Understanding Financial Systems and Macroeconomic Indicators
Financial System Fundamentals
Functions of Money
- Medium of Exchange: Facilitates transactions without the need for bartering.
- Store of Value: Allows wealth to be held over time.
- Unit of Account: Provides a common measure of value for goods and services.
Kinds of Money
- Legal Tender (Fiat Money): Money declared by a government to be legal tender, often with a monopoly on its manufacture by a central institution.
- Bank Money (Deposit Money): Money created by commercial banks through lending activities.
The Financial System
The financial system is an intermediary set of institutions that connects those who demand financial resources with those who offer them.
Financial Assets
A financial asset is any asset with a market value.
- Real Assets: Tangible, physical assets (e.g., land, buildings, machinery).
- Financial Assets: Titles or claims that represent a right to receive future financial income (e.g., stocks, bonds).
Financial Intermediaries
Institutions that act as a link between savers and borrowers.
- Banks: Financial institutions (commercial banks and savings banks) with the capacity to create money.
- Non-Bank Intermediaries: Companies such as investment firms, insurance companies, and leasing entities.
Objectives of the Financial System
- Promote private saving.
- Efficiently allocate available financial resources to meet the economy's needs.
Role of Banks
Banks are financial intermediaries that receive funds from some clients to lend to others.
Functions of Banks
- Resource Uptake: Banks gather funds from the public through various deposit accounts:
- Current accounts
- Savings accounts
- Time deposits
- Resource Investment: Banks invest these resources through:
- Acquisition of stocks and bonds from other companies.
- Concession of loans and credits to customers.
- Complementary Services: Banks offer additional services to customers, such as:
- Debit cards
- Credit cards
- Online banking, etc.
Other Financial Intermediaries
Beyond banks, other significant financial intermediaries include:
- Insurance companies
- Investment companies and funds (e.g., mutual funds)
- Pension funds
- Leasing companies
Monetary Concepts
Money Supply
The total amount of money that economic agents have available in a given economy.
Cash Reserve Ratio (Required Reserve Ratio)
A tool used by central banks to control money creation. It sets a limit or determines the proportion of deposits that banks must hold as cash reserves.
Coefficient (Reserve Ratio) = Legal Reserves / Total Deposits
Value of Money and Interest
The value of money is inversely related to the price level. Interest is the price paid for the use of money.
Financial Markets
Money Market
A market where short-term, highly liquid, and low-risk wholesale financial products are traded.
Capital Markets
Markets where financial assets with a maturity of more than one year are traded. They serve as a bridge between savers who want to invest their money and entities seeking long-term funding.
National Accounts Basics
Gross Domestic Product (GDP)
Expenditure Approach (GDP at Market Prices - GDPmp)
GDPmp = Private Consumption + Investment + Public Spending + (Exports - Imports)
Income Approach (GDP at Factor Cost - GDPcf)
GDPcf = Compensation of Employees + Gross Operating Surplus
Relationship between GDPmp and GDPcf:
GDPmp = GDPcf + Indirect Taxes - Subsidies
Gross National Product (GNP)
GNP = GDP + Net Factor Income from Abroad
Where Net Factor Income from Abroad = (Income of national factors abroad) - (Income of foreign factors within the country)