Are trade and capital mobility substitutes or compliments?

Essay by mohit007University, Bachelor'sC+, April 2004

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In order to successfully devise an answer to the above question we need to understand that there are not one, but a number of various factors that need to be considered in order to come to any form of conclusion. We need to take into account the objectives of trade and the form of trade flows. Most importantly we also need to consider the impact of capital market integration on FDI flows, and the impact of product and capital markets integration on the prices of capital and traded products.

The term trade refers to the process of buying and selling goods and services. When goods or services are exchanged by people in different countries, international trade takes place. Trade and capital mobility is the movement of traded products or services and capital funds across borders and between countries.

Trade patterns can be identified through the use of the Grubel- Lloyd Index. Trade patterns have corresponded to some varied influences since the 1990's. The existence of comparative advantages between countries reflects inter-industrial trade. Grubel-Lloyd Index will have a value close to zero if intra-industrial trade is dominant. The presence of scales economies is revealed by intra-industrial trade. His prevents countries from producing the entire range of the commodities it consumes. Intra-industrial trade patterns cannot be forecasted. When trade between two countries is entirely intra-industry, Grubel-Lloyd Index will be equal to industry.

If economies among countries are alike then intra-industrial trade will be pre-eminent. If they are not similar, inter-industrial trade will prosper.

From the Grubel-Lloyd indices for 1992 (Source OECD. Foreign trade by commodities. 1995 issue) it can be observed that the U.K, France, Germany, Netherlands and Belgium are mostly dominated with intra-industrial trade. Countries such as Spain, Ireland and Italy are positioned at a more intermediate level, whereas Portugal...