There are various questions which is analysed by the student are given below:
- Analyse how financial markets work to allocate capital within the domestic economy and the international trade, investment and development purposes.
- Use the emerging economy of your choice, evaluate the various key challenges which are faced by the country faced due to industrialization and he various trade polices?
BRIEF BACKGROUND OF FINANCIAL MARKETS
The financial market is the venue where financial products are transferred between the parties. All of these securities are traded and controlled by entities that include major market players, middlemen (brokers), investors and regulators. Financial markets are generally divided into two classes of equity and debt.
Equity financial market- It is a stock exchange where securities such as bonds are purchased and sold. Examples of such exchanges are the London Stock Exchange (LSE), the New York Stock Exchange (NYSE), etc. Equity shares are exchanged between the groups in this industry where the financial instruments firms do not intervene. Equity market includes high risk as the significance of the securities may be shifted due to different reasons.
Debt financial market- This is a bond market where the groups make investments by offering loans in which they gain interest (Downes and Goodman, 2014). This system is known to be a less volatile platform as the value of their shares does not change, the bond holders are the first to be paid when the business is liquidated and even the fixed interest is received against loan. In addition to the risk, the return on the investment in this sector is also small.
DOMESTIC ECONOMY AND CAPITAL ALLOCATION
Capital allocation is a process for the allocation of resources by the government and other accusations within the territories of the nation. National capital is distributed using micro and macro forms. In the macro mode, the Governments of the United Kingdom and its agencies allocate money in the nation by distributing the currencies. On the other hand, at the micro level, businesses issue shares and other securities that are further exchanged in local money and the stock market through which capital is distributed.
Central banks are the agencies responsible for managing and regulating the capital allocation in a nation. In the context of the United Kingdom, such financial regulators are the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). All of these entities are instances of financial institutions that have the function of granting currency on the market and then managing the circulation of currency.
Monetary policy is a technique established by the Bank of England, which has guidelines for controlling the flow of capital (Paunov, 2012). Such plans and legislation include the minimum number of liquidity that each bank must maintain, the minimum level of borrowing, etc. Each of these regulations are merged to form a monetary policy.
In addition to monetary policy, there are many other rules governing the United Kingdom's financial system. These regulations ensure that investor rights are guaranteed by rules that constrain market abuse, market manipulation, accountability in financial reports, etc.
Domestic money market
This system is the place where people can save the money and obtain loans from financial firms in the domestic currency. This domestic money market changes the flow of money as people's savings raise the money on the market and the loans issued decrease the money in the market. This is a two-way system where loans are deemed to have been issued for a long period of time, but deposits are granted for a short time.
People's savings are transferred in commercial banks toward which they have a minimum interest rate. That deposited funds is recognized as the market capital assigned to it. The allocated money is further channeled to provide citizens with loans against such a promise about which high interest rates are paid.
Such markets are the exchange for equity and debt instruments, such as stocks, shares, bonds, bonds. In the sense of the global community, i.e. the United Kingdom, the London Stock Exchange (LSE) and AIM, which is a small company stock exchange, are forms of stock exchanges. The stocks of the firms are exchanged in these stock exchanges. When an individual buys the shares of ABC Ltd. from LSE, the individual pays the monetary amount through which the capital starts to stream into the market and eventually raises the value of the currency.
INTERNATIONAL ECONOMY AND CAPITAL ALLOCATION
The distribution of resources on international markets or the economy is a system for the transfer of money to countries that do not include domestic territory (Jones, 2012). As a consequence of financial markets and rules and regulations, the distribution of resources in the international economy varies from the domestic market. International capital markets have a variety of markets where a nation and its people can invest their capital on the global market. Examples of the global capital market include NYSE (New York Stock Exchange), Shanghai Stock Exchange (SSE), etc. There are various ways where individual and corporate stakeholders in the United Kingdom can spend in the global market by which money is distributed to the global economy. These ways are discussed as follow:
Commercial banks - These are the financial institutions that have a crucial role to play in taking deposits and issuing loans. National investors can deposits their accumulated savings in institutions against that they can generate a return. In addition, loans may also be received from commercial banks in foreign countries. Both of these are the instruments for the allocation of capital to the global economy. These banks also provide the opportunity to equitably distribute for both long and short periods of time.
