Section 1 Saving and Investing
Preview
Objectives
After studying this section you will be able to:
- Understand how investing contributes to the free enterprise system.
- Explain how the financial system brings together savers and borrowers.
- Describe how financial intermediaries link savers and borrowers.
- Identify the trade-offs among risk, liquidity, and return.
Section Focus
Investment promotes economic growth and contributes to a nation's wealth. The financial system includes savers and borrowers, as well as the institutions that transfer savers' dollars to borrowers. When borrowers invest these funds, they fuel economic growth.
Key Terms
- investment
- financial system
- financial asset
- financial intermediary
- mutual fund
- diversification
- portfolio
- prospectus
- return
If you go to school today, you give up your time now so that you will be prepared for a career in the future. If a firm builds a new plant, it spends money today for the sake of earning more money in the future. A government may spend money today to build a dam to ensure that people will have a source of hydroelectric power in the future. All of these actions represent investments.
In its most general sense, investment is the act of redirecting resources from being consumed today so that they may create benefits in the future. In more narrow, economic terms, investment is the use of assets to earn income or profit.
Investing and Free Enterprise
As you have read, one of the chief advantages of the free enterprise system is that it allows people to make a profit. This profit motive leads individuals and businesses to make investments. Investing, in fact, is an essential part of the free enterprise system.
Investment promotes economic growth and contributes to a nation's wealth. When people deposit money in a savings account in a bank, for example, the bank may then lend the funds to businesses. The businesses, in turn, may invest that money in new plants and equipment to increase their production. As these businesses use their investments to expand and grow, they create new and better products and provide new jobs.
How does this illustration suggest that investment promotes economic growth?
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