The Functions of the Financial System | Economics Essay

The Functions of the Financial System | Economics Essay Introduction The objective of this chapter is to provide a theoretical and empirical literature review of the relationship between financial development and economic growth in general and more narrowly at sectoral growth analysis. Therefore, it is important to determine what financial development relates to, how the financial sector and overall economy are related to each other, and the implications of such a relationship for other sectors of the economy. In the following of this chapter, the study will first review the theory of financial development, whereby explaining the framework of financial system and how they affect growth of the real sector. The next section will focus on those authors who believe that economic growth is a good predictor of financial sector development. Further, effects of financial development on various sectors growth will be discussed. The next section will review the existing empirical studies examining the relationship of FD and growth. Theoretical Background Financial System A financial system is a network of markets and institutions that bring savers and borrowers together (Hubbard, 1997). Financial systems have become the keystone of most economies around the world. This field is of great interest to economists, who research mainly the causes and impacts of its development. Through years, economists has changed their perceptive has about the nature of the relationship between financial systems and economic growth. Bagehot (1873) established the pioneering theory on the relation between financial system and economic growth in his book Lombard Street: A Description of the Money Market (1873). He found that financial markets facilitate the accumulation of capital and these markets manage the risk from relative investments and business strategies. Later, Schumpeter (1911) identified that financial intermediaries facilitate technological innovation by gathering savings, evaluating investment projects, monitoring managers and facilitating transactions. The main argument of Schumpeter was that financial development affects economic growth through technological changes and this is done by banking institutions than stock markets. According to the Schumpeterian model, banks create entrepreneurs who carry out new investment projects that lead to economic growth as these rise in investment opportunities are available due to new combinations of providing finance to entrepreneurs. Following, there were Goldsmith (1969), McKinnon (1973) and Shaw (1973) who emphasised on the role of capital accumulation in economic growth. In the McKinnon-Shaw model, a well developed financial system mobilises savings by channeling small valued savings into profitable large scale investments. According to them, without a proper participation of financial system, these savings might not be available for further investment because a financial institution mobilises savings from various savers in an efficient and effective way by avoiding information asymmetries and lowering transaction costs. Unlike Schumpeter, they did not distinguish between the banking sector and the stock market. For them, both of markets are important in the process of economic growth. Although Schumpeter (1911), McKinnon (1973), Shaw (1973) and other economists emphasised on the positive role of financial development on economic growth, they failed to explain clearly how channeling of those funds affects growth. Then came Levine (1997, 1999), who has first depicted this link clearly. Levine demonstrated five main functions of the financial markets that affect the economic growth. More specifically, Levine pointed out that financial system Facilitate the trading, hedging, diversifying, and pooling of risk, Monitor managers and apply corporate control, Allocate resources, Mobililize savings, and Facilitate the exchange of goods and services. Functions of Financial System Unlike other economists, Levine (1999) produced a comprehensive way of showing the significant role for financial markets. The impact on economic growth occurs through the following channels according to Levine. As discussed above, financial markets play a significant role in economic growth through their role of allocation capital, monitoring managers, mobilizing of savings and promoting technological changes among others. Economists had held the view that the development of the financial sector is a crucial element for stimulating economic growth. Financial development can be defined as the ability of a financial sector acquire effectively information, enforce contracts, facilitate transactions and create incentives for the emergence of particular types of financial contracts, markets and intermediaries, and all should be at a low cost.  [1]  Financial development occurs when financial instruments, markets and intermediaries ameliorate through the basis of information, enforcement and transaction costs, and therefore better provide financial services. The financial functions or services may influence saving and investment decisions of an economy through capital accumulation and technol ogical innovation and hence economic growth. Capital accumulation can either be modeled through capital externalities or capital goods produced using constant returns to scale but without the use of any reproducible factors to generate steady-state per capita growth.  [2]  Through capital accumulation, the functions performed by the financial system affect the steady growth rate thereby influencing the rate of capital formation. The financial system affects capital accumulation either by altering the savings rate or by reallocating savings among different capital producing levels. Through technological innovation, the focus is on the invention of new production processes and goods.  [3]   As market frictions and laws, regulations and policies differs to a greater extent across economies and over time, the impact of financial development on growth may have different implications for resource allocation and welfare in the economy. Relationship between Financial Development and Economic Growth (i) Link of financial development and real sectors of the economy The theoretical evidence that financial sector development fosters economic growth has been accumulating over many decades. Schumpeter (1911), McKinnon (1973), Shaw (1973) Goldsmith (1969), Levine (1999) and other proponents came with a clear understanding of the role of financial development on economic growth. However, these theories do not provide a clear explanation of the transmission of financial development to the real sector of the economy thats lead to growth. Recently, some researchers have translated these abstract links between financial development and economic growth into concrete channels, such as household consumption, investment, trade (exports and imports) and government spending. Consequently, any increase from household consumption, investment, trade and government spending will have a positive impact on the real sector of the economy, and on the growth of economies. This link is illustrated below: Yt= Ct+ It+ (Xt-Mt) + Gt, where Yt is the gross domestic product, Ct is household consumption, It is domestic investment Xt is exports, Mt for the imports and Gt is government spending. Financial development and household expenditure are highly correlated, as discussed in Claessens and Feijen (2006). They argued that despite the causal relationship between financial development and household consumption is less clear than in the case of income, there is evidence that financial development is a leading indicator for increases in household consumption. Apart from increasing the household welfare, financial development also increases investment through the allocation of capital to private sector. The World Business Environment Survey (WBES), recent research concludes that finance is the most important constraint on firm growth. Other studies such as, Rajan and Zingales (1998), Perotti and Volpin (2005) have found that the number of firms in an industry grew faster in counties that have better financial development. Claessens and Feijen (2006) also highlighted that the presence of financial intermediaries with their products such as credit cards, debit cards facilitate domestic and international payment service whereby facilitating trade. The Claessens and Feijen framework hence has demonstrated the link between financial development and economic growth through concrete channels. (ii) Finance- Growth Nexus In the traditional development economics, there exist two distinct views of the finance-growth nexus. The first view was first proposed by Schumpeter (1911) who argues that services provided by financial intermediaries are essential drivers of innovation and growth. Thus, well-developed financial systems channel financial resources to their most productive use. The Schumpeters view was later formalised by Goldsmith (1969); McKinnon (1973); Shaw (1973); King and Levine (1993); Pagano (1993); Fry (1995); Zervos and Levine (1996, 1999); Christopoulos (2004); Manoj and Kamat (2007) and Hasan, Watchel and Zhou (2008) where all believed that financial development is a catalyst for economic growth. The second view suggests that economic growth is the major driving force behind the development of the financial sector. This idea is very much stressed in the work of Robinson (1952). According to him, as an economy grows, more financial institutions, financial products and services emerge in markets in response to a higher demand for financial services. Further, the Patricks hypothesis (1966) was introduced with the supply leading and demand following, which is important to determine the relationship between financial development and economic growth. The demand following view explains the demand for financial services as dependent upon the growth of real output and the modernization of subsistence sectors. Thus, the creation of modern financial institutions, their financial assets and liabilities, related to financial services are a response to the demand for these services by investors and savers in the real economy. Therefore, the more rapid growth of real national income, the gr eater will be the demand by enterprises for external funds (the savings of others) and therefore financial intermediation. Also, with a given aggregate growth rate, the greater the variance in the growth rates among different sectors or industries, the greater will be the need for financial intermediation to transfer saving from slow-growing industries to fast-growing industries. In this case, an expansion of the financial system is induced because of real economic growth. The second causal relationship between financial development and economic growth is termed the supply leading by Patrick (1966). Supply leading has two functions. Firstly, is to transfer resources from the traditional low-growth sector to the modern high-growth sector and secondly, to promote and stimulate an entrepreneurial response in these modern sectors. Thus, the availability of financial services stimulates the demand for these services by the entrepreneurs in the modern, growth-inducing sectors. However, previous empirical studies have produced mixed and conflicting results on the nature and direction of the causal relationship between finance and economic growth

