4.4.1 the role of financial markets

What are financial markets?

Where buyers and sellers can trade financial assets

2 main reasons financial markets exist

• meet demand for services—> savings

What are the 4 functions of money

1 medium of exchange- facilitates transactions between producers and consumers
2 unit of account- common measure of value of goods and services being exchanged
3 store of value- it must hold its value overtime or people will not use it
4 means of deferred payment- used to express value of debt

UK Financial Sector

• UK economy relies heavily on financial sector functioning well— lending and borrowing must function effectively + consistently to maintain growth
• ONS ESTIMATES FINANCIAL AND INSURANCE SERVICES ACCOUNT FOR 8.6% GDP AND 3.3% EMPLOYMENT - dec 2021
  -UK TRADE SURPLUS in financial services and on the current account of BOP

Possible reasons for large size of financial sector in UK and particular dominance in London

• comparative advantage- English language

Principal of the loan

Total amount borrowed

• IR payed by borrower is calculated as % of the principal

Collateral

something pledged as security for repayment of a loan

5 main roles of financial sector

A) facilitate savings
B) to lend to businesses and individuals
C) facilitate the exchange of g&s
D) to provide forward markets in currencies and commodities
E) provide a market for equities

Role: to facilitate savings

• allows people to transfer their spending power from the present to the future
• it can be done through range of assets—> storing money in saving accounts and holding stocks and shares

Role: lend to businesses and individuals

• allows consumption and investment
• sometimes referred to as financial intermediary—> step between taking money from one person and giving it to another since money from savings is used for investments

Role: facilitate the exchange of goods and services

• by creating a payment system
• central banks print paper money —> institutions process cheque transactions —> companies offer credit card services —> bank bureau de changes buy and sell foreign currencies

Role: Provide forward markets in currencies and commodities

• where firms are able to buy and sell in the future at set price—> E.G. farmer wants to sell the crop they are growing at garunteed price in month time
• forward market exists for commodities ( basic good

Role - Provide a market for equities

• equity's- companies shares
• issuing shares is an important way of company to finance expansion but ppl unlikely to buy shares if they are unable to sell them in future
• financial markets provide ability for shares to be sold on in future- making assets more appealing