Question

Explain the financial account of the balance of payments. Discuss the benefits and harms of financial globalization taking also into account different types of financial flows and their implications.

Answer 1

The Balance of payment refers to the statement of all the transactions that are made between the entities of a nation with the rest of the world over a definite period of time. It includes both the current account and the capital account with the current account consisting of net trade in the goods and services, net earnings on cross-border investments and net transfer payments. The capital account consists of the import and exports of capital and foreign aid

                              The Financial account is a component of the Balance of Payment that contains the claims or the liabilities of the non-residents, especially with respect to the financial assets. It includes direct investment, portfolio investment and also reserve assets. It helps in tracking the shift in international asset ownership and is composed of two sub-accounts the first one including the domestic ownership of foreign assets like foreign bank deposits and securities in foreign companies and the second one composed of foreign ownership of domestic assets like the purchase of government bonds by foreign entities or the loans that are provided to the domestic banks by the foreign institutions. The foreign account increases with the increase of domestic ownership of foreign accounts and decreases with the increase of foreign ownership of domestic accounts.

                                    Financial flows refer to the flow of financial assets both within the nation and abroad like Foreign Direct investment [FDI], remittances, Portfolio investment, International debts and repayments, developmental aids etc. Thus, taking in to consideration all the above forms of financial assets flows, the following are the benefits and harms of financial globalization

Benefits of Financial Globalization

· It helps in the financial integration of a nation with the rest of the world and hence helps in boosting the financial capability of a nation

· With increased FDI’s across the globe, it helps in the industrial expansion and boosting of a local investment and economy

· The concept of International debts helps a nation to overcome any economic turbulences and thus regain the economic stability of the nation

· With the aid of pegging, the currency stability of a nation could be utilised for improving the currency stability of another nation

· The macroeconomic volatility of a nation could be dealt with various financial aids as a result of globalization

Harms of Financial Globalization

· As globalization has brought the world in to a single market, it has various effects on the local market and domestic economy

· With improved FDI patterns, the local market is expected to face higher competition levels which may harm the local market

· The domestic consumption patterns may be affected on a large scale with rising financial aids from international institutions

· With increased international debt, the currency of a nation may lose its value which would harm the international trade benefits of the nation