INTRODUCTION TO INTERNATIONAL FINANCE
International finance is also known as international macroeconomics. It is because nations trade with each other, lend and borrow from each other, and affects economic movement that international finance came into existence.
With international credit and debit, opportunities are growing and options are available to raise one’s income. On the downside, as international finance can cause income growth so can it cause potential financial crisis.
The largest market in the world is foreign exchange. It is then followed by exports and imports. With globalization, international trade has become very important and essential to all nations.
International finance is a result of various types of currencies. It is also a result of intertemporal trade. Intertemporal trade is shown and is present in securities. Flows of securities are huge, more massive than trade in its entirety. Those that contribute largely to fluctuating markets are the gross flows. The situation that sets the stage for financial and currency crisis are when country borrowers receive monetary currencies that are not from their country. Example is peso to dollar.
The history of capital flows notes that there was a very large capital flow until the year 1913. A big trough caused the market not to recover until the middle of 1980s although post World War II economy is much favorable than the pre-World War II period. The fruitful and productive years of financial mobility was curved by World War I. Furthermore, the Depression years up to World War II were really a downtrend.
It was only with the beginning of the oil shocks that recovery became possible. As of the present, the status of the economy is back to the economic standing of World War II. This only proves that institutions, along with technology, promote capital flows and globalization.
The International financial system is vital to international economic organizations. Bimetallism should be identified. Gold standard, which is the top of the capital market globally, should also be identified. Depression shattered the system during World War I. The system then worked again until it collapsed at the onset of OPEC and previous to that, the Vietnam War.
Globalization cannot be pinpointed as the culprit since there was a very high international capital mobility in the early twentieth century. Some major countries have adopted the euro as their currency and canceled out their own currency. Some countries attach their currencies to the dollar or another important currency.
Bilateral exchange rates are the cost of one currency as against another currency. The periods that were prominent for its tremendous instability were the 1970s and 1980s. European countries attempted to stabilize the variations of their currencies against each other. The forerunner of the euro was the EMS. It reserved individual currencies yet the European countries were compelled to narrow bands.
When Italy, Sweden and the United Kingdom dropped out of the system in 1963, it underwent a massive crisis. This encouraged the direction towards the euro. The euro eliminated speculations against other individual currencies.
All European Union members are required to accept and adopt the euro. However, United Kingdom and Sweden still have political issues to settle regarding this. Italy joined in but France and Germany are being difficult.
Evaluating a single currency is ambiguous at best as it is the result of doing commerce with other countries. Trade weighted exchange rates are rates based on a country’s shares of trade transactions with the United States. Example is the peso exchange rate to the US dollar.
After 1973, prices became more unstable causing inflation. Variations in a country’s inflation rates are a significant factor in the establishment of nominal exchange rates.
The current account balance is the total amount of net exports of a country including net transfers. Net exports are the exports of goods and services without the imports. It is how a country’s trade relations with other countries are evaluated and analyzed. If a certain country has a surplus in its current account, it is said to be obtaining assets from other countries. If it does not have a surplus, the country is said to be in debt.
A reason why developing countries are becoming large lenders to rich countries as the United States is because of the financial crisis at the turn of the twenty-first century. Reserves were built up by these developing countries.
On the other hand, a country can have a huge current account shortage but can have a surplus or excess in the capital account.
Credit:ivythesis.typepad.com
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