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Finance and Economic Development
Finance and Economic Development
Walter
J.M.
of
Employment,
Interest
and
Money
the and
Joseph Schumpeter in his book-Theory of Economic Development published in 1934 talks about the relationship between credit (a form of finance) and innovation which causes economic development.
"The banker stands between those who wish to form new combinations and the possessors of productive means. He is essentially a phenomenon of development, though only when no central authority directs the social process. He makes possible the carrying out of new combinations, authorises people, in the name of the society as it were, to form them. He is the ephor of the exchange economy.
Gerschenkron
in
his
book-
J. (1952), The Generalisation of the General Theory, in her book- The Rate of Interest and Other Essays said :
leads,
indicates a situation of growing betterment of individuals in the society. In economics it relates to material well-being which is determined by production of goods and services. development refers to growth of GDP with its balanced distribution in the society.
Economic
system through bringing together the savers and investors promote the production of goods and services. flows to agriculture
(a)Financial sector.
(b)Financial flows to industrial sector. (c)Financial flows to service sector. (d)Financial flows to speculative stock markets?
Prior savings theory Credit creation theory Theory of forced savings Financial regulation theory Financial liberalisation theory
theory regards saving as a prerequisite or a determinant of investment. It holds that all savings in the economy can find investment outlets. to this theory if Investments exceed savings then it generates inflation in the economy. there should be an emphasis on mobilisation of savings from each nook and corner of the country to raise the availability of savings to finance higher level of investments.
According
Therefore
S S1 E
r1 E1 r2
S1=I1 S2=I2
S, I
PPF
PPF1 Y
reduce the cost for searching investment opportunities for individuals. verify the soundness investment projects. the use which it was lent. borrowers interest. of of the for
They
Monitoring
funds
Enforcement
(d). Maturity-Transformation
theory accepts that savings do not constraint the investments given the banking system. theory is based on the concept of inside-money.
This
This
theory can be understood by looking at the role of banks in creation of demand deposits in a fractional reserve system with multiple banks.
and Schumpeter were supporters of this theory. the main
Kalecki
ex-ante ex-post
savings.
It
was argued by J.M. Keynes and James Tobin. rather saving. is not determined by savings investment determines its own
Investment
If
there is monetary expansion to finance investment over saving then if there is excess capacity in the economy it will generate income and therefore matching savings.
At full employment rise in investment will increase inflation that will reduce the real interest rates and this cause shift in portfolio-pattern causing people to use more capital intensive techniques which causes output and savings to rise. This is called portfolio or Tobins effect. At full employment if investment increases it leads to inflation which benefits the capitalists and that causes there income to grow and therefore savings. This is know as distribution effect.
theory is primarily based on the article written by G.A. AKERLOF (1970) The Market for Lemons: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics, Vol. 84 (1970), pp. 488500 and Joseph Stiglitz and A. Weiss(1981), Credit Rationing in Markets with Imperfect Information,
There is imperfect information in the market. If there is no control over interest rates then bad borrowers will replace good borrowers ultimately to cause the failure of repayments. there is too much competition that will lead to frequent change of the lenders which will create greater degree of asymmetric environment in the economy.
If
Economic Development.
McKinnon and Shaw are main proponents of the Financial Liberalisation Theory.
They argued against the financial regulation theory by calling the regulated economies as financially repressed economies.
Existence
towards consumption and against savings. capital intensive industries. low yielding investments.
Promoting
Promoting Making
investors not to investigate alternative investments and proposing better management in their organisation.
More
Innovation
of financial instruments which make the payment system more efficient and better suited for customers.
Finance Inter-relation Ratio (FIR): Ratio of Financial assets to physical assets. New Issue Ratio (NIR): Ratio of primary issues to physical capital formation.
FOF represents systematic record of net transactions involving financial instruments during a given period of time. All the participants in financial activities be grouped into few sectors (in India it six); and all the financial claims can grouped into few instruments (in India it ten). can is be is
Following the system of double entry bookkeeping in financial accounting, the transactions between participants could be treated in quadruple entry form. The FOF is prepared usually quarterly annually and presented in a matrix form. or
entries show flow of funds into different sectors; while column-wise entries show receipts from various sectors. reveals the overall surplus or deficit of a sector. also expresses changes in assets and liabilities of different sectors. represents a comprehensive picture of an economy where policy makers can identify where to put funds and what kind of financial policy to follow during different business climates.
FOF
FOF
FOF
is also presented in terms of sectors and forms of instruments which bring up the change in assets and liabilities of sector during a period of time. convention is to treat increase in assets of a sector as uses of funds and increase in liabilities as sources of funds. of funds in India.docx
The
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