Vital Facts On International Finance – A Look At The Bigger Picture

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.

Therefore, before you take immediate steps to start managing your personal financial state, take some time to look into the bigger picture. Know the vital essential facts that are related to the international finance so that you may come to know the impacts of your small personal financial decisions on the global economy. With changes in the global economy, you can also understand the reason behind the changes in your personal financial decisions.

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