Contents

No.

Title

Page

1.

What is Finance

2.

The Crucial of Finance Economy

3.

Strengths and Weakness of Market Economy

4.

Financial Issues Should to Investigate

5.

The Impact if The Financial Market Does Not Exist in a Country

6.

The Reason for Countries to Grow Slow

4-5

WHAT IS FINANCE?
"Finance" is a broad term that describes two related activities: the study of how money is
managed and the actual process of acquiring needed funds. Because individuals, businesses and
government entities all need funding to operate, the field is often separated into three subcategories: personal finance, corporate finance and public finance.
All three categories are concerned with activities such as pursuing sound investments, obtaining
low-cost credit, allocating funds for liabilities, and banking. Yet each has its own specific
considerations. For example, individuals need to provision for retirement expenses, which means
investing enough money during their working years and ensuring that their asset allocation fits
their long-term plans. A large company, on the other hand, may have to decide whether to raise
additional funds through a bond issue or stock offering. Investment banks may advise the firm on
such considerations and help them market the securities.
As for public finance, in addition to managing money for its day-to-day operations, a
government body also has larger social responsibilities. Its goals include attaining an equitable
distribution of income for its citizens and enacting policies that lead to a stable economy.

WHY THE FINANCING IS CRUCIAL FOR ECONOMY?

Executive Summary
The financial system is critical to the functioning of the economy as a whole and banks are
central to the financial system. In addition to providing substantial employment, finance serves
three main purposes:
Credit provision
Credit fuels economic activity by allowing businesses to invest beyond their cash on hand,
households to purchase homes without saving the entire cost in advance, and governments to
smooth out their spending by mitigating the cyclical pattern of tax revenues and to invest in
infrastructure projects. Banks directly provide a substantial amount of credit in the country, but,
unlike in almost any other economy, financial markets are the ultimate providers of most credit.
Liquidity provision
Businesses and households need to have protection against unexpected needs for cash. Banks are
the main direct providers of liquidity, both through offering demand deposits that can be
withdrawn any time and by offering lines of credit. Further, banks and their affiliates are at the
core of the financial markets, offering to buy and sell securities and related products at need, in
large volumes, with relatively modest transaction costs. This latter role is particularly important
in the financial system, given the dominance of markets, but is often under-appreciated.
Risk management services
Finance allows businesses and households to pool their risks from exposures to financial market
and commodity price risks. Much of this is provided by banks through derivatives transactions.
These have gotten a bad name due to excesses in the run-up to the financial crisis but the core
derivatives activities provide valuable risk management services.
Many argue that the U.S. financial system grew overly large in the bubble period and is still too
large today. We agree that some of the activities that took place in the bubble period involved
taking on excess amounts of risk, but it is extremely hard to determine the right size of the
financial system based on well-grounded economic theories. In truth, it is very difficult to judge
the right size of almost any industry and attempts at the use of central planning and other
mechanisms to correct assumed problems of this nature have usually failed.
Nonetheless, it is reasonable to assume that a sector will be too large if there are unwarranted
economic subsidies flowing to it. This does appear to have been the case in the bubble and may
still be the case, although such subsidies have been much reduced by a series of actions to
remove government support and to force the financial industry to operate more safely.

STRENGTHS AND WEAKNESESS OF MARKET ECONOMY

STRENGTHS
Market economy has several strengths. Having healthy competition and a system that encourages
entrepreneurship is important in any market.
1. Harder working employees due to the threat of losing their job or being laid off because
the product or service is not selling.
2. Friendly competition between companies will encourage efficiency among employees to
lower costs for success.
3. Companies become creative in finding new products to sell or manufacture and less
expensive ways to accomplish their goals.
4. As companies grow due to market economy, foreign investors will begin to take an
interest and help expand.
5. Private companies take over activities and venues that were in the past public sector. This
reduces the size, power and cost of state bureaucracies.
6. Production increases for the frivolities that will cost more money but people want. This is
a classic example of supply and demand.
7. Social and technical skills needed to function within a market economy system are
quickly learned as is the knowledge to succeed.
8. There is a larger variety of consumer goods available for a wide range of people ranging
from middle-class to the very affluent.
9. Encourages people to step up and try their hand in the market economy. Encourages
entrepreneurs to start up a business and sell merchandise or offer services at competitive
rates.

