The Financial Sector

Question 1

What is finance?

Answer 1

Is the money businesses need in order to start-up, operate day to day or expand

Question 2

What is the financial sector made up of?

Answer 2

Banks, insurance companies, accountancy, money markets

Question 3

Where is the financial sector an important aspect of the economy?

Answer 3

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

Question 4

Whats the difference between savings and investment?

Answer 4

• 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

Question 5

What is the link between interest rates, savings and investment?

Answer 5

• Both are a function of the rate of interest - higher interest rates attract savings but deter investment
• Both affected by confidence

Question 6

What is the CORRELATION between savings and investment?

Answer 6

• 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

Question 7

Financial Sector IS efficient at creating economic growth

Answer 7

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

Question 8

The financial sector ISN’T efficient at creating growth. What other sectors could be said to be more important?

Answer 8

• 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

Question 9

What does the impact of the financial sector on economic growth depend on?

Answer 9

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

Question 10

The financial sector DOES promote economic development?

Answer 10

• 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

Question 11

The financial sector DOESN’T promote economic development especially for developing countries?

Answer 11

• 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

Question 12

What is the Harrod-Domar model?

Answer 12

Economic growth model stresses the importance of savings and investment as key determinants of growth

Question 13

The model suggests that the economy’s rate of growth depends on…

Answer 13

• The level of national saving (s)

- The productivity of capital investment (capital output ratio)

Question 14

How is the rate of growth of GDP calculated using the Harrod Domar model?

Answer 14

Savings ratio/Capital output ratio

Question 15

If the capital output ratio is low…

Answer 15

…an economy can produce a lot of output from a little capital

Question 16

If the capital-ratio is high…

Answer 16

…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

Question 17

If the savings rate is 10% and the capital output ratio is 2, how much would a country grow by per year?

Answer 17

5%

Question 18

What are the 2 ways rate of growth in an economy can be increased?

Answer 18

• Increased levels of savings in the economy

- Reducing capital output ratio

Question 19

What would happen if boosting investment generate economic growth?

Answer 19

• 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

Question 20

Features of the financial sector in developing economies?

Answer 20

• 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

Question 21

Features of the financial sector in emerging economies?

Answer 21

-As countries develop and wealth increases in terms of wages and corporate profits, there is naturally an increasing demand for financial services

Question 22

What is microfinance?

Answer 22

Is a term that describes schemes that provide small loans for small scale projects in developing countries

Question 23

Due to lack of access to banks in developing countries, what have people in rural areas relied on?

Answer 23

Informal providers of finance - money lenders, much more difficult for business to take off

Question 24

What is mircrofinance essentially?

Answer 24

To remedy the problem of accessing finance in developing countries

Question 25

Positives of microfinance?

Answer 25

• Fills saving gaps
• Can relieve poverty
• Source of finance without huge interest

Question 26

Negatives of microfinance?

Answer 26

• Entrepreneurial ventures are not always succesfull
• Lenders can still apply exorbitant interest rates and bully borrowers
• Loans are not big enough to alleviate poverty (health, education) most money used for consumption

Question 27

What could be used instead of the financial sector in promoting economic development?

Answer 27

Foreign aid, but could lead to govt failure due to corruption etc