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 of a nation refers to the economic statement of all the transactions between various components of a nation with the rest of the world over a definite period of time. The BoP is composed of current account and the capital account. Th current account consists of various components like 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, foreign aid etc

                                    The Financial account refers to a component of the Balance of Payment that is composed of the claims or the liabilities of the non-residents with respect to the financial assets. It contains various components like direct investment, portfolio investment and also reserve assets. The various benefits of a Financial account are

· It helps in tracking the shift in international asset ownership

· It is composed of two sub-accounts. The first one includes the domestic ownership of foreign assets like foreign bank deposits and securities in foreign companies and the second one is 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 that may happen both within the nation and abroad like Foreign Direct investment [FDI], International debts, remittances, Portfolio investment etc. The following are the various advantages and disadvantages of Financial Globalization

Advantages of Financial Globalization

· Financial globalization 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

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

· The FDI’s, which are a part of financial flow across the globe, he expansion of domestic industries and thus helps in improving the local economy

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

· With industrial collaborations, the domestic industries may gain an advantage of getting access to many components that it may not possess if it operates as a single entity

Harms of Financial Globalization

· The major disadvantage of FDI is that the local market is expected to face higher competition levels which may ultimately result in harming the local market

· The consumption patterns of a local economy 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

Thus, all the above factors contributes to the various benefits and harms of financial globalization.