Savings-investment flow

economic-dictionary

The savings-investment flow is the movement of money from savers to investors that creates a market known as the loanable funds market.

Savers are suppliers and investors are demanders. In other words, when a person, company or institution saves, what they are doing is offering money. Conversely, when a person, company or institution wants to invest, and does not have enough money, they demand money.

To put it another way even more colloquial. The saver has money to spare and the investor lacks money. With which, logic dictates that, if one has money left over (saver) and another lacks money (investor), both have something in common. The first seeks to make the money that is not being used profitable in exchange for a price (interest rate). The second (investor), since he needs money, is willing to pay a price (interest rate) to make an investment that he hopes will generate a profit.

Financial intermediaries are usually in charge of putting savers and investors in contact.

The circular flow of income

Everything is born thanks to the circular flow of income. In reality, the savings-investment flow is one of the parts of the circular flow of income. The circular flow of income can be summarized in the following image:

In other words, households or families offer themselves to work and companies look for workers to carry out their economic activity. Both agree and the families receive a salary that is paid by the company. Likewise, thanks to the workers, the companies produce products that they then sell to consumers. These consumers are both companies that buy goods and services, and households that, thanks to the salary they receive, buy goods and services they need.

From this process, there are companies, homes or institutions that have money left over. That is, they consume less than they earn (savings) and others that intend to consume or produce more than they can (investment).

This is where the savings-investment flow is born.

The role of financial markets

For an economy to grow, it is necessary for this flow to function properly. The better this flow works, the better a country's economy will function. Thus, for it to work as well as possible, there must be entities that facilitate the movement of money as much as possible.

What does it take for this flow to move in the best possible way?

What is needed is very simple: financial markets that are as efficient as possible.

An efficient financial market is one that connects savers and investors in the fastest, most efficient, safe and cheap way possible.

In this sense, the entities that are in charge of putting savers and investors in contact are financial intermediaries. They can be seen summarized in the following table:

These entities are the ones in charge of pooling savers and investors.

The editor recommends: Circular flow of income

Economic circuit

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