Econ – Chapter 13 – Outline #1 I. Savings and Financial System = An economic system must be able to produce capital if it is to satisfy the wants and needs of its people. To produce capital, people must be willing to save, which releases resources for use elsewhere. + Savings to and Economist = A. Saving and Capital Formation = when people save, they make funds available to others. When businesses borrow these savings, new goods and services are created, new plants and equipment are produced, and new jobs become available. Saving makes economic growth possible. 1. Example – Entrepreneurs who borrow = a. When people save, they are abstaining form consumption, which frees resources for others to borrow and use. These resources also make investments possible. B. Financial Assets and the Financial System – for people to use the savings of others, the economic must have a financial system, or a way to transfer savers’ dollars to investor. 1. How do people save? a. Financial Assets = 1). If the borrower defaults, the lender can use the financial asset as proof in court that the funds were borrowed and that repayment is expected. 2). When funds are lent from one individual or business to another, a financial asset is generated. 2. The Financial System a. The Main Components of the Financial System = b. Any sector of the economy can provide savings, but the most important sectors are the household and businesses. State and local governments provide some savings, but they are net borrowers of funds. c. Financial intermediaries = d. Borrowers = e. Almost everyone participates in the financial system. The smooth flow of funds through the system helps ensure that savers will have an outlet for their savings. Borrowers, in turn, will have a source of financial capital. 3. Investments = C. Nonbank Financial Intermediaries = Savings banks, credit unions, commercial banks, and savings associations obtain fund when their customers and / or members make regular deposits. + Nonbank Financial Institutions = 1. Finance Companies = a. Many merchants cannot afford to wait years for their customers to pay off high cost items on the installment plan. The merchants sell the customer’s installment contract to a finance company for a lump sum. b. Utilizing a finance company = c. Consumer Loans = d. Bill Consolidation Loan = 2. Life Insurance Companies = life insurance companies collect their funds in order to provide financial protection for the survivors of the insured, collecting a large sum of cash. a). Premium = b). Insurance companies tend to lend their surplus funds to others, making loans to banks in the form of large certificates of deposit. They may negotiate other arrangements with smaller consumer finance companies. 3. Mutual Funds = a. Mutual fund stockholders receive dividends earned from the mutual fund’s investments. They many also sell their mutual fund shares for profit, just like other stocks. b. Mutual funds allow = c. Size of the funds = 4. Pension Funds a. pension = b. pension funds = c. private pension funds = d. government pension funds = 5. Real Estate Investment Trust = a. REITs borrowing = Read the article and answer the questions on page 324: _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ .