Finance plays a crucial role in the economy of every nation. Consequently, understanding what finance is has become a top concern for everyone. So, what exactly is finance? What are its nature and functions within the economy? The Tech-conomix Hub will address these questions in the article below. Let’s explore!
1. What is Finance?
In economics, the concept of finance (Finance) encompasses the distribution relationships of social wealth in the form of value, arising from the processes of forming, creating, and distributing monetary funds in the broader economy. The objectives of the stakeholders under specific conditions are the focal points of these financial relationships.
So, what is finance? Through the establishment and utilization of monetary funds, finance integrates various relationships that arise to meet the needs of stakeholders in society. It exists in all aspects of life, from individuals and businesses to government organizations.
From an economic perspective, finance is considered the science of money and money-related activities, including the provision of monetary resources for essential needs. This involves managing financial resources, investments, credit, and other financial activities to ensure economic stability and development.
2. The Nature of Finance
The essence of finance can be understood as the economic relationships involved in the distribution of total social product in value form. Through these relationships, monetary funds are created and utilized to meet the accumulation and consumption needs of economic entities.
Although finance may outwardly appear to represent the monetary funds of entities in society, finance is not synonymous with money. Essentially, in the exchange of goods, money serves as a universal equivalent with its fundamental functions: a means to measure the value of goods, a medium of exchange, and a store of value.
Finance, on the other hand, refers to the relative movement of money as it performs its functions, aiming to establish and utilize monetary funds within the economy.
3. What are the Financial Relationships?
The essence of finance is detailed through the fundamental economic relationships involved in distributing the total social product in value form. These include:
- Relationships between the state and economic entities, organizations, and residents:
These financial relationships arise from the state collecting taxes, fees, and charges, as well as its budget expenditures to sustain operations and promote social development. - Relationships between intermediary financial institutions and non-financial economic entities:
Intermediary financial institutions, such as banks, insurance companies, and investment funds, play a crucial role in mobilizing and distributing capital within the economy. - Relationships between economic entities, organizations, residents, and internal relationships within these entities:
These include financial relationships stemming from the buying and selling of goods and services, borrowing, investing, and profit-sharing among individuals, businesses, and organizations. - Relationships between nations worldwide:
International financial relationships arise from activities such as international trade, foreign direct investment (FDI), borrowing, and international aid.
4. Functions of Finance
a. Mobilization Function:
The mobilization function of finance involves creating financial resources by gathering capital from various sources within the economy. This includes collecting funds from individuals, businesses, and organizations through methods such as issuing shares, bonds, and savings deposits.
Mobilized funds are utilized for investing in economic development projects, business operations, infrastructure, and other activities to foster economic growth and improve living standards. Capital mobilization must adhere to market mechanisms, including the supply-demand relationship. Interest rates, borrowing conditions, and fundraising methods must align with market conditions and investor demands.
To ensure efficient mobilization, it’s necessary to diversify sources of capital by leveraging both domestic and foreign funds, as well as short- and long-term capital. Risk management is also critical, involving credit assessment, risk analysis, and careful financial planning to ensure the effective and sustainable use of mobilized funds.
b. Distribution Function:
The distribution function of finance pertains to allocating the total social product in value form. Through this function, both centralized and decentralized monetary funds are created and used for specific purposes. The financial distribution consists of two main processes: initial distribution and redistribution.
- Initial Distribution: This involves allocating the total social product to the participants in material production and services. The product’s value is divided into basic incomes for production factors such as labour, capital, land, and enterprises. Examples include:
- Wages: Income received by workers for their labour.
- Profit: Earnings of business owners from investing capital in production and business activities.
- Income from land: Rent or earnings from utilizing natural resources.
- Income from capital: Interest or dividends from lending or investing financial resources.
- Redistribution: Redistribution reallocates previously distributed incomes and monetary funds to balance and adjust incomes across social groups, regions, and economic sectors. Examples include:
- Taxes and fees: Collected by the state from individuals and businesses to fund public services like healthcare, education, security, and welfare.
- Subsidies and welfare: Provided to low-income groups, the unemployed, the elderly, and other vulnerable populations.
- Internal transfers: Financial transfers within enterprises or organizations to balance resources and optimize efficiency.
c. Supervisory Function:
The supervisory function refers to finance’s objective role in monitoring, inspecting, and evaluating the flow of financial resources to ensure the effective creation and utilization of monetary funds. This function is essential for maintaining stability and sustainability within the financial system.
Financial supervision involves objectively tracking and assessing how monetary funds are mobilized, distributed, and utilized. These activities help ensure that resources are used effectively and for their intended purposes, preventing financial fraud and abuse.
Supervision includes activities such as internal/external audits, compliance checks, and performance evaluations. While financial supervision is inherently objective, financial inspection involves subjective human efforts to evaluate the distribution and use of funds, including detailed assessments through compliance checks and audit reports.
5. Conclusion
In the article above, we have explained what finance is. Fundamentally, finance plays a vital and indispensable role in the development of individuals, businesses, and the State. Finance also serves essential functions such as mobilizing, distributing, and supervising monetary resources to achieve developmental goals.
We hope this information helps you better understand the concept of finance. Stay tuned with The Tech-conomix Hub to ensure you don’t miss out on more valuable insights!