Savings,

Investment and
Financial System

A Written Report by 1-12 (Group 7)

Thaleah B. Balon
Annica Faith V. Castro
Alyssa Marie V. Ceneta
Carl V. Paculanang

Savings, Investment and the Financial System

What Is a Financial Institution (FI)?
A financial institution (FI) is a company engaged in the business of dealing with financial
and monetary transactions such as deposits, loans, investments, and currency exchange.
Financial institutions encompass a broad range of business operations within the financial
services sector including banks, trust companies, insurance companies, brokerage firms, and
investment dealers. Virtually everyone living in a developed economy has an ongoing or at least
periodic need for the services of financial institutions.

The financial system: the group of institutions that helps match the saving of one person with
the investment of another.

Financial markets: institutions through which savers can directly provide funds to
borrowers. Examples:

• The Bond Market.

A bond is a certificate of indebtedness.

• The Stock Market.

A stock is a claim to partial ownership in a firm.

Financial intermediaries: institutions through which savers can indirectly provide

funds to borrowers. Examples:

• Banks

• Mutual funds – institutions that sell shares to the public and use the proceeds to
buy portfolios of stocks and bonds

Different Kind of Savings

 Private saving
= The portion of households’ income that is not used for consumption or paying
taxes
= Y–T–C

 Public saving
= Tax revenue less government spending
=T–G

 National saving
= private saving + public saving
= (Y – T – C) + (T – G)
= Y – C – G
 = the portion of national income that is not used for consumption or government
purchases

Some of the Financial Institutions in the Philippines Economy?

The Bangko Sentral ng Pilipinas (BSP) is the monitory and regulatory body of all the
financial institutions inside the Philippines. 

Broadly, there are 4 different types of financial institutions in the country: 

1. Universal and commercial banks: Resource wise, these represent the largest group of
financial institutions. These banks offer a range of financial services. The universal banks
differ from commercial banks in ways that they have the authority to engage in underwriting and
other functions of investment houses and to invest in equities of non-allied undertakings in
addition to the functions of an ordinary bank. 

2. Rural and cooperative banks: These banks are well known and popular among rural
communities in the Philippines. These banks play an active role in developing the rural economy
by providing basic financial services to the rural communities. These services can range from
helping farmers through the different stages of production to buying vehicles. The difference
between the rural banks and Cooperatives is the way they are owned. Rural banks are owned and
managed privately while cooperative banks are organized/owned by cooperatives or federation
of cooperatives. 

3. Thrift banking system: The system is composed of savings and mortgage banks, private
development banks, stock savings and loan associations and microfinance thrift banks. These
banks are engaged in accumulating savings of depositors and investing them. They also provide
short-term working capital and medium- and long-term financing to businesses engaged in
agriculture, services, industry and housing, and diversified financial and allied services, and to
their chosen markets and constituencies, especially small- and medium- enterprises and
individuals.

4. The market also consists of some non-banks with quasi-banking functions. This group
consists of institutions engaged in the borrowing of funds from 20 or more lenders for the
borrower's own account through issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of re-lending or purchasing receivables and other
obligations.

Key Macroeconomic Variables

Real Gross Domestic Product. Real GDP divided by the number of workers in the economy is
our best readily-available index of the status of the economy: how well the economy is doing as
a social mechanism for producing goods and services that people find useful: the necessities,
conveniences, and luxuries of life.
The Unemployment Rate. An economy with no unemployment would not be a good economy.
Just as an economy needs inventories of goods - goods in transit, goods in processes, goods in
warehouses and sitting on store shelves - in order to function smoothly, so an economy needs
"inventories" of jobs-looking-for-workers ("vacancies") and of workers-looking-for-jobs ("the
unemployed"). An economy in which each business grabbed the first person who came in the
door to fill a newly - open job and in which each worker went and took the job associated with
the first help-wanted sign that he or she saw would be a less productive economy.

The Inflation Rate. A measure of how fast the overall level of money prices is rising. If the
inflation rate this year is five percent, that means that this year things-in-general cost five percent
more - in money terms, in terms of the symbols printed on dollar bills, not in sweat or toil.

The Interest Rate. Economists speak of "the" interest rate because different interest rates move
up or down together.But in actual fact there are a very large number of different interest rates,
applying to loans that mature at different times in the future, and to loans of different degrees of
risk.

The Leve of Stock Market. The level of the stock market is the key economic quantity that you
likely hear about most - you most likely hear about it every single day on the news.The level of
the stock market is an index of expectations of how bright the economic future is likely to be.
When the stock market is high, average opinion expects economic growth to be rapid, profits
high, and unemployment relatively low in the future.

The Exchange Rate. The price of one currency in terms of another currency. For example, the
exchange rate between the £ and the $ may be £1=$1.65. This means that you need to pay a price
of £1 to get every $1.65. Exchange rates can be fixed or floating.Fixed means that they stay at
the same value as set by the government.Floating means that they fluctuate day to day according
to the market. More generally the term can also refer to the price at which any good is being
traded for another good.

