International Trade Finance: Capital Allocation in UK Economy

This report provides an overview of international trade finance, investment, and capital allocation, focusing on the United Kingdom's economy. It discusses the background of financial markets, explaining how capital allocation occurs in both domestic and international contexts. The report evaluates the challenges faced by the UK due to industrialization and trade policies, including the impact of Brexit and the COVID-19 pandemic. It also highlights the role of financial institutions like commercial banks and central banks in managing capital flow and maintaining economic stability. The analysis covers aspects such as foreign direct investment, GDP growth, and the influence of monetary policies on achieving inflation targets and promoting economic growth. The report concludes with recommendations for navigating these challenges and optimizing capital allocation strategies.

International trade
Finance and
Investment

Executive Summary
Trade, finance and investment all are a crucial part of economy. Their helps the
economies in their proper functioning and connecting them at international market. It does not
involve the dealings in money only but also the movement of services and goods. It combines the
complete economy at a common point. They deal at both international and domestic level and
allocates the capital within their jurisdiction. Any kind of policy directly affects these economies
whether positively or negatively.

Contents
Executive Summary..............................................................................................................................
Contents................................................................................................................................................
INTRODUCTION................................................................................................................................
MAIN BODY.......................................................................................................................................
Discuss about the background of financial market......................................................................4
Explain the way in which capital allocation takes place in a domestic economy.......................5
Explain the manner in which the capital allocation takes place in International market.............8
Evaluate the challenges faced by country due to industrialization and Trade policies.............11
CONCLUSION..................................................................................................................................
Recommendations......................................................................................................................13
REFERENCES...................................................................................................................................

INTRODUCTION
Trade finance refers to a fiscal instrument which is used by organisations for the purpose
of supporting trade at international level. It assists in easing the dealings of export and import in
order to provide monetary help to the companies. It provides credit facility to firms so that they
can comfortably satisfy their needs of money while dealing with foreign corporations (Baloch
and et. al., 2019). The report is based on United Kingdom (U.K.). It mentions about the
background of financial market in addition to the way capital is allocated in international and
domestic economy. It also examines the economy of UK along with the challenges faced by it in
presence of trade policies and industrialization.
MAIN BODY
Discuss about the background of financial market
Financial market refers to the set of each and every possible seller and buyer of fiscal
tools. It is a place where the goods and services are traded for the smooth and the effective
operation of the economy of country.
They deal in money, bonds, derivative market, ownership and capital. In earlier days,
people do not have any specific base of exchanging their products, so they used to give their
goods in place of getting other. This was known as Barter system. After evolution of money,
people got a settled base for circulating their goods. This money is generated by the central
banks of the country and then spread to the countrymen with the help of loans or some
investment activities. After this, with various activities like production, selling and buying of
goods and services, this cash is circulated among the citizens of country. But it was important to
regulate this market as this flow of money was not balance (Bende-Nabende, 2018).
Types of financial market:
 Capital Market: These are the marketplace where the investment and the saving are
conducted amongst the organisation’s people with the aim to lend or invest the capital for
the people who are in need. In this come the stock and the bond markets which seek to
improve the efficiency of the company and also creates a place for trading the securities.
 Money Market: It is a market where the fiscal instrument is traded in the short - term
with the higher liquidity. Its main objective is to trade in the medium for the economy
and finance.

Working of Banks, Money and Capital Market:
Money market accounts pay a variable financing cost, permitting you to bring in a profit
from your cash. It's normal for these records to have layered rates, which means higher offsets
are compensated with a higher yearly rate yield (APY). Currency market accounts will quite
often offer better returns than ordinary investment accounts. It accounts are like investment
accounts, yet they have some value-based elements like a financial record.
A capital market helps an economy by giving a stage to acquire assets for business tasks,
advancement exercises or abundance upgrade. The working of a capital market follows the
hypothesis of the roundabout progression of cash.
The bank gets revenue instalments on those credits from borrowers. A piece of that
premium is then gotten back to the first store account holder as premium for the most part on a
bank account, currency market record or CD record. Banks principally bring in cash from the
premium on advances just as the expenses they charge their clients. These charges can be
attached to explicit items, for example, ledgers, or connected with monetary administrations.
Explain the way in which capital allocation takes place in a domestic economy.
Capital allocation in these markets takes place in the form of loans or selling of goods and
services and securities among nations. Another most commonly used way is Foreign Direct
Investment. Countries attract foreign companies to make investment in their nation by either
investing their money in that nation or bringing their own company over there. Through
globalisation and liberalisation, corporations are provided the authority to open their branch in
other countries but they are required to adapt all the rules and regulations enforced in that nation
whether they are related to trade or not. Moreover, the stock market of international level is also
included in this only.

