Capital Allocation in Domestic and International Economy

This report discusses the allocation of capital within the domestic and international economy, focusing on the UK economy. It explores the impact of capital allocation on trade, investment, and development, as well as the challenges faced by the UK economy. The report also provides insights into the mixed economy of the United Kingdom and offers recommendations for improvement.

INTERNATIONAL TRADE
FINANCE AND INVESTMENT

EXECUTIVE SUMMARY
Capital allocation is the process of assigning the various financial resources such that it
can impact the growth and prosperity of the country's economy. This report presents about the
capital allocation within the domestic and international economy in the world. The project
considers the UK economy which follows the mixed economy where government is active in
certain sectors and in the remaining the private institutions are handling. These sectors are
contributing to the GDP, international trade and the inflation in the economy. It shows the
current status of the UK economy and the rate of prospective growth in the future. The Brexit
policy and the free trade agreements with EU are some major challenges that are faced by the
UK economy and are leading to barriers in the growth.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1a) Allocation of capital within domestic economy and internationally for trade, investment
and development purpose with the help of financial market.......................................................1
1b. Mixed Economy of United Kingdom....................................................................................6
Challenges faced by UK due to industrialization and trade policies.........................................11
CONCLUSION..............................................................................................................................12
RECOMMENDATIONS...............................................................................................................13
REFERENCES..............................................................................................................................14
Online ........................................................................................................................................15

INTRODUCTION
International trade refers to the transactions of buying and selling of goods taking place
across borders in the form of exports and imports. It has increased with the evolution of
globalization in the economies. The project shall be showing the allocation of the capital within
the domestic and the international economy. Apart from that it shall also show the mixed
economy of UK, how it operates and what is the current status of the economy. Lastly it shall be
suggesting certain recommendations that should be improvized in the UK economy.
MAIN BODY
1a) Allocation of capital within domestic economy and internationally for trade, investment and
development purpose with the help of financial market
Background of financial market
Financial market is crucial part of any economy that help the country to be in position of
efficient flow of money, increment of capital and growth of economy can take place. The
current report give emphasis on UK which is mixed economy. UK is hub for financial institution
for fund management. it has become such a centre for banks and investors that it is first priority
to invest in financial market.
The word financial securities' industry refers to the market where securities are traded by
investors. In economy of money creation and flow is undertaken by financial Service Authority
(FSA) (What is trade finance? 2021). All the Important decision regarding financial service
industry is taken by FSA. British government has taken the action of making complex group. In
which FSA is on top that deals with top major financial establishment and regulatory bodies.
Financial market is the market where buyers and sellers meet to sell or buy securities
there are mainly five types of financial markets such as Over the counter in which they manage
small institutions that can be traded in low-budget and are within less regulatory framework. The
second type is bond market in which investors loan money on the basis of securities with specific
interest rate. Another type is money market in which they trade high liquity securities that can be
mature in less than one year. Fourth is derivative market, this the place where measure of
securities is ascertained from its primary assets. The last type is forex market where investors
trade in currencies.
There are two types of capital market like primary and secondary. In primary market new
securities are issued in way of IPO in order to fulfil capital requirement of company and in
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secondary traders buy and sell existing shares to make profit.
All policies related to money floating and creating is done by the bank of England in UK
as it is the central bank. In Mixed economy like UK the money flow is process based on the
policies made by central bank. Commercial banks take money from public of UK in form of
deposits and use this money to grand loan to capitalist and needed Common people of UK with
fixed interest rate. The global crises help the every economy to understand how incorporate
financial nature of modern world can result in financial shocks for both domestic and
international economy.
Inflation rate is measured by comparing the price rate that has increased from previous
year. Increase in inflation rate decreases purchasing power of the economy. The below graphical
presentation of data shows the current scenario of UK. In the below graph there is presentation of
Inflation rate change in UK economy. Data also represents that various policies made by the
government to low down the inflation rate for well-being of society. In 2018 the statistic show
rate was 2.48% and in 2019 it declined to 1.79% and it further declines to 1.19%. Which is
positive for development of economy. For the purpose of investment and trade it a beneficiary
part.
UK is very powerful nation as its currency has become powerful in global economy it
exchanges rate fluctuates every second with reference to international economy. The
international factors decide the rate of exchange and that rate is used while doing investment and
trade in global markets and domestic market also get affected with these changes. UK is second
after US world-wide trade and investment.
