Essay on the Financial System in the U.S.

Paper Type:  Essay
Pages:  5
Wordcount:  1186 Words
Date:  2021-06-25

Definition of Growth and Its Recent History

Economic growth is defined as the much an economy produces as compared to its initial production. There is more profitability of a business and a rise in the stock prices if an economy is producing more. It, therefore, gives the capital to companies for investment and the ability to hire more employees. Changes in gross domestic product (GDP) are a measure of Economic growth. GDP measures the entire economic output of a country for the past year. Focusing on the recent economic growth of US, it is concerned with the characteristics and the importance of the economy of US from colonial times to the present. The history gives emphasis on the economic performance and the effect of new technology on economic performance, the change of size in the sectors of the economy and the legislation effects and government policy.

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Importance of productivity

Productivity is a measure of the efficiency of the labor measured by output per worker hour. It is the main determinant of the living standards. It does the quantification of the use of the available resources by an economy by doing a relation between input quantities to output quantity. Higher productivity leads to lower average costs which are passed in lower prices on to consumers resulting in encouraging demand, employment increase and more output. Secondly, it leads to competitiveness improvement and trade performance. Thirdly, it leads to higher profits, higher wages and growth in the economy. Therefore it is said that productivity is not everything, but in the end, it is almost everything.

The Role of Financial System and Description of Two Markets That Are Part of the Financial System in the U.S. Economy

Financial markets and financial intermediaries are some of the financial systems in an economy. Their role is to channel funds from the ones that have savings to those that have their uses that are more productive. These financial systems perform two main types of financial service. These services reduce the cost of movement of funds between the lenders and the borrowers. The result of these is more efficient resources allocation and faster economic growth. These are liquidity provision and risk characteristics transformation of assets. These financial systems also play a role in making sure that there are exchange and settlement of payments.

The two markets that are part of the financial system in the U.S. economy are:

The bond market-The bond is a certificate of indebtedness that makes the specification of the borrower to the bond holder. It is a contract that has a maturity date and a redemption value to the buyers. Money received by the buyers is used in the expansion of the business of the company.

Stock market- equity finance is the sale of stock. Stocks have more risks compared to bonds but have higher returns. The price of a stock is determined by its supply and demand. Negative information about a company changes the price of the stock that people are willing to pay.

The importance of stocks and bonds owning in the diversification of holdings and the type of financial institution that eases diversification.

Diversification is the process of reducing the risk of investment by allocating investments among various financial instruments. It is the best technique of reducing risks and maximizing the returns on investment. The reaction of bonds and stocks are different with regards to certain adverse events. Doing a diversification of these assets leads to a reduction in the sensitivity of the market swings, It is because the bonds move in opposite direction from the stocks which will offset unpleasant movements of the other therefore no losses are incurred. Diversification is made easier through mutual funds.

Benefits of market for insurance and the problems that impede perfect working of the insurance market

Efficient distribution of risks through diversification is the benefit derived from the market for insurance. The insurance companies and its shareholders will do a holding of the cost of a payout rather than having one person responsible.

Adverse selection is a situation when the demands of an individual for insurance have a relation to their risk of loss. The higher the risk, the greater the need is for insurance and the higher the likelihood of payment to be made by an insurance company. Due to the lack of information by the person needing insurance, companies are unable to make an allowance for the increased risk in the determination of the price of insurance. It, therefore, becomes an impediment for the perfect working of insurance.

Moral hazard occurs when an isolated risk party behaves differently than it would behave if it were fully exposed to risk. Moral hazard occurs as a result of the failure of organizations to consider the consequences of its actions. They have a tendency of being careless which makes the other parties responsible for the actions they did. There is an incentive for a party having more information concerning its actions of behaving inappropriately with regards to the other party with less information. Therefore it is another factor that impedes the perfect working of the insurance market.

Factors to be considered by a stock analyst in determination of the value of a share of stock

A stock analyst should consider the future profitability of a firm when determining the value of the stock. Future profitability becomes an important factor since it helps in making a decision on the type stock or share that is to invest in. Failure to consider this will bring risks that will probably lead to losses in investing in them.

Reasons why minimum-wage laws best explains the structural unemployment among college graduates or teenagers

The laws of minimum-wage serves as a better explanation for the unemployment witnessed among the college graduates than among the teenagers. There are fewer skills among the teenagers that are related to the job than what the college graduates have. Therefore, their wages are affected by minimum wage because they are low enough to be affected by the minimum wage. The wages of the college graduates in general normally exceed the minimum wage.

View of the current unemployment level of the U.S. economy and whether it is healthy or unhealthy.

For people who lost and those that lose jobs, unemployment, of course, becomes bad news to them. However, for the overall economy, a flat or slightly rising rate of unemployment could be a sign that there is room for improvement for the job market. It, therefore, seems to sound healthy for the U.S economy. The reason for this is that the government makes an assumption that there is unemployment if the people are actively searching for work. Millions of Americans are not in the active seeking of jobs hence are not counted as unemployed. However, theoretically, they are available for work. They would have made a huge pool of potential workers if they had been drawn into the labor force. If this could have been happening, there could have been an allowance for the continuity of the growth of jobs for longer without having the rate of unemployment drop below 5 percent which is the benchmark.

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