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Semester 2: B.COM Financial Marketing Analytics
Internal and International Trade
Internal and International Trade
Internal trade refers to the buying and selling of goods and services within a country. It encompasses all domestic transactions, influencing local economies and serving the needs of consumers.
International trade is the exchange of goods and services between countries. It allows nations to specialize in the production of certain goods, promoting economic growth and efficiency through comparative advantage.
Internal trade plays a crucial role in the economy by ensuring efficient distribution of resources, creating jobs, and fostering competition among local businesses. It enhances consumer access to a variety of goods and services.
International trade enables countries to access goods not available domestically, promotes economic development, and facilitates cultural exchange. It can lead to increased productivity and a wider array of products for consumers.
Barriers may include government regulations, tax policies, and local market restrictions. These barriers can limit market access for businesses and impact the prices of goods and services.
International trade barriers may consist of tariffs, quotas, and trade agreements. Such barriers can affect international pricing and a nation's balance of trade, leading to trade deficits or surpluses.
Key theories such as absolute advantage, comparative advantage, and factor endowment explain the rationale behind trade. They highlight how countries can benefit from trading based on their unique resources and capabilities.
Trade policies, including tariffs, subsidies, and restrictions, are designed by governments to protect domestic industries or promote exports. Such policies can significantly impact both internal and international trade dynamics.
A shift towards digital trading platforms, increased emphasis on sustainability, and evolving trade agreements are current trends influencing both internal and international trade landscapes in the global economy.
Balance of Payments
Balance of Payments
Definition and Importance
Balance of Payments refers to a systematic record of all economic transactions between residents of a country and the rest of the world over a specific period. It is crucial for understanding a country's economic health, determining exchange rates, and assessing foreign investment.
Components of Balance of Payments
Balance of Payments is divided into three main accounts: the Current Account, the Capital Account, and the Financial Account. The Current Account includes trade in goods and services, income, and current transfers. The Capital Account records capital transfers and acquisition/disposal of non-produced, non-financial assets. The Financial Account captures cross-border investment flows.
Current Account and Trade Balance
The Current Account primarily deals with trade in goods and services. A trade surplus occurs when exports exceed imports, while a trade deficit is when imports surpass exports. The trade balance is a key indicator of economic performance.
Capital and Financial Accounts
The Capital and Financial Accounts reflect the movement of capital in and out of a country. Capital Account includes financial transactions that don't affect the future income; the Financial Account includes foreign investments and reserves actions.
Adjustment Mechanisms
Adjustments to Balance of Payments occur through currency valuation, changes in income and prices, and government policies. A persistent imbalance may lead to economic adjustments such as devaluation or policy reforms.
Impact on Exchange Rates
Balance of Payments influences exchange rates through supply and demand of currencies. A surplus can lead to currency appreciation, while a deficit may result in depreciation.
Global Implications
Balance of Payments has significant implications on a global scale, affecting international relations, trade policies, and global economic stability.
Foreign Exchange Rate Theories
Foreign Exchange Rate Theories
Purchasing Power Parity (PPP)
PPP theory asserts that exchange rates should adjust so that identical goods in different countries have the same price when expressed in a common currency. It is based on the law of one price and helps to explain long-term currency valuations.
Interest Rate Parity (IRP)
IRP theory suggests that the difference in interest rates between two countries will result in a corresponding change in the expected exchange rate between the currencies of those countries. It helps to facilitate arbitrage opportunities and maintain equilibrium in the forex market.
Balance of Payments Theory
This theory states that exchange rates are influenced by a country's balance of payments. A surplus in the balance leads to appreciation of the currency, while a deficit can lead to depreciation, as foreign exchange demand and supply are affected by international trade.
Monetary Model of Exchange Rates
This model emphasizes the role of money supply, inflation rates, and interest rates in determining exchange rates. It posits that changes in these monetary factors influence currency value in the long run.
Behavioral Equilibrium Exchange Rate (BEER)
BEER takes into account economic fundamentals and market sentiments to determine the equilibrium exchange rate. It considers factors such as growth differentials, trade balances, and market expectations.
Asset Market Approach
This approach focuses on the forex market as a financial market where expectations and capital flows play a significant role in determining exchange rates. It emphasizes the role of investors and speculators in influencing currency movements.
International Monetary System
International Monetary System
Definition and Purpose
The International Monetary System refers to the set of rules and institutions that govern international currency exchange rates and the flow of capital across borders. Its primary purpose is to facilitate international trade, investment, and financial stability.
Types of Exchange Rate Systems
The International Monetary System comprises various exchange rate regimes, including fixed, floating, and pegged systems. Fixed exchange rates are tied to a specific currency or a basket of currencies, while floating rates fluctuate based on market forces. Pegged systems are a hybrid, where a currency is tied to another currency but allowed to fluctuate within a certain range.
Key Institutions
Institutions such as the International Monetary Fund (IMF), World Bank, and Bank for International Settlements (BIS) play crucial roles in the International Monetary System. The IMF provides financial support and guidance to countries facing economic difficulties, while the World Bank focuses on long-term economic development and poverty reduction.
Globalization and the International Monetary System
Globalization has significantly impacted the International Monetary System by increasing the interdependence of economies and financial markets. This has led to a greater need for coordinated monetary policies and stronger regulatory frameworks to ensure stability.
Challenges and Reforms
The International Monetary System faces several challenges, including currency volatility, imbalances in trade and capital flows, and inequalities among nations. Reforms may include establishing new reserve currencies, enhancing the role of the IMF, and creating mechanisms to address currency manipulation.
Future Trends
Future developments in the International Monetary System may include the rise of digital currencies, increasing influence of emerging economies, and potential changes in the role of the US dollar as the dominant reserve currency. Additionally, climate change and sustainability will likely impact financial decision-making on a global scale.
International Financial Institutions
International Financial Institutions
Definition and Purpose
International Financial Institutions are organizations that provide financial and technical assistance to countries for development projects and economic stability. They aim to reduce poverty, promote economic growth, and facilitate international trade.
Types of International Financial Institutions
There are several types of IFIs, including multilateral development banks, regional development banks, and international monetary organizations. Notable examples include the World Bank, International Monetary Fund (IMF), and regional banks like the Asian Development Bank (ADB).
Role in Global Economy
IFIs play a critical role in the global economy by providing funding for development projects, stabilizing economies during crises, and offering a platform for international cooperation. They support nations in implementing reforms and building infrastructure.
Functions of IFIs
The primary functions of IFIs include providing loans, offering grants, facilitating technical assistance, advising on policy reforms, and enhancing capacity-building in member countries.
Impact on Developing Countries
IFIs significantly impact developing countries by funding essential services such as education, health, and infrastructure. However, their influence can also be controversial, leading to debates over conditionality and sovereignty.
Challenges Faced by IFIs
International Financial Institutions face several challenges, including criticism over governance structures, transparency issues, and the effectiveness of their interventions. They must adapt to the changing economic landscape and address the concerns of various stakeholders.
