The major gain of international trade is that it has brought about increased prosperity by allowing nations to specialize in producing those goods and services at which they are relatively efficient. The relative efficiency of a country in producing a particular product can be described in terms of the amounts of other, alternative products that could be produced by the same inputs. When considered this way, relative efficiencies are described as the comparative advantages. All nations can do simultaneously gain from exploiting their comparative advantages, as well as from the large-scale production and broader choice of products that are made possible by the international trade. Suppose that Japan is relatively more efficient in producing steel than food and the United States is relatively more efficient in producing food than steel. So we can expect food to be cheap relative to steel in United States, and steel to be cheap relative Continue reading
International Economics
Profit Maximization vs Shareholders Wealth Maximization
Profit is obtained by subtracting total cost (TC) from total revenue (TR). Under the assumption of the neo-classical theory, a firm will aim to produce a level of output where the difference between the total revenue and total cost is the greatest. The maximization of TR-TC is the equilibrium condition for a profit-maximizing firm. This is because once the firm is getting the most profit from a particular level of output and sales, it will not be incentivised to alter the level of output that is giving it the most yields in total investment performance. A firm which strictly follows the primary assumption of the neoclassical theory of the firm will make its decisions on inputs and outputs based on the marginal effects of the components in the profit equation. Thereby leading economists to arrive at the conclusion that the condition for profit maximization to be achieved is when marginal Continue reading
Analysis of Joseph Schumpeter’s ‘Theories of Economic Development’
At the turn of the century, a period of strengthening the role of monopolies, increasing property differentiation of the population and the deepening of cyclical crises appeared the concept of an Austrian economist and sociologist Joseph Schumpeter. Joseph Schumpeter was an economist and sociologist, he came into the history of economic science as a profound scholar of theoretical problems of entrepreneurship and evolution of socio-economic systems, as the historian of economic theory. His broad vision of the evolution of socio-economic processes still has influence on modern economic thought. He presented his understanding of the subject of economics and tried to combine economic theory, economic sociology and the history of economic analysis. He tried to create a coherent system of believes that explains new phenomena and processes. According to his theoretical views, J. Schumpeter does not belong to any known economic schools. He was involved in many issues, focusing on the Continue reading
Measuring National Income – Three Methods of Measuring National Income and Output
National income can be defined as the part of the objective income of the community including income derived from abroad which can be measured in money i.e the money value of goods and services which is produced and made available for consumption in an economy for a particular period which is usually a year. National income, also known as Gross Domestic Product (GDP) is very helpful to the economists to track the economic growth’s rate, average living standard in one country as well as the distribution of income between different groups of population (i.e. inequality gap). For measuring the national income, the national economy is viewed as follows: The national economy is considered as an aggregate of producing units combining different sectors such as agriculture, mining, manufacturing and trade and commerce. The whole national economy is viewed as a combination of individuals and household owning different kinds of factors of Continue reading
International Fisher Effect
According to the Relative Version of Purchasing Power Parity Theory (PPP) one of the factors leading to change in exchange rate between currencies is inflation in the respective countries. As long as the inflation rate in the two countries remains equal, the exchange rate between the currencies would not be affected. When a difference or deviation arises in the inflation levels of the two countries, the exchange rate would be adjusted to reflect the inflation rate differential between the countries. The International Fisher Effect (IFE) theory is an important concept in the fields of economics and finance that links interest rates, inflation and exchange rates. Similar to the Purchasing Power Parity (PPP) theory, IFE attributes changes in exchange rate to interest rate differentials, rather than inflation rate differentials among countries. Nominal interest rates would automatically reflect differences in inflation by a purchasing power parity or no-arbitrage system. The two theories Continue reading
Note Issuance Facility (NIF)
Note Issuance Facility (NIF) offers a good mix of capital market and syndicated loan operations. Note Issuance Facility is a usual medium term, floating rate, funding instrument – it is a long-term position for the investor who has shifted their performance for short term in view of the country risks of some less developed countries. NIF is a medium term arrangement under which borrowers can issue short term papers (called a Euro note) with the underwriting support of the commercial banks. The different names given to these main facilities with some variation in its terms are revolving underwriting facility(RUF), short-term note issuance facility (SNIP), transferable revolving underwriting facility (TRUF) and Note Purchase Facility (NPF). Note Issuance Facility is the legally binding commitments of the underwriting banks to support funding for a period of say, five years. Mechanism and Documentation of Note Issuance Facility (NIF) The issuer of Note Issuance Facility Continue reading