Financial markets are continuously being developed throughout the world to improve the transfer of funds from surplus units to deficit units. In some countries, the financial markets are just starting to be developed. In others, such as the United States, the financial markets are being transformed to remove inefficiencies. Because the financial markets are much more developed in some countries than in others, they vary among countries in terms of the volumes of funds that are transferred from surplus units to deficit units and the types of funding that are available.
Many foreign countries have recently converted to market-oriented economics, in which businesses are created to accommodate the needs or preferences of consumers. A market economy requires the development of financial markets, where businesses can obtain the financial they need to products and consumers can obtain the financing they need to purchase specific products.
Many financial markets are globally integrated, allowing participants to move funds out of one country’s markets and into another’s. Foreign investors serve as key surplus units in the United States by purchasing U.S. Treasury securities and other types of securities issued by businesses. Conversely, some investors based in the United States serve as key surplus units for foreign countries by purchasing securities issued by foreign corporations and government agencies. In addition, investors assess the potential return and the risk of securities in financial markets across countries and invest in the market that satisfies their return and risk preferences.
With these more integrated financial markets, U.S.market movement may have a greater impact on foreign market movements, and vice versa. Because interest rates are influenced by the supply of and demand for available funds, they are now more susceptible to foreign lending or borrowing activities.