Financial and economic studies

1. The state

A state is a political organization with a centralized government that maintains a monopoly by

use of force within a certain geographical territory.

Functions and roles of the state

­ traditional
→ had already existed in the time of the earliest states
→ lawmaking
→ execution of laws
→ protection of the citizens
­ social
→ appeared after the industrial revolutions
→ main aim: creating and maintaining a higher standard of living
→ education
→ healthcare
→ social insurance system (pension, unemployment benefit, family allowance
etc.)
→ public services (eg. child protection, waste management, postal services, public
cemeteries, retirement homes etc.)

­ economic
→ this was accepted after the Great Depression (apart from WW1), this meant the
decline of the liberal idea of no economic intervention by the state
→ an early economic function was the setting of tariffs (though its main
motivation was the gaining of income)
→ providing jobs
→ public investments
→ modernisation of the economy
→ development of infrastructure
→ preparing for and helping the arrival of foreign capital

The relationship of modern states and market economy

­ before the market economy: the state had to use force to achieve its economic goals
eg. the redistribution of wealth, collection of taxes
­ in the market economy everything is determined by the demand and supply → the
state has only regulatory and supervisory roles in the economy
→ provides the necessary means to the unproblematic operation of the market
economy
→ reduces the disadvantages of this type of economy eg. workplace regulations,
social insurances, environmental protection
­ how can the state participate in the economy?
→ creating laws regarding economy (eg. laws regarding the use of the budget,
regulations)
 → developing the infrastructure to help the economy (eg. building roads to help
trade)
→ being present at the market with public enterprises
→ encourage the inflow of foreign capital
→ protection of home economy with eg. protective tariffs
→ maintains the competitiveness of the country
­ most of the modern states operate a mixed economy
→ an economic system blending elements of market economies with elements of
planned economies, free markets with state interventionism, or private
enterprise with public enterprise
→ still determined by the market (supply-demand)
→ foreign capital also has an important role
→ governmental intervention results in the appearance of a social market
economy
▪ mainly a capitalist system but
▪ government can intervene to reduce social tensions and inequalities

Economic tasks of the state

­ providing the legal conditions
→ regulations and laws regarding the economy
→ all 3 branches participate in this task eg.
→ the government proposes and the parliament accepts a law on the rights and
duties of workers, if violated, the court takes action
→ tries to prevent or reduce the problems of the market
→ tries to protect free competition
▪ eg. regulates the monopolies of companies
→ creation of public goods (közjavak)
▪ public good: a product that one individual can consume without
reducing its availability to others
▪ eg. law enforcement, national defense, sewage systems, public parks
etc.
­ redistribution of wealth
→ taxation
→ redistribution of this money to improve the standard of living → see at the
social function of the state
­ stabilisation
→ policies regarding e.g. inflation
→ providing a stable currency
→ maintaining the balance of the budget
→ legal defense of private property, business contracts

National budget
­ the financial plan for a country’s government
­ states how much money the government intends to spend during a year, what it intends
to spend it on, and where it expects to get the money to pay for that spending from
­ usually covers a fiscal year
­ in developed states the government uses up the 30-60% of the GDP (in Hu: 50%)
­ consists of different sub-systems (alrendszerek) with different tasks
­ in Hungary there are 4 big sub-systems
 → central budget
→ local budget
→ Healthcare Fund (Egészségbiztosítási Alap)
▪ social insurance
▪ hospitals
→ Pension Fund (Nyugdíjbiztosítási Alap)
▪ orphan’s, widow’s, disability and regular pension
­ there are also the Separated Funds (Elkülönített Alapok) that have special tasks eg. the
National Research, Development and Innovation Fund or the National Cultural Fund
(Nemzeti Kutatási, Fejlesztési és Innovációs Alap, Nemzeti Kulturális Alap)
­ the central budget is controlled by the parliament
­ the local budget is controlled by the local or county assemblies
­ whether the state uses the central or the local budget depends on the task (eg. the
protection of the country from a foreign attack is financed from the central budget
while waste-disposal of a town is financed from the local budget)
­ income of the state = taxes

­ deficit: when the state spends more money that it receives

→ have to take loans to continue its operation
→ can issue state bonds that can be bought by individuals or corporations and will
be repaid within a predetermined period

2. The money market

Money
­ first: bartering
­ with the development of trade, coins appeared → coin minting was a royalty
­ 19th century: banknotes
­ there are two types
→ currency (deviza) → money you use inside your country
→ foreign exchange (valuta) → the value of your money compared to other
countries’ currency
­ today we use money two ways
→ cash that could be replaced by checks or credit cards
→ bank money (számlapénz)
▪ money kept in the bank
 ▪ 90% of all money

