Institute of International Education 2 2 Saving, Investment and Financial System Robinson Crusoe economy Institute of International Education Saving of Robinson ▪ Robinson lives alone and makes a livi[.]
2.2 Saving, Investment and Financial System Robinson Crusoe economy Institute of International Education Saving of Robinson ▪ Robinson lives alone and makes a living by fishing; • Notice that Robinson is the producer AND the consumer; or, in other word, he is the firm AND the household ▪ Suppose fish is storable Robinson can either eat all the fish he catches, or eat part of it and store the rest – but Robinson Saves! ▪ Why would he save? • Notice that Robinson has to eat some fish everyday to keep himself alive Institute of International Education Now to be more realistic ▪ Fish can be storable, but not for ever In the real world, capital depreciates ▪ If we make the extreme assumption that fish is nonstorable, can Robinson save? Robinson Yes, he can … but not alone Suppose there are Robinson Institute of International Education Robinson Two Robinsons can make arrangement ▪ Robinson gets sick one day and cannot catch fish ▪ Robinson helps him out by sharing fish with him and Robinson makes the promise that he will return the fish back once he recovers and fishes again ▪ In this case, Robinson is the borrower and Robinson is the saver ▪ The income of the saver goes to the borrower Institute of International Education Two Robinsons can make arrangement ▪ Robinson wants to spend a day making fishnets to catch more fish in the future; ▪ Robinson helps Robinson by sharing fish with him; and Robinson promises that he will give the fish back ▪ In this case, Robinson is still the saver, but Robinson is the investor ▪ The investment is financed by saving! Institute of International Education When there are only two Robinsons ▪ They talk and make arrangement; When there are millions of people as in the real world… ▪ Things take place through MARKET; ▪ Firms’ investment are financed by households’ saving through FINANCIAL INSTITUTIONS Institute of International Education Financial system ▪ The financial system: consists of the institutions that help match the saving of one person with the investment of another ▪ The financial system is made up of various financial institutions which can be grouped into categories: - Financial markets - Financial intermediaries Institute of International Education Financial Institutions ▪ Financial markets: institutions through which savers can directly provide funds to borrowers ▪ Examples: ▪ The Bond Market A bond is a certificate of indebtedness ▪ The Stock Market A stock is a claim to partial ownership in a firm Institute of International Education Financial Institutions ▪ The Bond Market: How Bond works? • Issue Bond • Regular interest Buy bond and lend money to the issuer payment to investors • Repay principal at maturity date Government/ Corporations Institute of International Education Financial Institutions ▪ The Stock Market: How Stock works? Another way for raising funds is to sell stock in the company Stock represents ownership in a firm and is a claim to the profits that the firm makes Companies issue stock to raise capital Companies receives money from investors Institute of International Education Companies use funds raised to generate more profit Companies give their shareholders profit ... Education Financial system ▪ The financial system: consists of the institutions that help match the saving of one person with the investment of another ▪ The financial system is made up of various financial. .. institutions which can be grouped into categories: - Financial markets - Financial intermediaries Institute of International Education Financial Institutions ▪ Financial markets: institutions through which... They talk and make arrangement; When there are millions of people as in the real world… ▪ Things take place through MARKET; ▪ Firms’ investment are financed by households’ saving through FINANCIAL