Modern Economic Systems and Financial Fundamentals
Current Economic Systems
Monetarist and Neo-Keynesian Models
Monetarist: This system focuses on obtaining benefits and follows the classical liberalism of Adam Smith (the harmony of the market). It is limited to ensuring the smooth functioning of free trade, the price of money, and inflation-critical mechanisms, while reducing the weight of state taxes on the economy.
Neo-Keynesians: Based on the theories of J.M. Keynes, this model argues that the market does not guarantee full employment and balance. They believe the market needs to be corrected through supporting fiscal and monetary measures, proposing the welfare state as a primary goal.
Components of the Public Sector
The public sector is comprised of public authorities, public enterprises, and social security.
Distribution of Public Spending
- Social protection: 34%
- Health expenditure: 14%
- General services: 13%
- Educational expenditure: 11%
- Economic expenses and public investment: 11%
- Other (Order, culture, defense, housing, and environment): 5%
Taxation and its Purpose
Types of Taxes
Taxes are classified into direct taxes, indirect taxes, and special levies.
Purpose of Tax
Taxes are used to support the goods and services provided by the administration, redistribute income and wealth, sustain the country's infrastructure, and restrict or divert certain expenses.
The Nature of Money
Historical Evolution of Money
Money has evolved through three distinct stages: merchandise, paper, and trust.
Functions of Money
Money serves as a medium of exchange, a store of value, and a unit of account and measure.
Types of Money
Money includes cash in banks (checking accounts, savings, and time deposits) and quasi-money.
Inflation: Causes and Effects
Classes of Inflation
Inflation is categorized as moderate, rampant, or hyperinflation.
Causes and Effects of Inflation
The primary causes are demand-pull inflation and cost-push inflation. The effects of inflation include uncertainty, negative output (affecting economic growth and employment), and a decrease in international competitiveness.
Financial Markets and Institutions
Types of Financial Intermediaries
- Banking: Banks, savings banks, and credit unions.
- Non-bank: Investment companies and funds, pension funds, insurance companies, leasing (rent to final purchase), and factoring (collectors).
The Stock Market
The stock market is used to facilitate contact between people who buy assets and those who sell them.
The Eurosystem and Trade
Eurosystem Core Functions
The Eurosystem defines and implements monetary policy in the euro zone, manages the foreign exchange reserves of the EMU, issues legal tender notes, and ensures financial system stability and price stability.
Commercial Arrangements
Free trade (Librecampismo): Total freedom to buy and sell products. Protectionism: A trade measure intended to prevent the entry, wholly or partially, of foreign products by raising tariffs or taxes paid at the border for those products.
Main Protectionist Measures
These include tariffs, quotas or contingent measures with equivalent effect, dumping, and aid or subsidies to domestic firms.
The Balance of Payments (BOP)
Terms of the Balance of Payments
- Current account balance: Includes the commercial balance of goods, services, income, and current transfers.
- Capital account balance: Includes the transfer of capital and the purchase of intangible assets.
- Financial account balance: Records all financial transactions of a country with respect to the exterior.
Reasons to Buy Currencies
Currencies are purchased for commercial reasons, international financing, speculation, risk reduction, and as a financial mattress.