International Economics – Basics

Financial management normally focuses upon three key decisions viz., acquisition of wealth, their investment in profitable ventures and the payment of dividend.

It is the generally agreed objective and decision criteria of any financial management to maximize shareholders wealth and maximization of net present value, respectively.

The following are certain questions normally posed:

Does the focus, objectives and decision criteria of financial management in a domestic and an international firm differ or are they the same ?

The commonly agreed answer for this question is – Though the focus, objectives and criteria would remain constant, financial management in a multinational firm is much more complex.

In the case of any domestic firm, movements in exchange rates and country risk are substantially ignored. But in the case of a multinational firm there is no way that we can analyze international financing and investment opportunities and repatriation of dividends without an understanding of the impact of foreign exchange rates and foreign country risk upon the basic model of financial management.

When a British company is raising funds by way of a U S dollar borrowing, the concern is to minimize the cost of capital; however, the concern is not only with respect to dollar cost of borrowing but also pound cost of capital.

Of course it is not only U S dollar borrowing and the U S interest rates, but also exchange rates and all those factors which influence exchange rates such as interest where a British company is considering an investment opportunity abroad.

The appropriate comment for this can be: “If money is for business, foreign exchange is the language of economics”

In the case of any dealings in international markets, the concern is more on foreign exchange rates only.

Economics is a science of rational choice. In the context of international economic relations, there is a need to analyze the flow of goods, service and payments between a nation and the rest of the world, the policies directed at regulating these flows, and their effect on the nation’s welfare. International economics deals with these aspects of economic relations among nations.

Since economic relations among the various nations are affected by the political, social, cultural and military relations among nations etc, the scope of international economics is very wide.

In more specific terms, international economics deals with the theory of trade, the theory of commercial policy or protectionism, foreign exchange markets, balance of payments and the adjustment in balance of payments.

Foreign exchange markets form the framework for the exchange of one national currency for another to support cross-border trade, capital and service flows.

The balance of payments depicts a nation’s total receipts from and the total payments to the rest of the world. It reflects nature and scope of international transactions of a country for a certain period of time.