International Trade, Finance and Investment
Name of the Student: Korum Ahmed
Student’s ID: (ID H1601178)
In this report evolution in the domestic and international market will be discussed. The role of Bank of England, UK monetary policy, UK regulations governing the finance market will be discussed briefly. Introduction to BRICS will be done here in this report as well. The report wills also contain brief discussion about London Stock Exchange and AIM. Different types of international trade agreements will also be discussed here. Evaluation of the emerging economy of India will be done in this report as well. Again critical assessment of the problems that the India economy faces will be done in this report at the end.
People of the UK go through various types of short term savings and investment plans for earning maximum returns in a quick and easy manner in the domestic market where commercial banks play important role in the allocation of capital. Crossing the national boundary international trading is done between a large number of lenders and borrowers in the international capital market. In the international capital market the trading and capital allocation of different countries all around the globe is done. The present report contains brief discussion on the role of Bank of England, monetary policies of UK and regulations governing the UK financial system.
Introduction to debt and equity market:
Debt and equity are financial instruments traded in the debt and equity market. Government and corporate bonds and mortgages are examples of debt instruments which require fixed payment of the holders following some of the interest. On the other hand the common stock shares are examples of equity instruments. These types of instruments are traded in the stock markets such as the London Stock Exchange, New York Stock Exchange, etc.
Capital allocation in the domestic economy:
The banking system and examples:
The banking, as well as the financial sector of the UK, is very stable. The banks and other financial institutions in the domestic market of the UK have to perform under a tight regulatory framework. There are both foreign and government-owned banks present in the market. Lloyds Group, the Royal Bank of Scotland (RBS) Barclays and HSBC are the giant banks present in the UK banking sector. The Competitive and Market Authority (CMA) of the UK takes a number of anti-competitive actions make the market stable. The UK financial market is monitored by the Financial Conduct Authority (FCA) which is a government body.
- Bank of England and its Roles:The macro and microeconomic roles are the two major roles that the Central Bank of the UK plays. The banks further monitor the market to maintain stability. Maintaining price stability and inflation regulation is the macroeconomic role of the bank and to act as a lender in the money market is the microeconomic role (Baldwin, 2013). From this bank the government and many other banks in the present market take a wide range of financial services. The banks maintain the gold and foreign exchange reserve of the county as well.
- UK Monetary policy:the Finance Service and Banking Act 2000 (FSMA) is the primary regulatory framework which is designed to regulate the financial performance in the UK banking and financial sector. The Monetary Policy Committee (MPC) sets out the monetary policy in the UK on behalf of the government. MPC consists of 9 individual members and they go through several meetings before deciding monetary policies and finally. It may take 2 or 3 years to implement the policies properly for getting the benefits. One form of monetary policy is the manipulation of the exchange rate as it is influenced by the interest rate. A wide range of schools of economic theories has evolved for more the 100 years which shapes the modern monetary policy of UK.
- Regulations governing UK financial system: policy of UK Bank of England, a division of it which is Prudential Regulatory Authority (PRA) along with the Financial Conduct Authority (FCA) is the three main regulators of the banks in the UK. The current regulatory framework legislation and rules have been derived from the Financial Service and Market Act 2000 (FSMA) which is the primary regulatory framework in the UK. The banking and financial regulation of the UK is influenced by the European Economic Area (EEA). Rulemaking, regulatory policy, enforcement, supervision all are maintained by these. The banking regulation of the UK is also influenced by Her Majesty’s Treasury. FSMA 2000, the Banking Act 2009, the financial Service Act 2013, Financial Service Act 2016 is some of the principal regulations that govern the banking industry throughout the UK (Blackstone, 2016).
Domestic money market (short term savings and long term loans):
Compared to the long term investment the short term investment does not bring about high return of profit. And for the case of short term saving and investment buying various stocks and stock funds is a riskier thing to do. The short term saving in the UK has to be done for at least three years. Short term saving has limited downside or none at all compared to the long term savings. In the UK the short term investment is highly liquid and an investor can get the money whenever they want (Daudin, 2015). There are a number of short term investment plans in the domestic UK money market such as treasuries, money market accounts, savings accounts, short term UK government bond funds, short term corporate bond funds, etc.
For the case of long term loans the cost is speed over the time and it is easier to afford as the repayments are lower. But borrowing over a longer period of time one will end up more interest. For this it is better to pay off the loans as quickly as possible. People generally prefer long term loans with smaller repayments. Up to a period of 10 years or more the long term loans are paid off. For affordable monthly payment, availability of many lenders, competitive interest rates and availability of larger loan amount the long term loans are considered in the UK money market (Eyler, 2013).
Source: Office for national statistics.