Figure 1Foreign Direct Investment, United Kingdom
It refers to the manner through which the capital amount of country is distributed to the
within the nation so that this can be used for generating profitability and raising efficiency of
nation in managing and using its resources. Financial markets are an important aspect of n
economy for allocating these money resources (Cao and et. al., 2018). This aid the companies of
UK in arranging capital by transferring the amount from the person holding surplus to the people
in need. This process takes place when the public having extra money deposits their cash with
banks or purchase shares or other securities. This money hold by bank is provided to firms in
form of loans for undertaking their projects or continuing their daily operations in form of loans.
The securities purchased by people automatically provide this capital to the organisations in
return of providing them ownership in the business. This is how the level of money is controlled
in domestic economies.
The allocation of money in an economy takes place through financial markets and they
work as a bridge among borrowers and lenders. They help in maintaining the fiscal balance in
country. So, in this way the capital of a nation is allocated and managed by the them.
The economy of United Kingdom is market oriented. It is present at fifth position when
looking at ranks of Gross Domestic product and at ninth according to Purchasing Power Parity.
The import and export level of country has also increased a lot and it is at fifth position in both
terms. Its government has always taken huge interest in making its economy better. At present, it
runs according to the rules of liberalisation and norms of low taxes. From the last many years,
Bank of England and its monetary policy committee are deciding the interest rates amid of the

required inflation rate that is must for boosting the economy high. It has once faced a high level
of recession during the late year of 2000’s for tackling that, it invested in the up-gradation of
GDP (Keohane, 2019).
Presently, the data says that the UK economy has raised by 0.6% after pandemic when
looking at Gross domestic product and by 0.7 % from the services point of view. While, a growth
of 6.4% has been found in human health services and professional, technical and scientific
services were the second contributors towards the growth of service sector. After the alteration in
stamp duty, UK is also getting strengthened legally. On the opposite side, the production level of
country was decreasing with some exceptions which accounted due to bad weather conditions.
The construction output has also raised by 1.3 % because of rise in expenditure of repair and
maintenance.
Its imports of fuel also reduced by 30.4 % due to the outbreak of Corona virus which
reduced the number of flights with a big number. The international Passenger Survey stated a
great decrease in passengers travelling to other countries (Krugman, 2021).
UK has also been effected because of Brexit deal which separated it from European
Union. It lowered down the GDP of country by around 4 %. It also affected the whole supply
chain system and the routes and operations of all the businesses. The economy of UK has been
affected due to new rules and regulations. On the whole, it can be said that it has put some
positive impact on some sectors.
Figure 1 GDP growth (Annual %) United Kingdom

The banking sector plays a significant role in capital allocation by accepting savings and
utilising those monies to provide funding to those in need in the form of grants. They operate as
a middleman for the movement of money in this way. Central banks devise policies for
allocating funds and set various rates, such as the Bank rate, to regulate money mobility. The
current monetary policy of the United Kingdom has been established in order to reach the goal
inflation rate of 2% while also maintaining growth and employment. The UK's financial system
is governed by the FCA and the Bank of England.
Explain the manner in which the capital allocation takes place in International market.
International financial market can be defined as a place where all the transactions in
relation to money or other things equal to cash are conducted at a large level. These dealings take
place among various countries and companies of different nations (Demirgüç-Kunt and Levine,
2018). At this place, goods are exchanged between the nation having surplus amount to the one
who is facing deficiency of that product. Looking at the broader level, this does not involve only
money but also foreign direct investment, rate of exchange along with gold.
It is a normal practice of lending and borrowing of money in between nations. Usually,
countries prefer to handle these transactions in their own currency so that it can help them in
increasing the value of its currency. Here, goods and services are sold and purchased which helps
in moving the excess from one country to the other nation who is facing shortage of these
products. The sender government enjoys the benefit of profit and the receiving party gets
benefited by satisfying its countrymen. This help investing persons in ascertaining the exchange
and inflation rates of countries in which they desire to invest. With the help of these markets,
companies can easily have access over credit whenever they feel need of it. This process has
been increased and is conducted with ease and proper regulations with opening of international
market (Ducas and Wilner, 2017).
The World bank controls the money flow in market along with availing loans to its
member countries. The functions of these institutions are just like they are performed at the
national level. They also collect funds from the representatives by selling their securities and this
resource is availed to the needy country.
A global financial centre where notes, currencies, debt instruments, mutual funds, shares,
and other types of securities are sold and purchased is known as an international capital market.
There are several marketplaces that fall under this category, which are detailed below:

