International Factor Movements - International Borrowing and Lending

International Borrowing and Lending

International borrowing and lending is another type of international factor movement; however, the "factor" being moved here is not physical, as it is with labor mobility. Instead, it is a financial transaction. It is also known as portfolio investment. International lending takes place through both private, commercial banks and through international, public banks, like multilateral development banks. It can be classified as a type of intertemporal trade, i.e., the exchange of resources over time. Intertemporal trade represents a tradeoff of goods today for goods tomorrow, and it can be contrasted with intratemporal trade, an exchange of goods taking place immediately. Intertemporal trade is measured by the current account of the balance of payments.

According to the time value of money, the present value of money is not equal to its future value (e.g., $1000 today is worth more than $1000 a year from now). Those wishing to borrow money from a lender must provide a measure of compensation above the value of the principal being borrowed. This compensation usually happens in the form of an interest rate payment. People do not all have the same demand for present and future consumption, so if borrowing and lending are allowed the "price of future consumption", i.e., the interest rate, will emerge. For the purposes of international economics, countries can be thought of in the same way as people. If a country has a relatively high interest rate, that would mean it has a comparative advantage in future consumption—an intertemporal comparative advantage. Countries that borrow from the international market are, therefore, those that have highly productive current investment opportunities. Countries that lend are in the opposite situation.