Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
... measure "financial investment" flows between countries, when considering the question raised here?

The direct question is whether there are net real benefits of economic relations to both parties, and international financial investment is not established as a plausible means for providing net real benefits to both countries.

Indeed, if there was balanced trade, which is a pre-requisite of Ricardo's model, there is no substantial opportunity for net flows of financial capital, and no need to pay a tribute in blood and treasure in return for prior receipts of financial capital.

So the main job of measuring flows of "investment" in financial terms is to indicate how far the international relations between the countries are from conditions in which mutually beneficial trade is one plausible outcome.

Obviously we have to be on guard against the semantic confusion that people and organizations holding wealth constantly rely on, the confusion between "financial investment" and "economic investment". "Investment" in economic terms ... acquisition of newly produced goods and services used to expand productive capacity ... is not in the capital account ... it is in the trade account.

And the point of financial "investment" is not to increase the amount of economic investment that takes place, but rather to place a financial claim on the product of the economic investment that takes place.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jul 20th, 2008 at 01:49:18 PM EST
[ Parent ]
Thanks for the pointer on terminology.  So if Bridgeport makes milling machines and a US citizen purchases them and ships them to a factory in Mexico in which he has a 49% share and co-owns with a Mexican national who is the managing partner, how would that be described in these terms?  Today it would be Intel or Motorola setting up chip plants, etc. "off-shore" and the capital could come from third parties in third nations.  Not being trained in you discipline, I am always stepping in it.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 20th, 2008 at 02:11:02 PM EST
[ Parent ]
If someone buys something from a producer in one country and ships it to another country, that is a trade transaction.

If trade is balanced, as in Ricardo's model, then the international finance for that import of an investment good would come from equivalent export earnings of that country.

But trade is not balanced, so assuming a foreign-controlled subsidiary is importing that investment good, it does so by borrowing money from banks in the low-income country, at a preferential rate because it is a quite desirable customer for a bank or financial intermediary in that country.

Given the normal tendency for net capital flows go to high income countries from low income countries(NB), the international finance comes from either elbowing aside other imports, forcing down the terms of trade to make exports more competitive and reduce incomes earned on resources used in the low-income country, or as a result of other wealthy corporations offering to either take over a larger share of the low-income nation or else help put the low-income nation deeper in debt to overseas interests.

(NB. This is not how it would work if the world was like the traditional marginalist theory, where there is no international hierarchy of core, semi-peripheral, and peripheral nations, but out here in the real world, high income core economies have the hard currencies, and there is therefore a strong incentive for those accumulating wealth in low-income countries to exchange that for wealth in a hard currency and hold their wealth in account balances in a core economy somewhere.)

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jul 20th, 2008 at 04:25:03 PM EST
[ Parent ]


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