Question

1. Provide brief definitions (and examples) for the following:

a. surplus-savings unit

b. deficit-savings unit; Can a saver be a DSU? Explain.

c. financial middleman

d. financial intermediary

Answer 1

In any Economy, there are two types of economic units.

A) Surplus saving Economic units

B) Deficit saving Economic units

A) Surplus saving Economic units (or) Surplus spending Economic units:

It is a Economic unit income over its consumption during the period, it can be a house hold,business or any other entity that makes income more than its expenditure to sustain itself.

Surplus spending unit is a Acquisition of Financial assets like equity instruments,debt instrumens and deposits etc.

For example: In India, house hold sector is a surplus spending Economic unit.

Lets take an example of if a country's Economic Aggregate savings are 60% of GDP, while aggregate investment was 50% of GDP and the difference of 10% GDP is the surplus savings.

B) Deficit saving Economic units:

Consumptions on investments exceeds the income,its always shows the negative savings.

For example: In the US,house holds sometimes represent a deficit spending units,they struggle financially and not able to purchase additional consumer products(or)invest in the stock market with out Government assisstence.

C) Fianancial Middleman:

Financial middlman are brokers who bring buyers and sellers together,they issue savings (primary claims)to the ultimate lender.

D) Finacial Intermediaries:

Financial Intermediaries are Finacial Institutions which are middlemen between savers and investors,they lend money as well as mobilize savings.

Savers       Finacial Intermediries Borrowers Financial Markets

For example: Financial intermediaries are Banks,Financial Institutions,investment companies,insurance companies and Mutual Funds etc.

Fund flow from surplus saving units(house holds) to deficit spending units(Businesses) through financial middlemen and Financial Intermediary.

The main purpose of US financila system is transfer of funds to surplus savings unit to deficit savings unit.