The world economy has been heavily influenced by the increase in the degree of connectivity and integration of countries, corporations, firms, and the people within them. This has occurred in terms of their economic, political, and social activities. In addition, many emerging economies, such as South Africa, have also been influenced by the degree to which most countries have become integrated into the global economy.

Globalization affects all aspects of society, but economically, two main trends define it. First, countries continue to expand their trade in goods and services. Second, countries continue to reduce their barriers to capital flows. These two aspects are largely interrelated as the firms within a country may require capital to produce goods or provide services, while other firms may wish to pursue new opportunities within foreign markets. In addition, as the relatively wide international scope for business opportunities for firms increases, as a result of globalization, it also poses many challenges. This was made abundantly clear during 2007/2008, when a housing and mortgage crisis in the United States developed into a global financial crisis. In addition, the continued development and growth in the use of crytocurrencies present a number of unique opportunites and challenges for those involved in the foreign exchange market.

As a part of this course we will discuss the fundamental concepts, principles, and analytical theories that define various aspects of international finance, where we will seek to improve our understanding of the manner in which exchange rates fluctuate. In addition, we will also consider various ways in which the risks that are due to exchange rate fluctuations can be managed.

1 The theory of international economic transactions

The theory relating to international economic transactions is an old and consolidated tradition in the existing literature, where much of the initial research focused on cases where factors of production are generally less mobile between countries than within a single country. Traditionally, this observation has served as a starting point for the development of a theory of international trade based on the extreme assumption of perfect national mobility and perfect international immobility of the factors of production, accompanied by the assumption of perfect mobility (both within and between countries) of the commodities produced, where exceptions are made for possible restrictive measures on the part of governments.

Another facet of the early literature considers the role of different countries as distinct political entities each with their own frontiers, which gives rise to a series of problems that does not occur in many general economic models, such as the levying of duties and other impediments to trade, the existence of different national currencies whose relative prices (the exchange rates) possibly vary through time, etc. These foundations have been expanded considerably over time and this discipline is of ever increasing importance given the rise in the degree of openness and interdependence of economic systems.

As in any other discipline, we can distinguish between theoretical and descriptive aspects of this area of study, where the former is further divided into the theory of international trade and international monetary economics. All these distinctions are of a logical and pedagogical nature, but of course both the descriptive and the theoretical part are necessary for an understanding of the international economic relations that exist in the real world.

The descriptive part, as the name clearly shows, is concerned with the description of international economic transactions just as they happen and of the institutional context in which they take place: flows of goods and financial assets, international agreements, as well as international organizations like the World Trade Organization, International Monetary Fund, and others.

The theoretical part tries to go beyond the phenomena to seek general principles and logical frameworks that can serve as a guide to aid our understanding of actual events (that may be influenced by policy interventions). Like any economic theory, we make use of abstractions and models (often expressed in mathematical form) to bring clarity to critical aspects that need to be considered.

Although many aspects of international trade and international finance are strictly intertwined, this course will largely focus on aspects of international finance, which contains aspects of positive and normative economic postulates.

1.1 International macroeconomics and finance

International finance is also often associated with aspects relating to international monetary economics, open-economy macroeconomics, or international macroeconomics (which are an important areas of macroeconomics); as it deals with the monetary and macroeconomic relationships that exist between various countries. This field also deals with areas relating to balance-of-payments disequilibria in a monetary economy, with a significant focus on the automatic adjustment mechanisms and the adjustment policies concerning the balance of payments. In addition, it also considers the interaction between the balance of payments and other macroeconomic variables; the role of various exchange-rate regimes; and aspects relating to exchange-rate determination.

As the name denotes, a significant part of international finance also incorporates a number of aspects that are prominent features of the finance literature. These would include the role of international financial markets, international monetary systems, international policy coordination and international monetary integration (or currency unions). Furthermore, there are also aspects that relate to problems of international liquidity, currency crises, debt problems, etc. This area of study also considers the efficiency of international financial markets, where one could consider the exchange rate as the price of an asset that is associated with various risks and rewards. This may be of importance to those who are looking to develop various trading strategies that may be applied on the foreign exchange markets.

