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
International Economics
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
Offshore Financial Centers (OFCs)
Any international business unit, whether manufacturing or trading is always looking for funds for their operations. Every company cannot take funds from its home country due to strict regulations or interest cost or taxes. All over the world the business community is in search of locations where their investments are safe and the funds can be taken out without any barriers and invested comfortably for any ventures in any part of the world. Currently, Mauritius, Malta, Panama, Man’s Island, Cyprus, Seychelles and Hawaii are a few centres attracting offshore banks. Since 2003, the Government of India has permitted banks to set up offshore banking operations in Special Economic Zones. Hence, the system of offshore banking has become part of international business. Offshore banks are banking units set up by foreign banks in territories where the restrictions and regulations are limited and the intervention of the country of location is minimal. Continue reading
Conflicts with Firms Profit Maximization Objective
Profit maximization is the most popular hypothesis in economic analysis, but there are many other important objectives, which are not to be avoided by any firm. Modem business firms pursue multiple objectives. An important aspect of profit is its use in measuring and controlling performances of the individuals of the large business firms. Researches have concluded that the business individuals of middle and top management often deviate from profit objective and try to maximize their own utility functions. They give importance to job security, personal ambitions for promotion, larger perks, etc. But this often conflicts with firms profit-making objective. The reasons for conflicts are as follows: More energy is spent in expanding sales volume and product lines than in raising profitability. Subordinates spend too much time and money doing jobs perfectly regardless of its cost and usefulness. Individuals depend more to the needs of job security in the absence of Continue reading
Economic Impacts of Deficit Financing
Deficit financing can be regarded as a necessary evil which has to be tolerated, at least in the developing economies; only to the extent it can promote capital formation and economic development. This extent of tolerance is called the “safe limit of deficit financing”. This safe limit shows the amount of deficit financing that the economy can absorb and beyond which ‘inflationary forces’ may be set in motion. The economic impacts of deficit financing are: Deficit Financing and Price Level There are two opinions regarding the effect of deficit financing on the price level especially in a developing country. According to one view, deficit financing need not be inflationary in character especially if it is used during the peace time. The advocates of this view argued that: In a developing economy the existence of non-monetized sector will absorb the issue of new currency and shrink in its size over a Continue reading