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Financial theory teaches that worth of equity share is resolute by the fundamental amount . The
theory focuses on how the rate is determined and explains the relationship among market in
domestic and global economy (Trade finance, 2021). Financial theories help the banks and
financial institution to get the thumb print and modification of this theory accordance with
changing circumstances.
Capital Allocation with Domestic Economy
Capital market is the place where buyer’s and sellers of bonds and shares come together
to meet common objectives. Capital allocation is related to floating of shares, bond and securities
in domestic economy. In UK bank gets well amount of deposits that used to provide loan. In
capital market financing is done for more than one yearn or may be for long period. The primary
allocation of capital is done in federal bank, corporations and government.
According to Burton, (2020) Economy of UK government focuses on how efficiently it
allocates its resources that is increase country's efficiency. The economy's authorities try to
manage the capital of economy in such way that it can balance both side of balance of payment
and balance of trade. An efficient allocation of resources is key element for success of UK
system. UK is second largest economic system as it mobilizes private capital to finance. Internal
capital play important role in domestic development of nation.
With the views of Endres and Harper, (2020) Theories related to allocation of capital
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plays essential role in development of economy performance. There are different theories that are
suitable to nations according to their type, their position of handling funds, growth of country,
policies and structure of government etc. the common theory to manage capital flow in economy
is balanced growth theory that contribute in worldwide economic development. The theory states
that there should be balanced number of industry generation so that it can create market for one
another. This concept is also suitable for mixed system scheme of United Kingdom.
There are other theories also that represents different ways of allocating resources that are
essential for well-prosperity and development of any nation. Roston is also concept that provide
assistance to developed country to developed more and get more advancement in every sector of
their economy. The theory supports each sector of industries like agriculture, infrastructure and
manufacturing etc. capital allocation in proper manner with accord to fulfil enough requirement
of each segment will lead to alteration in process of activeness. All this will outcomes
improvement f market situation of United Kingdom.
according to Maggiori, Neiman and Schreger, (2020) Being mixed economy UK has
stable GDP, it has enabled to boost its economy by diversifying its capital resource. Proper
management of resources has made the nation to generate employment opportunities. Two
methods for allocation are adopted by nation to maintain accuracy with WTO. In UK lenders
give money to borrowers on the condition of paying back on maturity date with decided interest
amount. And other way is that in which lender of money is ready to accept payment of his own
money from borrowers on fixed payment in each month. This is totally dependent on borrowers'
capacity to pay e.g.- monthly, quarterly and yearly. This is part of monetary system of mixed
economy which decides rates of interests for lending and borrowing money. Using theories for
domestic allocation of funds is best way to design economic structure for development and
growth of UK economy.
Capital allocation with international markets
In International economy capital allocation refers to how and where this corporates body
of economy decides to spend its money which it has attained from several operations. It tries to
allocate in such manner that domestic country can have benefits while trading in international
economy. Interconnectivity of different countries increases complexity of trade so proper guild
lines are needed to protect interest of developing countries so balance among nations can be
maintained. Financial institutions have been evolved from external environment to keep accuracy
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of transactions. All over the world economic globalization has developed.
According to Maggiori, Neiman and Schreger, (2020) The important factor for allocation
of capital for prominent success is management of risk prevailing in cross border trades. The
country must identify political, economic and social risk that can affect the currency valuation of
nation. There are many elements that been used by enemy country to decline GDP and other
growth indicators such as hedging, swaps etc. these are those methods that help the country to
save from unpredictable changes that can occur due to international changing circumstances.
Hedging with forward contract is the deed made between buyers and sellers in which they
decide the price on future date. This method helps to buying country to not to pay more and
selling country to prevent from losses of lower prices of their products. The common way of
hedging of foreign risk is forward contract. Spot market and forward market are two market
available for trade. In spot market the transactions are done exact time and currency rate is
current rate which is prevalent in international market at the time of transaction. And in Forward
market delivery is done in predetermine future and the acceptance rate is determined for future
date. Hedging risk is similar to forward contract that assist the global market to implement.
Those policies that can forbid investors from risk. A swap is a financial agreement that are made
by two or more parties for financial exchange for series of payments.
In contrast, Goldberg and Krogstrup, (2018) stated that International monetary fund is
responsible for providing guidance to members of IMF for decent BOP and IIP of countries.
