Theoretically, there is no evidence of a correlation between finance and the economy. But over the years, economists have gathered a lot of empirical evidence that suggests that developments in the financial sector influence the process of economic growth. In this article, we propose to find out more about this correlation.
In many ways, finance is an emanation of the economy. Finance describes the management, creation, and study of money, banking, credit, investments, assets, and liabilities that make up financial systems. It is divided into three classifications: public finance, corporate finance and personal finance. Finance, like corporate finance, involves the management of assets, liabilities, income and debt. Companies obtain financing through a variety of means, ranging from equity investments to credit agreements. Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings and retirement planning. Public finances include tax systems, public spending, budgetary procedures, stabilization policy and instruments, debt problems and other government concerns.
Economics is a social science that studies the production, consumption and distribution of goods and services. Although called a “social science” and often treated as one of the liberal arts, modern economics is in fact often very quantitative and mathematical. There are two main branches of the economy, macroeconomics and microeconomics. Macroeconomics is a branch of economics that studies the behaviour of the global economy. In macroeconomics, various economic phenomena, such as inflation, national income, gross domestic product (GDP) and unemployment trends, are analysed in depth. Microeconomics is the study of economic trends, or what is likely to happen when individuals make certain choices or when factors of production change. Just as macroeconomics focuses on the behaviour of the overall economy, microeconomics focuses on the smaller factors that affect the choices made by individuals and firms.
Finance and economics are interdependent
Despite the many differences, finance and economics have a clear correlation. It is important for investors to avoid arguments about economics and finance, both are important and have valid applications. In general, economics focuses more on the economic nature, such as the performance of a country, region or market. Economics also focuses on public policy, while finance focuses more on companies or industries. Finance also focuses on how companies and investors assess risk and return. Historically, economics has been more theoretical and finance more practical, but over the past 20 years the distinction has become much less pronounced. In fact, the two disciplines seem to converge in some respects. Economists and financial professionals work in government, business and financial markets. At a fundamental level, there will always be a separation, but the two are likely to remain very important to the economy, investors and markets for years to come.