Professional Documents
Culture Documents
FINANCIAL SYSTEM
Financial System provides the platform by which funds are transferred from those entities that have
funds to invest to those entities that needs funds to invest
THE FUND PROVIDERS- those that have funds are the ones that spend less than their income
FUND DEMANDERS- while those that need funds experience fund shortage vecasue they spend
more than their income.
Two routes where funds can flow
1. Direct Financing- The borrower-spender borrows and deal directly with their supplier.
2. Indirect Financing- the borrowing activity between both parties happens though indirectly
through the intervention of a financial intermediary.
Financial intermediary act as 3rd party that facilitate the borrowing activity between Lenders and
borrowers.
This borrowing activity or transaction happened with the use of what we call cash and near cash.
Cash- is money in physical form of currency such as Banknotes and Coins or these are the ready
money use for an exchange transaction.
Near-cash item is a term used to describe non-cash assets that are very liquid and that are easily
convertible into cash such as savings accounts, certificates of deposit (CDs), foreign currencies, money
market accounts, marketable securities, and Treasury bills (T-bills).
Most people used cash and or near cash items as they are considered more efficient way to do
business as compared to the barter system.
Barter system- is simply defined as trading goods and services between two or more parties without
the use of money.
FUNCTIONS OF MONEY
1. Medium of Exchange- money serves as a medium through which goods and services are
exchanged. It can take various forms such as coins, banknotes.
2. Store of Value and Unit of Account- serves as a store of value by retaining its purchasing power
over time. This means that if you save money today, you can generally expect it to retain its value in the
future, allowing you to purchase goods and services at a later date.
3. Standard Measurement- serves as a standard of measurement by providing a common unit of
account that can be used to express the value of goods, services, and assets. Individuals and
businesses can more effectively assess the value of different items and make informed decisions about
how to allocate resources.
Bitcoin is a decentralized digital currency that operates without a financial system or government
authorities. Bitcoins are gaining popularity in digital financial system; but they are not regulated in a
specific country and are considered speculative assets. Some developed countries allow Bitcoin to be
used, such as the U.S., Canada, and the U.K. Several countries, including China and Saudi Arabia,
have made it illegal to use Bitcoin.
Financial System is a network of institution, market, and contracts that bring together lenders or
providers and borrowers or demanders. They are the two main players of the system.
LENDERS- are those who believe that money that they have now has the potential of snowballing in
the future; hence they lend it to a financial institution like a bank.
Borrowers- can be household that needs to buy a house or a car but does not have enough money
on hand or a car but it does not have enough money on hand to acquire it; a firm that needs more
capital to fund an asset to bring more income; or the government that typically spends more than it
owns.
The lenders and borrowers agree to fulfill their goals through exchange in three ways:
1. Bond Market, the banking system where depositors are considered lenders and those who loan
funds are considered borrowers. This bond market is also known as debt market, a financial market
which participant are provided wiht the issuance and trading of debt securities.
2. IOU or I owe you- Government may choose to increase its funds by issuing IOU, a written
acknowledgement of the debt of one party to another, promising to pay on a regular basis and the
principal at a certain date
3. Stock Market- a place where ownership in a company may be sold and brought. It is composed
of exchanges and over the counters where shares are issued and traded publicly. Rememeber that
changes in stock market may just be reactions to real or perceived changes in the performance of an
economy or of the company.
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Financial institution is an entity that provides financial services to individuals, businesses, and
governments. It focuses on dealing with financial transactions, such as investments, loans, and
deposits. It serves as the backbone of the financial system, providing essential services that promote
economic growth and allocate capital efficiently.
Investment means committing funds to one or more assets, which can be a financial or real asset.
Most individuals and firms make this decision to increase their wealth and secure the future.
Savings, on the other hand, may be understood as a part of wealth (a portion of income) that may
be used to fund the investment of another. The financial system works in a way that it considers the
interaction of the investors and the savers, as in savers put their assets into an institution to penetrate
(access) the market for the investor's use.
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Financial Assets- A financial asset is a non-physical asset that arises from contractual agreements
on future cash flows or from owning equity instruments of another entity. Financial asset is someone
else's liability. It highlights the inherent duality of financial transactions where in most cases, one party
holds a financial asset, another party holds a corresponding liability.
For ex: when an investor purchases a bond issued by a corporation, the investor holds a financial
asset (the bond) while the corporation holds a liability (the obligation to repay the bond's principal and
interest).
Also, financial assets are "manufactured" by the stock market or any financial institution. But the term
manufactured here are not physically manufactured like tangible goods. Instead, they are created or
issued through various financial transactions and agreements. They are greatly affected by inflation or
the decreasing purchasing power of money.
Stocks - ownership shares in a corporation that represent a claim to the company's assets
and earnings. It provides potential for future cash flows. Owning stocks entitles shareholders to certain
rights, including voting rights at shareholder meetings and the right to receive dividends
Bonds - are debt instruments issued by governments, municipalities, corporations, or other
entities as a means of raising capital. So, the investor or the bondholders consider this as financial
asset since when they purchase a bond, they are lending money to the issuer in exchange for the
promise of repayment(of the principal amount and interest)
Currencies - is a generally accepted form of payment, including coins and paper notes.