From UK aspect inward foreign direct invest is from investors of foreign market that want to
invest or withdraw their fund in UK sectors with aim of gaining expected return. From the below
graphical presentation it can be interpreted that FDI in UK is increasing day by day. When any
country has good FDI growth it shows its economic growth in positive direction. It shows that
from 2001 to 2018 the inward FDI has upward direction way. So it can be assumed that in 2021
it will also grow in same inclination.
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United Kingdom's global FDI has reached peaked in 2018. it helped it a lot in powering
its currency value in global market. International monetary fund manages FDI transaction to
safeguard the investors’ money. These funds are used by country to create, expand and make tie
ups industries so more opportunities of employment can be generated and standard living can be
maintained.
1b. Mixed Economy of United Kingdom
The economy of United Kingdom is considered to be mixed which involves free trade as well as
government intervention in some sectors. Majorly it can be referred as the capitalist economy as
there are free markets and global economy and the major decisions also are based on the free
market forces. But certain decisions like building hospitals, schools, roads, bridges etc. lie in the
hands of the government and approximately 35% of the GDP is the government spending done
for the development of the economy (Powell, 2019). It can be defined as the mix of both market
and planned economies where market is allowed to operate freely and decide the optimum
allocation of resources but government intervenes when market fails. The following data shows
economic statistics of UK mixed economy.
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GDP Grwoth
From below data the data it can be evaluated that trend of GDP reduced in initial 2 years
and then it increased from 2017 to 2019 which shows positive increment of UK economy
growth. There are various actions after industrialization that are taken for growth.
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Poverty rates
From the below graphical presentation that there is no significant in pverty of children,
working people, working age adults but there is drastic change in pensioner’s poverty rate.
8

Inflation rate
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Above graph depicts that inflation rate from 1994 to 2021 has forceful changed that has
impacted positively on UK economy. Inflation rate is biggest challenge that are faced by
economies that result in lowering purchasing power of common people (United Kingdom:
Inflation rate from 1985 to 2025, 2021.).
Ineqaulity in housing activity, declining greenhouse gas emission and poverty among
working people are the biggest challenges that are faced by UK economy. Due to
industrialization UK's productivity adversely impacted. Skills were required to tackle the
industrialization situation but UK was lacking in that area that resulted into unemployment of
workers.
Currently the pattern of trade in UK is free for all the entrepreneurs who can produce and
sell whatever they want to and also allocate the resources as per their free will. The trade
comprises both domestic and international including the exports and imports made globally. The
internal industry trade is governed by technology and the factors of production and intra industry
is governed by the competition and the economies of scale (Greer, 2020). Over the years the
trade growth in both the intensive and the extensive forms has led to a lot of development of the
nation. The change has been in the range of goods and services that are being traded which
intensively considers the increased volume and extensively considers the expansion of the range
of products for the exports and the imports. It shows the extensive growth of bilateral trade with
various countries and intensive growth of trade value with the existing trade partners.
The major trade partners for UK has been United States, Germany, The Netherlands, China and
France which constitute 46% of the total trade of UK in goods and services (Giersch, 2019). The
international trade of UK has been a major source of income for the economy and can be further
developed to ensure sustainable development.
The state of the economy in UK is poor as it has lost its momentum since the pandemic
broke globally. Also, because of the limited access to the markets of European Union post Brexit
policy the trade has been robust. The chances of recovery are estimated in the coming years with
the help of redesigning of the fiscal and the monetary policies. The deal with the EU is also
finalized such that the damage can be minimized and the employment levels can be improved.
Various rates and measures can measure the state of economy and determine the competitive
advantage that it persists as compared with other economies (Jenkins, 2016). The rate of interest
is currently 0.1% which has been dropped by Bank of England in order to meet the disruption
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done by coronavirus. The unemployment rate currently is 4.9% which has increased over the
previous year in which it was 3.8%. The rate of inflation has also decreased as compared to
previous year's data.
The competitive advantage that the economy of UK has over the other global economies
is the political and economic stability, lower rates of taxation and inflation and commitment of
the government to establish a healthy competition with privatization (Bartlett, 2019). All these
positive aspects of the UK economy help to attract a lot of foreign investment which ultimately
boosts its employment levels, per capita income and develops the nation as a whole.
