The Role of Finance in International Trade: An Essay

This essay delves into the critical role of finance in international trade, beginning with an overview of financial markets, including money and capital markets, and their functions in price discovery, liquidity, and transaction cost reduction. It examines capital allocation, the effects of interest rates, and the dynamics of international money markets, foreign direct investment, and foreign exchange rates. The essay analyzes the impact of exchange rates on international trade and explores the challenges faced by India due to its trade policies, including efforts to attract foreign direct investment and the implementation of the Goods and Services Tax (GST). The conclusion summarizes key findings, emphasizing India's role in the World Trade Organization and its promotion of exports, while also acknowledging the complexities of intellectual property policies and the need for Indian businesses to adhere to strict regulations in various sectors. The report aims to provide insights into the financial aspects of international trade and the economic landscape of India.

Essay on international trade
Finance
Finance is the lifeblood or the power source of growth for international trade. Also, a
financial market is a marketplace in which people trading of securities and it plays a vital
role in the smooth operation of capitalist economies (LSBF staff, 2018). Under the financial
market, 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 junior
consultant 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 where
different things are to be explained. The first part proves the background of the financial
market and how it allocates capital allocation among domestic as well as international
economy. Capital allocation and international market economy is the important feature for
economy growth, On the other hand, it can be affected due to several factors which we
discussed in the report. Towards allocating capital within domestic market and international
market, it requires to be aware of how financial market works, as well as I, will discuss the
various 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 of
the emerging economy. Furthermore, at the time of industrialisation and preparing trade
policies, problems faced by India are discussed in the report. At the end of the report, the
report concludes by summarising the key finding and makes recommendation accordingly
by applying constant use of academic models to explain the proposed suggestion and
recommendation.
Financial markets background
A financial market refers to a market where people exchange or trade financial securities
include the bond market, Forex market, derivative market, and stock market. Also, it plays a
significant role in promoting the smooth operation of capitalist economies by distributing
resources 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 which
are 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 and
the buyer of financial securities figure out the price of traded assets. However, at the same
time, the return from the investment's funds is decided by the participants. The market
promotes efficient information distribution and allows a participant to classify the prices at
which agreements can be bought or sold.

Liquidity- This function allows investing to sell financial instruments since it is referred to as
a 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 sell
it.
Reduction of transaction costs- This function is implemented when the members of the
financial market are charged the cost of trading financial securities. In market economies,
the economic basis for the existence of institutions and instruments are related to
transaction costs, so, the surviving institutions and instruments are those that have the
cheapest costs.
Capital and money markets are the two major types of financial markets which will be
explained below:
A capital market is a place where long-term debts are bought and sold. Let's look at two
main types of capital market. The word "market" can have a different meaning. The primary
market is a market where new securities are built and sell stocks and bonds for the first to
their public. The secondary market is where investors traded the securities they already
own. The secondary market is commonly known as the stock market for buying equities; this
involves the new stock exchange (NYSE), NASDAQ, and all major exchanges all over the
world. In the secondary market, investors trade previously issued securities without
company involvement. Let's take an example- If you want to buy Amazon (AMZN) stock, you
need to only deal with other investors who own shares in amazon. Amazon is not involved
with the transaction directly (Brain Beers, 18 Sep 2020).
The money market is a part of an economy that gives short term funds. It performs a
primary role in the financial system of a country, by influencing it through the country's
monetary 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 financial
market:
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 contactless
payments, foreign exchange, etc. Furthermore, it allows agents to insure against price
volatility.

Capital Allocation
The word "capital Allocation" is the method of distributing and investing a company's
financial 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. All
decisions 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 business
and may have an extreme effect on long term investment returns for its shareholders. The
management looks to distribute the capital in that way which will create wealth for
shareholders 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 the
money. Lower the interest rate can influence people to borrow money to make big
purchases. When people pay less interest, it will give more money to spend, which creates a
ripple effect of increased spending across the entire economy. Also, a lower interest rate
can be beneficial for business people and farmers because it encourages them to buy large
equipment due to the low cost of borrowing. Thus, this creates a situation where the
productivity of the economy increases.
HIGHER INTEREST RATE
A high-interest rate means that people do not have left as much disposable income in their
pocket, so they need to cut back on their spending. When a higher interest rate is
integrating with an increased lending level, this will not only affect the public but also affect
the business people and the farmers who need to cut back on their spending for buying
pieces of equipment. Thus, this creates a situation where the productivity of an economy
reduces.