Currency traders buy currencies they expect to appreciate in value relative to other currencies and sell
currencies they expect to depreciate. In this context, currencies are traded as financial instruments
Commodities - raw materials, basic resources, agricultural, or mining products. Gold and
silver are naturally occurring metals with intrinsic value and physical properties. Commodities like gold
and silver may be considered either financial assets or real assets, depending on the behavior in the
market
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Real Assets- something with intrinsic value due to its substance and properties. Examples of these
are valuable pieces of jewelry, machines or other physical assets that are used to produce products
and services to generate revenues.
Real estate- is defined as the land and any permanent structures, like a home, or improvesments
attached to the land, whether natural or man-made.
Commodity- are raw materials used to create the products consumers buy, from food to furniture to
gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products
such as oil and natural gas, and metals such as gold, silver and aluminum.
- commodities like gold and silver may be considered financial asset or real asset depending
on the behavior in the market.
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Short term Instruments- mostly securities the mature in less than one year and are traded in
money market. Money market cater to fund demanders who need short-term fund from fund providers
who have excess short-term funds.
Long-term instruments- those mature more than a year and are traded in capital market. The
foundation of the capital market is made up by the dealers and brokers market which create a venue for
bond and stock transaction.
Financial derivative- are forms of financial instrument, a value of which is derived from another
instrument. Example is stock option, wherein the stock is the base and the option would be its
derivative. It is tradable financial instrument based on an asset's underlying value.
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The process of investment essentially involves portfolio management.
Portfolio management process refers to the systematic approach of managing an investment
portfolio to achieve specific financial objectives while considering different factors. This process starts
with:
Building Assets - building the collection or set of assets. In this step, investors carefully select
assets based on their investment objectives, risk tolerance, time horizon, and market outlook. The goal
is to build a diversified portfolio that spreads risk across different asset classes and investment
opportunities.
Allocation of Assets - we allocate assets across different investment classes, splitting of the
portfolio into five or less types of investment classes. The allocation decision is based on the investor's
investment goals and market conditions.
Construction Decision - involves selecting specific investments within each asset class to
implement the asset allocation strategy. This decision can be approached using either the top-down or
bottom-up approaches in portfolio management.
i. top-down approach starts with an analysis of macroeconomic factors, market trends,
and global economic conditions or it tries to allocate assets by country or region, as well as the type of
asset since Macroeconomics takes a wider view and looks at the economies on a much larger scale
such as country or region. Investors using a top-down approach may allocate assets across different
countries or regions based on factors such as economic growth prospects, interest rates, inflation rates,
political stability, and currency outlook.
ii. bottom-up approach is looking at specific company/ies then investing in it, so focuses
on analyzing individual companies or securities to identify investment opportunities. Investors using a
bottom-up approach evaluate factors such as company fundamentals, financial performance,
competitive advantages, management quality, and growth prospects. Instead of macroeconomic trends
or regional considerations.
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Introduction:
The significant bond between finance and development is fundamental to understanding how
economies evolve and societies progress worldwide. Finance, comprising various methods of
managing and distributing capital, acts as a catalyst for development by facilitating investments,
encouraging entrepreneurial endeavors, and fostering innovation. Whether it's providing access to
essential financial services for individuals or directing funds towards productive initiatives, finance
plays a central role in shaping the paths of nations and communities.
ROLE OF FINANCE
1. Link savers and investors
2. SCREEN & MONITOR PAYMENTS
3. SMOOTHEN CONSUMTION
4. MANAGE RISKS
5. MANAGE PAYMENT SYSTEMS
Finance is essential for economic development because it helps businesses grow by providing
money for investments and operations. It also allows people to save and borrow money through
services like banking and insurance, which supports entrepreneurship and job creation. Finance
encourages innovation by funding research and development. Additionally, it helps manage risks and
ensures that money flows smoothly through the economy. Overall, finance is vital for driving
economic growth, prosperity, and improving living standards globally.
Microfinance:
1. Rotating Savings and Credit Association
2. MICROLENDERS
3. STORE CREDIT
4. MONEY LENDERS
Microfinance, a specialized area within the broader field of finance, aims to serve individuals and
small businesses who typically lack access to traditional banking services. It provides small-scale
financial products such as loans, savings accounts, and insurance, with a focus on empowering
entrepreneurs, especially in developing nations. By facilitating entrepreneurship, stimulating job
creation, and alleviating poverty, microfinance contributes significantly to economic development.
When combined with conventional finance, microfinance plays a crucial role in advancing financial
inclusion and improving people's lives, ultimately contributing to sustainable development and
prosperity worldwide.
Microcredit:
1. MICRO SAVINGs
2. MICRO INSURANCE
Microcredit is a part of microfinance that gives small loans to people who can't get them from regular
banks. These loans help entrepreneurs and small business owners buy what they need to grow their
businesses. By giving people access to credit, microcredit helps them start or expand their
businesses, create jobs, make more money, and improve their lives. It also helps local economies
grow and reduces poverty, especially in places where formal banking services are hard to access.
