Chapter 11: Interrelationships among Financial Development, Growth Rate, and Trade Openness: Study for USA, China, and India

In today’s world almost all the countries are under globalization network both in trade and capital accounts. The countries removed trade restrictions for smooth flow of goods and services across the borders and the financial institutions of the countries are integrated more. The central banks of the countries bear additional responsibilities in making the exchange rate of the domestic currency and overall price level stable. They apply different monetary policy tools such as bank rates, reserve ratio, open market policy, forex managements, etc., in these purposes. A depreciation of the home currency vis-à-vis the currency of the trading partner makes import costlier and export cheaper that lead to increase in the reserve of foreign currency. On the other hand, an appreciation of the home currency makes erosion of foreign currency reserve. However, the effects of these two currency changes depend upon the elasticity of export and imports. If the sum of these two elasticities is greater than unity (known as Marshall–Lerner condition) then only the home country will benefit in increasing foreign currency reserves. The free trade theoreticians propose that free trade always makes both or all trading partners better off through appropriations of the comparative advantages the trading partners do enjoy. The overall scales and scopes of the economies improve that make the enhancement of the growth rates of aggregate as well as per capita incomes. Globalization is a common term that encapsulates overall openness of the countries.