“The Financial System and Savings”
> Explanatory Article by Marios Kyriakou, MSc Economics
About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.
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<Last updated 12.04.2020>
Hi! If you are interested in Economics, I’ve prepared the below to help your understanding about savings and investments. You should take a look at this short article in which I discuss about how the Financial System works and Savings.
The financial system consists of financial organizations that help bring depositors, who want to proceed in Savings, with investors, who want to proceed in Investments. It plays a vital role for the country’s economy, since it is the main mechanism through which money is transferred from savings to investment > this leads to production growth.
Two types of Capital that concerns us in this section: Physical and Financial Capital.
a) Physical Capital: machinery, tools, raw material, whatever good was produced to be used in the production process.
b) Financial Capital: Money used by households, businesses and the government to buy physical capital.
Part of their income is taxed and the rest is the disposable income, which can be either used for expenditure (to buy goods and services) or for savings.
Savings = Disposable Income – Income used as Expenditure (to buy Goods and Services). Savings can be public or private.
Private Savings: it’s the amount of income minus amount of consumption and taxes. Public Savings: it’s the amount of government income from taxes minus government expenditures.
This is people’s money, they belong to the government, and so these belong to the public. This is Government Budget that will be the expenditure needed for government functions and government assigned responsibilities.
Budget Surplus: When income from taxes are more than Government Expenditure. This is positive Public Savings.
Budget Deficit: When income is from taxes is lower than the amount of expenditure then we have budget deficit. This is negative Public Savings.
National Savings: The sum of Private and Public Savings.
Why do people save? There are many reasons. For example, in order to provide funds for large purchases like a house, cars, higher education. In order to provide funds for countering health problems (surgeries). In order to provide funds for sustaining standard of living when people are not working. In example, some people have health issues, they are not able to work, no income will be distributed to them unless it comes from government expenditure. Other reasons involve savings as law implementation. Social Insurance fund is a form of forced savings.
What factors affect the amount of savings?
a) Spirit for Savings: It’s something that is taught and matures in family, school and the society. People always try to teach their children that “first save and then consume”.
b) The Country’s economic situation: When unstable economic conditions hold in the country, people cannot counter poverty, debt and unemployment it is not possible for them to proceed in saving. Another view supports that uncertainty for their future income leads to more savings today.
c) When the interest rates on deposits are higher, more and more people will want to increase savings to benefit from it. The opposite is happens when interest rates are lower.
d) Government fiscal policy: sometimes increasing taxes leads to more savings, while other times to higher savings. Also might lead to people choosing other means to save (gold, land etc.)
Savings make possible for Investment to take place, leading to businesses, thus increasing production. If people save their income at home and not as a deposit in banks, the economy is doomed since it leads to fewer investments and lower production > this means less jobs and fewer needs and wants satisfied.
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