Impact Of Capital Market On Economic Growth

1.1. The capital stock in a country reveals the profitability of the federal capitals, meaning the ability of the state to use its capitals to generate revenues. These revenues in turn impact the GDP in the meaning that the higher the profitability of the capital, the higher the gross domestic product. Some data that could be assessed to help establish this relationship include the values of the private nonresidential gross fixed capital formation, the private residential gross fixed capital formation, the private total gross fixed capital formation, the government gross fixed capital formation or the total gross fixed capital formation (Kiel Institute for the World Economy).

3.Some economists suspect that one of the reasons that economies in developing countries so slowly is that they do not have well-developed financial markets. Does this argument make sense?

The overall development of an economy is a major factor that has significant impacts on the development of the economy's financial markets. Since well-functioning financial systems offer good and easily accessible information, they lower the costs of transaction. This in turn enhances resource allocation and strengthens economic growth. The financial services industry consists of various systems such as stock markets and banking systems that enhance growth and help in poverty reduction. However, commercial banks tend to dominate the financial system during low levels of economic development while stock markets become more active and effective during periods of high levels of economic development ("Financial Sector", n.d.). The other important systems in the financial services industry include sound macroeconomic policies, shareholder protection, and good legal systems.

The specific issues being studied are all linked to economic growth and financial development. The authors use a certain method to help them in their research. “After considering the panel characteristics of the dataset, long-run relationships among financial development, economic growth and

Interest rate is considered as one of the main parameters to control the economic conditions of any country. Interest rate is the key variable for time value of money, which causes a greater shift in money markets and capital markets. This study is basically carried out for the capital market or stock market.

Economic growth is the percentage increase in real national output in a given time period or the increase in the productive potential of the economy. Countries grwo at different rates, this is partly due to the fact that they are at different stages of their economic cycle. The economic growth for the UK is at 0.2%.

Through our discussion this past week, we pondered the role of institutions in investment and the subsequent resulting growth. I hypothesize that institutional quality, measured through economic freedom, influences three separate mechanisms that determine the level of investment and its efficiency in creating growth. First, institutional quality determines how markets allocate investment capital, favoring both less risky and higher returning projects. Countries with institutions more consistent with economic freedom have lower taxation rates and less chance of asset seizure, making them more attractive destinations for investment capital. Secondly, prospective investment capital is less likely to be used to pay bribes or be confiscated by the governments of more economically free countries. Thus, the capital is more likely to create growth rather than be allocated towards unproductive means. Lastly, countries with more economic freedom should observe higher rates of return due to increased worker productivity and lower regulatory costs, creating more economic growth and allowing for further investment. In sum, investment in more likely to be allocated to countries with better quality institutions, the investment capital is more likely to be used towards productive projects in those countries, and finally, the investment capital should produce higher returns, leading to more economic growth. This is particularly relevant in the

Economic growth, in simple terms, is the increase in an economy’s potential output over time. It is no secret, different countries grow at different rates. Is the cause of this difference that countries accumulate capital at different rates? In order to answer this question, it is necessary to start by examining how the accumulation of capital affects economic growth. Moreover, is capital accumulation the only factor responsible for the fact that countries grow at different rates? We will then look into other possible factors, which may affect a country’s economic growth.

The features or characterizations (as stated by Miller, 1986 and Merton, 1992) of Financial innovation is the ability to generate additional sources of funds and act as an “engine of economic growth” (Josh, L. Peter, T. 2011). It is indeed true that these breakthroughs generate additional sources of funds for the firm but it also has the potential to affect the entire economic system. Perhaps even leading to far reaching changes (as further firms down the line can adopt the changes that came as a result of the financial innovation) e.g. FI enable firms to raise capital in larger amounts at a lower cost than they could otherwise, by developing a more (say) cost efficient form of production. The next firm down the line can then benefit from the lower cost production (as they would be able to access or learn this new form of cost saving from the previous firm). This is an example of FI’s influence on economic systems and being a driving force for growth.

Financial Institutions or banks are very important and valuable for the sake of the economic growth of an economy (Gup, 1999). Therefore, the government of almost every country of the world likes to execute their growth through the existence of financial institutions. Apart from the financial institutions, there is yet another thing that needed to be there in an economy known as Financial Markets (Gup, 2003). This assignment is a Financial Market based assignment in which different provisions and elements of the financial markets would have been acknowledged and analyzed. There are three different parts of the assignment which further bifurcated into different answers.

Extensive amount of studies have been undertaken to examine the effect of stock market on GDP growth. Some of the studies on this topic are Demirguc-Kunt and Levine (1995), Levine and Zervos (1993, 1995, 1998) etc. In theory well developed stock market should enduce saving and efficiently allocate capital to productive investments which would later lead to increase in the rate of real output. Stock markets contribute to accumulation of domestic savings by enhancing the scope of financial instruments available to savers and investors trough diversification of their portfolios. Dailami and Aktin (1990) think stock markets provide important source of capital investment at low cost which should serve as an obvious benefit for the economy in general. In developed economies with developed stock markets share ownership provides individuals with probably the most liquid means of sharing the risks and benefits of investing in promising projects. The main advantage of liquid stock market is that it provides investors to cope with liquididy risk by allowing participants hit by illiquidity constraints to sell their stakes to othe participants who at the time do not suffer form the same problem. These transactions are done in real time with frictions in the market being at the minimum. The ending result of this process is that capital is not prematurely withdrawn form firms to meet short term liquidity need. It is just changing hands. Stock markets also play an important role in

Economic development and growth may not be the same thing depending on how growth rate is affecting the country's socio-economic development. However important and well known theories of macro-economic suggest that if markets are left on their own, people will improve their socio-economic wellbeing automatically as the result of better economic growth rate of the country. In other words, financial liberalization automatically leads to socio-economic uplift as suggested by Solow growth model. This appears to be true when we consider the differences that exist in liberalized and non-liberalized countries today.

Economies grow and develop, they expand and advance, and they progress and prosper. There are phases when they decline too, and there are economies that experience continuous decay. If one considers long stretches of human history, one knows that economies (civilizations) disappeared altogether. We will not take into account such long stretches of time. We shall not consider too distant a past either. We will leave them to historians, may be, economic historians.

Existing studies reveals that the huge surge in international capital flows since early 1990s has created unprecedented opportunities for the developing countries like India to achieve accelerated economic growth. International financial institutions routinely advise developing countries to adopt policy regimes that encourage capital inflows. Since the introduction of the reform process in the early 1990s, India has witnessed a significant increase in capital inflows. The size of net capital inflows to India increased from US $ 7.1 billion in 1990-91 to US $ 108.0 billion in 2007-08. Today, India has one of the highest net capital inflows among the EMEs of Asia. Capital inflows, however, not an unmitigated

Adam and Tweneboah (2008) analyzed the impact of Foreign Direct Investment (FDI) on stock market development in Ghana. Market capitalization, FDI, stock market development and exchange rate variable are considered and found long-run relationship between FDI and stock market development in Ghana. Raza and Jawaid (2012) investigated the effects of foreign capital inflows and economic growth on stock market capitalization in 18 Asian countries by using the panel data from the period of 2000–2010 and found that foreign direct investment has significant negative and economic growth has significant positive relationship with the stock market capitalization, whereas, the results of workers’ remittances is found insignificant in long run. However, no causal relationship is found in between workers’ remittances and stock market capitalization. They suggested that investor should not idealize the inflow of workers’ remittances to