Professional Documents
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Chapter 3, Basic Elements of Financial System
Chapter 3, Basic Elements of Financial System
Financial System
Rules Governing
Financial
Financial Sector the Conduct of
Instruments
Trade
Financial
Markets
Financial
Institution
Four Sectors of the Economy Engaged in
Borrowing and Lending
• Households
• Firms- sources of income
are those arising out of
household expenditures
and those arising out of
investments of other firms
• Government
• Foreigners
Relationship Between Household Income and
Spending at Various Stages
Stage in the Life Income Financial Decision
Cycle of the
Household
New Smaller than Spend savings or
Expenses borrow
Middle Age Bigger than Build up savings and
Expenses liquidate borrowings
Retirement Smaller than Spend savings
expenses
Why Firms Invest and
Borrow
• Deficiency in Capital due to
Opportunities
• Additional investment may
bring additional income or
economies in operation
• Avail quantity discounts for
bulk purchases from
suppliers
• Additional revenues from
sales financed by loans or
investments
Transferring Funds from the Lenders
to Borrowers
• The financial system is
concerned with
transferring funds from
lenders to borrowers
• The lenders are those
whose revenues exceeded
their expenditures. They
are referred to as Surplus
Spending Units (SSUs)
• The borrowers have
expenditures exceeding
their revenue and thus are
referred to as deficit
spending units (DSUs)
Methods of Transferring funds from SSUs to
DSUs
• Direct Finance
• Indirect Finance