Bond markets – This is the sort of marketplace where securities are exchanged between the entities. The nation's investors can invest in bonds that are both governmental and non-governmental to the global economy.
Foreign exchange markets- This is the sort of marketplace where securities are exchanged between the entities. The nation's stakeholders can invest in bonds that are both governmental and non-governmental to the global economy.
Global stock markets- This is the stock market where domestic investors can invest in foreign companies by purchasing their bonds, such as shares. This is known to be the most efficient type of capital allocation, since there are higher chances of capital multiplication (Shepherd, Silberston, and Strange, 2013).
Derivatives- This market is equivalent to the stock exchange, but only the shares, derivatives and futures of the firm are exchanged. Investors of the United Kingdom, whether individual investors or organizations, may build for the future and choices of firms in foreign nations. This method of capital allocation in the global economy is profitable, but also extremely risky, given the unknown future prices of derivative products.
Non-banking financial institutions- Such entities are insurance companies, angel investors and other pawnshops in which individuals can invest in order to distribute their resources to the international economy. The main objective for investing in such entities is to generate higher interest in savings. All of the above types or economies are the mechanism by which resources can be distributed to the global economy.
TRADE, FINANCIAL AND INVESTMENT THEORIES
Ricardian Commercial Theory is an economic theory that was put forward by David Ricardio in 1817 (Ricardian trade theory. 2017). This idea is based on the principle of global trade in which it has been claimed that if an asset is available at minimal cost in an international economy, it would be easier to purchase the cost in order to achieve opportunity costs and competitive advantage. Using this theory, the United Kingdom may acquire resources such as labor, that are accessible at low cost in global nations such as China.
Opportunity cost is the cost that is lost due to the option of an alternative. According to Ricardian theory, a nation should obtain an analysis of all the option or opportunity costs and then take the appropriate decision (Folsom, Fitzgerald and Van Alstine, 2012). Opportunity cost is the price of the best possible option that is missed. The principle can be illustrated by an example; the United Kingdom is a developed nation with a labor rate of 19 pound an hour. The option open to the company of that nation is either to hire United Kingdom labor at a rate of 19 pounds an hour or to employ Chinese workers at a rate of 5 pounds an hour. By employing Chinese labor, the cost of the opportunity will be 19 pounds per hour per labor. The cost of this option says that organizations must evaluate all alternatives and then choose one alternative that is most suitable for them.
The comparative advantage is the capacity of a country to produce goods at a lower rate than other nations. Ricardian Economic Theory states that developed countries must recruit workers from developing countries so that this comparative advantage can be gained. Both of the above-mentioned concepts of the Ricardian exchange strategy emphasize the leasing of the wealth of the international economy in such a way that a benefit can be gained.
CONTRIBUTION IN THE INTERNATIONAL TRADE
World trade organization (WTO)
The WTO is the most powerful organization to regulate global trade and investment. This organization plays a major role in the abolition of regulations and in the elimination of trade barriers that favor its member nations. This is a fair association that helps nations trade in global markets because, in the current situation, global trade and investment is developing with full force, but in a way that protects the interests of all countries.
Regional trade agreements (EFTA)
The European Free Trade Agreement (FTA) is a forum by which its countries can trade freely to each other without any limitations or high tariffs (Shahbaz, Tiwari and Leitão, 2013). The organization was founded in 1960 and its function is to promote free trade for its member countries in order to increase profitability and increasing customs duties. The organization has four member nations, Iceland, Norway, Switzerland and Liechtenstein. These countries have the right to do business with each other without limitations.
Investment treaties between states (FDI)
FDI or foreign direct investment is an agreement between the european countries that allows these countries to negotiate trade deals with each other at predefined rates. This Treaty has benefited nations from trading without any limitations on the importing and exporting of goods, and at present each nation is capable of auto-manufacturing the items that it needs. All of the above-mentioned partnerships have an own contribution to international trade, which helps both the participating countries in that trade.
INTRODUCTION TO BRICS
BRICS is a group of five developing nations, including Brazil, Russia, India, China and South Africa. This organization has been formed with the intention of increasing the new markets for these nations to encourage industrial revolution (Frieden, 2015). The goal of all member states is to join this organization so that they can gain from it at a time of crisis. The partnership plays a key role in promoting global trade, as this exchange can be carried out without any limitations or trade barriers. The country chosen by the BRICS Member States is China. The reason for choosing China is that it is rapidly industrializing and developing stock markets.