War and Terror - It’s Time to Stop the Killing :: Argumentative Persuasive Argument Essays

War and Terror - It’s Time to Stop the Killing Somewhere within the last 120,000 thousand years, our ancestors began migrations quite different from any that appear in the archeological record preceding that time and somewhere between forty and fifty thousand years ago those migrations accelerated to the point that Cro Magnon hominids, our forebears, settled every nook and cranny on the planet. The last major migration occurred when the land bridge opened up in Siberia, as the glacier receded ten thousand years ago, and Homo Sapiens, who our species had become by then, trudged all the way to Tierra del Fuego within a thousand years or so. Jared Diamond (â€Å"The Third Chimpanzee† & â€Å"Guns, Germs, and Steel†) makes a case for some biological change, probably related to speech, as the variable making such migrations possible. He also makes the observation that these human migrations were coincident with the extinction of large mammals. The archeological evidence seems to bear this out. All over the planet there is fossil evidence of the extinction of one large mammal after another at approximately the same time the human migrations happened in that part of the world. Some scientists speculate that the cause of these extinctions is more complicated than the fact that they are coincident with the expansion of the number of humans and they are probably right; but something of major proportions in the evolution of our species definitely changed to allow humans to sweep across all but the most uninhabitable places on earth in a relatively short period of time. Dr. Diamond is careful to temper his speculation with the caution that all the facts are not yet in, and probably never will be, I might add. As a biology-oriented scientist, he continues to look to some physical/anatomical change to account for the advances made by humans resulting in our capacity to take on the unknown dangers lying beyond the next range of mountains or across the next river. For a couple of million years humans had evolved fairly slowly toward that point when a â€Å"great leap† occurred in the pace of our development. Anatomically we are about the same now as we have been for the last 125,000 years, so the guess is that some language advancement made the difference. Linguists have traced the capacity to speak back through a few proto languages to a point where the development of the ability to speak gets lost War and Terror - It’s Time to Stop the Killing :: Argumentative Persuasive Argument Essays War and Terror - It’s Time to Stop the Killing Somewhere within the last 120,000 thousand years, our ancestors began migrations quite different from any that appear in the archeological record preceding that time and somewhere between forty and fifty thousand years ago those migrations accelerated to the point that Cro Magnon hominids, our forebears, settled every nook and cranny on the planet. The last major migration occurred when the land bridge opened up in Siberia, as the glacier receded ten thousand years ago, and Homo Sapiens, who our species had become by then, trudged all the way to Tierra del Fuego within a thousand years or so. Jared Diamond (â€Å"The Third Chimpanzee† & â€Å"Guns, Germs, and Steel†) makes a case for some biological change, probably related to speech, as the variable making such migrations possible. He also makes the observation that these human migrations were coincident with the extinction of large mammals. The archeological evidence seems to bear this out. All over the planet there is fossil evidence of the extinction of one large mammal after another at approximately the same time the human migrations happened in that part of the world. Some scientists speculate that the cause of these extinctions is more complicated than the fact that they are coincident with the expansion of the number of humans and they are probably right; but something of major proportions in the evolution of our species definitely changed to allow humans to sweep across all but the most uninhabitable places on earth in a relatively short period of time. Dr. Diamond is careful to temper his speculation with the caution that all the facts are not yet in, and probably never will be, I might add. As a biology-oriented scientist, he continues to look to some physical/anatomical change to account for the advances made by humans resulting in our capacity to take on the unknown dangers lying beyond the next range of mountains or across the next river. For a couple of million years humans had evolved fairly slowly toward that point when a â€Å"great leap† occurred in the pace of our development. Anatomically we are about the same now as we have been for the last 125,000 years, so the guess is that some language advancement made the difference. Linguists have traced the capacity to speak back through a few proto languages to a point where the development of the ability to speak gets lost

Cell Theory and Knowledge and Understanding Essay

Explain how the advance in technology allowed the progressive accumulation of knowledge and understanding of the cell theory The technological advancements, in the scientific field, have opened opportunities for scientists to accumulate knowledge and understanding of the cell theory and have thus provided justification to the living organisms that exist. Notably, prior to the proposal of the cell theory, limited knowledge and understanding of what humans comprised of was evident and thus the theory of spontaneous generation was brought forth. This theory, which has been disproved by Virchow in 1855, suggests that living matter arouses spontaneously from non-living matter. As a consequence of limited technology, many people believed this theory as technological inventions like the light compound microscope, which showed life, were non-existent at the time. Evidently, in 1665, Robert Hooke, an English scientist, invented his own compound microscope and observed the cellular nature of the cork. The topic of cells was brought forth and from this moment, in 1674 Leeuwenhoek viewed microscope ‘ animalcules’ and in 1838, Schleiden and Schwann produced the cell theory, stating that all living things are made of cells and cells are the basic unit of organisms. Moreover, the technological introduction of stains were developed and assisted scientists to efficiently see cells and their internal structures. This staining technique, as a result of technology, created a contrast between the transparent material and its background, presenting a clear image of the cell. Therefore, through the technology advancement in staining techniques, the processes of the cells and nuclear division of the cell were visible. Significantly, towards the end of the 19th century, compound light microscopes had been developed to a point where the resolving power of microscopes was diminishing, with difficulty in separating objects. The next scientific breakthrough was evident as a result of the invention of the electron microscope, in 1933, which had a magnification of up to one million times and can show detailed images of internal structures. Thus, the accumulation of knowledge of the cell theory being radical, present the idea that the advancement of technology has had a tremendous impact on the cell theory.

Masculinity and Gender Roles - 1232 Words

How is gender and gender roles socially constructed? Soulliere states that gender is a cultural creation that is frequently developed by and represented through popular cultural media such as advertisements, music, sports, and entertainment television (Soulliere 2006). The article â€Å"Wrestling with Masculinity: Messages about Manhood in the WWE† by Danielle M. Soulliere (2006), examines messages about manhood revealed by televised professional wrestling (Soulliere 1). Messages concerning masculinity and manhood were investigated and compared to the cultural version of masculinity (Soulliere 2006). Soulliere’s research proves that the World Wrestling Entertainment (WWE) depicts messages, which supports the dominant hegemonic form of masculinity (Soulliere 2006). To further grasp and understand Soulliere’s hypothesis, we must first examine her research methods and outcomes. Soulliere states that television programs and advertisements such as the WWE provide gender and social role models (Soulliere 2006). Soulliere references that the dominant form of masculinity is associated with various male characteristics that consistently appear in the media. Such attributes include violence and aggression, emotional restraint, toughness, risk-taking, physical strength, courage, power and dominance, competitiveness, and achievement and success (Soulliere 2006). Additionally, presentation of men in sports continues to reaffirm the traditional hegemonic notion of masculinity and SoulliereShow MoreRelatedGender, Masculinity, And Gender Roles1380 Words   |  6 Pagesthemselves. They are not observed from outside in, but from the inside out. At the same time, Danzon reverses and thus subverts the classic representations of gender, while relocating and challenging gender roles. 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