Develop finance Assignment Example | Topics and Well Written Essays - 2500 words

Develop finance - Assignment Example b) On what basis do McKinnon and Shaw argue for financial liberalisation? Answer: McKinnon and Shaw were of the opinion that ceilings in interest rates, requirements of high reserve and restriction on allocation of credit can be accounted for the poor performance of investment mechanism. The work of the researchers is based on the role of the liberalized rates of interest on mobilization of savings as well as distribution of funds to investments that are high in earning. They indicated the role of the financial sector in order to increase the volume of savings. c) What imperfections in financial markets were disregarded by the McKinnon-Shaw style models and with what result? Answer: The hypothesis of Shaw and McKinnon is of the opinion that savings can be chocked by financial repression. They opined that only financial liberalization can lead to higher savings as well as investment which are the step to achieve accelerated growth. The hypothesis has failed to settle the debates on fi nancial liberalization. The process of financial liberalization is not at all smooth and continuous. Exogenous shocks can be held responsible for liberalization reversals in the developing countries. It is difficult to take the costs and benefits of financial liberalization into account. ... The net earnings of a country are recorded in the current account while the net change in the ownership is recorded in the capital account. The former is the sum total of balance of trade, cash transfers as well as factor incomes. The later consists of reserve account as well as the loans and investments between the country and the globe. There are mainly three types of financial capital namely equity capital, debt capital and specialty capital. The debt form of capital is injected into a business knowing that the capital must be returned back at a future date that is predetermined. The equity form of capital is the cash written by the holders of shares as well as the owners of the business into the organization that has no offsetting liabilities. The last from of capital is gold standard. It is among the few sources of capital that have almost zero economic cost. b) What are the dangers associated with international debt flows? Answer: The dangers of international debt flows are dan gers in credit rating, bankruptcy danger, judgments, loans and late payments. The credit rating is negatively affected by debts. Bankruptcy can also be thought of as one of the dangers of debt. When the debt level reaches at such a height that is infeasible to pay, bankruptcy acts as the option. But it will be unfair to think bankruptcy as debt free card. A situation of bankruptcy can also negative effects on the credit report and can also affect the availability of credit in future. A high level of debt can result in multiple late payments if the available resources are not able to cover up the payments. c) Have developing countries benefited from FDI? Answer: FDI plays a more significant role in the developing countries than in the developed countries.