EVALUATING GROWTH OF CHINA
China is a developing nation and there are several factors that increase its GDP or Gross Domestic Product. A few of these drivers, along with their development, are listed below:
In 2011, agricultural activities accounted for 9.25% of China's total gross domestic product that increased in 2012 and made a significant contribution of 9.40% (China: distribution of gross domestic product (GDP) across economic sectors from 2008 to 2018).
Services (IT, finance, insurance, business services, personal services etc.)
In 2017, China's service sector made a significant contribution a total of 51.9 percent to China's total GDP growth in 2018, as the service industry led a total of 52.2 percent to China's complete GDP in 2018.
This sector contributes 40.5 per cent to China's overall GDP in 2017, that is increasing in 2018 as the contribution of the manufacturing industry to GDP this year was 40.7 per cent.
China's rate of inflation in 2018 was 2.07 per cent, which rose by 0.48 per cent from 2017 (China inflation rate. 2019)
CHALLENGES FACED DUE TO INDUSTRLIALISATION
China is a developing nation that emphasizes most of its attempts to improve industrialization in its own country so that global trade and financial services can bring prosperity. There are various problems and issues facing them in the course of this industrialization. Some of these difficulties are listed below:
- Infrastructure – This is the most important problem facing all developing nations. When considering China with other nations, the rate of development of infrastructure is small. But the fact is that only a certain regions in China have a sound and productive infrastructure. Infrastructure is a mixture of the different basic elements that a nation must have in order to enable its people and trade. These are road connections, transport, wastewater, water and electrical networks. All of these are the basic needs through which trade can be improved in a nation. China is the fastest-growing nation in population. Nevertheless, the lack of infrastructure in the different cities of this nation is becoming an obstacle, which means that resources can not be exported from these regions.
Corruption – Corruption is the problem that emerges as a result of the circumstance wherein powerful people abuse their authority with their own advantage China is a developed country with the highest population in the world. Due to this large population, rivalry is immense in every field of commerce, which eventually results in corruption (Ibrahim, 2012). Government officials are seeking bribes from people in order to get their work done. Bribes has resulted in increased trade prices, which have become one of the most difficult factors in China. Industrialization has enriched China by increasing trade, but it has also raised the question of corruption.
- Environmental Concerns- Industrialization in China has increased the number of factories that have increased emissions. This issue has been extended to the extent that few cities in China are currently suffering from low-value air, which affects human health. This issue is not limited to air pollution alone. Waste from the industry is dissolved in water, that is also the cause of water contamination in China.
CHALLENGES FACED DUE TO WTO
The World Trade Organization is an organization which manages and regulates global trade in such a way that the interests of its member nations can be guarded. In order to meet its objective, there are various limitations that the WTO has imposed on China. Such constraints are the obstacles that China faces.
Recent trade policies of WTO
Recent trade policies of Global trade Organizations stress that every nation must abide by the rules on patent rights in order to protect every member nation of the WTO. The technology transfer is also another foreign policy set out by the WTO. In this strategy, countries will share their alien technology with the globe so that every nation in the world can take full advantage of it.
Approaches to trade agreement
The World Trade Organization (WTO) has a policy to the regulation of IPRs so that the nation of its business which has been covered by its intellectual property rights can be protected. This method to the trade deal was implemented by the WTO in such a way that every nation can gain from improved innovation, but only a country with an intellectual property right can gain from the trade.
Challenges faced due to trade policies set by WTO
China is a country known for its small enterprises engaged in the production of automate goods, the IPR from which is already in the ownership of other corporations (Sun, 2018). The World Trade Organization (WTO) has launched a policy stating that no company will leverage copyrights that have a serious impact on China's business.
Another effect is the strategy of the WTO, which specifies that every Member State must pass or exchange its technology with other nations, so that every country will prosper from modern technology. This strategy has had little effect on China's giant trade organizations, which have reduced the value of innovation.
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It can be concluded from the above report that financing is the backbone of global trade that contributes to its growth and development. Global markets have been described as the gateway to the allocation of capital to national and international markets. In the above article, China is listed as an advanced economy facing a number of challenges. This segment argued that the main challenges confronting China as a result of industrialization are infrastructure, bribery and environmental problems. It has also been outlined that the World Trade Organization has implemented a number of strategies that have had a serious impact on business practices in China.