improving domestic economy of UK.
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REFERENCES
Books and Journals
Ajmi, A.N. and et.al., 2014. How strong are the causal relationships between Islamic stock
markets and conventional financial systems? Evidence from linear and nonlinear
tests. Journal of International Financial Markets, Institutions and Money. 28. pp.213-227.
Antras, P. and Foley, C.F., 2015. Poultry in motion: a study of international trade finance
practices. Journal of Political Economy. 123(4). pp.853-901.
Badarinza, C., Campbell, J.Y. and Ramadorai, T., 2016. International comparative household
finance. Annual Review of Economics. 8. pp.111-144.
Bai, J., Philippon, T. and Savov, A., 2016. Have financial markets become more
informative?. Journal of Financial Economics. 122(3). pp.625-654.
Bolton, P., Santos, T. and Scheinkman, J.A., 2016. Cream‐skimming in financial markets. The
Journal of Finance. 71(2). pp.709-736.
Cavalcante, R.C. and et.al., 2016. Computational intelligence and financial markets: A survey
and future directions. Expert Systems with Applications. 55. pp.194-211.
Fiedor, P., 2014. Networks in financial markets based on the mutual information rate. Physical
Review E. 89(5). p.052801.
Foley, C.F. and Manova, K., 2015. International trade, multinational activity, and corporate
finance. Economics. 7(1). pp.119-146.
Goldstein, I. and Yang, L., 2017. Information disclosure in financial markets. Annual Review of
Financial Economics. 9. pp.101-125.
Lahmiri, S., 2015. Long memory in international financial markets trends and short movements
during 2008 financial crisis based on variational mode decomposition and detrended
fluctuation analysis. Physica A: Statistical Mechanics and its Applications. 437. pp.130-
138.
Melvin, M. and Norrbin, S., 2017. International money and finance. Academic Press.
Nyborg, K.G. and Östberg, P., 2014. Money and liquidity in financial markets. Journal of
Financial Economics. 112(1). pp.30-52.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.
Vorbrink, J., 2014. Financial markets with volatility uncertainty. Journal of Mathematical
Economics. 53. pp.64-78.
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