Capital Market Household Economic Inequality in Australia

Question: 1. Outline the financial institutions and markets whose expansion can help economic productivity and growth according to finance literature. Also, outline the institutions and markets which hinder economic productivity and growth. Discuss Australia and overseas countries. 2. If the Australian manufacturing sector had the highest growth rate over the past serval decades and held the largest share of Australian GVA, would you consider the industry to be oversized? Explain your answer by referring to the similarities or differences between the finance and manufacturing sectors. Answer: 1. The success of any country depends on the financial growth of that particular country. Financial growth is related with the economic growth of a country. There are many components of the economy of a country (Lewis 2013). Two of the most important components are the banking sector and the financial sector. As per various business journals, there is a huge role of the banking and financial sectors in the economic growth of the Organization of Economic Cooperation and Development (OECD) countries like Australia, Paris and other countries. Thus, it can be said that there is a huge growth of the banking and financial sectors I Australia and other countries under OECD. However, as per the research of the OECD, the continuous overgrowth of the banking and financial sectors can harm the economy of the countries. There are many financial institution and markets exists in the economic system of a country. There are some financial institutions that can contribute to the economic productivity and growth of a country (Hull 2012). They are banks, various financial companies, life insurance companies, general insurance companies, friendly financial societies and others. The main function of these types of financial institutions is to maintain the flow of money in the economy (Gennaioli, Martin and Rossi 2014). These financial institutions help to control inflation and recession of the economy. On the other hand, there are various markets like the capital market, money market, commodity market and others which play a crucial part in the development and growth of the economy. The main functions of these markets are to provide capital and money to various businesses (Bhojraj and Libby 2015). This is related to the development of the economy as the development of the business contributes to the develop ment of the economy. These are the markets and institutions that contribute to the development of the economy. On the other hand there are some institutions and market that hinders the development and growth of the economy. As per the report provided by OECD, the over progress of the financial institutions like banks and credit giving agencies are becoming a barrier to the economic growth and give birth of the financial inequality. As per the report of OECD, the credit expansion by these kinds of financial institutions is blocking the way of economic growth (www.abc.net.au 2016). The expansion of lending is a good indicator for the economic growth until it does not exceed the limit. When the loan amount exceeds 60 per cent of the gross domestic product (GDP), it is a long term growth sign. However, when the percentage goes to 100 to 110 percent of GDP, it indicates the reduction in economic growth. Apart from growth, another issue is the inequality issue (Dollman et al. 2015). The financial sector employees are earning premiums over other industry employees with the same level of education. H igh salary is attracting the employees towards the financial sectors where there is no contribution of them towards the economic growth. This is happening due to inequality. These institutes are relating to the money market of a country. Thus, the overgrowth of the money market is same harmful for the economy as these type of institutes. 2. Manufacturing sector and the financial sector are two of the most important sectors in a country. Both the sectors are two completely different sectors. There are some differences exists in these two sectors and there are some similarities exist. Manufacturing sector refers to the sector where goods are produced by various chemical, mechanical and physical processes. This is the sector which is responsible for the production of consumer goods of a country (Unit 2013). On the other hand, financial sector refers to those firms which provide financial assistance to various commercial and retail customers (Joshi et al. 2013). This sector consists of banks, insurance companies, investment funds and others. Thus, it can be seen that there is a huge difference in the operation of both the sectors. The similarity is in the aspect of financial assistance to the economy of the country. Both the sectors are responsible for the growth of the country. Financial institutions are providing finan cial support to the people which passively contribute to the financial assistance to the country. On the other hand, manufacturing units are also providing a healthy percentage towards the growth of the country. This is the similarity between these two sectors. Australian GVA is a term which is used to define the unduplicated value of the good and services produced by the manufacturing companies in Australia. The question can be answered by two different perspectives. It has been said that the Australian manufacturing sector has been witnessed the highest growth for the last three decades. The question is that does this growth make the Australian manufacturing sector oversized. This situation can be answered by two aspects. Firstly, as per the statement, the manufacturing sector is growing rapidly compared to other sector. The reason is that there are a moderate number of companies in the industry. The companies are doing actually well by manufacturing consumer goods for the Australian. On the other hand, there is enough demand for those manufacturing goods which is assisting the companies in earning a large amount of revenue. If this is the case, then it can be said that the industry is not oversized. The reason is that the manufacturing sector is contributing for the purpose of the growth of the country. This is the qualitative aspect. Secondly, there are a lot of manufacturing units in Australia. The number is more than any other units in the country. This huge number results in the most proportion of growth in the Australian GVA. However, in the reality, the scenario is different. The highest growth is the result of the huge number of manufacturing units. The units are not giving high growth, but the number of units makes the growth high. In this case, it can be said that the industry is oversized. The reason is individual little growth. This is the cumulative aspect. These are the two logics behind the statement. References ABC News. (2015).Financial sector slows economic growth, widens inequality: OECD. [online] Available at: https://www.abc.net.au/news/2015-06-18/financial-sector-expansion-slows-economic-growth/6555276 [Accessed 20 Oct. 2016]. Bhojraj, S. and Libby, R., 2015. Retraction: Capital Market Pressure, Disclosure Frequency-Induced Earnings/Cash Flow Conflict, and Managerial Myopia.The Accounting Review,90(4), pp.1715-1715. Dollman, R., Kaplan, G., La Cava, G. and Stone, T., 2015.Household Economic Inequality in Australia(No. rdp2015-15). Reserve Bank of Australia. Gennaioli, N., Martin, A. and Rossi, S., 2014. Sovereign default, domestic banks, and financial institutions.The Journal of Finance,69(2), pp.819-866. Hull, J., 2012.Risk Management and Financial Institutions,+ Web Site(Vol. 733). John Wiley Sons. Joshi, M., Cahill, D., Sidhu, J. and Kansal, M., 2013. Intellectual capital and financial performance: an evaluation of the Australian financial sector.Journal of intellectual capital,14(2), pp.264-285. Lewis, W.A., 2013.Theory of economic growth(Vol. 7). Routledge. Unit, M.C., 2013. State of Australian cities 2013.Canberra: Department of Infrastructure and Transport.