Background to International Trade and Finance

Background to International Trade and Finance

The investors : 

• Must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset and classes and securities that will benefit from economic trends occurring within the country
• Macroeconomic variables (inflation, unemployment, consumption) affect the overall level of activity
• Different's impacts on the growth and profitability of industries

How do investors identify markets that provide opportunities ?

1. Analyze cross-country differences in factors

•     Expected GDP growth rates
•     Monetary and fiscal policies
•     Trade policies
•     Competitiveness

B. Longer term perspective

• A country’s stage of economic and financial market development
• Demographics
• Physical and human capital
• Comparative advantage -> being able to produce a good or service at a lower cost or use fee resources

Opportunity cost (x) = q(y) / q(x)

A country has and advantage in producing a good or service if its opportunities cost of producing that good is less than that of tis trading partner.

A country that has not an advantage can still gain from trade by exporting the goods in which it has a comparative advantage.

It can also change over time as a result of:

-structural shifts in its domestic economy

-shifts in the global economy

-accumulation of physical or human capital

-New technology

-discovery of new natural ressources

Aggregate output and income :

Agregate output : value of all the goods and services produced in a specified period of time

Aggregate income : value of payments earned by the suppliers of factors used in the production of goods and services

4 broad forms of payment :

• Compensation of employees
• Rent
• Interest
• Profit

Aggregate expenditure : total amount spent on the goods and services produced in the domestic economy during the period

Output / Income / expenditure => must be equal

The aggregate output of a nation over a specified time period is usually measured as its gross domestic product (GDP) or it’s gross national product (GNP) also referred to as gross national income (GNI)

Gross National Product (GNP) : market value of all final goods and services produced by a factors of production supplied by residents of a country

GNP = Gross domestic product + net factor income from abroad (Income earned in foreign countries by residents - income earned by foreign nationals domestically)

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