 Commercial Banks: By performing money transfer and linking bank accounts on an
international level, these banks serve as a link between diverse countries. They receive
deposits as well as provide money from different nations or clients from different
countries, much as local banks. Take, for instance, the Asian Development Bank.
 Bond Market: This is a bond market that facilitates bond trading across borders. They
entice investors from around the world to invest in and exchange bonds. They were also
issued by a non-domestic corporation. The most common currencies used in these
markets are Euros and Dollars (Guan, Mittoo and Zhang, 2021).
 Global Stock market: It refers to international level of the market where equities are
traded with domestic enterprises. This enables investors to buy shares in a variety of
countries without any restrictions. They assist in the provision of funds to countries that
are unable to secure funds out of their own power brokers. For instance, consider the
Australian Stock Exchange.
 Derivatives: These are used to keep the exchange rate in check when exchanging goods
across international borders. These derivatives' value is determined by the agreed-upon
financial asset. Take, for example, the JSE's International Derivatives.
Conduct an evaluation of the emerging economy.
Arising economies from the name proposes are those countries which are not considered as a
completely evolved country yet these are creating in the field of financial matters. This sort of
country is considered as emerging country based on certain elements. These countries are named
as an arising countries as the compass of their monetary improvement arrives at the worldwide
market and they have begun managing in the global monetary market. With the end goal of this
review, the arising country chose is India. Indian economy is creating at a developing face and is
managing in a wide range of worldwide exchange instruments. Indian Economy recorded their
GDP at US $ 2.62 lakh crores which remains at the second situation on the planet after UK. Be
that as it may, after a profound examination the GDP of the nation is falling incessantly.
 Farming: Indian Economy relies tremendously upon the Agricultural area. Generally,
58% of the number of inhabitants in India is as yet relying on this area to make pay. This
area includes, cultivating, ranger service and fishing. About Rs. 19.48 lakh crores were
the complete gross worth added by this area in the GDP which is US $ 276.37. The

portion of this area was around 17.8 % in the GVA at current cost. Start of pandemic
compounded the situation for the Indian economy. The product area of the economy has
likewise been impacted yet in some time it developed by 17.34 % which was gainful for
the country.
 Manufacturing: India have seen various changes in the residency of the current
government and they have concocted new projects which roused various organizations to
come and create in India. This program was sent off as Make in India. It has given
acknowledgment to the Indian economy worldwide and have acquired numerous FDIs
the economy. This has set out expanded work open doors for the overall population of the
economy. This area has made proficient enhancements in expanding the GDP of the
country however remains after the rural area. This area has additionally moved toward
spending a great deal of sum on innovative work. Trades from this area were 43 % in the
year 2019.

 International Trade: This alludes to the training by which labour and products are moved
starting with one country then onto the next. These are done through products and
imports on account of a country. These imports and products in the country infer is
exchange balance. On account of Indian economy, the exchange balance has seen a fall of
almost 88.55 % in the year 2020. The fundamental justification for this have been the
Covid pandemic.
 Inflation: This alludes to the increment in the overall costs of items and administrations in
the economy throughout some undefined time frame. This is all inverse to the collapse in
the economy. It is a chain impact on the off chance that the costs of the items are
expanding, the shoppers request less of the merchandise, the creation diminishes, the pay
of the customers likewise diminishes and henceforth they request all the more less items.
This influences the expectation for everyday comforts of individuals in an economy. The
expansion rate in India have seen a little ascent and this influences the loan fee of the
banks, pace of annuity and different things also.
Evaluate the challenges faced by country due to industrialization and Trade policies
It is procedure in which the whole economy of country changed from agricultural base to
industrial hold. People started manufacturing their product at large scale. Earlier the goods which
were produced manually and in small scale, after industrialization, they were prepared with the
help of machines and in bulk quantity. Almost whole world enjoyed this change as they were
earning huge amounts of profits and reputation from world (Miroshnychenko, Bozzi and

Barontini, 2019). But due to this revolution nation faced lots of challenges like many people lost
their jobs. This helped the countries in boosting the economy of nations. For example, with the
introduction of machines for production, the working of people got automated. Due to this, now
there was a need of less people for doing same work and that too in less time and hard work.
This resulted in loss of jobs and put nations in a very critical situation which all countries had to
tackle effectively. Even in present times, with a single political decision, the whole economy gets
affected, it can be positive or negative. This impact has been discussed below in relation with
UK.
Four key challenges faced by UK due to its new Industrial strategy
 Productivity – The production level of country is at low stage from last some years.
There are five aspects of productivity – Innovation, People, Business Environment,
Infrastructure and Place. These were the bases which can help in increasing the output
level on hourly basis. Here, the entrepreneurs working at small and large level were not
given any importance. They were not having enough money to carry out the activity if
supply chain. It did not even recognise the competition existing in the economy. Another
problem was that it was really difficult to implement this properly.
 Skills – This was other problem in the implementation of this strategy. People were not
having required skills. There was a huge demand of skilled engineers but they were not
available in the country. The government did not desire only new skills but was also in
search of finding new technique of inhibiting learning among people. There were some
plans like new regulators and offices from students, retraining scheme for the purpose of
reskilling and many more. But they got shortened at the time of implementation. One of
the problem was shortage of funds that were must for the completion of some tasks
(Nigro, Favara and Abbate, 2021).
 Digitalisation and Technology – This was another strategy recognised under
industrialisation that there is a great requirement of handling of data through artificial
intelligence. Even in this case, the amount allocated for the fulfilment of task was low
when comparing to the desired figure. Brexit – A lot of industrialists said that they had face lot of challenges due to Brexit. The
economy has to suffer a lot because of this. But on contrary, many feel that it is a very