Financial sector

• Savings is money that is deposited in banks/financial institutions and allied investment to take place
• Investment is the amount of goods purchased or accumulated per unit of time which are not consumed at the present time
• The Harrod-Domar model is a model of economic growth that emphasises the importance of savings and investment
• Microfinance are schemes that provide finance for small-scale projects in developing countries
• Financial markets provide somewhere for consumers and firms to store their funds. Savings are rewarded with interest payments from the bank
• The role of the financial sector includes lending to businesses and individuals. The transfer of funds between agents is aided by financial markets. The funds can be used for investment or consumption
• The transfer of real economic resources is facilitated in a financial market. Financial markets can make it easier to exchange goods and services from the physical market, by providing a way that buyers and sellers can interact and transfer funds
• The currency market is another kind of financial market used to trade one currency for another
• In commodity markets, investors trade primary products, such as wheat, gold and oil. Future contracts are a method for investing in commodities. This involves buying it selling an asset with an agreed price in the present, but a delivery and payment in the future
• A forward market is an informal financial market where these contracts for future delivery are made
• A secure and stable financial sector is required in emerging and developing economies in order to promote economic development
• Without the financial sector, consumers and firms cannot generate sufficient savings to make the macroeconomy stable
• In many developing countries, there is only limited wealth, which means money cannot be put aside for the future and they can only afford to spend in the short run
• Without sufficient savings, there is inadequate capital accumulation
• Africa's saving rate is around 17% whilst the average for middle income countries is around 31%
• It is more expensive for the African public and private sectors to get funds since they have higher borrowing costs, which impedes capital investments
• The Harrod-Domar model states that investment, saving and technological change are required in an economy for economic growth
• The Harrod-Domar model shows that the rate of growth increases if the savings ratio increases. This leads to increased investment and technological progress, which leads to higher productivity
• The rate of growth is calculated by the savings ratio divided by the capital output ratio
• The limitations of the model are that there is a low marginal propensity to save in some countries or there might be a poor financial system
• The limitations of the model are that there is a low marginal propensity to save in some countries or there might be a poor financial system
• A limitation of the Harrod-Domar model is that funds might not lead to borrowing and investment. There could be inefficiency in the work force
• A limitation of the Harrod-Domar model is that funds might not lead to borrowing and investment. There could be inefficiency in the work force
• The paradox of thrift could be considered. An increase in savings could lead to an increase in investment. However, an increase in savings means there is a reduction in spending, which leads to a fall in AD
• Microfinance involves borrowing small amounts of money from lenders to finance enterprises. It increases the incomes of those who borrow and can reduce their dependency on primary products.
• Microfinance can help people break away from aid and gives borrowers financial independence. In Bangladesh 95% of microfinance cohorts are women
• Microfinance loans detach the poor from high interest, exploitative loan sharks. It can also help businesses to be set up.
• Since the money from microfinance foes straight to small and medium enterprises (SMEs) it can stimulate employment
• Microfinance loans may not be reliable if there is dishonesty regarding where the money was spent
• A foreign currency gap exists when the value of the current account deficit is larger than the value of capital inflows
• Capital flight is when capital and money leave the economy through investment in foreign economies. It is triggered by an economic threat eg hyperinflation. It can worsen an economic crisis