London Stock Exchange and AIM (London Stock Exchange for Small Businesses):
Stock markets are market places for buying, selling, issuing and trading securities and ownership stakes of various organizations and companies. Currently, there are 60 major stock exchanges all around the globe. New York Stock Exchange and UK Stock Exchange are some of the oldest stock exchanges in the world.
London Stock Exchange is the largest stock exchange in the whole Europe which is also the oldest one in the world. It is situated in the city of London and the current market capitalization of it is 4.59trliion US dollars. The investors and traders can make money through buying and selling wide range of securities in this exchange. It provides various companies all around the worldwide range of routes for increasing their profiles and make money. In this stock market people can buy shares of thousands of companies all around the world and become a part of the money market (Dufey, 2014).
As a submarket of London Stock Exchange, the AIM (Alternative Investment Market) was established which works as an international market place for the smaller growing companies all around the world. The smaller companies willing to raise their profile as well as their market share along with capital can get themselves listed in the AIM. AIM provides much regulatory flexibility compared to the main market where being listed in the public exchange they can raise their capital getting access to the public market. It was established in 1995 and has been the most successful growth market in the world. It is supported by experienced advisors and experts in wide range of fields and sectors and more than 3600 companies are listed here (Gilpin, 2017).
Evaluation of capital allocation in the international market place
International capital market and examples:
The international capital market is much like the domestic capital market but here in the international market the individual persons, companies, organizations and even the government can lend money to the other who are in need and make trading operations across the world. The commercial banks provide a platform for trading between the buyers and sellers at the international level where both bother the party’s benefit. These banks provide a range of financial services, grand loans and accept deposits to the individuals and companies at the international level following their own outlined policies (Groppelli, 2016).
Source: slide share.
In the native currencies of various countries except for USA and international bond also known as debt bond is issued by a non-domestic entity. Following some of the specific intervals the principal amount, as well as the interest in it, is paid. On the other hand the Euro bond is issued in currencies other than the home currency of a country. These types of bonds are helpful for raising the capital of a range of organizations. Foreign exchange market determines the exchange rate of currencies all around the world. It is an over the counter global market place which is also known as FX or Forex. It enables the participants to speculate exchange, buy and sell in various currencies. For currency speculation the foreign exchange derivatives are used whose payoff depends on the foreign exchange rates. It is one kind of financial instrument that is used to gain access to various hard to trade markets (Hallwood, 2016). in the international market place also there are a number of non-bank financial instruments such as venture capitalists, insurance firms, microloan organizations, pawnshops, currency exchanges, etc. these types of institutions are specialized in various sectors which are not suited to banks which also serve as competition to the banks. This institution plays important role in providing wide range for services in both the national and international money markets.
Discuss the Ricardian theory on comparative advantage
Contribution of different types of international trade agreements:
- World trade organization (WTO, OECD, etc.): for ensuring sustainable development and strengthening economic prosperity WTO, OECD (Organization for Economic Cooperation and Development) undergo various economic activities all around the world. The WTO sets up rules for enabling effective international trade removing the barriers for international investment and economic cooperation (McKinnon, 2017). These types of organizations work for removing trade disputes and barriers all around the world so that efficacious capital allocation in the international money market can be done. These types of organizations work for promoting empowerment and economic diversification all around the world.
- Regional trade agreements:The regional trade agreements are done among various countries around the world for ensuring proper trade and economic cooperation. For creating new job opportunities, better investment, expanding the market and many other reasons the regional trade agreements take place. Currently there are more than 320 regional trade agreements prevailing all around the globe which strengthens the trading relationship among various nations of the world (Millar, 2013). NAFTA is a North American Free Trade Agreement which is a trilateral trade agreement in North America. EFTA is a free trade agreement among four nations of Europe. Some other examples of regional free trade agreements are CPTT, ASEAN, CFTA, EEC, etc.
- Various types of investment treaties between nations:When investment treaties take place between two nations it is called bilateral treaties. There can be bilateral, multilateral and sectorial investment treaties among various nations of the world. The sole purpose of these types of treaties is the protection, promotion, and liberalization of investment between the member nations (Mishkin, 2018). There are more than 2500 bilateral treaties all around the world. Through foreign direct investment, an investor of one country invests in another country too own and control a business. Following these types of investment treaties different nations can come to agreement on investment and economic cooperation removing barriers of trade.
Evaluation of emerging economy of India:
Introduction to BRICS:
BRICS is the acclimate of five developing countries (Brazil, Russia, India, China, and South Africa) of the world. It is often considered as the new shift of international economic movement. For achieving a wide range of economic achievement the member countries work together and increase economic collaboration and cooperation. For achieving sustainable development programs and infrastructure the member countries of BRICS works so that economic growth, trade, and investment cooperation among the developed and developing countries of the world can be ensured (Rajan, 2014). It works for coming up with greater contributions the economic and social development in the members’ nationals as well as other developing countries. For coming up with significant development impact in the member countries for promoting sustainable development projects and infrastructure the BRICS has established New Development Bank in 2014. It works with various national development banks and a range of multilateral development institutions for ensuring extensive network of global trading partnerships (Rajan, 2018).
