Economics: Factors of Production

Factors of Production

• Capital is one of the basic factors of production in economics.

Definition of Capital

• Capital is the amount of money a producer pays for other factors of production (labor, land, and entrepreneur) used in the production process.

Role of Banks in Financial Intermediation

• Banks are financial institutions that facilitate the transfer of finance from those who have excess funds to those in need.
• People with excess money save by depositing it in banks.
• Those who need money can borrow from banks in the form of loans, following the bank's lending procedures.

Financial Intermediation

• The activity of banks is an example of financial intermediation.

Financial Institutions and Markets

• Banks and other financial intermediaries will be discussed in this unit, including:
  • Introduction to financial intermediaries
  • Introduction to financial markets
  • Financial institutions
  • Banking and non-banking financial institutions

Historical Development of Banking in Ethiopia

• The historical development of the banking sector in Ethiopia will be explored.

Electronic Banking and Indigenous Institutions

• E-banking (electronic banking) will be discussed.
• Indigenous financial institutions in Ethiopia, such as "ikub" and "iddir", will be explored.

Financial Intermediaries

• A financial intermediary is an entity that acts as a middleman between two parties in a financial transaction, such as a commercial bank.
• Financial intermediaries offer benefits to consumers, including safety, liquidity, and economies of scale in banking and asset management.

Role of Financial Intermediaries

• They mediate between providers of financial capital (with excess money) and users of financial capital (with a shortage of money).
• Financial intermediation is the transfer of funds from surplus spending units to deficit spending units through financial intermediaries.

Benefits of Financial Intermediaries

For Depositors

• Financial intermediaries provide safety, ensuring depositors' money is free from risk of loss.
• Depositors earn interest on their saved money.

For Borrowers

• Financial intermediaries provide loans to borrowers, who are known as investors.
• Borrowers use loans to finance investments (production).
• Financial intermediaries charge borrowers annual interest on borrowed money.
• Increased borrowing enables increased investment, which is beneficial for the economy.

Importance of Finance

• Finance is essential for an economy to function, just like blood circulation is essential for the human body.
• Finance enables individuals to buy their day-to-day needs, as ability to pay is a component of demand.