Financial sector Flashcards
What is the financial sector
Part of the overall economy made up of banks, money markets and brokers
Savings v investment
savings is a leakage, investment is an injection. Therefore in theory, more savings harm economic growth, more investment increases it
What is investment
the addition to the capital stock
Where is there a negative correlation between savings an investment
higher interest rates attract savings but deter investment. Confidence increases investment, decrease savings.
Where is there a positive correlation between savings and investment.
neoclassical economics: investment is determined by available savings in the economy. S=I
Evaluate the role of the banking system in economic growth
Banking system is critical to economic growth, financial institution supports innovation and creativity, particularly for small business leading to future growth by identifying and funding productive investment. Facilitates creation of wealth, trade and formation of capital
Evaluate the role of stock exchange for promoting economic growth
provides a platform for new and expanding business to gain funding, allowing to grow, make more profits hire more workers etc…
Evaluate the role of money market in driving economic growth
contributes to economic stability and development of a country by providing short-term liquidity to governments, commercial banks and other large organizations. Investors with excess money that they do not need to invest it in the money market and earn interest.
Why is the financial sector not efficient at creating growth
driven by its own interests, banks are reluctant to take risks and don’t do enough to support businesses, stock exchange is driven by short-term profits/dividends an is not interested in long term growth
What other sectors may be more important at creating economic growth than the financial sector
government/public sector, primary/secondary business that create real wealth
What does the efficiency of the financial sector at creating economic growth depend on
how well is the sector regulated?
What is the harrod-domar model
importance of savings and investment as key determinants of growth
According to the harrod-domar model what does the rate of growth depend on
level of national savings and the productivity of capital investments (capital-output ratio).
Rate of growth of GDP formula
savings ratio/capital output ratio
What does a high capital output ratio mean
needs a lot of capital for production, and it will not get as much value of output for the same amount of capital
What does a low capital output ratio mean
lot of output from little capital
How can rate of growth in an economy can be increased
increased level of savings in the economy, reducing the capital output ratio
How can boosting investment generate economic growth
boosting investment generates economic growth leading to higher level of national income allowing more people to save which can lead to more investment, boosting economic growth
Finance sector in emerging economies
as countries develop and wealth increases in terms of wages and corporate profits there is naturally an increasing demand for financial services.
Finance sector in developing economies
have very limited access to financial services such as credit, savings and insurance. Banks often refuse to service poor households and microenterprises because of the high cost
What is microfinance
describes schemes that provide finance for small scale projects in developing countries. Aims to increase access to finance in developing countries
What does lack of access to banks in developing countries cause
Caused them to rely on informal money lenders who charge exorbitantly high interest rates
How does microfinance work
loans are provided by banks without the need for collateral. However, borrowers were required to form themselves into group of 5 with joint responsibility for the repayments. This reduce the transaction cost to the bank of making and monitoring the loans. May be important to end absolute poverty
What is the disadvantage to microfinance
interest rates are still high e.g. 20% because of expensive lending and administrative costs. Collective lending so only as strong as the weakest.
What do MFIs offer
business loans, deposits, savings, pension and insurance products
