Assignment Sample on Financialization and Its Impact on the Modern Economy
Financialization is an important part of the economy and it includes the financial market and the activities of financial organizations such as households and industries. In this essay, the implication and impact of financialization on the macroeconomy and microeconomy of a country will be discussed in detail.
Financialization and its impact on the macroeconomic level
Financialization has been proven to be an effective instrument through which a country may gain better economic stability and its citizens may get benefitted through better economic development. Financialization is associated with widespread economic development where increasing the size of the economy of a country becomes of the most major aims and objectives where most of the countries have shifted from industrial capitalism. Financial frameworks are usually designed in order to meet the requirements of the rising economies which may boost the process of expansion of Gross Domestic Product (GDP) of any country (Gimet et al., 2019). Furthermore, it may be asserted that financialization directly impacts the growth of the financial sector of a country which is important for improving the macroeconomic activities to a considerable extent. However, it may be implied that widespread adoption of financialization has resulted in significant increase in the amount of financial resources and also increased diversity in the field of financial instruments. In other words, it may be stated that financialization has definitely impacted the financial services in a positive way which has enabled other sectors to grow at a constant rate.
On a broader note financialization has benefited the common people in increasing the levels of their income which is an indicator of economic growth of countries such as the USA. On a contradictory note, it may be argued that financialization is regarded to be an important aspect of economic development as it impacts the various activities associated with financial markets. In a more specific way, financialization has revolutionized the entire economic system profoundly where significant changes have been made in the economic policies which ultimately led to remarkable changes in corporate behaviour. In addition to this, it may be opined that financialization on a global basis has further improved the value of global financial assets to a considerable margin where securitization has increased immensely in the last few decades. On a broader note, it may be opined that financialization and several improvements in the field of financialization increases the quality of operations in emerging markets which is considered to be extremely beneficial in maintaining liquidity in financial markets.
Along with this, financialization aids international trade by directly impacting the amount of foreign exchange transactions. The outbreak of the Covid-19 has impacted the financial operations which hint towards the fact that market volatility is one of the most crucial risk factors of financial markets along with debt sustainability (Bogdan and Lomakovych, 2021). However, economic activities and social conditions are closely interlinked with financialization and the entire process of financialization also affects several social groups and global organizations. Financial liberalization is another factor which influences the financialization process by impacting deeply all the financial markets and shareholders. Along with this, it may be argued that finacialization is often criticized for focusing on short term goals rather than focusing on long term goals which may affect the quality of the products. Moreover, financialization is a term which is often used to categorise the different levels of capitalism where profit is gained through exploring the different financial resources in a detailed manner. On the other hand, financialization and its excessive use usually reduce economic growth as a larger portion of investments may not generate fruitful outcomes resulting in loss of funds.
Furthermore, financialization has impacted both the financial as well as nonfinancial corporations and it may be added that financialization often impacts innovation in a negative way. In a more specific way, financialization may increase financial instability by mispricing products which ultimately impacts the valuation of the assets to a great extent. Financialization needs to be treated with utmost care and attention in order to carry out innovation and economic growth which may boost the growth of the economy in the long run. Financialization also impacts physical investments and also on normal rates of profit which may be avoided through implementing necessary changes in the financial sector through technological advancements.
It may be stated that there is a huge importance of financialization in building and developing the economy of a country. On the other hand, it may be opined that in the modern era, it is extremely essential for a country and an organization to maintain the financial stability through financialization. Moreover, it may be argued that three is an intimate relationship between financial industries and financialization as it has been observed that there are both positive and negative impacts of financialization on the global economy and labour market (Shkolnyk et al., 2019).
One of the biggest features of financialization is that it may play an essential role in changing the operational and functional structure of the financial market of a country. Furthermore, financialization is extremely essential in conducting direct investment in an industry which may create a positive impact in developing the economy of a country. On a special note, financialization is immensely essential for the development of entire financial sectors of a country as well as it is useful to motivate the shareholders of an industry. Nowadays, it is extremely important for an organization to earn more profit while if an organization may not be able to earn extra profit then it may harm the growth of an industry. Financialization also plays a significant role in improving the profit level of the entire industry which creates a beneficial impact on the economic growth of a country. On a contradictory note, there are several risks of financialization such as due to financialization a country may experience prolonged recession and debt deflation. Moreover, financialization in the developing nations may create several challenges and difficulties such as it may reduce the corporate investment and increasing income inequalities of these countries (Storm, 2018).
It needs to be implied that due to financialization the financial organizations such as banks may face several complex issues which indicate that financialization may not be able to increase the real advantage of the economy. However, financialization is immensely suitable for the growth of financial sectors as it has a positive impact on increasing the productivity of the manufacturing organizations of a country. Additionally, if the industries of an organization get direct investment then there is a huge possibility of growth for the companies. It is the duty of the government of a country to make effective financial decisions or else it may hamper the entire economic growth of a country. In this modern era, the financial risk is increasing day by day and for that reason, bubbles and financial crises are the most highlighted topic in the macro economy. The government of a country has to implement several strategies such as reducing the effect of spill over which may be influential in mitigating post bubble crisis conditions.
