Within an economy, how would you describe an economic unit and is saving among economic units desirable? In providing an answer, explain why policymakers place such emphasis on increasing levels of saving, and the need to develop a savings culture in the Caribbean. Furthermore, what is the likely impact on an economy that has 98%-100% of its economic units as net savers?
An economic unit is one that participates in the economy either through saving, investment or consumption. Anyone or institution can be an economic unit- government, household, schools,...etc. An increase in the level of savings serves to protect the balance of payments and to raise resources to finance investment in an ...view middle of the document...
You can add to this answer by identifying the advantages of having financial intermediaries in the system. Some advantages are listed below.
There is much benefit to the operations of FI which provide special services which include
• Information costs- The aggregations of funds in a FI provide greater incentive to collect information about customers/ corporations and to monitor their actions. The FI which is now the delegated monitor for small household savers, is able to collect such info at a lower average costs than would be the case for the individual saver.
• Liquidity and price risk- FIs provide financial claims to household savers which are highly liquid and have low price-risk. FI are able to reduce risk by diversification.
• Transaction costs services- as a result of the size of the FI, there are economies of scale in transaction costs. FI are able to purchase assets in bulk (mutual funds and pension funds) and thus savers can reduce the transaction costs of their assets purchases.
• Maturity intermediation- FI can better bear the risk of mismatching the maturities of their assets and liabilities. They can produce new type of contracts such as long-term mortgage loans to households while still raising funds with short-term liability contracts. It is able to control such risk as interest rate risk through its access to the markets and instruments for hedging such as loan sales and securitization.
What are the main means through which a firm could be financed? Within the region’s financial system, what is the main source of funding? Explain why that source of funding you have identified is the dominant one, and do you envisage any changes as it relates to financing in the future?
Firms could be financed through debt or equity. Debt financing involves borrowing money that has to be repaid over a period of time, usually with interest while equity financing is the issuance of shares of common or preferred stock in a company so to raise money. In the region, firms are funded by debt and more specifically bank debt. As a consequence of our underdeveloped capital markets, banks are dominant. This position is unlikely to be altered until there is a change in the culture of the investor base and thus liquidity will start to flow into capital markets. Note that the lack of liquidity affects the cost and the efficiency of financial markets.
Compared to fifty years ago, the Caribbean’s small savers are more restricted with what they can do with their excess income. Is this a reasonable assertion?
Unlike fifty years ago, the market has become more sophisticated and thus individuals have more access to a greater range of financial products and institutions in which to invest in. Some examples of such instruments include mutual funds and derivatives products like future contracts.
Explain direct and indirect finance. Which of the following scenarios can be categorized as either direct or indirect finance?