The financial system and the economic development of a country go hand in hand. An economist cannot view economic development and financial system as two different things because the potential development of an economy depends on the strength of its financial system. This clearly states that the two concepts are inseparable. Let us see the participation of financial system in the growth of the economy. But before we get to it, there are two important terms here: financial system and economic development. Let us understand them separately before analyzing the relationship between them.
What is Economic development?
- When the economic, social and political well being of the citizens of a nation develop complimenting each other, then it is called economic development. A lot of people tend to get confused between the words growth and development.
- The word growth simply means the increased ability of the nation to produce more goods and services from then on this simply represents the GDP of the nation and generally doesn’t take the welfare of the people into consideration.
- The growth of the nation can fluctuate depending on its productivity in a particular financial year. Economic development is more sustained, slow paced and occurs over a long period.
Financial System of a country:
- A financial system is made up of three main participants: lenders, borrowers and investors. Participants of the financial system exchange funds, where the market is complex, closely related and they keep linking the investors and the borrowers. The financial system of the nation is expected to make its participation in the national, international and also at different trade levels.
- The other important factors that are a part of a financial system is the markets that let potential investors and borrowers meet. The investors and buyers carry out their transactions through the market instruments that are available in the markets.
- The financial market is broadly classified into Capital Market, Money Market, and Forex Market. Each market has its own set of market instruments on which the participants of the market trade and make profits. The better the participation, the more the economy develops.
Relationship between the two:
- Now we have a decent knowledge of the terms financial system and economic development. So let us see the relationship between economic development and financial system, and how it affects a nation.
- After understanding the terms economic development and financial system, it is quite easy to say why the development of an economy depends very much on its financial system.
- It is no doubt that the financial strength is imperative for the development of the economy. So the wealth of the nation is the collective strength of the individuals who participate in the monetary transactions of the nation.
- A lot of individuals, firms, companies and other enterprises take part in the financial system. The growth and profitability of every single participant in this system automatically reflect on the growth of the nation.
- Especially profits made by investors in the forex markets lead to huge improvement in the financial strength of the nation.
- Bankers, investors and financial institutions, who form the financial sector of a government, spend, liquidate and multiply their money in this financial system. So this simply means that the strength of the nation depends on the strength of its financial system.