International Finance
CPA REVIEWS NOTES- INTERNATIONAL FINANCE© kadenchimbi@yahoo.com , 0754 327487
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TOPIC 1: INTRODUCTION TO INTERNATIONAL FINANCE Learning objectivesAfter reading this topic you should be able to:
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Understand the background of international finance
•
Define international finance
•
Explain the reason for studying international finance
•
Explain the roles of international financial manager
•
Understand the background of multinational corporations
•
Distinguish between international finance and domestic finance
1.1 BACKGROUND TO INTERNATIONAL FINANCE
International finance as a subject is not new in the area of financial management, it has beenwidely covered earlier in international economics and it is only the fast growth of internationalbusiness in the post-world war II and the associated complexities in the internationaltransactions that made the subject as an independent area of study.For several centuries, international economists have used the classical economic theory of comparative advantage to explain the trade movements between nations. Looking at the writingsof Adam Smith and David Ricardo in the eighteenth and nineteenth century, the theory in simpleterms, states that everyone gains if each nation specializes in the production of those goods thatit produces relatively most efficiently and imports those goods that other countries producesmost relatively efficiently. The theory supported free trade arguments, such as the NorthAmerican Free Trade Agreement (NAFTA)The doctrine of comparative advantage made an initial assumption that although the products of economic activities could move internationally; the factors of production were relatively fixed ina geographical sense. Land, labor and capital were assumed internationally immobile.The fast growing of the cross-border business transactions in the second half of the lasttwentieth century triggered the birth of multinational corporations, which is considered
1
TOPIC 1: INTRODUCTION TO INTERNATIONAL FINANCE Learning objectivesAfter reading this topic you should be able to:
•
Understand the background of international finance
•
Define international finance
•
Explain the reason for studying international finance
•
Explain the roles of international financial manager
•
Understand the background of multinational corporations
•
Distinguish between international finance and domestic finance
1.1 BACKGROUND TO INTERNATIONAL FINANCE
International finance as a subject is not new in the area of financial management, it has beenwidely covered earlier in international economics and it is only the fast growth of internationalbusiness in the post-world war II and the associated complexities in the internationaltransactions that made the subject as an independent area of study.For several centuries, international economists have used the classical economic theory of comparative advantage to explain the trade movements between nations. Looking at the writingsof Adam Smith and David Ricardo in the eighteenth and nineteenth century, the theory in simpleterms, states that everyone gains if each nation specializes in the production of those goods thatit produces relatively most efficiently and imports those goods that other countries producesmost relatively efficiently. The theory supported free trade arguments, such as the NorthAmerican Free Trade Agreement (NAFTA)The doctrine of comparative advantage made an initial assumption that although the products of economic activities could move internationally; the factors of production were relatively fixed ina geographical sense. Land, labor and capital were assumed internationally immobile.The fast growing of the cross-border business transactions in the second half of the lasttwentieth century triggered the birth of multinational corporations, which is considered