Financialization and its impact on microeconomic level
It may be asserted that the economy of a country or a region is directly impacted by the various financial operations which take place within an economy where several economic policies and financial plans are made which influence corporate behaviour and other economic institutions. In other words, it is no exaggeration to state that economic activities have not grown proportionately in comparison to other activities which have raised certain questions about the modern economy and capitalism (de Medeiros and Amico, 2019). However, it needs to be mentioned that financialization impacts microeconomics to a great extent where transfer of income takes place from real sector to financial sector which may increase or decrease the flow of cash into an economic system. In addition to this, it may be implied that financialization may operate through certain ways which are closely associated with changes in structure of the financial markets. Along with this, it may be opined that microeconomics is the branch of economics associated with the behaviour of the individuals and also deals with making decisions regarding allocation of financial funds and is thus dependent on financialization.
On a contradictory note, it needs to be argued that financialization is often considered responsible for causing several problems and obstacles in private investments which is an essential aspect of microeconomics where individual investments often become an important factor in boosting the micro economy. Additionally, financialization is also said to be harmful for the micro economy as it reduces mutual dependence of capital and labour which ultimately impacts the social contract in a negative way. In a more specific way, it may be stated that financialization may be held responsible for creating instability in the macro economy by creating unequal income distribution which goes beyond the ambit of normal financial systems. Technological advancements have profoundly impacted the entire financial system which has changed the financial institutions and markets to a considerable extent over the past few decades (Currie and Lagoarde-Segot, 2017). Apart from this, it needs to be asserted that the increasing use of advanced financial instruments and their misuse or excessive use often affects the microeconomic activities which ultimately impact the national economy of a country.
However, it may be implied that increasing levels of inequality based on unequal income opportunities creates widespread disputes at microeconomic levels where individual interests get affected by financialization. In a more specific way, it may be mentioned that the increasing technological changes has directly affected various economic activities including production, consumption and utilisation of resources. Moreover, globalisation has also impacted the entire financialization process which has ultimately influenced several microeconomic activities including individual income, consumer equilibrium and individual savings. On a broader note, it needs to be strongly argued that advancements in the field of technology and increasing trends of globalisation have assisted in making effective financial decisions which is an important factor of microeconomics where utilization and allocation of financial funds becomes truly vital. However, financialization and its impact on macroeconomics is not limited to individual boundaries where individual economic activities get affected and extends further. In other words, poverty and inequality are the two major factors which impact financial stability at microeconomic levels and through implementation of various tools including cost estimation, cost analysis and project prioritization significant success may be achieved in the field of microeconomics. Financialization often influences manufacturing process and corporate finance which has several economic consequences (Liu et al., 2021).
In addition to this, financialization is considered to be an instrument through which financial policies are shaped in order to generate better economic outcomes. Apart from this, it may be mentioned that financialization at microeconomic levels impacts profoundly on financial markets through making changes in economic policies where statistical records and evidence becomes essential in taking any major decision. Furthermore, it needs to be added that financial transactions, real interest rates play a crucial role on profitability of the financial firms which ultimately impact the broader economy. Additionally, financialization has an impact on the micro economy which is a part of the greater economy and influences the stock market to some extent. Financialization also plays its role in global resource allocation which is regarded as a major factor of globalisation where global resources are allocated and utilised in a proper way. Financialization is responsible for economic liberalization of the masses where microeconomic interests get addressed along with other economic aspects. Financialization is often implemented strategically to generate financial profitability in order to reduce and manage several financial risks which impacts capital accumulation (Cordonnier et al., 2019).
From the above discussion, it may be clearly concluded that financialization is an important tool through which various changes have been made possible in the modern economy where both positive and negative impacts have been noticed. Financialization needs to be dealt with utmost care and attention in order to further improve the financial performance of countries which will certainly prove beneficial in developing a better future.
Bogdan, T. and Lomakovych, V., 2021. Financialization of the global economy: macroeconomic implications and policy challenges for Ukraine. Investment Management and Financial Innovations, pp.151-164.
Cordonnier, L., Dallery, T., Duwicquet, V., Melmies, J. and Van De Velde, F., 2019. The (Over) Cost of Capital: Financialization and Nonfinancial Corporations in France (1961–2011). Review of Political Economy, 31(3), pp.407-429.
Currie, W.L. and Lagoarde-Segot, T., 2017. Financialization and information technology: themes, issues and critical debates–part I.
de Medeiros, C.A. and Amico, F., 2019. Financialization and capital accumulation. Journal of Economic Issues, 53(2), pp.587-594.
Gimet, C., Lagoarde-Segot, T. and Reyes-Ortiz, L., 2019. Financialization and the macroeconomy. Theory and empirical evidence. Economic Modelling, 81, pp.89-110.
Liu, S., Shen, X., Jiang, T. and Failler, P., 2021. Impacts of the financialization of manufacturing enterprises on total factor productivity: empirical examination from China’s listed companies. Green Finance, 3(1), pp.59-89.
Shkolnyk, I., Kozmenko, S., Kozmenko, O. and Mershchii, B., 2019. The impact of the economy financialization on the level of economic development of the associate EU member states. Economics & Sociology, 12(4), pp.43-331.
Storm, S., 2018. Financialization and economic development: a debate on the social efficiency of modern finance. Development and Change, 49(2), pp.302-329.