Financial Markets and the Real Economy Essay Example | Topics and Well Written Essays - 4000 words

Financial Markets and the Real Economy - Essay Example In this perspective, recorded economy includes all economic activities within a country that are recordable and reported through gathering of appropriate statistics (Bailey 78). Non-monetized economy on a different perspective refers to all economic activities that are linked to self-consumption. Therefore, real economy is a composition of all the aspects of economic activities within a given nation. Overview of Financial Markets Financial market on the other hand refers to a place where buyers and sellers (individuals and entities) meet to trade on assets that include equities, currencies, derivatives, and bonds. In most cases financial markets are referred to as stock markets. Amazingly, financial markets are as old as humanity. Financial markets started the moment mankind settled down to engaging in serious activities of growing crops and exchanging them with other crops. Despite this aspect of trade was known as barter, there were some financial markets aspects within the trade. For instance, there are possibilities that some people due to one reason or another attain bad harvest (Levinson 99). However, with the bad harvest such individuals had to struggle and obtain a way of farming and obtaining food for their families. In so doing, there was the aspect of obtaining credit hence the assertion that financial markets are as old as humankind. With advancements and developments, financial markets in the contemporary business environment have taken a totally different shape. There are many forms of financial markets currently all of which have their specific purposes to accomplish. In addition, financial markets developments and advancements have led to formation of highly organized markets like the...This essay attempts to create an understanding of the link between real economy and financial markets, adding to the numerous debates, articles, and studies on the link between financial markets and real economy Real economy is part of economy concerned with actual production of goods and service within a country. Real economy in most cases is referred to as the total economy, which encompasses all the economic components such as economic activities, both monetized and non-monetized transactions, official and unofficial, and all transactions or activities that take place between rural and urban areas Financial markets serve functions in which they are formed or mandated to within a given economy. The first fundamental function that financial markets perform is that of setting price. Through determining the exchange rates, financial markets have the vista of providing price discovery. The second fundamental function of financial markets is the valuation of assets. Through determining market prices, financial markets are in a position of valuing assets Economists believe that a powerful measurement of economic performance is only attainable through obtaining a marginal value of wealth from asset markets. Other than the fact that real economy impacts positively and negatively on financial markets, it is inevitable that financial markets also affect real economy either positively or negatively. In most cases, real economy benefits or is disadvantaged from the various functions of financial markets.