24) financial sector Flashcards
who has roles in the financial sector
Businesses who specialise in providing finance are in the financial sector of the economy Best known examples are banks, including high street (retail) banks and investment banks
• Retail banks (e.g. Barclays/Lloyds) mainly deal with small businesses and households)
• Investment banks provide the financial support needed by larger businesses/organisations
• Well known investment banks are: Goldman Sachs, Citigroup JP Morgan, Credit Suisse
• Many other organisations also provide financial services and are part of the financial sector.
These include: Accountancy firms (e.g. KPMG/Grant Thornton), Insurance companies, pension groups, building societies (specialise in mortgages) and credit unions.
why is the financial sector important?
Together, all the organisations that make up the financial sector are critically important to achieving economic growth. Their services enable businesses, governments and other organisations to operate smoothly, take risks, grow, make profits, reinvest profits. They also help households to save, plan for the future, enjoy life etc. Think of it as like the oil needed to lubricate the engine of the economy.
what are savings?
Savings (S) is the part of income not spent on consumption (C), set aside for future use
• S is a considered to be leakage from the circular flow of income
why can savings be good?
- However, this does not mean that S is bad. It is essential for households to save
• Also, savings provides the funds that banks need in order to make the loans that fund mortgages and business investment (I)
what is investment?
Investment is spending by businesses on increasing or improving their capital stock
• E.g. buying new equipment, buildings, vehicles; acquiring other businesses etc.
how do governments invest?
Governments also “invest”- this is called Capital Expenditure (e.g. new roads/hospitals)
what is economic development, how is it measured?
- Economic development can be simply defined as improvements in the standard of living
- This is different to economic growth (improvements in income or output levels)
- Development is measured by the HDI index and includes 3 elements:
• GNI per capita- this can normally be taken to reflect economic growth - Adult Literacy levels- this reflects educational standards
• Life expectancy at birth- this reflects on standards of health care
is economic growth always good?
• Literacy and Life expectancy may not improve with economic growth
GNI per capita may improve with growth depending on levels of inequality/population
- Savings are really important to development as savings are required for investment
why are savings important for development?
- Savings are really important to development as savings are required for investment
- Investment is really important for development as is enables new businesses to set up, existing businesses to survive and grow, all adding to employment and income levels, therefore (hopefully) improving GNI per capita.
when is development a priority?
Development though, is mainly a priority for developing and emerging economies- it matters less if your development is already advanced (developed countries)
why do developing economies struggle?
- The problem is that developing economies, who desperately need to develop more don’t have the capability to fund this through savings and investment One reason for this is that household and business income is so low that there is no spare income to fund savings or retained profits
• This means that there is very little finance available to fund investment
• Equally, government tax revenue is very low meaning that governments can’t fund the capital expenditure needed for improving infrastructure, schools and hospitals.
• Completing the vicious circle, banks and other financial sector organisations have either very little funds to lend out or very little incentive to expand (tiny profits available)
• Therefore, one of the main issues preventing faster economic development worldwide is the lack of viable or strong financial sectors in developing economies
what does the Harrod Domar Model and what does it suggest?
This is a model for economic growth, used to illustrate the problem outlined above
that in developing economies growth depends on the relationship between the capital output ratio and savings
why is growth essential for development?
growth is essential for development as it will (hopefully) increase GNI per capita and increase government tax revenue which can fund better health and education
how do you calculate the rate of economic growth?
The rate of economic growth=S/K where K is the ratio of capital to output, The smaller the number for K the better: E.g. if one piece of capital is making 2 things, then K is 0.5. If one piece of capital makes a 100 things (0.01), the capital is clearly far more efficient
linking to the Harrod Domar Model, why do developing countries have low rates of growth and development?
- savings are very low
- the capital output ratio is far too high