International capital market and international
money market
The international monetary market was implemented in May 1972, but it was introduced in
December 1971. An international money market is a place where the transactions of
international currencies between several central banks are carried out; these transactions
will be carried out using gold or in US dollar as a base. The international money market plays
a key role in handling a huge sum of international currencies traded daily. "The Bank for
International Settlements has revealed that the daily turnover of a traditional exchange
market is about $1880 billion (about $5,800 per person in the US)" (Brian Twomey, 2020).
FOREIGN DIRECT INVESTMENT
Foreign direct investment means an investment is made by a firm or an individual in one
country into business interests found in another country. (James Chen, 2018). Foreign
direct investment plays a significant role in expanding economies and emerging markets
where business needs funds and ability to boost their international sales.
FOREIGN EXCHANGE RATE
The foreign exchange rate is the value of one country currency versus the currency of
another country. The exchange rate directly affects international trade, the flow of capital
and political sentiment. A low exchange rate support tourisms and the export economy.
Thus, domestic goods become cheaper for a foreign buyer. Consumers will have the power
of buying to spend on imported goods.
Impacts of Exchange rate in the International
Market
In this time of globalisation, goods from other country areas ordinary, or sometimes even
more ordinary, than produced domestically. The foreign exchange rate affected the prices
which they pay for imported products. A weak domestic currency refers that the price they
pay for foreign products will usually grow. A weaker domestic currency can increase the
inflation rate in a country that is a big importer, as of higher prices for foreign goods. This
might include the central bank raise interest rate to counter inflation, as well as to support
the currency and prevents it from plunging sharply. On the other hand, a strong currency

depresses inflation and exerts a drag on the economy that is tantamount to tight monetary
policy (Elvis Picardo, 2020).
Challenges faced by Indie due to trade
policies
The Indian trade policy for 2015-2020 is set out in the Foreign Trade Policy and the Indian
government liberates its foreign policies every five years. On the other hand, the FP is re-
evaluated periodically to account for an external and internal macroeconomic factor.
Foreign policies aim to stimulate the increase of India's share in global exports to 3.5% by
2020. It looks to set up the link between trade policy and other domestic initiatives,
including "Made in India". Together, these policies try to incentivize the diversification of
India's export base thus it will result in increasing global competitiveness. The Indian trade
policy for 2015-2020 will remain in force up to 31 March 2020 and a new Indian trade policy
is expected to come into force by 1 April 2020 (Sanjay Notani, 2020).
Also, India has now been implementing measures to attract foreign direct investment. The
FDI limit applicable in several sectors has been liberalized and the FDI policy has been
simplified. Furthermore, India has been making efforts to help ease foreign trade. In recent
years, India introduced changes to domestic competition and intellectual property policies
and laws. The new goods and services tax (GST) regime replaced all indirect tax laws in India
from 1 July 2017. With its implementation, both central and state governments will
concurrently implement GST on most goods and services imported to or produced, in India.
GST will enhance India's trade competitiveness by cutting the imposition of multiple taxes.
In effect, GST will convert the Indian economy into a single common market. This measure is
likely to ease India's otherwise complex tariff structure (Panagariya, 2019).
Conclusion
I will discuss the background of the financial market, and it concludes that a financial market
is a place where buyer and seller exchange securities. The types of the financial market,
money market, key role of financial intermediates, trade-in Ricardian model has been
discussed in the report. Also, I have studied that how the interest rate affects in U.S
economy, foreign direct investment, how the exchange rate impacted the international
market. India is one of the originating members of the world trade organization. India has
been promoting many facilities through multilateral agreements. The Indian economy has
been facilitated for raising its exports in a broad range of areas, including clothing, textile,
etc. However, the intellectual property compared to the policy goes against India, and in a

different sector, Indian businesses must need to follow strict laws. In the end, this report
includes the evaluation of several sectors of India as an economy.