Econ – Chapter 13 – Outline #1
I. Savings and Financial System
= An economic system must be
able to produce capital if it is to
satisfy the wants and needs of its
people. To produce capital,
people must be willing to save,
which releases resources for use
elsewhere.
+ Savings to an Economist =
Means the absence of spending,
while savings refers to the other
dollars that become available in
the absence of consumption
A. Saving and Capital Formation
= when people save, they make funds
available to others. When businesses
borrow these savings, new goods and
services are created, new plants and
equipment are produced, and new
jobs become available. Saving makes
economic growth possible.
1. Example – Entrepreneurs
who borrow =
Borrow to start a business
immediately
if others have been saving in a bank,
then the bank has the funds for the
entrepreneur to borrow
if people have been spending their
income, then the bank may not be
able to make the loan
a. When people save, they are
abstaining from consumption,
which frees resources for others to
borrow and use. These resources
also make investments possible.
B. Financial Assets and the
Financial System – for people to
use the savings of others, the
economic must have a financial
system, or a way to transfer
savers’ dollars to investor.
1. How do people save?
put the money in a savings account,
commercial bank, or a thrift
(independent savings and loan
associations, high risk, but high
interest paid)
purchase a certificate of deposit at a
depository institution
purchase a government or corporate
bond
a. Financial Assets =
Receipts of deposits (paper trail)
claims on the property and the income
of the borrower
the receipts are assets because they
are property that has value
specify the amount loaned and the
terms at which the loan was made
1). If the borrower defaults, the
lender can use the financial asset
as proof in court that the funds
were borrowed and that
repayment is expected.
2). When funds are lent from one
individual or business to another, a
financial asset is generated.
2. The Financial System
a. The Main Components of the
Financial System =
st
1
component, the funds that the
saver transferred to the borrower
2nd, the financial assets or receipts
that certify the loans were made
savers, borrows, and institutions,
that bring surplus funds and
financial assets together
b. Any sector of the economy can
provide savings, but the most
important sectors are the
household and businesses. State
and local governments provide
some savings, but they are not
borrowers of funds.
c. Financial intermediaries =
Financial institution that pool funds
and lend them to others
include the depository institutions,
life insurance companies, pension
funds, and other groups that
channel savings from savers to
borrowers
d. Borrowers =
Generate financials assets when they borrow
funds
corporation borrows directly from savers or
indirectly from savers through financial
intermediaries
the corporation will issue a bond or other
financial asset to the lender
when the government borrows, they issue
bonds and / or other financial assets to the
lender
e. Almost everyone participates in
the financial system. The smooth
flow of funds through the system
helps ensure that savers will have
an outlet for their savings.
Borrowers, in turn, will have a
source of financial capital.
3. Investments =
Many businesses and individuals
watch for profitable investment
opportunities
looking for financial assets
Such as: corporate bonds,
government bonds, certificates of
deposit, and even saving accounts
in which they can invest
C. Nonbank Financial
Intermediaries = Savings banks,
credit unions, commercial banks,
and savings associations obtain
fund when their customers and / or
members make regular deposits.
+ Nonbank Financial
Institutions =
Group obtains funds in a different
manner, and includes finance
companies, life insurance
companies, pension funds, and
real estate investment trusts
1. Finance Companies =
Make loans directly to consumers
and specializes in buying
installment contracts from
merchants who sell goods on
credit
a. Many merchants cannot afford
to wait years for their customers to
pay off high cost items on the
installment plan. The merchants
sell the customer’s installment
contract to a finance company for
a lump sum.
b. Utilizing a finance company =
Enables the merchant to advertise
instant credit or easy terms without
actually carrying the loan full term
absorbing losses for an unpaid
account
taking customers to court for
nonpayment of the loan
c. Consumer Loans =
Generally check a consumer’s credit
rating and will make a loan only if the
individual qualifies
some loans are made to high risk
individuals, they tend to pay more for
the funds they borrow
finance companies charge more than
commercial banks do for loans
d. Bill Consolidation Loan =
A loan consumers use to pay off
all other bills
the consumer agrees to repay the
finance company over a period of
on or more years
2. Life Insurance Companies =
life insurance companies collect
their funds in order to provide
financial protection for the
survivors of the insured, collecting
a large sum of cash.
a). Premium =
The price paid for the life
insurance policy
it must be paid at specific times for
the length of the protection
b). Insurance companies tend to
lend their surplus funds to others,
making loans to banks in the form
of large certificates of deposit.
They may negotiate other
arrangements with smaller
consumer finance companies.
3. Mutual Funds =
A company that sells stock in itself
to individual investors and then
invests the money it receives in
stock and bonds issued by other
corporations
a. Mutual fund stockholders
receive dividends earned from the
mutual fund’s investments. They
many also sell their mutual fund
shares for profit, just like other
stocks.
b. Mutual funds allow =
People to play the market without
risking all they have in one or a
few companies
c. Size of the funds =
The size of the mutual fund allows for
the hiring of a staff of experts to
analyze the securities market before
buying and selling securities
allows for the purchase of different
stocks and bonds and to build up a
more diversified portfolio (hold several
investments, to protect from risk). If
the value of one investment falls
sharply, the affect will be minimal.
4. Pension Funds
a. pension =
A regular allowance intended to
provide income security to
someone who has worked a
certain number of years, reached
a certain age, or suffered a certain
type of injury
b. pension funds =
A fund set up to collect income
and disburse payments to those
person eligible for retirement, old
age, or disability benefits.
c. private pension funds =
Employers regularly withhold a
percentage of workers’ salaries to
deposit in the fund
during the 30 – 40 year lag between
the time the savings are deposited
and the time the workers generally
use them, the money is invested in
corporate stocks and bonds
d. government pension funds =
Similar to private funds
the government makes regular
contributions to the fund that will
pay benefits later
Real Estate Investment Trust =
A company organized chiefly to
make loans to construction
companies that build homes
provide billions annually for home
construction
a. REITs borrowing =
Borrow most of their funds from
banks and get their income from
the rents and mortgage payments
of the people who use their money
the income is use to pay interest
on the money they borrowed