Economics Vs Finance Basic principles

Transcription

1 Course Introduction to Finance ( INTRODUCTION TO FINANCE) (A.Y. 2017/18) Economics Vs Finance Basic principles

2 Agenda 1) Economics 2) Finance 3) Economics and Finance 4) Financial Needs 2

3 Economics Economics Etymology The etymology of the term reminds two Greeks words: - οἶκος (oikos) House - νόμος (nomos) Law, rules A proxy translationof the term Economics should be the rules about the house (management) but, in a modern meaning, it could be the management of available resourses. 3

4 Economics Economics Contents Economics concerns the different options of allocation, management and distribution of available resources. Being related to the possible use of the available resources and the decision making processes of economic agents that own these resourses, Economics can be classified within the social sciences. 4

5 Economics Economics Classification Regarding the use of individuals or society as reference points, it is possible to distinguish Microeconomcs from Macroecnomics. Microeconomics Macroeconomics Microeconomics concerns the study of individual behaviors and decisions (consumers, firms, etc.) about the use of their resources. Macroeconomics concerns the study of the allocation of resources between groups and different agents (families, firms, Governments, etc.) that interact with the aim to reach their goals. 5

6 Economics Economics and the Economic System The economic system is the set of production, exchange, allocation and consumption of goods and services. It follows that Economics can be referred as the discipline that studies the functioning of the economic system. 6

7 Economics The fundamental hypothesis of the classical economics The classical studies about Economics are based on some assumptions as 1 Economics Scarcity of resources There is a limited amount of resources to satisfy needs and achieve goals. Implications of such hypothesis concern the need to assess the effects of different allocations of resources in order to choose the optimal one that maximizes the utility functions of the economic agents. If resources are limited it could be not possible to satisfy all the needs of an individual or a group (society). 7

8 Economics Economics The fundamental hypothesis of the classical economics The classical studies about Economics are based on some assumptions as 2 Rationality of economic agents Economic agents are fully rationals and take decisions that maximize the expected results of their choices. The rationality of the economic agents implies the use of decision making processes based on complete and detailed analysis where all the available information are considered. Such decisions should lead to the best results possible. 8

9 Economics Economics The economic agents Within an economy different agents exist and differ each others for their goals and their role in the economic system. 1 Families 2 Firms 3 Governments 4 NPO (political parties, trade unions, religious organizations, charity organizations, etc.) Families are usually considered as consumers of good and services (the demand side of the market). The role of families in the economy is even related to the supply side of the labour market and with the production of savings. 9

10 Economics Economics The economic agents Within an economy different agents exist and differ each others for their goals and their role in the economic system. 1 Families 2 Firms 3 Governments 4 NPO (political parties, trade unions, religious organizations, charity organizations, etc.) Firms are involved in the production of goods and services in a profit oriented business. A relevant distinction is about financial firms (e.g. banks, insurance companies, etc.) and non-financial firms (e.g. agricultural, industrial and service industries) In an economic perspective firms are feautred by the release of new investments. 10

11 Economics Economics The economic agents Within an economy different agents exist and differ each others for their goals and their role in the economic system. 1 Families 2 Firms 3 Governments 4 NPO (political parties, trade unions, religious organizations, charity organizations, etc.) The Government (either the central Government and the local authorities) provides public goods (e.g. law and order, army, education, infrastructures, etc.) with the aim to achieve social well-being (e.g. economic development, full employment, etc.) 11

12 Economics Economics The economic agents Within an economy different agents exist and differ each others for their goals and their role in the economic system. 1 Families 2 Firms 3 Governments 4 NPO (political parties, trade unions, religious organizations, charity organizations, etc.) The main sources of funding for Governments are taxation and indebtedness (e.g. Issues of Government bonds) that are used to achieve political goals. With its policies the Government can be pivotal in the reallocation of wealth between different economic agents. 12

13 Economics Economics The economic agents Within an economy different agents exist and differ each others for their goals and their role in the economic system. 1 Families 2 Firms 3 Governments 4 NPO (political parties, trade unions, religious organizations, charity organizations, etc.) Firms are involved in the production of goods and services in a profit oriented business. A relevant distinction is about financial firms (e.g. banks, insurance companies, etc.) and non-financial firms (e.g. agricultural, industrial and service industries) In an economic perspective firms are feautred by the release of new investments. 13

14 Finance Finance Finance is the discipline that studies the money related issues. (production, exchange, distribution, etc.) A definition of money that is not limited to cash (banknotes and coins) and that involves any item or good that can be used as a payment facility (e.g. cheques, securities, etc.) leads to a definition of Finance as the discipline that studies the management of financial resources. 14

