The Financial Sector Flashcards
What is finance?
Is the money businesses need in order to start-up, operate day to day or expand
What is the financial sector made up of?
Banks, insurance companies, accountancy, money markets
Where is the financial sector an important aspect of the economy?
Important aspect of the economies of large and developed economies such as USA/Japan and the UK. However, often less developed in emerging economies and very much so in developing
Whats the difference between savings and investment?
- Savings is a leakage/withdrawal from the level of AD
- Investment is an injection
Therefore savings will reduce economic growth, investment will increase economic growth
What is the link between interest rates, savings and investment?
- Both are a function of the rate of interest - higher interest rates attract savings but deter investment
- Both affected by confidence
What is the CORRELATION between savings and investment?
- Neo-classical economics - investment is determined by available savings in the economy
- Increase in savings, then banks can lend more to firms to finance investment projects. S=I
Financial Sector IS efficient at creating economic growth
The banking system is critical to economic growth; financial institutions support innovation and creativity, particularly for smaller businesses. This leads to future growth by identifying and funding productive investments. Therefore facilitates the creation of wealth, trade and the formation of capital
The financial sector ISN’T efficient at creating growth. What other sectors could be said to be more important?
- Banks are reluctant to take risks and don’t do enough to support new businesses
- Other sectors are more important e.g. Government/Public sector, primary and secondary businesses which actually create real wealth, not paper wealth
What does the impact of the financial sector on economic growth depend on?
How well the sector is regulated. This varies from country to country - UK/USA very much finance markets, can’t say the same for SSA countries
The financial sector DOES promote economic development?
- Helps support investment
- I component of AD, shifts right
- Reduces NOG
- Boosting economic growth
- Will help development, GNI per capita (part of HDI) will increase
- This may not be the case due to inequality or distribution of income, reinvestments etc
The financial sector DOESN’T promote economic development especially for developing countries?
- Financial sector isn’t strong in most developing countries
- Especially Central African Republic
- X inside the PPF diagram
- X shows low levels of GNI/Real GDP etc
- Investment in developing countries is risky and therefore doesn’t happen, no growth no development
- Number of bank accounts has increased, Harrod Domar model, increae in S could lead to I, therefore growtha and development
What is the Harrod-Domar model?
Economic growth model stresses the importance of savings and investment as key determinants of growth
The model suggests that the economy’s rate of growth depends on…
- The level of national saving (s)
- The productivity of capital investment (capital output ratio)
How is the rate of growth of GDP calculated using the Harrod Domar model?
Savings ratio/Capital output ratio
If the capital output ratio is low…
…an economy can produce a lot of output from a little capital
If the capital-ratio is high…
…then it needs a lot of capital for production, and it will not get as much volume of output for the same amount of capital
If the savings rate is 10% and the capital output ratio is 2, how much would a country grow by per year?
5%
What are the 2 ways rate of growth in an economy can be increased?
- Increased levels of savings in the economy
- Reducing capital output ratio
What would happen if boosting investment generate economic growth?
- Economic growth may lead to a higher level of national income
- Higher incomes allow-more people to save
- More svaings can in turn lead to more investment, again boosting economic growth in developing countries
Features of the financial sector in developing economies?
- Have very limited access to financial services such as credit, savings and insurance.
- Banks, often refuse to serve poor households and micro-enterprises because of the high cost
Features of the financial 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
What is microfinance?
Is a term that describes schemes that provide small loans for small scale projects in developing countries
Due to lack of access to banks in developing countries, what have people in rural areas relied on?
Informal providers of finance - money lenders, much more difficult for business to take off
What is mircrofinance essentially?
To remedy the problem of accessing finance in developing countries