1.2 The use of static and dynamic models

It is also worth noting that one could make a distinction between much of the traditional international finance literature, which considers the balance of payments as a relatively static phenomenon, where the primary concerns relate to the specific determinants of trade and financial flows. This approach does not allow for dynamic interactions that may exist in the market. This is in contrast with the modern view of international finance, which considers trade and financial flows as the outcome of intertemporal optimal saving and investment decisions that are made by forward-looking agents. This approach has reached a high degree of sophistication, where models are based on policy-invariant microfoundations and rational expectations, while stochastic components may also be included to describe the effects of various economic shocks.1

Hence, we could consider that the study of international finance incorporates a number of important aspects from fields related to international macroeconomics and finance. Many of these concepts will be considered throughout the course of this semester, where we will make use of concepts that would be useful to cope with real-life problems.

2 Globalization

According to Wikipedia, “Globalization refers to the free movement of goods, capital, services, people, technology and information. It is the action or procedure of international integration of countries arising from the convergence of world views, products, ideas, and other aspects of culture.” Such a definition is relatively broad and would possibly include the following elements:

  1. the increase in the share of international and transnational transactions, as measured for example by the share of world trade and world direct investment (carried out by multinational corporations) in world output;
  2. the integration of world markets, as measured for example by the convergence of prices and the consequent elimination of arbitrage opportunities;
  3. the growth of international transactions and organizations having a non-economic but political, cultural, social nature;
  4. an increasing awareness of the importance of common global problems (the environment, infectious diseases, the presence of international markets which are beyond the control of any single nation, etc.,
  5. the tendency to eliminate national differences and to an increasing uniformity of cultures and institutions.

From an economic perspective much of the current debate and research is primarily focused on aspects relating to the following concerns:

  1. the actual degree of integration of markets;
  2. globalization as a process that undermines the sovereignty of the single states, reducing their autonomy in policy making and increasing the power of multinational corporations;
  3. the effects of globalization on world income distribution, both within and across countries;
  4. the possible development of an international government to cope with global problems.

For many, these are interesting topics that affect both large developed-world economies as well as small economies within the group of emerging markets or low-income countries. Some authors (see, for example, Dreher (2006), and Dreher, Gaston, and Martens (2008)) have also suggested indexes to measure the degree of globalization of the various countries, taking into account the three main dimensions of globalization (economic, social, and political). These indexes are available at http://globalization.kof.ethz.ch/.

3 Conclusion

In a modern world, future global business leaders will need to understand the issues relating to the effects of globalization if they are to make sound international financial decisions. In addition, they also need to be able to manage the myriad of risks that their businesses face in a competitive global environment. The objective of this course is to prepare students to deal with these and other real-world issues.

4 References

Dreher, A. 2006. “Does Globalization Affect Growth? Evidence from a New Index of Globalization.” Applied Economics 38 (10): 1091–1110.

Dreher, A., N. Gaston, and P. Martens. 2008. Measuring Globalization-Gauging Its Consequences. New York: Springer.

Krugman, P. 2000. “How Complicated Does the Model Have to Be?” Oxford Review of Economic Policy 16: 33–42.

Obstfeld, Maurice, and Kenneth Rogoff. 1996. Foundations of International Macroeconomics. Cambridge, Massachusetts: MIT Press.

Phelps, E. S. 2007. “Macroeconomics for a Modern Economy.” American Economic Review 97: 543–61.

Solow, R. M. 2000. “Towards a Macroeconomics of the Medium Run.” Journal of Economic Perspectives 14: 151–58.

Turnovsky, S. 1997. International Macroeconomic Dynamics. Cambridge (Mass): MIT Press.


  1. For those who are interested in the assumptions of these model see for example, Obstfeld and Rogoff (1996), Turnovsky (1997), Krugman (2000), Phelps (2007), Solow (2000).