Final answer:
Capital markets transform financial flows by repackaging money, banks use deposits to provide loans, firms issue stocks and bonds, investors trade stocks and bonds, and mutual funds combine investments. Trade balances and financial capital flows are interconnected, and comparative advantage and balanced trade impact both trade and capital flows.
Step-by-step explanation:
Capital markets play a crucial role in transforming financial flows. Banks use deposits to provide loans to companies, while firms issue stocks and bonds to raise capital. Investors can earn returns by buying stocks in companies. Financial investors also trade stocks and bonds among themselves, and mutual funds combine the investments of different companies. The connection between trade balances and financial capital flows lies in the fact that trade imbalances can impact the flow of capital in and out of a country.
Comparative advantage is another concept related to trade balances and capital flows. It refers to a country's ability to produce a good or service at a lower opportunity cost than other countries. When countries specialize in producing goods or services in which they have a comparative advantage, trade flows increase, leading to financial capital flows as well. Balanced trade, on the other hand, occurs when a country's exports and imports are roughly equal. In terms of investment and capital flows, balanced trade can be seen as a result of efficient allocation of resources and investments in industries that have a competitive advantage.