6.2 + 6.3 Bilateral debt and financial sector

what does debt allow people to do

debt allows people to consume and invest when they don’t have an income - even in a world w/out money or a financial sector

balance sheet

summarizes assets and liabilities

net worth / net wealth

difference between a person’s assets and liabilities

assets - liabilities = net worth

assets = liabilities + net worth

net worth measures the amount you could consume now if all your debts were paid

rate of interest

rate of interest = extra amt borrower promises to pay back / loan

financial intermediaries

simultaneously borrow and lend, make profits from channelling savings between savers and the ultimate users of their savings i.e. banks, pension funds

bonds

companies and governments borrow directly by selling liabilities known as bonds

bond = financial asset where gov or company borrows for a set period of time and promises to make regular fixed payments to the lender and to return the money when the period ends

sold in bond markets = secondary trading

shares

another way for companies to raise funds aka stocks and equities

companies sell them

give the owners shared ownerhsip of the assets of a firm, and therefore a right to receive a corresponding share of the firm’s profit

sold in stock market = secondary trading

what happens when a bond matures?

the issuer i.e. gov will make the final payment AND repay the initial amount (principal)

bc the initial purchaser of the bond can sell the bond at any pointin the secondary market, the payments of coupon and the repayment of principal will be made to whomever owns the bond at that time

do you receive regular payments on your investment for a share?

no - but you will receive dividends

diff between financial markets and real estate market

while financial assets are liquid (you can sell a shre or a bond in a matter of seconds), real estate is pretty illiquid (it can take months to sell a house)

what gives an indiciation of the size of the financial sector

the total value of all oustanding liabilities gives an indication of the size of the financial sector

does gdp or debt grow faster

over the last 75 yrs, debt has grown much faster - there had been no clear trend in the ratio of wealth to GDP

do richer or poorer countries have larger or smaller financial sectors and liabilities?

richer countries typically have larger financial sectors and liabilities relative to their income - there’s a pretty big correlation between the extent to which people participate in financial markets and the level of GDP per capita (positive correlation)

**also a positive relationship between GDP per capita and participation in stock markets

**expansion of activity in financial sector suggests an association with increased living standards but doesn’t tell us how it affects economic outcomes