1. What do you mean by Regional Financial System?

Present your understanding  on the

basis of various regional concepts with their importance in international trade and
capital flows.

A financial system is a densely interconnected network of intermediaries, facilitators, and

markets that serves three major purposes: allocating capital, sharing risks, and facilitating
all types of trade, including intertemporal exchange.The financial system is
the system that enables lenders and borrowers to exchange funds.
And regional financial system is a the set of global, regional, or firm specific institutions
and practices used to facilitate the exchange of funds using market principles, central
planning or a both. The policy and plans are carried out based on the region and nature of
operation of the financial institution that is carried out in a specific region. The world is
now a global platform for the companies to expand its business operation in any place
through the help of the financial system. The regional financial system is the worldwide
framework of legal agreements, institutions, and both formal and
informal economic actors that together facilitate international flow of financial capital for
purpose of investment and trade financing. The way of financial system and concepts
differs from state because of the kind of economies activities that they rely upon and
based on the monetary activities it takes place in the country. For example: We have
formal and informal financial sector where most of the financial activities is carried out in
an informal way which is 60% where formal stands at 40%.

International trade is the exchange of goods and services among countries. Total trade
equals imports and exports. it helps in the creating the jobs from exporting of goods and
boost the economy.
As of my understanding there are various regional concepts that works to build of the fine
environment to carry out the trade between the countries. There are various types of trade
agreements that is being done to boost the economy and help the national companies for
their expansion. There are different regional trade agreements, customs unions and
association like European free trade association (EFTA) and European Union (EU), North
American Free Trade Agreement (NAFTA), South Asia Free Trade Association (SAFTA)
etc. Basically, these trade agreements and association helps in the movement of labors,
companies and overall it helps countries to improve their financial position.  In free trade
association no duty is levied on imports from other member states, but different rates of
duty may be charged by each member on its imports from the rest of the world. A further
stage is the custom union in which free trade among the members is sheltered behind a
unified schedule of customs duties charged on imports from the rest of the world. These
unions or association is for the economic integration to make their region financially
strong to compute with the rest of the world. For example : In 1991 EU was formed for an
economic and monetary union which included the creation of a single currency (i.e.
Euro). Even though the member of each EU have different current in each state but when
they do inter-country business then they do it in euros between the member nation and
this unity makes them stronger in the world economy. The world trade organization
(WTO) plays an important role for countries to make the trade agreement between the
two nations and solve their dispute or trade wars. NAFTA established to eliminate all
tariff and non-tariff barriers of trade and investment between the United States, Canada
and Mexico.Where these countries can make the movement of the product such as crude
oil, machinery, gold, vehicles, fresh produce, livestock, and processed foods, originate
from these countries without paying any tariffs.

The term ‘capital flows’ refers to the movement of capital, i.e., money for investment, in
out of countries. When money for investment goes from one country to another, is a
capital flow. All capital flows comprise just money that is a consequence of investment
flows.Companies are always looking to make a product in a cheap rate so that they can
stay in market and compute with others and this makes them to move their manufacturing
unit in countries like china, Indonesia, Vietnam where they can get a cheap labor and
resource to reduce their manufacturing cost. In emerging economies capital flows can be
particularly volatile as the economy may experience periods of rapid growth and
subsequent contraction. Increased capital inflows can lead to credit booms and the
inflation of asset prices, which may be offset by losses due to depreciation of the currency
based on exchange rates and declines in equity pricing. Sometimes due the decrease of
the export and increase in the import leads to the trade deficit and this will hit the
country’s economy because country is losing money more than they are earning when
companies move away from the country. And in that case country injects the cash in the
economy to support the national companies to improve their business so they can bring
back money back to the economy by improving their business. For example: Right now
we are in the middle of the chaos because of the COVID-19 and lots of airline companies
are seeking for the government bailout to be in the business and to support the airlines
business lots of government are planning to make an emergency relief fund to support
their business. This relief fund will bring the capital flows in the market and it will be the
working capital for the airlines industry. It is really important to have the capital inflow in
the financial system when there is a liquidity crunch because this will only help
companies to survive and this will save people from being jobless. There is also a real
state capital flows where people buy the commercial real estate, businesses or house and
companies will look for the growth probability prior to their investment.
For example: A businessman from Russia buys property in London and wants to invest in
a football club over there. This will bring money into the England economy while capital
flows from Russia. On a larger scale, a government directs capital flows from tax receipts
into programs and operation and through trade with other nation and currencies.
Individual investors direct savings and investment capital into securities, such as stocks,
bonds, and mutual funds.