There are certain trade agreements that UK has signed with the rest of the world in order to
facilitate the terms of the trade that are to be undertaken. UK is planning the trade negotiations
and signing of the new trade agreements with US, Australia and New Zealand. A free trade
agreement with Japan named UK-Japan Comprehensive Economic Partnership Agreement
(CEPA). The trade policies post Brexit with the EU is also a trade agreement that is signed by
UK.
Challenges faced by UK due to industrialization and trade policies
The industrial revolution has its roots in the past, but over the years it has evolved as largest
manufacturer of many products through setting up large industries, technological advancements
and foreign investments. Industrialization has helped UK tremendously in its growth and
development. It has been so effective because of the flexible trade policies that are followed in
UK economy. UK follows a free and fair trade policy which helps in higher wages, wider range
of goods and services and increase household incomes. After separating from the EU it has
assumed greater powers and an independent trade policy (Hussain and Haque, 2016). Various
negotiations and the trade agreements have been undertaken so that international trade can be
flourished.
Pros and cons of the nation's economy: -
 The free trade agreements that UK has signed with several countries across the globe has
led to both positive as well negative impact on its economy. It has brought a comparative
increase in the economic growth and development of the country, advancement in the
technology and achieving the economies of scale (Dhingra and et.al. 2016).
Some negative outcomes of this policy could be exploitation of the natural resources,
poor working conditions and outsourcing of the jobs.
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 Brexit the other nation's policy involves the Britain to exit from the European Union.
This policy was formed to achieve certain benefits like assuming greater power, seat at
the World Trade Organization, trade with the major economies like Japan, US, China and
India and the flexible terms of the business (Steven, 2016).
But on the contrary some demerits it has caused for the British are risk to millions of
jobs, trade barriers with European Union and greater impact in the international market as
part of EU.
 The financial system and its regulations in UK is not completely left in the hands of the
market forces but there is required level of government intervention. When the economy
fails the fiscal and monetary policies as formulated by the authority works as the
stimulus. Other than that a proper check on the job security, overexploitation of resources
and monopoly creation, pollution levels etc. is kept.
The cons of this policy are that the economy shall be affected by the inefficiencies of the
public sector, lead to collision and shall snatch the freedom.
Agency Theory: - The agency theory of UK has been developed to improve the statutory
audit of the businesses. It says that an agency relationship must be established between the
directors and the stakeholders of the company. This theory also includes better accounting
practices so that the frauds can be subsequently minimized (Dhingra and et.al. 2018).
Risk and Return Theory- This is the most prominent theory which means higher the risk higher
shall be the returns of the investment. It is used in almost all the concepts of economic policy the
priorities are set accordingly.
CONCLUSION
It can be concluded that due to the breakdown of coronavirus the economy has become stagnant,
for which UK has to find the path of recovery. This can be efficiently achieved by prioritizing
the activities which are to be performed while keeping in mind the investments and the trade that
is provided by the FDI. The various trade agreements are to be designed such that it boosts up
the trade and development of the country. The uncertainties that are posed by the Brexit policy
shall also be reviewed such that trade barriers are not established and country can access its
market. The fees for the membership of EU which is now saved, should be used effectively so
that the newer opportunities for the success can be established.
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RECOMMENDATIONS
There are several recommendations for the development of the UK economy which has to be
undertaken so that the future success is ensured.
 More investment in the department of research so that the dependence for tech support
over the other countries can be reduced.
 Exploitation of natural resources should be reduced by the government such that the
sustainable development of the economy can be ensured.
 Maximize the employment levels in the country and provide job security for the jobs
which are endangered with the Brexit policy.
 The transport and the energy sector requires huge investment to build the infrastructure
that is desired by the foreign investors (Pradhan and et.al. 2017).
 Improve the inefficiencies in the public sector due to which important aspects like health,
education and infrastructure of the country is lagging behind. The government spendings
should be increased in these areas so that the overall development can be ascertained.
 Industrial revolution has been in action since long in UK but still the levels of
productivity are unsatisfactory. The economy must ensure higher levels of productivity so
that economies of scale can be attained.
 In order to meet the demographic challenges that are posed in the industries they need to
incorporate the old age people in the workforce.
 Increase in the ratio of government debt is also a point of concern for the UK economy.
The burden of the government is also to be reduced simultaneously with better exports
and increasing the GDP.
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