Explain by 2000 words and attach references.
Arguments for therefore against free international capital movements. Prefer polices to make those movements less volatile?
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In context to the current business environment, the increasing importance of the international capital movement can be observed. The international capital movements are having a great and growing importance for an economy. It is an important part of the international trade. It is because; the analysis of the international capital movements is an important part to adopt an adequate theory of international trade. The international capital movement is directly related to the international trade of goods and services. It provides mutual gain to both the lenders and borrowers as it provides highest risk adjusted returns (Yomogidaa, 2006). It is also beneficial for the countries to diversify the risks of temporary fluctuations in consumption patterns.
After the Second World War most of the countries in the world economy has established a free capital market in order to access the global capital market. It also led to liberalization in the several economies. But at the same time the free movement of capital at the international level cause a series of financial crisis in the 1990s. From the last two decades, a remarkable growth has seen in both gross and net international capital flow. The increase in the numbers of multinational enterprises caused an increase in the international capital mobility (Foders & Langhammer, 2006). The transfer of technology and managerial know-how also caused an increase in international capital flow.
Free International Capital Movements
The liberalization and open economies are causing an increase in the free international capital movements. The international capital movement has both positive and negative impact on the economy and its industries. The economic growth and international trade are the other components that also influenced by the free international capital movements. The international capital flow may be beneficial or harmful for the host country as well as for the country of origin.
Arguments in favor of international capital movement:
The free international capital flow a large number of benefits for an economy. A free movement of the capital is quite beneficial for the countries to finance more investment plans that are not possible from the domestic savings. An increase in the finance for new investment plans causes an increase in the output and the employment in the economy. The free movement of capital across the borders causes availability of the finance for high return projects. The increase in return from the investment leads to an increase in the growth rate of an economy. The capital inflows in a country in the form of direct investment bring the advanced and improved technologies and management techniques (Feldstein, 1999). It causes an increase in the business effectiveness and its competitiveness to face the international competition. It also provides access to the international networks that further causes an increase in the productivity and growth of the economies.
On the other hand, the capital outflow allows the domestic firms and citizens to earn a higher rate of return from the other market by making arbitrage profits. It also helps to diversify the risks of the organizations and investors that reduces volatility in the consumption and income of the individual. The free capital inflows and outflows also effective to increase the market discipline. The increase in the market discipline increases the effective allocation of resources that leads to a higher productivity growth. The lack of free international capital movements may reduce ...
This solution discusses international capital movements.