Micro savings:
1. RANDOM ROSCA (Rotating Savings and Credit Association)
2. AUCTION ROSCA
Finance and microsavings are important for economic development. Finance manages money and
includes banking, investing, and insurance. Microsavings, a type of finance, helps people, especially
in developing countries, save small amounts of money regularly. These savings can be used for
emergencies, investments, or building assets over time. Microsavings provide accessible and secure
ways for people to save, promoting financial stability, entrepreneurship, and reducing poverty.
Together, finance and microsavings help economic growth, financial inclusion, and better lives.
Islamic finance:
1. KURAN
2. SUNNA
3. HALAL INDUSTRY
Islamic finance follows Islamic law and avoids charging interest, instead focusing on risk-sharing and
avoiding certain industries. It offers services like banking, bonds, and insurance that comply with
these principles. In economic development, Islamic finance provides ethical and accessible financial
services to both Muslim and non-Muslim communities. It promotes stability by emphasizing asset-
backed financing and risk-sharing, which can prevent financial crises. Additionally, it directs funds to
socially responsible projects, supporting long-term economic growth. In summary, Islamic finance
offers an ethical alternative to conventional finance, playing a vital role in inclusive and sustainable
development.
CHAPTER 10
FOREIGN TRADE
Foreign trade - the exchange of goods and services between countries.
Barter - people change goods for a different variety of products.
The Geek civilization and the Roman Empires used to trade with their nearby empires and so
the Chinese (Middle Kingdom) to the world.
Countries in Asia are aiming to increase their exports and attract more foreign direct
investments (FDIs) to alleviate poverty, improve social reforms, increase life expectancy, and
of course, improve the quality of life.
Technological innovations led to globalization and made the world seem borderless in terms
of all forms of trading.
In the year 1913, gold and other precious metals were considered a medium of exchange; a
lot of countries considered it valuable and made it possible to trade much easier despite the borders.
David Ricardo (1772-1823) - a classical economist best known for his theory on wages and
profit, the labor theory of value, the theory of comparative advantage, and the theory of rents.
League of Nations
organized the World Economic Conference in 1927
masterminded the multilateral trade agreement between nations
set the regulations to keep up with the ever-evolving international trade
Profitability is maximized through efficient production and distribution, as well as exchange,
by the use of comparative advantage and regulations that are in place to ensure seamless business
transactions beyond borders.
In 2015, the ASEAN Economic Community or the AEC was established to allow free
movement of goods and services among its member countries.
The ASEAN Trade in Goods Agreement (ATIGA) allows Brunei, Indonesia, Malaysia, the
Philippines, Singapore, and Thailand to eliminate intra-ASEAN import duties on almost all of their
tariff lines, while reducing import duties to 0-5% on almost all tariff lines of Cambodia, Laos,
Myanmar, and Vietnam.
The ASEAN is composed of the following:
Brunei Malaysia Thailand
Cambodia Myanmar Vietnam
Indonesia The Philippines
Laos Singapore
The three additional East Asian members of the ASEAN plus three are China, Japan, and
South Korea, with the addition of some Oceanian members of ASEAN plus six, Australia
and New Zealand.
Balance of Trade
is the summary of the economic transactions of a country with the rest of the world for a
specific period.
serves as an accounting statement on the economic dealings between residents of the
country and nonresidents.
the balance between all payments out of country within a given period and all payments into
the country is an outgrowth of the mercantilism theory of balance of trade.
includes all payments between a country and its trading partners, private foreign loans and
their interest, loans and grants by governments/international organizations, and movements of
gold.
Benefits
- benefits such as variety of choices, better ideas, healthy competition, and economies of scale.
Variety of choices - allows countries to access goods and services that may not be available
domestically.
Better ideas - different countries interact through trade, they share knowledge, innovations, and best
practices, which leads to better ideas.
Healthy Competition- because it exposes domestic producers to a broader market, encouraging
them to improve efficiency, quality, and innovation to remain competitive.
Economies of scale - allows businesses to take advantage of economies of scale by accessing
larger markets beyond their domestic borders.
Comparative Advantage
- wherein each country specializes in a particular product or set of products and import everything
else for consumption.
World Price- refers to the prevailing market price of goods and services on the international market
• Importation- the act of bringing goods or services into one country from another country.
• Domestic Consumption- the total of amounts of goods and services consumed within a
country.
• Equilibrium Trade- the quantity of good or service that a country exports is equals to the
quantity that it imports.
• Domestic Production- refers to the output of goods and services produced within a country’s
border.
Tariff- is a tax or duty imposed by the government on imported goods and services.
• World Price with Tariff- it is the price of goods and services on the international market with
additional cost imposed by a tariff when the goods are imported.
• Revenue from Tariff- can be a source of income for governments and can be used to fund
various programs and services.
• Deadweight Loss- is a loss of economic efficiency that occurs when the equilibrium of goods
and services are not achieved due to tariffs.
• QD and QS with tariff- when a tariff is imposed, it affects the quantity demanded and quantity
supplied of that good.
• Equilibrium with Tariff- the imposition of a tariff affects the supply and demand of goods,
leading to changes in the equilibrium of price and quantity traded.