Stock exchange
­ a facility where stock brokers and traders can buy and sell securities (shares and
bonds)
­ two types: stock exchange (shares and bonds) and commodity exchange (products)
­ stock index: shows the fluctuation in the prices of stocks
­ in Hungary the Budapest Stock Exchange contains the commodity exchange as well

Financial intermediaries
­ basis of the money market is that there are people who need loans and others who give
loans, between them there are the financial intermediaries
­ those individuals and firms who deal with loans and investments
→ banks
→ insurance companies
→ pension funds

Role of the state in the money market

­ monetary policy
→ when the state intervenes in the economy through the money market
→ eg. the National Bank decides on the amount of money that will be minted
→ or: the National Bank sets the basic interest rate
­ fiscal policy
→ when the state intervenes in the economy through the commodity market
→ eg. introduces new taxes

Banks

Central/National Commercial
ensures safety of currency, prints banknotes,
coins
does not offer services for individuals offers services for individuals
give loans to commercial banks, defines the
loans to individuals
basic interest rate
State owned Owned by individuals

How was the value of money defined?

1. based on the amount of gold or silver the coins contained
2. golden standard → the value of the banknotes represented the amount of gold you
could change your money to. Its basis was the gold reserves of the country.
3. Bretton Wood system (1944-71) → value of the money was compared to the dollar
(whose basis was still gold)
4. European Monetary System → value of the money is defined by the economic
strength of the country and the trust of others
The 2008 financial crisis
­ cause: banks gave out too much loan at high risk to get more profit
­ consequences
→ government intervention was needed: EU and US had to bail out the banks by
giving them financial help
→ law on compulsory creation of an emergency fund
→ alternative forms of banking appeared
­ alternative forms of banking
→ credit union
▪ the members provide the money for loans
▪ they elect directors
▪ the directors decide on who can receive the loans
→ micro credit
▪ small loan to help the establishment of a really small enterprise
▪ usually in developing countries
→ crowdfunding
▪ individuals can directly invest in enterprises
▪ low risk since they usually invest a really small amount only

3. Households

Definition
­ one or more people living in the same dwelling on the same budget
­ not necessarily a family
­ receives its income by offering its services to the economy
→ services: workforce, time, money, wealth

Income
­ wage received for work → can depend on the qualification of the person and the
complexity and popularity of the work
­ money gained after certain properties → eg. renting a house or owning shares
­ social benefits (in some cases) → eg. family allowance, unemployment benefit
­ unexpected income → eg. heritage, donation

Expenses
­ taxes
­ necessary for leading an adequate lifestyle → eg. food, clothing, utility bills, rent.
transportation, telephone
­ durable consumer goods → eg. car, furniture, electronic devices
­ unexpected → eg. sickness, accident
­ other → eg. education, culture
­ the households have a predetermined budget and can’t spend more than their income
on the long run otherwise they become indebted

Households living in poverty

­ households with low work intensity: the working-age members of the household spent
only 1/5 of their possible working time with work
­ households at-risk-of-poverty: their income doesn’t reach the 60% of the median
income
­ material deprivation: couldn’t afford 3 out of the following 9 items: rent, heat, going
on holiday, eating meat regularly, car, phone, television, washing machine, unexpected
expenses
 4. Enterprises

In general
­ a company participating in economic activity
­ main aim: profit
­ profit: income minus the expenses
­ expenses
→ explicit (real): wages, raw materials, tax, rent
→ implicit (hidden): reducing value of machines because of their aging

Success of an enterprise can depend on

­ market (demand, supply, workforce)
­ taxation system in the specific country
­ regulations
­ geographic situation
­ cultural restrictions, different customs of a specific country

Types of enterprises
­ based on size (wealth)
→ small, medium and big
­ based on activity
→ manufacturing, service and trading
­ based on ownership
→ private-owned an state-owned

Private-owned enterprises
­ limited liability company (kft)
­ limited partnership (bt)
­ shareholding company (rt, nyrt, zrt)
­ general partnership (kkt = közkereseti)
­ sole proprietorship (magánvállalkozás)

general limited limited liability shareholding

partnership partnership company company
individuals and individuals and individuals and owners of the
members
companies companies companies companies shares
≥ 2 members, no
no predetermined has to have a has to have a
foundation predetermined
share capital share capital share capital
share capital
has to have a
general and a
the members are limited partner, limited limited
responsible for the general is responsibility, responsibility,
responsibility the activity of the responsible with members don’t members don’t
company with his wealth, the have to pay from have to pay from
their own wealth limited only with their own wealth their own wealth
his investment in
the company
5. Relationship between state, household, banks and companies