Page 18 - Griffenomics

GRIFFENOMICS ISSUE 1
18
FINANCIAL ECONOMICS
FACT: ON OCTOBER 24TH 1929, A DAY KNOWN AS BLACK THURSDAY, THE AMERICAN STOCK MARKET LOST 11% OF ITS VALUE
Economics is the study of human
behaviour. What has been referred
to as the ‘dismal science’ examines
topics such as allocating resources, max-
imising profits and distributing prod-
ucts e¢ciently and fairly to individuals.
However, many of the ideas in traditional
economics are quite theoretical and they
sometimes don’t perfectly resonate with
real world occurrences. Puzzled by this
problem, many economists have taken an
interest in a branch of the subject known
as ‘Financial Economics’ in recent years.
Financial Economics relates typical
economic principles and models to real
world financial situations.
Financial Economics is referred to as
the study of the allocation and distribu-
tion of assets within a period of time in
an uncertain environment, with the aim
of maximising the rate of return andmin-
imising the risk involved when investing.
Let’s take a classic example - The Stock
Exchange. People invest their money in
certain companies in the hope that they
can gain from the growth of the firm.
Time is required for the expansion. Once
the companies grow, investors earn ben-
efits and sell on their stocks. This reflects
the process of the allocation and distri-
bution of assets within a certain period
of time. However, what if a company suf-
fers a huge loss due to a natural disaster?
There is no doubt that investors in this
situation will also have a bad time. Peo-
ple experience a great deal of uncertainty
regarding their returns on stockmarkets.
They could make a killing or be over-
come by serious debts leading to even-
tual bankruptcy. The study of Financial
Economics requires that risks and un-
certainties are taken into consideration.
The Stock Exchange system is usually
used as an economic model for illustrat-
ing the concept of Financial Economics,
as it functions similarly to the features of
this particular branch of economics.
REAL VALUE VS. NOMINAL VALUES
Let’s suppose you hold a pound in your
hand and you have two options. You can
either use this pound to buy two choco-
late bars, which cost fifty pence each, or
you can save this pound in your pocket
and buy this chocolate later. Many peo-
ple tend to choose the latter option. They
are persuaded that they can buy more if
they save more. If you are one such per-
son then you should be careful - you have
fallen into a common trap! The value of
money changes over time. This may be
due simply to inflation or to the more
complicated control of prices by gov-
ernments and monopolists. Hence, the
pound in your hand will not always be
worth a pound as we know it. The real
value of it could rise or fall. This aƒects
how many chocolate bars you can buy.
Dealing with and understanding nominal
FINANCIAL
UNPREDICTABILITY
Delve into the unpredictable realm of financial economics.
“Speculation
is only a word
covering the
making of money
out of the
manipulation of
prices, instead of
supplying goods
and services.”
HENRY FORD
WALL STREET
The eight-block long
street has become
a metonym for the
American financial
sector.
TOSHO The Tokyo Stock Exchange is one of the three largest in the world
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