Agriculture, capital market, inflation and foreign direct investment of India:
India’s economy is one of the fastest-growing economies of the world. It is considered to be among the top three economies of the world in 10to 15 years. India has diverse agro-climatic conditions along with high proportion of agricultural lands for cultivation of wide range of corps. Agricultural exports from India are increasing due to high external demand and an increase the urban and rural income along with large population of the country (Root, 2014). But the country has long way to go for eradiating the sufferings of the farmers of the country in some of the rural areas.
Between April 2000 and June 2019 the equity inflow of Foreign Direct Investment of India has reached 436.47 billion US dollars. A report of NASSCOM (2016) states that there have been 4750 technology startups with more than 1400 new startups in the year 2016. The report also says that it has reached third largest startup base in the world that year. The technological growth of the country has enabled it to bring about significant changes in various services sectors such as IT, finance, personal and business services as well as insurance. Numerous initiatives of the government have successfully created widespread job opportunities which increase the employment rate of the country.
Figure: FDI equity inflow of India.
Critical evaluation of challenges that the Indian economy faces due to industrialization and trade policies:
A critical assessment of problems and challenges that India faces:
For a developing economy of India the industrialization plays important role. The country is going through wide widespread policies for privatization, liberalizztion, and deregulation of the economy of the country which is accelerating the economic development of the country. The country is effectively promoting specialization in various sectors, increasing employment opportunities, raising agricultural production and thus increasing economic stability and national income. Again in the path of economic and industrial development of the country corruption in different sectors, taxation problems and political stability are of real concern. For proper economic development and industrialization India lacks huge infrastructural development.
Infrastructural facilities include transport and communication, finance, housing and insurance, technological backup, health education, energy, etc. again the social infrastructural facilities of India are much lower than other countries of the world. Due to lack of transparent laws and processes, discriminatory powers in various department of the government, complicated taxation policy and licensing system and many other reasons there has been huge corruption issues present in various sectors of Indian economy. Many government organizations and political parties are often engaged in higher levels of corruption which are huge barriers for the economic development and industrialization of the country (Root, 2014). Again the custom duties of India are not aligned with the other ASEAN countries. There is low contribution of income tax, high rate and low yield of direct tax, regressive nature, widening indirect of tax net, progressive tax on income which are some of the major defects in taxation of India. The country needs to rationalize tax infrastructure and reduce corporate tax.
A critical assessment of the challenges that the Indian Economy is facing due to trade policies set by WTO:
The trading and external sectors of India plays significant role in the overall development of GDP growth of the country. The integration of trade and capital flow in the domestic economy of the country has significantly been successful in increasing its GDP. In recent years the government of the country has taken a range of trading policy which is expected to bring about huge economic development for thaw whole nation (Root, 2014). The Foreign Trade Policy 2015-20 is made products and location wise and it is expected to increase the economic development of the country through maximizing the foreign trade of the country.
In recent times India has signed a number of bilateral and multilateral trade agreements with various nations of the world. These recent approaches to trade agreements will be helpful for the country to come up with preferential tariff rates for trading wide range of products with various countries of the world. The Generalized System of Preferences (GSP) and the Global System of Trade Preference (GSTP) are preferential arrangements with 43 countries of the world. The ASEAN is also a free trade agreement of the country with 10 member states if Southeast Asian Nations. Various types of trade agreements of India are Partial Scope Agreement (PSA), Free Trade Agreement (FTA), Customs Union (CU), Common Market (CM), and Economic Union (EU). Apart from these the countries have come up with various bilateral and multilateral treaties with various nations of the world (Tams, 2010).
The WTO policies have helped India to increase its export competitiveness and improve integration in the economy of the country through lowering tariff barriers and thus getting access to the international capital market. In this way India has successfully settle trade disputes and follow structured trade settlements with numerous countries of the world. For being westernized the country has started to lose its culture and values. At the same time domestic industries have deteriorated.
India is one of the founding members of WTO. As a member of WTO, India has been facilitated with a number of facilities through multilateral agreement of WTO. WTO has both favorable and non-favorable impacts on the economy of India. For being founding member nations of WTO, India has been facilitated for increasing its exports in a wide range of sectors of economy including textile, clothing and service area. But the intellectual property related policy goes against India and in different sectors Indian companies have to follow strict rules and regulations. The report contains evaluation of various sectors of Indian economy. Again in this report assessment of the problems and challenges that the Indian economy is currently facing has been done.
Give 3 – 4 recommendations based on the main areas of this report.
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