Question

Discuss the links between financial market and real economy development and explain
why share price today, from an efficient financial market, can provide guidance on real economy
performance for the coming year.

Answer 1

Financial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services.The combination of well developed financial markets as well as diverse array of financial products and instruments,suits the need of borrowers and lenders and therefore the overall economy.

Financial markets play a critical role in the accumulation of capital and the production of goods and services.The price of credit and returns on investments provide signals to producers and consumers.Those signals help direct funds to the consumers businesses,government and investors that would like to borrow money by connecting those who value the funds most highly to willing lenders.In a similar way,the existence of robust financial markets and institutions also facilitates the international flow of funds.

Efficient financial market is one which is 'informationally efficient'.Market efficiency refers to how well current price relect all avialable,relevant information about the actual value of the underlying assets.Thus if the current price of stock shows the upward trend,it means economy performance is expected to be better.