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 = + 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. 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 =

1 st component, the funds that the saver transferred to the borrower 2 nd, 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 arethe 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