When it comes to the finances of a nation,
the two underlying categories are personal finance and international finance.
While the former deals with the financial issues faced by the individuals, the
consumers and the citizens of the country, the latter deals with the wider
perspective of the financial issues faced by the entire nation as a whole, as
an economy. While there are innumerable articles on the web about managing
personal finances and the facts associated with it, there are very few who take
a look at the bigger picture. The concerns of this article deal with some of
the important facts on international finance that everyone should take into
account. Have a look.
Relative
price- What is it?
Relative price, also known as the exchange
rate, is nothing but the price of one currency in terms of another currency. In
terms of oranges and guavas, the relative price of guavas in terms of oranges
is the number of guavas that you can give up to buy an orange. Similarly, when
it comes to the dollar-euro exchange rates, this is an indication of the number
of dollars that are required to purchase one Euro.
Currency
depreciation – What is the driving factor?
The theories that determine the exchange
rate offer a set of nominal and real variables that have an impact on the
exchange rate. In terms of the nominal variables, higher rates of inflation,
higher growth in the supply of money and higher nominal interest rates are the
factors that lead to a depreciation of the value of the currency.
Higher
nominal interest rates – Do they imply higher rates of inflation?
There is always a direct and positive
relation between higher rates of inflation and nominal interest rates. With
higher inflation rates, there will always be higher nominal interest rates. So,
you need to be careful enough to compare the nominal returns on the debt
securities of the different countries. If you see that a nominal return of 15%
on the debt security of a country and 5% in another country, you will know that
there are higher rates of inflation in the former than in the latter.
Changes
in information – Adjusting your expectations
As per international investment, the
investors require keeping track of the current political and economic
conditions of different countries. In case of debt securities, you usually are
aware of the nominal return that you will get from the other countries. During
investment, what you don’t know is what can change during the period when
you’re already holding a financial instrument of another country. What changes,
are the inflation rate and the exchange rate.