Largely Introduction and Definitions
Looking at the financial system.
"What is a system? A system is a collection of objects related by regular interaction and interdependence." [Production & Operations Management, Fifth Edition, by Adam and Ebert, page 9]
The way to examine the financial system is by imagining a satellite image. We begin by looking at it from 100 miles out. From this distance we can only see the major players and the main parts of the system. We then move in and are able to differentiate smaller and smaller details. This idea goes a long ways tin explaining what we will be doing for much of the year.
But before we begin a few definitions are necessary, (although you most likely already know them).
Economics: The study of how society allocates scarce resources. In the text's terms it is "the study of how society decides what gets produced and how, and who gets what."
As you are aware, Economics usually is broken down in Microeconomics and Macro-economics. Macro is the study of big things, and this is no exception. Macroeconomics is the study of " the aggregate or total behavior of all households and firms." On the other hand, Microeconomics is the study of how "individual decision makers" make economic decisions.
Finance is how funds are channeled through the economy. "From lenders to borrowers-- and vice versa--and how new funds are created by financial intermediaries during the borrowing process."
With these easy definitions, we can now begin to look at the financial
system. To do this we must first understand the long-range satellite picture.
So lets begin:
Surplus Spending units Have excess money-------Deficit spending units
need money
Deficit Spending units (as the name suggests)are those that whose spending exceeds their income whereas surplus spending units are those whose income exceeds their spending. Thus much of what will follow is based on the idea that in equilbrium we must balance our spending and income. The financial system allows us to do that.
From a time point of view, it would be very costly for the people with excess cash to find people who needed cash (and vice versa) (imagine having to go door to door to lend or borrow). As a result financial intermediaries came into existence. Who are financial intermediaries? For that we need to go back to a satellite view.
This time our view if from closer in. We still can't see much detail,
but we see some.
Picture here will not load...I will try again later...
Here in class we will investigate why financial intermediaries are necessary (imagine having to go door to door to lend or borrow). Notably, they reduce transactions costs.
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