Both finance and economics professionals are heavily employed in corporate, government, and non-profit organizations. At some basic level, however, there is bound to be a separation: finance will be concerned with cost factors, business valuations, lending criteria, and budgeting, while economics will be primarily concerned with how individuals, governments, and institutions choose to invest their money. At best, economics can be seen as a tool used by business owners and governments to manage their balance sheets.
At its most fundamental level, finance deals with the transfer of money from one hand to another. This may be done by lending it to the enterprise, using it to buy goods and services that have been acquired, or borrowing it to finance specific projects or activities. The purpose behind the transfer of capital is to divert resources from current income to current expenses, take care of losses, increase profits, or anything else that might be necessary in order to realize the original intention. Finance therefore encompasses many different activities, all of which have to do with the management of capital.
In order to properly understand and interpret the principles of finance, it is essential to have at least a working knowledge of the major areas of finance. One of the first things that anyone who desires to become a financial analyst must learn is how to properly read financial statements. Financial statements, also called accounting reports, provide information about a company’s net assets, liabilities, assets, revenues, and reserves. By understanding and interpreting the principles of finance, managers and other investors can better understand the state of their businesses. In this way, they can make more informed decisions about investing, financing, and other key aspects of the business’s operation.
One of the primary principles of economics is capital. The value of an investment, or its potential return on investment, is determined by the amount of resources which have to be invested in order to produce a return. Capital goods like plant and equipment, raw materials, and land are examples of capital. Profits and losses occur when an owner of a firm incurs a loss for the total value of his invested funds. This concept is similar to that of economics in general, where profit and loss are the two sides of the same equation. Capital goods such as plant and equipment, raw materials, and land are used to describe the process through which resources are converted into goods and services that generate revenue.
Another basic area of economics is finance. Finance is the science of creating and managing capital and operating the financial markets. Like economics, finance has long been the major study and focus of business owners, managers, investors, financial analysts, creditors, borrowers, and other interested parties.
The study of finance has traced its roots back to the ancient world, in particular to ancient Athens. Ancient Greeks would spend their surplus wealth to develop their own understanding and framework for understanding and interacting with the financial markets. Later during the Middle Ages, Islamic traders would develop the concepts of banking, money, and economics for the western world. In modern times, numerous economic books and journals have been written to help the business community, government officials, and educators gain a better understanding of economics.
Contemporary economics revolves around four main areas of study: microeconomics, macroeconomics, economic growth, and innovation. Microeconomics concerns the flow of markets and how it impacts the larger economy. Microeconomics is related most closely to consumer and business spending. Emphasis is also placed on the interactions between consumers and businesses with the government. The macroeconomics approach takes a longer view at the national economy and how it affects the global economy.
In order to understand how the different areas of economics relate to each other, it is helpful to have a comprehensive understanding of finance. Two main types of economics are macroeconomics and microeconomics. Microeconomics is the study of what is going on in the businesses or the broader economy as a whole. In contrast, macroeconomics looks at the bigger picture and makes broad assumptions about the behavior of the global economy. Both micro and macroeconomics are important and influential in the overall economic development. It can be a useful way to learn about the world of finance.