Week 5 discussion - Quotes: While trading in merchandise...

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Quotes: While trading in merchandise and services for many years received the bulk of the attention in analyzing the foreign exchange market, the recent growth in the volume of transactions in foreign exchange market, the recent growth in the volume of transactions in foreign currency assets in such that these transactions clearly dominate the market today. 497 The decision to invest internationally rests on the expected rate of return on the international asset compared to domestic alternatives. If the expected rate of return is greater abroad than at home, one would expect domestic residents to invest abroad. If the expected rate of return on home assets is higher than that on foreign assets, foreigners would be expected to invest in the home country. If there are no barriers to investment flows, funds should move from areas of low return to areas of high return until the expected returns are similar. However, it is not quite that simple because there is a major difference between the domestic investment and the foreign alternative.
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