Relationship between Finance and Economic Growth

Without address to dry academic definitions, economic is a social science that studies the production, and distribution of goods and services, with the aim of explaining how economies work and how their agents interact.

Finance is a branch of the economy devoted to providing funds to individuals, businesses and governments. The finances allow these entities to use credit rather than of money to buy goods and invest in projects. Finance plays an important role in the economy. While banks, credit unions and other financial institutions extend credit, they help expand the economy by directing savers' funds to borrowers.

Some economists argue that financial development is not directly related to a higher rate of economic growth and argue that the relationship between economic growth and financial growth is weak and unpredictable. However, some economists have associated the economic development of some countries with their solid financial systems that have contributed to high economic growth. It is evident that the development of financial institutions and markets is based on the rate of transfer of resources created by the savings sector to efficient investments.

Economic growth and social growth are interdependent and have a close but difficult relationship. With economic growth, it is clear that there are many environmental concerns in today's society. The economy is the decision-making process. Finance is execution.

Important linkages between economics and finance

Macroeconomic environment

Microeconomic environment

Key macroeconomic factors such as the growth rate of the economy, the internal saving rate, the role of the government in economic affairs, the fiscal environment, the nature of external economic relations, the availability of funds for the business sector, the rate of Inflation, the real interest rate and the conditions in which the company can obtain financing define the environment in which the company operates. No financial manager can afford to ignore key developments in the macroeconomic environment and their impact on the company.

While the understanding of macroeconomic developments sensitizes the financial manager to opportunities and threats to the environment, a solid foundation in microeconomics principles heightens his analysis of decision-making alternatives. Finance, in essence, microeconomics is applied. In summary, a basic understanding of macroeconomics is needed to understand the environment in which the company operates and a good understanding of microeconomics principles helps to refine financial decision-making tools.

Professional economists are hired as advisers from the public and private sectors. But finances are managed by individuals in families or by banks or other institutions. Financial and economic investments are not completely separated; in fact, they are often inextricably linked.

The distinctions between financial and economic investments often become confused in the common discourse. It's all "investment" and investment is generally considered a good thing. However, in his book "The Economic Process", the economist Carmine Gorgas warns against what he considers an intellectual trap: to believe that the accumulation of wealth (financial investment) counts as a "productive" use of money.