International movements-meaning-Export & import of merchandise & services-International investment-International Payments, Rate of exchange, Economic integration

1. Prepared By
Ms.Jissy.C
Assistant professor

2.  INTERNATIONAL MOVEMENTS
In international economics international factor movements are
movements of labor, capital, and other factors of
production between countries. International factor movements
occur in three ways: immigration/emigration, capital transfers
through international borrowing and lending, and foreign
direct investment.International factor movements also raise
political and social issues not present in trade in goods and
services. Nations frequently restrict immigration, capital flows,
and foreign direct investment.
 TYPES OF INTERNATIONAL MOVEMENTS
 1. International labor mobility
 2. International borrowing and lending
 3. Foriegn direct investment
 4. Multinational enterprises

3.  EXPORT AND IMPORT OF MERCHANDISE AND
SERVICE
 Merchandise exports are tangible goods sent out of a country;
merchandise imports are tangible goods brought in. Since these
goods visibly leave and enter, they are sometimes referred to as
visible exports and imports.
 The terms exports and imports are frequently used in reference
only to merchandise exports or imports. In the opening case, the
Jedi action figures are merchan- dise exports for Taiwan when they
are sent to the United States and merchandise imports for the
United States when they arrive.
 The exporting and importing of goods is the major source of
international revenue and expenditure for most countries. Among
companies engaged in some form of international business, more
are involved in importing and exporting than in any other type of
transaction.

4.  Importing and/or exporting is usually, but not always, the
first type of —foreign operation a firm undertakes. This is
because at an early stage of international involvement these
operations usually entail the least commitment and the least
risk to a firm’s resources. For example, firms may be able to
export by using excess capacity, thus limiting the need to
invest more capital. In addition, firms may be able to use the
services of trade intermediaries who, for a fee, will take on
the export-import functions, thus eliminating the need for
trained personnel and a department to carry out foreign
sales or purchases.
.
 Exporting and importing are typically not abandoned when
firms adopt other international business forms. Although
they may sometimes cease, they usually continue, either by
business with other markets or to complement the new
types of business activities.

5.  Economic Integration
 Economic integration is an arrangement among nations
that typically includes the reduction or elimination of
trade barriers and the coordination of monetary and fiscal
policies.
 Economic integration aims to reduce costs for both
consumers and producers and to increase trade between
the countries involved in the agreement.
 Economic integration is sometimes referred to as regional
integration as it often occurs among neighboring nations.

6.  Degree Of Economic Integration
Ms.Jissy.C Assistant Professor 6
Economy Union
Common Market
Customs Union
Free Trade
Preferential Trade Arrangements

7. Advantages of Economic Integration
 Trade Creation
 Greater Consensus
 Political Cooperation
 Employment Opportunities
Disadvantages Of Economic Integration
 Creation Of Trading Blocs
 Trade Diversion
 National Sovereignty

8. EXCHANGE RATE THEORIES TRADITIONAL APPROACH
( ALSO CALLED THE TRADE OR ELASTICITIES APPROACH)
 Based on flow of goods & services.
 Assumes an equilibrium exchange rate where the imports
balances the exports of the country.
 If at any point of time the imports exceeds the exports
(trade deficit) then the exchange rate will fall, which in
other words means – the domestic currency will depreciate

9.  EXCHANGE RATE THEORIES
Assuming A full employment phase in the nation, it is
advised that the domestic resources of the nation be
shifted towards production of export oriented goods and
services

10.  Assumptions:-
 There are no transportation costs for transporting a
commodity from one country to another(transportation
costs are Zero)
 There are no costs for converting one currency into another
(Currency conversion costs are zero)
 There are no restrictions on the movement of
commodities between countries ie, there are no trade
barriers or quatos

11. PURCHASING POWER PARITY :
Two versions of the purchasing power parity theory:
(i) The Absolute Version and (ii) The Relative Version
Absolute Version
 It states that exchange rates equal relative price levels.
 The exchange rate between two currencies should be equal to
the ratio of the price indexes in the two countries.
The Formula :RAB = PA/PB
Where, RAB= Exchange Rate between Two Countries
A,B & P = Price Index