WEAKNESSES
Although the market economy system sounds ideal, there are always problems with any type of
economic system. Here are some of the disadvantages of the market economy system.
1. The exploitation of workers is a large disadvantage because the working conditions and
long hours for less pay and few benefits, if any. The large corporations have moved their
production to countries where they can get cheap labor with few safety regulations for the
workers.
2. Investment priorities and wealth becomes distorted. The wealthy keep getting wealthier
and the public sector such as public education, transportation routes and public health
does not get the needed funds to keep evolving and providing for the publics needs.
3. Goods will be mass produced and therefore the cost will be driven lower. As a product
becomes popular and overproduced, the manufacturers must unload the goods, even if
that means lowering prices to where the general public can afford them.
4. Due to overproduction, industrial machinery will lay idle and therefore not producing a
profit for the manufacturer. Until the prices drop the goods will remain unsold and people
who cannot afford them have their needs unmet.
5. Unemployment rates go up due to the overproduction of goods. Workers are not needed
to keep producing goods and therefore companies cannot afford to keep works employed.
6. Having the market economy system will lead to periods of economic crises. The
economy will stop growing when goods are overproduced and workers are then
unemployed. The economic crisis will not end until the next item is founded that the
wealthy just have to have. Then they cycle starts again.

What other economic and financial issues should to investigate?

Financial market
Definition
A financial market is a location where buyers and sellers meet to exchange goods and services at
prices determined by the forces of supply and demand.
How it work?
A financial market may be a physical location or a virtual one over a network (for example, the
Internet). Here, people who have a specific good or service they want to sell (the supply) interact
with people who wish to buy it (the demand).
Prices in a financial market are determined by changes in supply and demand. If market demand
is steady, an increase in market supply results in a decline in market prices and vice versa. If
market supply is steady, a rise in demand results in a rise in market prices and vice versa.
Producers advertise goods and services to consumers in a financial market in order to generate
demand. Also, the term "market" is closely associated with financial assets and securities prices
(for example, the stock market or the bond market).
Why it matter?
A financial market facilitates transactions between buyers and sellers, as well as between
producers and consumers. Markets experience fluctuations and price shifts resulting from
changes in supply and demand. These changes result from fluctuations in many variables
including, but not limited to, consumer preferences and perceptions, the availability of materials
and external sociopolitical events (for example, wars, government spending and unemployment).
The forces of supply and demand.

What would be the impact if the financial market does not exist in a country?
1. Financial markets in emerging economies.
I specify a theoretical model in which entrepreneurs have the opportunity to invest in
profitable, but risky, long-term projects. Entrepreneurs have insufficient wealth to finance
the projects and must seek financing from risk-neutral international creditors.
2. Financial disclosure laws are weaker
Financial markets are weaker in emerging markets than in industrial countries in two
respects. Financial disclosure laws are weaker, implying that most financing takes the
form of debt instead of equity. In the event of default, the bankruptcy court awards
creditors a smaller share of the proceeds from the investment project.
3. Risky projects are financed by debt
When risky projects are financed by debt, creditors impose a ceiling on debt to assure that
entrepreneurs with a profitable project prefer repayment to sacrificing the specified
fraction of output in bankruptcy court. The larger the expected bankruptcy award, due to
larger expected output and greater creditor protection, the higher is the debt ceiling.
4. Only short-term loans are available
I also assume that only short-term loans are available, yielding maturity mismatch
between debt and investment. One-period loans finance two-period investment projects.
Maturity-mismatch is due to moral hazard, with the short maturity giving creditors
greater monitoring ability. In the event of default on initial debt, entrepreneurs lose access
to new loans.

Would it be the reason for countries to grow slow? (e.g South Africa)
South Africa is generally a divided, unhappy and increasingly corrupt country with its growth
potential hampered by contradictory and ever-changing government policy.
1. Expenditure to redress the apartheid legacy has reduced the resources available for
investments in the knowledge economy through investments in research and
development, infrastructure and tertiary education.
2. There are many of the governments honourable and justifiable goals have been
accompanied by large amounts of wastage, policy experimentation and cronyism.
3. Weaker than expected global economic recovery, particularly in Europe an
important trading partner.
4. The country are continued domestic policy flip-flops have compounded poor
leadership and a lack of vision.
The three scenarios
The original three scenarios were for South Africa through to 2030. This is the same horizon as
the governments National Development Plan. These were:

Bafana Bafana named after the countrys bumbling national soccer team. We concluded
that this is South Africas current pathway, fumbling along with no clear leadership or
direction.
A Nation Divided. In this scenario the ruling African National Congress (ANC) adopts
populist policies to shore up support. Eventually both the economy and the ANC pay a
heavy price.
In Mandela Magic, the government implements the NDP. This could either come about
through a revitalisation of the ANC or the growth of competitive multiparty democracy.

The lack of a dependable electricity supply will have a severe dampening effect on the
South African economy for up to a decade. This means that the country is unlikely to
escape from its middle-income trap in the near term.
even under these rates of growth, South Africa is likely to grow more slowly than its
potential, below the average rate forecast for upper middle-income countries and slower
than the average for the rest of the Africa.
This would not be a new phenomenon. South Africa has grown more slowly than other
upper middle-income countries for several decades, giving rise to high unemployment
and poverty.