Economic Relations with the Exterior: Trade, Investment, and Capital Flows
Economic Relations with the Exterior
All economic realities are interconnected. Foreign economic relations encompass trade, exports, and shipments – the portion of local production sent abroad for purchase by non-residents.
Trade Relations: Exchange of Goods and Services, and Trade Balance
Trade relations are measured by the Balance of Payments and the Trade Balance. These relationships involve the exchange of goods and services between agents of one economy and those of other economies. The two main components are exports (goods sold to other countries) and imports (goods purchased from other countries). The indicator used to measure the trade relationship of a territory is:
(X + M) / GDP = Degree of Openness
A higher GDP generally indicates a greater degree of openness, as production increases. Production growth stems from more efficient businesses, leading to cost reductions and the ability to offer higher-quality products at the same price. After conquering the local market, companies often develop strategies to enter foreign trade.
The Canary Islands, for example, has experienced increased openness since the 1980s. However, despite this growth, it continues to have a trade deficit. This is because its growth is driven by construction, tourism, and non-tradable sectors, limiting its ability to export products.
The Trade Balance
The trade balance is a record of a country’s imports and exports over a period. The Canary Islands has a trade deficit because its imports exceed its exports. This is due to its focus on non-tradable goods (goods that cannot be imported or exported), such as tourism, construction, and energy.
Personal Relationships: Migration, Tourists, and Professionals
These relationships involve individuals from one society interacting with other territories. They include flows of people, such as occasional movements (tourism), migratory movements, and professional movements.
Foreign Investors and Financial Capital: Foreign Investment (Direct, Portfolio, Real Estate) and Movements of Financial Capital
These relationships involve companies with operations in other countries. The Canary Islands has limited foreign locations, hindering the international recognition of its products.
Foreign investment and financial capital movements involve the flow of money, savings, loans, and capital contributions between countries. These flows can be speculative (hot money), involve opening accounts, or making deposits in another country. Internal borrowing can occur between private companies.
Hot money refers to funds that move rapidly between countries for speculative purposes, exploiting differences in exchange and interest rates.
Foreign investments are categorized as follows:
- Foreign direct investment: The creation of new businesses.
- Portfolio investment: Shareholdings and operations related to social capital.
- Real estate investment: Investments in land, lots, farms, estates, homes, and business buildings.
Foreign Intangible Assets with Economic Substance (Values, Customs, Information Products, Cultural and Scientific Content)
This encompasses the virtual economy and information with economic value. Cultural rights are becoming increasingly important. These relationships are gaining significance.
Balance of Payments (Balance of Trade + Balance of Services + Balance of Financial Capital)
The balance of payments is an accounting document that records trade, services, and capital movements between residents of a country and the rest of the world over a period. It provides detailed information on all financial transactions.
- The balance of trade records receipts and payments for imports and exports of tangible goods.
- The balance of services includes receipts and payments from the sale of services between residents of different countries.
- The current account balance includes the balance of trade and services.
- The financial capital account records changes in assets and liabilities of financial capital between a country and abroad.