12. Relative Version
 The relative version explains the changes in equilibrium
rate of exchange between two currencies. It relates the
changes in the equilibrium rate of exchange to changes in
the purchasing power parties of currencies
 It only version to determine the exchange rate.
 Equilibrium exchange rate is determined with the
Formula
R= Domestic price of a Currency X Domestic Price
Index
Foreign Price Index

13.  Purchasing Power Parity Curve
R1
Q
S
D
E
R
D
O
E1
D1
D1
S
S
S1
Quantity of Foreign Exchange
Exchange
Rate Rs per
Pound
Commodity export
point
Purchasing
Power Parity
Commodity Import
Point
Prepared By Ms.Jissy.C Assistant
Professor
13

14.  Above figure ,the curve DD refers to the demand curve for
foreign currency(Pound of England) and SS is the supply
curve of the currency .OR is the rate of exchange of rupees
per pound of England, which is determined by their
intersection at point E where the demand for the supply of
foreign exchange equals OQ quantity.
Suppose ,the price level rises in India & remains constant
in England .Then the exports from India will become
costlier and imports from England will become relatively
cheaper in India. Consequently ,the demand for pound
rises and the supply of Pound Declines
This can be seen from the shifting of Curve DD upwards to
the right to D1 D1 and that of curve SS to the left to S1
S1.Then the new equilibrium rate is determined at OR1
Rupees per Pound.
it denotes the new Purchasing power parity. The exchange
rate rises by the same % as the Indian price level.

15.  INTEREST RATE PARITY THEORY
 It is also called the covered interest parity theory.
 The theory states that there is a link between the nominal
interest rates in two countries and the exchange rate between
their currencies.
Prepared By Ms.Jissy.C Assistant Professor
15

16.  Interest Rate Parity (IRP) is a theory in which the
differential between the interest rates of two countries
remains equal to the differential calculated by using the
forward exchange rate and the spot exchange rate
techniques.
 IRP theory comes handy in analyzing the relationship
between the spot rate and a relevant forward (future) rate
of currencies. According to this theory, there will be no
arbitrage in interest rate differentials between two different
currencies and the differential will be reflected in the
discount or premium for the forward exchange rate on the
foreign exchange.

17. The theory applies to financial securities, and it makes
the following assumptions:
 When a currency is converted into another, or when a
financial security is bought or sold, there are no costs
involved. That is, transaction costs are zero.
 Money can freely flow between both the countries and
there is full mobility of capital.
 An investor can choose to invest in financial securities that
are denominated in the currency of the country where he
resides (domestic currency-denominated financial
securities) or to invest in financial securities that are
denominated in the currency of a foreign country (foreign
currency-denominated financial securities).

18.  INTERNATIONAL FISHER EFFECT (IFE) THEORY:
 It is also called the uncovered interest parity theory.
 This theory states that the forward rate (FX/Y) and the
expected spot rate [E (SX/Y)] will be identical because, even
without covering exchange rate risk in the forward market,
actions of market participants will make them equal

19. When the forward rate is greater than the expected spot
rate:
 All market participants will sell the dollar forward, hoping
to buy the dollar in the spot market at the expected spot
rate on the day that the forward contract has to be
honoured. When everyone sells dollars forward, the
forward rate will fall until it becomes equal to the expected
spot rate.
When the forward rate is less than the expected spot
rate:
 Market participants will buy the dollar forward, hoping to
make a profit by selling it in the spot market at the
expected spot rate on the day that the forward contract has
to be honoured. When everyone buys dollars forward, the
forward rate will rise until it becomes equal to the expected
spot rate.

20. Unbiased Forward Rate Theory (UFR)
 It states that the forward rate is an unbiased predictor of
the expected spot rate because the actions of market
participants make the ‘n’ period-forward rate be equal to
the expected future spot rate. This is the equilibrium
condition under the UFR theory where market actions will
ensure that the ‘n’ period-forward rate is an ‘unbiased
predictor’ of the expected spot rate ‘n’ days hence. There is
an equal probability that the ‘n’ period-forward rate will be
either higher or lower than the expected spot rate ‘n’ days
later.

