For building tools related to Financial trade analysis understanding the domain is important here we will try to disclose the basic of it and that completes your technical knowledge along with domain expertise .
Normally we assume that Economy of a Capitalist country to be closed. This is done to simplified calculations of country’s GDP,GNP,NI,Wage etc but in reality this never happens so lets just jump into foundation of open economics.
Interaction of economics with world happens in three broad ways .
- Goods that consumer and Firms can choose between state and foreign.Example will be choosing a Books from local author or international author.(Product Market linkage)
- Investors have the opportunity to choose between domestic and foreign assets.(Financial Market linkage)
- Firms can choose production location and workers to choose location of work(Factor market linkage).labour market linkage is very much restricted due to immigration laws. This can be subsidies as movement of goods .
we will focus here on the first 2 linkage.
Open Economy describes trade with other nation in Goods , services and also in financial assets. Foreign trade influence demand aggregation of the native states in two ways. when native state purchase some goods from foreign this causes a leakages in the circular flow of income decreasing the aggregate demand. Second Native export into foreign causes an injection into circular flow .The total foreign trade as a whole part of GDP is termed as degree of openness. For Indian Economy in 2013-14 ECONOMIC YEAR it was 44.1% of the whole Economy.
Now Goods and money are inverse directional to each others. Why we are counting on money now as in international trade no one single currency is used as benchmark so one could except native currency only when the currency is stable and has a constant purchasing power. For solving this mess Govt has said the currency can be converted into another asset @fixed price over which the international authority had no control which is most likely to be Gold or dollar. Governing factors are conversion @what price and @what quantity. International Monetary system is the concern authority to tackle this issue.
The Balance of Payments:
It records the transactions in goods,services and assets between residents of a country with the rest of the world for a stipulated period. there are two main account>>>>The current account and the capital account.
Current account : export , import , transfer payments(difference between export and import). here comes trade surplus means export exceeds import and trade deficit means the vice-versa. Trade in service is invisible trade as no one is crossing borders and also in terms of net profit.It includes both factor and non-factor income. trade balance is the balance of export and import . if we add trade in service and net transfer with trade balance we will get current account balance. again deficit and surplus will be seen .
capital account: records all transactions. purchase enters as -ve and export enters as +ve in sheet.
If your earing from service and private transfer is more your current account still shows a surplus with a trade deficit.
Why balance of payment is vital for a country?
A country’s BOP is vital for the following reasons:
- BOP of a country reveals its financial and economic status.
- BOP statement can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
- BOP statement helps the Government to decide on fiscal and trade policies.
- It provides important information to analyze and understand the economic dealings of a country with other countries.
By studying its BOP statement and its components closely, one would be able to identify trends that may be beneficial or harmful to the economy of the county and thus, then take appropriate measures.
we will discuss use of all this in next sitting.