Finance - An Offshoot of Economics

VSAT 2022

Finance and Economics

Finance is an offshoot of economics that deals with the management, creation, study of money and also covers topics like credit, investments, assets and liabilities that make up financial systems.


What is Finance?

Finance is mainly focussed on the study of prices,interest rates, money flows, and the financial markets. In a broader sense, the concept of finance also focuses on the time value of money, rates of return, capital cost, optimal financial structures and the quantification of risk.


Types of Finance: Personal, Public and Corporate

There are three branches of finance:

  1. Corporate or Business Finance

  2. Personal Finance

  3. Public Finance


Types of Finance


Types of Finance


What is Finance in Business?

Corporate finance involves managing assets, liabilities, revenues and debt for a business. Financing in a business is done through a number of ways including equity investments and credit arrangements. This kind of finance is also concerned with determining an excellent debt policy for a new company or the perfect strategy for asset allocation for an investor.


Objective of Business Finance


Objective of Business Finance


Personal Finance

Personal finance deals with the financial decisions and activities of an individual or household which include budgeting, insurance, mortgage planning, savings and retirement planning.


Public Finance

Public finance is a branch of finance which deals with tax systems, expenditures of the government, budget procedures, stabilisation policy, instruments, debt issues and other related concerns of the government.


Objectives of Public Finance


Objectives of Public Finance


Difference between Finance and Economics

There are various parameters to distinguish between economic and non - economic activities. Economics is a more theoretical concept while finance is more practical. Both economics and finance are interrelated disciplines. The concept of finance is derived from economics which is focused on how goods and services are made, distributed and used. Finance types include personal, public and corporate finance. Economics is divided into Macroeconomics and Microeconomics. Macroeconomics deals with the overall economy and Microeconomics deals with specific factors within the economy.


Finance v/s Economics


Finance v/s Economics


Distinguish between Economic and Non - Economic Activities

Economic activity deals with production and consumption of goods and services for monetary gain whereas non - economic activity is performed gladly without any expectation in return. Economic activity is performed with the motive to earn money while non - economic activity is performed for social or psychological gain. Economic activity has a pragmatic approach while non - economic activity is idealistic in nature. Economic activity results in value addition of the national income whereas non - economic activity does not affect the national income.


Case Study

Effect of COVID - 19 on Economy in India

The COVID - 19 pandemic had brought social and economic life to a standstill. In this study, the impact of this pandemic on affected sectors such as aviation, tourism, retail, capital markets, and MSMEs will be assessed. The outbreak impacted nations in many ways, especially the lockdowns made social and economic life disturbed.


The world experienced a multi-sectoral impact of the virus as the economic activities of nations slowed down. The World Health Organisation and the World Bank in a 2019 Report jointly estimated the impact of the COVID - 19 pandemic at 2.2% to 4.8% of the global GDP. The International Monetary Fund chief also stated that the world is faced with extraordinary uncertainty about the depth and duration of the crisis and it was the worst economic fallout since the Great Depression.


This pandemic affected almost every sector including the manufacturing and the services sector: hospitality, tours and travels, healthcare, retail, banks, hotels, real estate, education, IT, recreation, media, and others. The economic stress has caused many employers to lose their jobs. The pandemic-induced lockdown and social distancing made productivity loss on one hand, and they also reduced demand for goods and services by the consumers in the market on the other hand. Thus economic activity collapsed.


Every crisis brings about a special opportunity to rethink on the path undertaken for the development of a human being and society. This COVID - 19 pandemic had a clear message for the Indian economy to adopt sustainable development models.


Summary

Though Finance and Economics are interrelated, they are not identical disciplines. Economics is mainly focussed on local or international markets, human behaviour, goods and services etc. Finance studies the financial system and related to money, banks, loans, investments, savings, etc. Both these disciplines inform and influence each other. Investors also pay special attention to both of these disciplines since both these influence the markets to a larger extent.

FAQs on Finance - An Offshoot of Economics

1. How is finance related to economics?

Finance is a special branch of economics and it deals with the management of money, credit, banking, and investment. Economics is a more theoretical concept while finance is more practical. Both economics and finance are interrelated disciplines. Both finance and economics can be seen as two sides of a coin. Finance professionals apply economic principles to deal with various problems in real life. Basically, finance is microeconomics as it is the branch of economics that deals with the financial decisions making of different entities.

2. What are the three forms of financing?

Three types of financing are debt financing, equity financing, or a combination of the two. Debt financing comes from banks, government loan programs, or anyone you can convince to lend you money, to be repaid over a period of time with interest. Equity financing is the money you or an investor places into the business, representing an ownership position in the venture. The combination of debt and equity financing is the best suited form of financing for a company’s market value.

3. What is the significance of Finance?

The significance of Finance lies in the fact that it deals with the activities involving money. Finance focuses on managing cash in any activity and institution. It regulates the inflow and outflow of money. In business, finance is concerned with investments, and funds management and helps the business in overcoming financial obstacles such as shortage of cash, etc. For a business, finance is the most important aspect. It helps in strategising the future plans for the business and also gives an idea of how to grow the business.

Comment