21.  International Payments
 Meaning of International Payments:
When money is transferred from one party to another
due to any economic transaction it is called the process
of payment. Payments are of two types. One is local, the
other is international. When payment is made in the
same country it is called local payment. On the other
hand, when the payer and receiver are of two different
countries, it is called international payment

22.  Characteristics of International Payment
 Transaction between Two Countries:
 International transaction is done between two countries,
i.e., the business done between two countries is called
international business. When one country buys goods
from another it is called the importer and the selling
country is called the exporter.
 2. Two Parties:
 Like local business, in international business too, there
must be atleast two parties. One party receives the
payment while the other gives the payment. This giving
and receiving of payments is included in international
payments.

23. 3.Value Transfer:
 Money transfer and value transfer are two different
things. Money transfer happens in local business while in
international business value transfer takes place.
Because two countries have different currencies the
value transfer is done through an exchange banker.
4. Process:
 One characteristic of international payment is its difficult
work process. It is a difficult process in comparison to
local business. The reasons for this are different
currencies, exchange control, variation in exchange rates
etc.

24.  5. Economic and Non-Economic Activities:
 International payment takes place due to both economic and
non-economic activities. Export-import, loan, interest etc. are
included in economic activities. Due to these activities one
party becomes the payer and the other becomes the receiver.
The responsibilities are fulfilled by – payment from one to
another. Non-economic activities include help, grant,
damages, money transfer by non-residents, expenses
incurred on embassies, tourists, sports persons etc.
 There are no difficulties in payments in local business. Both
parties reside in the same country and face no problem in
giving or receiving payment in the local currency. But when
payment process takes place between two countries it is
called international payment. There is difficulty in international
payment because both parties are of different countries.
Currencies in both countries are different and the currency of
one is not legally acceptable and foreign exchange is
controlled by the governments in all the countries.

25.  Need for International Payments:
 1.Merchandise Transactions
 2. Service Transactions
 3. External Debt
 4. External Aid
 5. Compensation
 6. Interest
 7. Royalty
 8. Different Expenses

26.  Problems in International Payments:
1.Different Currencies:
Every country has a currency of its own which is accepted in
that country only. The internal value of these currencies may
be low. Therefore, problems arise in international payments.
The payer wants to pay in its currency while the receiver
wants to be paid in his own currency. Therefore, due to the
non-parity in the currencies of each country there is a problem
in international payment.
2. Exchange Rate:
 These payments are affected by the variation in exchange
rate. Fixing exchange rates is a difficult process. Moreover,
due to changes in exchange rate it is difficult to decide on
which day the payment should be made. If an exchange rate
is decided then it is possible that it may change on the day of
payment. In such a situation the payer would not know how
much money he needs

27.  3. Exchange Control:
 Government controls the exchange rate which causes
problems in international payment. These controls cause a lot
of delay in payment and businessmen suffer losses. Due to
these controls exports and imports are limited.
 4. Banking System:
 International business and payments are possible only
through banks. Such payments can be made only through
those banks which have branches in foreign countries. The
bank’s branches have to be contacted through the bank only
which is time consuming process. The bank charges are high
as well.
 5. Risk:
 International business is more risky. This risk is related to
international business. There is always a chance of the
payment reaching the wrong hands or two companies may
have similar names.

28.  INTERNATIONAL INVESTMENTS
 International Investments are those investments that are
made outside the domestic markets and offer portfolio
diversification and opportunities for risk minimization. An
investor can make international investments, thereby
broadening his portfolio and expanding his horizon of
returns. International investments also serve as a means of
adding different financial instruments to the list when
domestic markets are confined and limited by their variety.

29.  Types of International Investments
Government Funds/Aids
Cross Border Loans
Foreign Portfolio Investment
Foreign Direct Investment
Types of Financial Instruments for International
investments
American Depository Receipts
Global Depository Receipts
Foreign Currency Convertible Bonds

30.  Advantages of International Investments
 Access to opportunities existing in different markets that
indigenous markets might not provide.
 Access to instruments that allow negating currency
exchange risk and may guarantee greater gains.
 Offsetting risks pertaining to domestic markets and
diversification of a portfolio.

31.  Disadvantages of International Investments
 Political and economic turbulence can greatly affect such
investments
 Accessibility to and availability of vital information
related to foreign firms and markets is also a concern
 Complications are rendered by legislations and varying
operating conditions of foreign markets.