How do Financial Markets Affect Economic Activity in the 21st Century? - Expository Essay

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Carnegie Mellon University
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In any economy across the globe, a smooth and well-developed operating financial market acts a crucial role in underwriting to the efficiency and health of an economy. It goes without saying that there exists an active and vigorous relationship between economic growth and financial market development.

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How Did Financial Markets Get To Affect Economic Activities in the 21st Century?

Financial markets help the efficiently direct flow of investments and savings in an economy. These capital markets help in ways that are directed towards facilitating the accumulation of production and capital of services and goods. Thus, such a combination of well industrialized financial institutions and markets as well as a varied array of financial instruments and products ensembles the needs and preferences of lenders and borrowers and that of the economy as a whole.

Financial markets affect the economic activities of a nation either positively or negatively. In the 21st-century new credit markets and ways of leveraging capital have emerged and increased in the stock exchange. The emergence and rise of the credit and leveraging capital aims at increasing the money supply to equity markets without any losses occurring. Financial banks have come up with methods of implementing money supply guidelines to achieve zero stock market losses. Thus this paper explores how financial markets get to affect economic activities in the 21st Century.

Financial instruments (derivatives and bank CDS), markets (bonds and trade stocks), and institutions (insurance companies, banks, pension funds, and mutual funds) make available unreserved opportunities for all investors to focus on specific services or markets and diversify certain risks. Financial institutions and capital markets contribute immensely to the growth of any economy. The relative mix of financial institutions and capital markets is not deemed to be a crucial growth factor.

Huge financial markets that have lots of activities in trading provide substantial liquidity for participants in markets than in thinner markets that have few participants and securities which inhibit available opportunities of trading. Hence, most of the financial systems across the United States of America usually is considered as being the most developed in the entire world. Through its daily transactions in financial institutions and markets that range from short-term to long term basis transactions of money and capital are enormous. Most of these financial assets are liquid; while others consist of secondary markets that are attributed to facilitating the transfer of financial assets which are in existence at low cost.


Financial markets have a crucial role that they play. This position includes the accumulation of production goods and capital. Prices of returns and credit on investments make available signals to consumers and producers who are financial market participants. The signal provided benefits consumers, investors, governments, and direct funds that include households, businesses, and savers who would have a preference in borrowing money by linking up with the ones who value funds highly and can pay higher and at high-interest rates. Similarly, the existence of financial markets and institutions facilitates the flow of funds internationally between different countries.

Additionally, efficient financial institutions and markets tend to lower transactions and search costs in an economy. Since they provide a robust array of financial products that consist of different price and risk structures and maturity, a financial system that is well-developed offers products to all participants who provide lenders and borrowers a close match to their preferences and needs. Governments, businesses, and individuals who need funds have easy access to financial markets or financial institutions which may at times provide funding to a particular cost that meets the criteria put in place. Hence this permits investors to make a comparison of the cost involved in financing and the rate of investment returns attained thus making an informed decision on what best suits their preference and needs. Thus, in that line, financial markets help in directing the allocation of credit to the entire economy that assists in the facilitation of the production of services and goods.


Benjamin, R. and Wigand, R., 1995. Electronic markets and virtual value chains on the information superhighway. Sloan Management Review, 36(2), p.62.

Dicken, P., 2003. Global shift: Reshaping the global economic map in the 21st century. Sage.

Gilpin, R. and Gilpin, J.M., 2000. The challenge of global capitalism: The world economy in the 21st century (Vol. 5). Princeton, NJ: Princeton University Press.

Shiller, R.J., 2009. The new financial order: Risk in the 21st century. Princeton University Press.

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