Internatinal Economics - Essay Example

Therefore, in zero capital mobility there is no money that is flowing in and/or out of the country (Accounting equation explanation with examples, 2011). The equilibrium of balance of payment which is meaningful under pegged exchanged rate refers to when the government induced transactions of balance of payments are zero when they nominal exchange. In this case, receipts on exports and imports are equal. From the above we can come up with an equation describing the balance of payment: B = T + k Where B is balance of payment, T is trade balance and k surplus of capital account.

Therefore the overall is: B = T + k = 0 Under fixed rates of exchange, increased domestic banking will lead to a situation where circulating capital will be reduced since money will be laying in the banks. Due to this the supply of money will decline both abroad and at home. Since banks will reach their desired reserve ratio they will be in a position to lead and loan money conveniently. This will turn force the prices of commodities to fall both at the national and international level (Wild, 2005).

Domestic money shock or domestic monetary shock is the increase or decrease of the supply of money in the economy. . In addition the reaction may occur in “real” behavior. Either way, monetary shocks real are in the relative changes in prices (Wild, 2005). Perfect capital mobility can be defined in four distinct ways: Investment rates are not affected by exogenous changes in rates of national saving, condition Feldstein-Horioka. Real rates of interests across a country are equalized by capital flow internationally, real parity interest.

The flow of capital equalizes interest rates when conducted using common currency, covered parity interest. Uncovered parity interest, the flow of capital equalizes expected return rates on bonds in spite of exchange risk exposure. Also it is the absence barriers which hinder capital movement internationally. Its requirement are that, return rates on capital in different countries be the at equilibrium. World asset equilibrium is when there is a balance on the assets which are owned by different countries.

In the economic theory each and every asset has its fundamental value. But in most cases many assets have a class of specific natural buyers. Assets are more valuable to these natural buyers than to the rest of the buyers. Natural buyers tolerate more risk, therefore, if they can get more money they will spend it asset acquisition there by driving the price of assets up. When capital is perfectly mobile the above scenario is facilitated with ease as opposed to a case where there is zero capital mobility.

In such a case, there is no flow of money hence no money to purchase assets and this will lead to a state of in equilibrium (Accounting equation explanation with examples, 2011). When there is perfect capital mobility, world interest rates, price level variables, income, and foreign domestic