Global trade and finance are key drivers of economic globalization. agreements, , and international banking facilitate the flow of goods, services, and capital across borders. These systems have created interconnected markets but also pose risks of financial crises and economic imbalances.
, , and have transformed global finance. While these innovations increase efficiency and profitability, they also raise concerns about market volatility, tax avoidance, and systemic risks. Understanding these complex systems is crucial for navigating the globalized economy.
International Trade
Free Trade and Tariffs
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Introduction to the Trade Barriers and Protectionism | Macroeconomics View original
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Gains from Trade | Boundless Economics View original
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Free trade agreements reduce or eliminate between countries to encourage international trade (, TPP)
Tariffs are taxes imposed on imported goods that increase the price of foreign products
Protectionist measure used to shield domestic industries from foreign competition
Can lead to trade wars where countries retaliate with their own tariffs (US-China trade war)
Non-tariff barriers include quotas, subsidies, and regulations that restrict or discourage imports
Debate over free trade centers on balancing economic benefits with concerns over job losses and environmental impacts
Currency Exchange and Trade Balances
Currency exchange rates determine the relative value of different currencies in international markets
Fluctuations impact the price of imports and exports and can affect trade balances
Countries may manipulate exchange rates to make their exports cheaper (currency devaluation)
Trade deficits occur when a country imports more than it exports, while trade surpluses occur when exports exceed imports
Persistent trade deficits can lead to economic imbalances and debt accumulation
Countries aim to maintain balanced trade or run surpluses through export promotion and import substitution strategies
Global Financial Markets
Stock Markets and Electronic Trading
Stock markets facilitate the buying and selling of company shares and serve as a key indicator of global economic health (, , )
Interconnected nature of global markets means events in one country can quickly impact others
highlighted systemic risks posed by global market integration
Rise of electronic trading has increased the speed and volume of global financial transactions
uses computer programs to execute trades based on market conditions
exploits tiny price discrepancies for profit, but can contribute to market volatility
Offshore Financial Centers and Tax Havens
Offshore financial centers are countries or jurisdictions with low tax rates and strict banking secrecy laws (, , )
Attract capital from individuals and corporations seeking to minimize taxes or maintain financial privacy
Controversial due to association with tax evasion, money laundering, and illicit financial flows
are countries with very low or no taxes that facilitate tax avoidance by multinational corporations
Companies shift profits to subsidiaries in tax havens to reduce overall tax burden
Governments seek to combat tax avoidance through international agreements and anti-avoidance legislation ()
International Banking and Finance
Global Banking System
facilitate cross-border financial transactions and provide credit to businesses and governments (, , )
Enable global trade and investment by providing financing, foreign exchange services, and risk management
Correspondent banking relationships allow banks to provide services in countries where they lack a physical presence
(BIS) serves as a bank for central banks and promotes monetary and financial stability
establish international standards for bank capital requirements and risk management
(IMF) provides loans to countries facing balance of payments crises and promotes global financial stability
Global Financial Crises and Contagion
can spread rapidly due to interconnected nature of financial markets and banking systems
began in Thailand and spread to other East Asian countries through currency and stock market contagion
2008 global financial crisis originated in US subprime mortgage market and spread worldwide through exposure to complex financial instruments
occur when countries are unable to repay or refinance government debt (, )
Can lead to default, economic contraction, and contagion to other countries and financial markets
Effective crisis response requires coordinated action by governments, central banks, and international financial institutions
Bailouts, liquidity provision, and fiscal stimulus can help stabilize markets and restore economic growth
Reforms to financial regulation and oversight aim to prevent future crises and improve resilience of global financial system