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What is a Financial System?
The Financial system (or the economy, your choice) is
composed of consumers, manufacturers, distributors.
These groups need money to purchase products and
services. One way of looking at Finance is that it is getting
the money to purchase these goods and services.
Many economists assume that households have excess
money and corporations need money. (This is obviously a
gross simplification. At any given point some individuals
have excess money to invest where others need to borrow.
The same is true for corporations and other organizations,
but the simplified model makes things easier for the
moment.)
The purpose of the Financial System is to make sure that
the money flows to those who value it the highest (that is
those who can put it to the "best" use) and then back to those who
invested in the first palce with as little loss as possible.
Graphically this can be shown:
Now
Corporations
«
Households
(Need money)
$
(have money)
In return for giving the corporations money, the investors will expect it back in teh future along with a "rent" on the money. THis rent is what we will call a return.
Graphically:
Future
Corporations
>>
Households
(have money)
$
(Want money back)
This is a simple model of the Finanical System, Everything else
is Finance is just building on this and improving the system's efficiency.
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