Financial Market Part 1
#YOUCANLEARNECONOMICS
#ECONOMICS
We use “money” to denote many different things in everyday conversation. We use it as a synonym for income: “making money.” We use it as a synonym for wealth: “She has a lot of money.” In economics, you must be more careful. Here is a basic guide to some terms and their precise meanings in economics.
Money is what can be used to pay for transactions. Money is currency and checkable deposits at banks. Income is what you earn from working plus what you receive in interest and dividends. It is a flow — something expressed in units of time: weekly income, monthly income, or yearly income.
Saving is that part of after-tax income that you do not spend. It is also a flow. If you save 10% of your income, and your income is Rs3,000 per month, then you save Rs300 per month. Savings (plural) is sometimes used as a synonym for wealth—the value of what you have accumulated over time.
Your financial wealth, or wealth for short, is the value of all your financial assets minus all your financial liabilities. In contrast to income or saving, which are flow variables, financial wealth is a stock variable. It is the value of wealth at a given moment in time.
At a given moment in time, you cannot change the total amount of your financial wealth. It can only change over time as you save or dissave, or as the value of your assets and liabilities change. But you can change the composition of your wealth; you can, for example, decide to repay part of your mortgage by writing a check against your checking account. This leads to a decrease in your liabilities (a smaller mortgage) and a corresponding decrease in your assets (a smaller checking account balance); but, at that moment, it does not change your wealth.
Financial assets that can be used directly to buy goods are called money.
The money includes currency and checkable de- posits—deposits against which you can write checks. Money is also stock. Someone who is wealthy might have only small money holdings—say, Rs1,000,000 in stocks but only Rs5000 in a checking account. It is also possible for a person to have a large income but only small money holdings—say, a monthly income of Rs10,000 but only Rs1,000 in his checking account.
Investment is a term economists reserve for the purchase of new capital goods, from machines to plants to office buildings. When you want to talk about the purchase of shares or other financial assets, you should refer them as a financial investment.
Money, which you can use for transactions, pays no interest. In the real world, as we already mentioned, there are two types of money: currency, coins and bills, and checkable deposits, the bank deposits on which you can write checks or use a debit card. The distinction between the two will be important when we look at the supply of money. For the moment, however, the distinction does not matter and we can ignore it. Just think currency.
Bonds pay a positive interest rate, i, but they cannot be used for transactions. In the real world, there are many types of bonds and other financial assets, each associated with a specific interest rate. For the time being, we also ignore this aspect of reality and assume that there is just one type of bond and that it pays, i, the rate of interest.
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