To summarize, macroeconomics is a delicate juggling of measurements, calculations,

compromise and cooperation, not unlike family dynamics where balance creates harmony and
success.

How the Financial System is related to key macroeconomic variables?

1.Gross Domestic Product - The GDP equals the total value of goods and services produced in
a country during a year. Economic growth is, therefore, a sustainable increase in the amount of
goods and services produced in an economy over time:

2.Unemployment Rate - The second most important macro-economic concept is the

unemployment rate, which is a key indicator of the condition of the labor market.
3.Inflation - The third most important macroeconomic concept is inflation, which is an increase
in the overall level of prices measured by the consumer price index. When the inflation rate is
high, the real value of money erodes.

The Model of the Supply and Demand for Loanable Funds in Financial
Markets
The supply of loanable funds comes from saving:

 Households with extra income can loan it out and earn interest.

 Public saving, if positive, adds to national saving and the supply of loanable funds. If negative, it
reduces national saving and the supply of loanable funds.

The demand for loanable funds comes from investment:

 Firms borrow the funds they need to pay for new equipment, factories, etc.

 Households borrow the funds they need to purchase new houses.

How to use the loanable funds model to analyze various government policies?

What the loanable funds model illustrates

The loanable funds market illustrates the interaction of borrowers and savers in the economy. It
is a variation of a market model, but what is being “bought” and “sold” is money that has been
saved. Borrowers demand loanable funds and savers supply loanable funds. The market is in
equilibrium when the real interest rate has adjusted so that the amount of borrowing is equal to
the amount of saving.

Key Features of the loanable funds model

 A vertical axis labeled “real interest rate” or “r.i.r.” and a horizontal axis labeled
“Quantity of loanable funds” or “Q_{LF}QLFQ,
 A downward sloping demand curve labeled D_{LF}DLFD, start subscript, L, F, end
subscript and an upward sloping supply curve labeled S_{LF}SLF

 An equilibrium real interest rate and equilibrium quantity labeled on the axis

Loanable Funds Model

Governmet Policies
Policy 1. Event: government replace income tax by consumption tax. This will result in an
increase in supply of loanable funds. Equilibrium interest rate falls , and the equilibrium saving
and investment increases.

Other policies that affect private saving

Taxation on interest and dividend
Decrese in taxation will increase return to saving for any real interest rate, increase the desire to
save and loan at each new interest rate.

Policy 2. Event: Government uses a n investment tax credit to encourage investment. An

investment tax credits gives a tax advantage to any firm building new factory or buying new
equipment. Increase in demand for loanable funds.
Policy 3. Event: An increase in government budget depicits. An increase in budget depicits will
lower national saving and shift the supply of loanable funds in the left. The equilibrium interest
rate increases, and the equilibriums saving and investment falls.

How government budget deficits affect the Philipppine Economy

A budget deficit occurs when an individual, business, or government budgets more spending
than there is revenue available to pay for the spending, over a specific period of time. Debt is the
aggregate value of deficits accumulated over time.

Causes
Many situations can cause spending to exceed revenue. An involuntary job loss can eliminate
revenue. That occurs in the early stages of credit card debt. The debtor keeps charging, and only
paying the minimum payment. It's only when interest charges become excessive that
overspending becomes too painful.

Like families, governments also lose revenue during recessions. As workers lose jobs, there
aren't enough taxes coming in.

Unlike families, the federal government can keep adding each year's deficit to the debt for a long
time. As long as interest rates remain low, the interest on the national debt is reasonable.
Effects
There are immediate penalties for most organizations that run persistent deficits. If an individual
or family does so, their creditors come calling. As the bills go unpaid, their credit score
plummets. That makes new credit more expensive. Eventually, they may declare bankruptcy.

The same applies to companies who have ongoing budget deficits. Their bond ratings fall. When
that happens, they have to pay higher interest rates to get any loans at all. These are called junk
bonds.

Governments are different. They receive income from taxes. Their expenses benefit the people
who pay the taxes. Government leaders retain popular support by providing services. If they
want to continue being elected, they will spend as much as possible. Most voters don't care about
the impact of the debt. As a result, deficit spending has increased the debt to unsustainable
levels. The World Bank says this tipping point is when a country's debt to gross domestic
product ratio is 77 percent or higher.

Higher debt interest payments

When the government borrows, it offers to pay an interest payment to those who buy the bonds.
The interest rate attracts investors to lend the government money.

Crowding Out
Increased government borrowing may cause a decrease in the size of the private sector. The
government borrow by selling bonds to the private sector. Therefore, if the private sector
(banks/private individuals) buy government bonds, they have less money to invest in private
sector projects.