The Stock Market and the Economy Summary
Numerous economic research studies show that financial systems, which are comprised of financial markets and institutions, significantly influence economic performance both nationally and worldwide. This action is achievable due to the close relationship between the aforementioned financial system constituents, among others, and their ability to work coexistent with one another. This paper presents some of the ways financial institutions and markets’ elements of the financial systems influence the American and international economies.
How financial institutions and markets influence the American and worldwide economy
Financial institutions and markets may impact the United States (U.S) as well as the global economy both positively and negatively. An example of a positive impact is that well-developed and smoothly working financial institutions and markets contribute significantly to the efficiency and health of an economy. This is achievable due to strong positive bonding between the development of these financial systems and economic growth. For instance, well-developed capital markets and banking industry in the U.S ensure efficient financing decisions support an improved resource allocation hence the ever-growing American economy (G Suresh Babu, 2018).
Another positive influence of financial institutions and markets on the global and the U.S economy is that these financial systems assist in proficiently directing the investment and savings flows in the economy in a manner that facilitates capital accumulation and the manufacture or production of commodities improving the economic growth. For instance, ever-increasing daily transactions occurring in various financial markets and institutions like banks globally facilitates financial assets transfer hence boosting the economic development of different world nations (Bezemer & Hudson, 2016).
One of the negative impacts of these financial systems on the U.S and the global economy is the detrimental money laundering practice. This ill practice is very damaging to any world economy. It impairs legitimate private sector development mainly by supplying commodities priced below manufacturing price or cost, thus making it hard for a fair competition of legal or valid financial activities. For example, in the United States, money laundering has threatened various attempts by numerous states to put forward reforms into their respective economies through privatization hence derailing economic development (McDowel & Novis, 2011).
Four financial institutions or markets and their specialty
Two examples of financial institutions include;
Central Banks
These financial institutions serve as the responsible government’s agency for the management and oversight of all banks within a given country. Additionally, they are responsible for regulations and supervision of other financial institutions as well as construct the monetary policy within a country.
Brokerage institutions
These are firms that help various institutions and person purchase and sell securities among or to available investors.
Two examples of financial markets include;
Stock markets
These are financial markets responsible for valuing the available securities and providing a smooth operating market where willing investors purchase and sell shares (Firth, 2017).
Bond markets
These are financial institutions responsible for issuing and trading of debt securities.
How Bond and stock markets affect the American economy
The bond markets influence the American economy by acting as a critical factor in determining interest rates. This activity significantly impacts the American liquidity amount. Additionally, it also affects the possibilities of business expansions.
On the other hand, stock markets impact the American economy, granting permission to launch new products, raising the capital required to settle debt, and expanding American business operations.
References
Bezemer, D., & Hudson, M. (2016). Finance Is Not the Economy: Reviving the Conceptual Distinction. 745-768.
Firth, M. (2017). The Role of the Stock Market. The Valuation of Shares and the Efficient-Markets Theory, 1-13.
G Suresh Babu. (2018). International Journal of Multidisciplinary Research and Development, 5(8), 100-107.
McDowel, J., & Novis, G. (2011). The consequences of money laundering. Economic Perspectives, 6(2), 1-8.