15 Economic and Finance Economics Vs Finance In a modern society usually any economic transaction has a financial consequence. Individual need Economic need Financial need 15

16 Economic and Finance Economics Vs Finance In a modern society usually any economic transaction has a financial consequence. Individual need Economic need Financial need Example #1 Hunger To buy food To pay for food 16

17 Economic and Finance Economics Vs Finance In a modern society usually any economic transaction has a financial consequence. Individual need Economic need Financial need Example #2 Housing To rent and apartment To pay rent 17

18 Economic and Finance Economics Vs Finance In a modern society usually any economic transaction has a financial consequence. Individual need Economic need Financial need Example #3 Plan for goals To Save To deposit money in a bank account 18

19 Economic and Finance Economics Vs Finance In a good perspective Finance should support the Economy by providing the rights tools to achieve economic goals. While economic issues concern the production, trade and consumption of goods and services, financial issues concern the transfer of financial reasources between agents with the aim to support them in achieving their economic goals. 19

20 Economic and Finance Economics Vs Finance Real Financial Economy Economy Part of an economic system that concerns the production, exchange and consumption (use) of goods and services. Part of the economic system that concerns the production, exchange and use (consumption) of financial products and services. Food, clothes, furnitures, motor vehicles, electronics, etc. Loans, securities, payment facilities, insurance, etc. 20

21 Economic and Finance Economics Vs Finance Economic System Financial System A set of individuals and organizations that work to satisfy the population needs by the use of available resources. A set of financial products, intermediaries and markets. It represents the infrastructure needed to produce and distribute financial products and services. 21

22 Economic System Economic and Finance Economics Vs Finance A set of individuals and organizations that work to satisfy the population needs by the use of available resources. ATTENTION Financial System A set of financial products, intermediaries and markets. The presence of an efficient financial system is essential for supporting the economic development of a Country or an economic area. It represents the infrastructure needed to produce and distribute financial products and services 22

23 Economic and Finance Economics Vs Finance Economic System Financial System When the Financial System does NOT work properly A set of individuals and organizations that work to satisfy the population needs by the use of available resources. A set of financial products, intermediaries and markets. Firms can not find money to run their business or make it grow. It represents the infrastructure needed to produce and distribute financial products and services Results could be a downturn of the economy, a slowdown of development and a decrease of job opportunity. 23

24 Economic and Finance Economics Vs Finance Economic System Financial System When the Financial System does NOT work properly A set of individuals and organizations that work to satisfy the population needs by the use of available resources. A set of financial products, intermediaries and markets. People are not able to save for the future. It represents the infrastructure needed to produce and distribute financial products and services When people do not trust banks anymore and use cash to save money they will have no returns, will have the risk of theft, etc. 24

25 Economic and Finance Economics Vs Finance Economic System Financial System When the Financial System does NOT work properly A set of individuals and organizations that work to satisfy the population needs by the use of available resources. A set of financial products, intermediaries and markets. People are not able to borrow. It represents the infrastructure needed to produce and distribute financial products and services When banks are not able to recognize a good borrower from a bad one the good borrower will not have the chance to borrrow to buy an house, start a business, send children to college, etc. 25

26 Economic and Finance Real economy and Financial economy The real economy concerns the exchange of goods and service, while the financial economy concerns the exchange of financial resources. The two parts of the economy are connected each other because the management of economic resourses (e.g. land, real estate properties, natural resources, etc.) requires the use of financial resources (e.g. money, loans, credits, etc.). 26

27 Economic and Finance Real economy and Financial economy Example Families and Firms can interact in different manners. Families can buy products from firms. Firms Products Families Firms will transfer their products (goods) to families (buyers) that will transfer an amount of money to firms. Money 27

28 Economic and Finance Real economy and Financial economy Example Families and Firms can interact in different manners. Firms Money Work Families Firms can buy workforce from family members. Families will transfer workforce to firms (service) that will pay for it (salary). 28

29 Economic and Finance Real economy and Financial economy From the Economic perspective Families and Firms close an economic loop where families receive products and give workforce. Real loop Financial loop Work Example Money (Salary) Firms Families Firms Families Products Money (Prices) In the meanwhile a financial loop is closed because Families pay the price of the good they bought and receive the salary for their work. 29

30 Financial Needs The most common classification of financial needs is Payments (trade) Investment Capital raising 4 Risk Management 30

31 Course Introduction to Finance ( INTRODUCTION TO FINANCE) (A.Y. 2017/18) Economics Vs Finance Basic principles