Investment Composition

Although capital accumulation takes place in many institutional sectors of the economy (firms, households, public sector,…), a narrower definition is used in national accountancy.

Investment is just new capital accumulation in business (both private and state-owned).

Household by convention do not invest, even if it does exist a capital accumulation in cars, computers, electric appliances, etc. Public expenditure is partly devoted to roads, railways, infrastructure, buildings (as for schools, hospitals,…).

All this is clearly capital accumulation whose utility will last over time. Still, it is quite a common practice for investment in public sector being considered zero by convention.

Investment is classified according to the degree of directness with which it is linked to current and future sales:

1. inventories stock of finished goods, semi-manufactured goods, and raw materials in commercial premises, storehouses and producers' plants;
2. equipment for direct production of services and goods;
3. transport and auxiliary machineries;
4. office and general endowment for indirect workers and management;
5. any long-lasting improvement in those items;
6. industrial plants and service buildings;
7. other buildings.

In today's world, investment in immaterial assets is getting more and more important, as with the case of expenditure in Research & Development, human capital, software and other areas.

Financial investments in shares, obligations and other financial instruments are not considered as "investment" in a macroeconomic sense nor in national accountancy. The same is true for real estate exchanges of used buildings (both residential and non-residential).

When considering the issue of the creation and diffusion of innovation through investment, a crucial distinction should be made between complementary investments and competitive investments.

Value Of Investments

Investment is the value of machinery, plants, and buildings that are bought by firms for production purposes.

Investment plays six macroeconomic roles:

1. it contributes to current demand of capital goods, thus it increases domestic expenditure.
2. it enlarges the production base (installed capital), increasing production capacity.
3. it modernizes production processes, improving cost effectiveness.

4. it reduces the labour needs per unit of output, thus potentially producing higher productivity and lower employment.

5. it allows for the production of new and improved products, increasing value added in production.

6. it incorporates international world-class innovations and quality standards, briging the gap with more advanced countries and helping exports and an active participation to international trade.

Trade Imbalances

Trade imbalances are widespread throughout the world and persistent over time.

In order to reduce the gap with rich countries, poor countries have to rise much faster than them, which are usually their main commercial partners. But this leads to trade deficit, which risks to jeopardize growth with alternate phases of "stop-and-go".

Trade balance tend to be strongly anti-cyclical: in boom periods it usually exhibits deficits, whereas in recessions a trade surplus can help inverting the business cycle. The reasons are explained in depth here and here.

Trade Balance

Trade balance is a component of GDP: other things equal, a surplus increases GDP and deficit reduces it. If this impact is strong enough, it gives rise to the traditional Keynesian multiplier effect with consumption moving in the same direction.

In financial terms, trade balance influence the total size and the composition of the current-account balance and, more broadly, it influences the balance of payments (which comprehends not only the trade balance but also income payments, loans and aid from abroad, etc).

In particular, long-lasting trade deficit can lead to foreign debt, on which a country has to pay interests. If this debt is judged by market agents as unsustainable, a currency crises can erupt. Even before that this perspective materialises, the government can be induced to dampen GDP growth.

Determinants Imports and Exports

Convergent or divergent dynamics of imports and exports are the first causes of trade balance changes.

Everything that impact asymmetrically on imports and exports can impact the trade balance. In particular price and non-price competitiveness is relevant. If external pressure forces down the prices at which a country sells its exports, than a trade deficit is more likely ("terms of trade" effect). In other words, in a hierarchical world, trade balance can reflect political balance of power.

A faster GDP growth than trade partners' ones usually results in trade deficit, since imports are elastic to GDP (they rise more than proportionally).

Currency exchange rate can be very important - possibly due to a fixed exchange rate and a higher inflation rate than commercial partners, an overvaluation of the domestic currency can lead to deep trade deficits on most products and with most countries. A sharp devaluation can dramatically improve all these relationships.

If financial transaction are particularly intensive and autonomous, an inflow of FDI can lead to higher imports (of production inputs for the new foreign-owned plants), also because of revaluation of currency. Hopefully, this short-run effect will be balanced by more exports in the future. In this cases, trade balance is adjusting to financial movements.

Imports and Exports

Net trade with foreigners: exports less imports. A trade deficit means that exports are insufficient to pay for exports; a trade surplus, the opposite.

Sometimes called "net exports", the trade balance is a component of GDP, to the effect that a perfectly equilibrated trade balance makes the GDP dependent only on domestic values (consumption, public expenditure, investments).

A simultaneous increase of both imports and exports by the same amount leaves unaltered the trade balance. Any difference in dynamics between exports and imports has a multiplied effect on trade balance.

Composition - Trade balance is usually decomposed by product and by country (bilateral trade balances). Relevant is the degree of concentration of the imbalance in trade caused by one or few commodities. If concentration is high, a targeted industrial policy could improve the balance (e.g. reduce the imbalance).

On the other hand, if a deficit is due only to few partners, proactive and consensus-based trade negotiations with them could fairly quickly set the problem.

Although less general than trade balance, which includes both goods and services, the "merchandise balance", which includes only goods and not services, is sometime used because of better data availability.

Things to Consider in FOREX

What's nice about foreign exchange is you don't often, if not never, attain less than what you actually put in. Commonly, you gain substantial amount of income.
Nevertheless, as a wise investor, you must only invest what you consider extra since the market itself is vulnerable to fluctuations.
The FOREX currency trading system can give you a better picture of the whole trading process.

Do You Profit from FOREX?

Where could you perhaps earn profits in a common business?If you indeed want to earn in foreign exchange, then you must be aware of the currency fluctuations--that is where earning most of the time sets in. This is a risk, yet the potential of what you reap as always been huge, even attaining a ratio of 1:200.

Base Currency and a Terms Currency

Every foreign exchange transaction involves two currencies—and it is important to keep straight which is the base currency (or quoted, underlying, or fixed currency) and which is the terms currency (or counter currency). A trader always buys or sells a fixed amount of the “base” currency, most often the dollar—and adjusts the amount of the “terms” currency as the exchange rate changes.

The terms currency is thus the numerator and the base currency is the denominator.When the numerator increases, the base currency is strengthening and becoming more expensive; when the numerator decreases, the base currency is weakening and becoming cheaper.

In oral communications, the base currency is always stated first. For example, a quotation for “dollar yen”means the dollar is the base and the denominator, and the yen is the terms currency and the numerator; “dollar-swissie” means that the Swiss franc is the terms currency; and “sterling-dollar” (usually called “cable”) means that the dollar is the terms currency.

Currency codes are also used to denote currency pairs, with the base currency usually presented first, followed by an oblique. Thus “dollar-yen” is USD/JPY; “dollar-Swissie” is USD/CHF; and “sterling-dollar” is GBP/USD.

A good Internet Based FOREX System

A good internet based FOREX system is yet another great tool in the hand of the on-line investor or home based business person looking for a new business challenge.

Home based FOREX businesses are gaining popularity as FOREX trading is made available to the every day person through the introduction of FOREX trading systems and software.
These days more and more individuals are open to the potential opportunities that trading currencies on the FOREX market has to offer.

With the help of FOREX systems internet trading is now the best way of communicating with on-line brokers, traders and financial institutions as trillions of dollars in currency are traded every day on the foreign exchange market.

Without good FOREX systems and software there would be fewer small and medium investors willing to learn and participate in this potentially risky but lucrative Foreign Exchange market.