Stock Markets: Effective In Promoting Economic Growth?

1357 words - 5 pages

There is an existing debate among economists around whether financial development causes economic growth or growth is followed by other factors. To understand this relationship many researchers have focused on the impact of banks in the financial market on economic growth. The basic idea of financial development and economic growth was raised by Schumpeter (1912) who argued that the ability of financial sector in financing the entrepreneur’s innovation will lead to growth.
Opponents of this idea argue that stock markets are not effective in promoting economic growth. Mayer (1988)
UK as market-based financial system considerable amount of need for finance is provided by the capital market.
An important factor which can affect growth is the liquidity of stock market.
It is well known that United Kingdom has one of the developed financial systems around the world with a vibrant stock market with the market capitalization of ........ in 2009. Comparatively it is higher than other countries with well developed financial market.
Financial development can trigger economic growth. Levine (1997) defines five functions for financial intermediaries. He believes that each of the functions can enhance growth through two channels: capital accumulation and technological innovation.
Pagano (1993) financial markets provide participants in the market with the ability to share risk through banks, insurance and securities market
Levine (1991) points out that stock markets enable individuals to diversify liquidity risk through portfolio formation moreover in the time of liquidity shacks they will be able to sell it in the market.
Pagano (1993) argues that development in financial markets may have dubious effect on financial development. He claims that development in financial market can discount the saving rate and consequently the growth rate will decline. At the same time as financial markets develop, investors are more likely to diversify their portfolio and protect themselves against the potential losses.
Pagano (1993) assumes an endogenous growth model in which existence of insurance in the financial market will reduce the precautionary saving. That is a case in which development of financial market may decelerate growth.
The existing argument between economists is whether financial development cause growth or vice versa, growth cause financial development or both and if it does so what the channel is.
Many studies have been done in order to measure the impact of many general variables on growth. But a more specific study is needed to analyse the impact of market specific variables on growth.
King and Levine (1992) claim that there is a significant correlation between many financial development indicators and growth.
Most of the existing studies have focused on the role of banks on growth.
Levine and Zervos (1996) claim that stock markets contribute the financial system with creating some new incentives for investment that are...

Find Another Essay On Stock Markets: Effective in Promoting Economic Growth?

The Role of Globalisation in Economic Growth

2198 words - 9 pages The Role of Globalisation in Economic Growth Table of Contents Pages 1. Executive Summary.............................................................................................3 2. Globalisation........................................................................................................4 3. World Trade Organisation

Stock Markets: The Castle in the Air vs The Firm Foundation Theory

1412 words - 6 pages distribute in the future in the form of dividends. At this point, future expectations have to be included which would of course entail more intricate calculations. The overall issue with the firm foundation theory, as pointed out in our text, is that it relies on difficult forecasting towards the extent and duration of future growth. Effects of the Market Overall all both of the above mentioned theories have aided somewhat with the stock market. The

Rapid Economic Growth in East Asia

521 words - 2 pages Over the past decade, there has been rapid long-term economic growth for East Asian countries. These newly industrialising countries are experiencing growth rates in GDP per head at around 6% to 7% compared to the 2% to 3% for most industrial economies. If this growth continues, South Korea and Taiwan might take away America's distinction as the world's richest country. This rapid economic growth is a result of several economic and political

Analyzing the Effective Growth of Population in Alberta

1340 words - 5 pages possible measures to increase the quality of life and develop health facilities for all population groups. Furthermore, Alberta’s population expectations observe the significant changes in the future birth rates, which play very important role for the community growth. The purpose of this paper is to analyze the effective growth of population in Alberta. Firstly, the report will focus on changes in population in twentieth first century. Secondly

he role of economic geography in economic development and the impact of ICT on economic growth

2233 words - 9 pages countries are armed with good communications. On the contrary, some writers believe that geography still matters a great deal for economic interaction and for the spatial distribution of income.To discuss, I will concentrate on the role of economic geography in economic development and the impact of ICT on economic growth. From the existing inequality of economic development, we can see distance still matters in terms of economic transactions and

Environment and economic growth go hand in hand in Denmark.

