Advanced Issues on

Economy and Finance

MOMO
Economy & Finance

• An economy is an area of the production, distribution and

trade, as well as consumption of goods and services by
different agents.
• Finance is the process of channeling money from savers and
investors to entities that need it for production and
consumption of goods and services.
•

• Economy need to be Financed.

• They are often entangled together both in real life and in
debates.
The basics 1 – the 3 markets

• Goods and services market

•

• Production and consumption

•

• Labor market
•

• Employment
•

• Financial market
•

• Loan and investment

The basics 1 – the 3 markets

• Goods and services market —— negative feedback

•

• Production and consumption

•

• Labor market —— negative feedback

•

• Employment
•

• Financial market —— positive feedback/“self-fulfilling

prophecy”
•

• Loan and investment

The basics 2 – the 3 banks

• Commercial bank
•

• deposits and loans

•

• Investment bank
•

• stock and bond

•

• Central Bank
•

• Interest rate & printing money

Labor
Market

Financial
Market

Monetary
Goods & Policy
Service
Market
The basics 3 – The 2 cycles

• Short-term economic cycle (Expansion & Recession)

•
Borrowing → Spending → Income → Productivity → Borrowing →→→ Inflation →
• Interest rate↑/reserve ratio↑ → Borrowing → Spending → Income →→→ Deflation
→
• Interest rate↓/reserve ratio↓ → Borrowing ……
•

• Long-term economic cycle (Boom & Deleveraging)

•
Borrowing → Income → Assert value → More borrowing → Accumulation of debt
(bubble) →
• Spending → Income → Borrowing →→→ Depression
Issue 1 - Deleveraging

• Preemptive measures
•

• Reactive measures
What causes bubble?

•
Risky financial activities ：
•

•
Disfunction of regulations on investment banking
•
Shadow banking
•
Fannie Mae and Freddie Mac during the 2008 subprime mortgage crisis
•

•
Reforms & Regulations:
•

•
Glass–Steagall Act: Separation of commercial and investment bank
•
Dodd–Frank Act: Consumer Financial Protection Bureau & other regulation
on investment
•
Narrow banking
•
Too big to fail/too big to exist act
How to revive the economy

• Austerity
•

• Default or restructure of debt

•

• Progressive taxation
•

• Buying of national debt/Quantitative easing

Other issues during deleveraging

• Unemployment
•

• Labor protection
•

• Inequality
Issue 2 – Corporate finance

• Capital structure
•

• Bond
• Equity
•

• Cash flow and risk management

•

• Insurance & Credit rating agencies

Issue 2 – Corporate finance

• Venture capital
•

• Mergers and Acquisitions (M&A)

•

• As an aspect of strategic management, M&A can allow

enterprises to grow or downsize, and change the nature of
their business or competitive position. (e.g. reduce cost,
expand scale, increase competitiveness etc.)
Issue 2 – Corporate finance

• Venture capital
•

•
Venture capital (VC) is a form of private equity financing that is provided by
venture capital firms or funds to startups, early-stage, and emerging companies
that have been deemed to have high growth potential or which have
demonstrated high growth. The start-ups are usually based on an innovative
technology or business model and they are usually from the high technology
industries, such as information technology (IT), clean technology or
biotechnology. (e.g. Uber, Airbnb, Xiaomi & Didi etc.)
•

• Criticism
•

• Shadow monopoly
•
Risk
•
Huge waste of resource
Issue 2 – Corporate finance

• Mergers and Acquisitions (M&A)

•

• As an aspect of strategic management, M&A can allow

enterprises to grow or downsize, and change the nature of
their business or competitive position. (e.g. reduce cost,
expand scale, increase competitiveness etc.)
•

• Criticism
•

• Monopolization
Issue 3 – Public finance

• Fiscal policy
•

• Industrial policy
•

• Commercial policy
•

• Key Stakeholders
Fiscal policy

•
Types
•

•
Neutral fiscal policy: spending ≈ revenue
•
Expansionary fiscal policy: spending > revenue
•
Contractionary fiscal policy: spending < revenue

•
Funding
•

•
Taxation
•
Seigniorage
•
Issuing national bond
•
Fiscal reserves
•
Governmental assets
Fiscal policy

• Measure
•

• Taxation
• Transfer payment (e.g. welfare programs, voucher etc.)
• Infrastructure programs
•

• Effect
•

• Economic stability
• Employment
• Social justice
Fiscal policy

•
Welfare trap
•

•
2 case studies:
•

•
Argentina
•

•
2018 Monetary crisis
•
Caused by high public employment, doubled subsidy etc. during the presidency
of Cristina Fernández de Kirchner (CFK)
•

•
Greek government-debt crisis
•

•
2009 election year
Industrial policy

• Focuses:
•

• Improving competitiveness
• Structural transformation
•

• Case studies:
•

• Successful: China/The Asian Tigers

• Failure: Import-substitution-industrialization (ISI) in Latin
America/Sub-Sahara Africa
Commercial policy/trade policy

•
Types:
•

•
WTO
•
Protectionism
•
Regional Trade Agreements (e.g. the Bangkok agreement)
•
Bilateral Free Trade Agreements
•
Preferential Trade Agreements (e.g. NAFTA)
•

•
Tools:
•

•
Tariff
•
Import Quotas
•

•
Clash: Protection/Win-win/Responsibility
Key stakeholders

• Government
•

• Politicians or technocrats
•

• Companies
•

• People
•

• Employment
• Spending
Important aspects to note

• Politics, media and public perception

•

• Political philosophy and moral philosophy

•

• Impact on individual life