Capital account records public and private investment, and lending activities. It is the net change in foreign ownership of domestic assets. If foreign ownership of domestic assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a capital account surplus. On the other hand, if domestic ownership of foreign assets has increased more quickly than foreign ownership of domestic assets in a given year, then the domestic country has a capital account deficit. It is known as “financial account”. IMF manual lists out a large number of items under the capital account. But India, and many other countries, has merged the accounting classification to fit into its own institutional structure and analytical needs. Until the end of the 1980s, key sectors listed out under the capital account were: (i) private capital, (ii) banking capital, and (iii) official capital. Private capital Continue reading
International Economics
The Seven Dimensions of Culture by Fons Trompenaars
Fons Trompenaars is the author who belongs to dutch he is one the author of cross cultural communications. Fons studied economics from free university of Amsterdam and he got hid PhD from Wharton school. Trompenaars and Charles hampden have developed a culture which have seven dimensions. Five of his dimensions covers the way in which people interact with each other. The seven dimensions of culture by Trompenaars are explained below. 1. Universalism (vs. Particularism) Universalism/particularism distinguishes societies based on the relative importance they place on rules and laws as opposed to personal relationships. The basic question is: “What is more important–rules or relationships?” Members of universalistic societies focus more on rules, codes, values and standards and believe that they take precedence over the needs and claims of friends and other personal relationships; believe that rules or laws can be applied to everyone and should be used to determine what is Continue reading
Pricing to Market Concept
One important aspect of Purchasing Power Parity (PPP) doctrine is its espousal of law of one price, i.e. assuming one-way transport costs and tariffs. A HMT watch will be priced the same whether it is sold either in Mumbai or New York. But in the literature of international finance two stylized facts are prominently mentioned. First, real exchange rate movements are seen to be very persistent at the aggregate level of the economy. Second, individual prices of traded commodities tend to be sticky in terms of local currency at the micro level. Engel (1993) has compared the relative prices of different commodities within the same country versus relative price of the same commodity across different countries and he has reached the conclusion that the former measure is less variable in all but a few cases such as primary commodities and energy. Also Engel finds Continue reading
Components of International Financial Environment
International financial environment is totally different from domestic financial environment. International financial management is subject to several external forces, like foreign exchange market, currency convertibility, international monitory system, balance of payments, and international financial markets. 1. Foreign Exchange Market Foreign exchange market is the market in which money denominated in one currency is bought and sold with money denominated in another currency. It is an overthe counter market, because there is no single physical or electronic market place or an organized exchange with a central trade clearing mechanism where traders meet and exchange currencies. It spans the globe, with prices moving and currencies trading somewhere every hour of every business day. World’s major trading starts each morning in Sydney and Tokyo, and ends up in the San Francisco and Los-Angeles. The foreign exchange market consists of two tiers: the inter bank market or wholesale market, and retail market or client Continue reading
The Circular Flow Model of the Economy
The circular flow model is used to represent the monetary transactions in an economy. It helps to show connections between different sectors of an economy. It shows flows of goods and services and factors of production between firms and households. The circular flow of income is a model that helps show the movement of income and spending throughout the economy. In the economy, households help provide firms with factors of production, e.g. labour. Organisations use these factors to provide goods and services to the household. The households will then spend their money on the goods and services provided by the firms. This money is use by the firms to pay the households for the work they provide, through wages. This process will repeat itself and then form the circular flow of income. There are two main flows within the model shown above, the flow of physical things, e.g. Good and Continue reading
Understanding Akerlof’s “Lemon Market Theory”
The Lemon Market Theory (LMT) explained by Nobel Prize winner George A. Akerlof in 1970 in his seminal paper, “The Market for Lemons: Quality Uncertainty and the Market Mechanism” describes how markets that sell good products is never identified because of poor quality supplying markets, as sellers of the poor quality products are provided incentives to sell their products. Incentives such as guarantees, warranties and brand names oppose the quality uncertainty issue. The Lemon Market Theory also focuses on the information asymmetry or unbalanced information between the buyer and seller, where the entire set of sellers take the credit for the quality of the product or service rather than granting the individual quality reward to the appropriate seller who provides the good quality ones. This result in extinguishing the existence of good quality sellers from the market because their product’s quality or service is never recognized or identified and they Continue reading