538 words - 2 pages musttake account of the environment, soenvironmental policy must pay due regardto growth,' says Stefan Nyström at theSwedish Environmental ProtectionAgency.'Environmental regulations andtaxes must be designed in such a way as toencourage growth, rather than hinder it.'The days when promoting sustainabledevelopment was a job for the environ-mental authorities alone are gone.We allshare a responsibility for the future: gov-ernment agencies

Breaking Boundaries: Economic Growth in Canada in relation to Immigration.

681 words - 3 pages Breaking BoundariesEconomic growth within Canada is something that we are always striving for and one area that can be improved upon is immigration, an increase in immigration levels is showing to be necessary in order to sustain and advance our economic growth and prosperity. But some people in Canada argue that such increases would only serve to aggravate our unemployment problem and put added strain on the social welfare system. This is an

Uganda: A Country in Need of Economic Growth

1202 words - 5 pages chronically unreliable government, leaving it as one of the world’s poorest countries. Uganda’s weak infrastructure and corrupt government are two of the primary constraints against a continuation of economic growth. Uganda has ongoing military involvement in the War on Congo, wrongly taking money from the already deprived country and into the war. Many villages in Uganda also have to waste their precious money and time in pursuit of hiding places

The Concentration of Economic Power in the Public Sector Undermines the Foundations of Economic Growth

2300 words - 9 pages , such as complacency and lack of motivation in individuals, lack of motivation to be efficient in firms, etc. However, the concentration of economic power in the public sector does have its merits in promoting economic growth. Decision making processes made by the government allows for a coordinated direction to economic progress and promotes stability and structure. This is particularly crucial in the starting up of

China set to cool off its Growth. An essay about the recent high levels of economic growth in china. Economics

638 words - 3 pages China set to cool off its Growth.China is experiencing large economic growth to the point where it may not be sustainable without equally large inflation. But any reduction in rate of Chinese economy's growth will have little effects on neighboring Asian economies due in part to the current and anticipated growth of both U.S. and Japanese economies anticipated. It appears that the Chinese government is trying to take preemptive, measures

Impact of Foreign Remittances on Economic Growth and Poverty Reduction in Pakistan

2476 words - 10 pages to find jobs and/or wages to satisfy their needs, they will look elsewhere. Pakistan’s history provides us with a new trend of emigration nearly each decade. Remittance is an important source of foreign exchange earnings for Pakistan since 1970. During the past four decade Pakistan received significant amount of remittances, however, fluctuation were also observed in the inflow of remittances. Inflow of remittances affects economic growth

Similar Essays

Bubbles In Stock Markets Essay

1586 words - 6 pages available information of future stock prices, dividend payoffs, inflation rates, interest rates and all other economic factors that affect the present prices of stocks. All investors are perfectly rational and choose to invest in stocks which will have a positive payoff. Therefore, all financial assets must always be priced correctly. Any apparent deviations from the correct pricing for stocks, according to the efficient market theory, must be an

Risk Management In Stock Valuation And Markets

2705 words - 11 pages ). Factors that affect stock prices Economic factors Market related factors Firm specific factors Economic factors Investors examine diverse economic factors that influence cash flow of a firm when valuing a company. All these valuation helps investors in deciding whether stock of a company is overvalued or undervalued. Two economic factors are as follows: Impact of economic growth Impact of interest rate International economic condition

Insider Trading In Stock Markets And Sebi.

10058 words - 40 pages )Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner,c)Registering and regulating the working of collective investment schemes, including mutual funds,d)Promoting and regulating self

Economic Growth And Business Fluctuations In Australia

651 words - 3 pages This report aims to analyse Australian Real GDP from 1975. The most commonly used indicator of economic growth is the annual rise in real gross domestic product (GDP). The GDP is an estimate of the total value of goods and services produced in a year. Real GDP is calculated by using constant dollar term which corrects for inflation.The Australian Real GDP figures are provided to the public at the Reserve Bank of Australia (RBA) website