Question

What relationship would you expect to find between the level of development of a country’s financial system and its level of economic development? Explain in terms of the country’s level of savings and level of investment spending.

Short answer

There exists a direct relationship between the level of development of a country's financial system and its level of economic growth.

The story of savings and investment spending in a country works efficiently under a sound-defined financial system.

Step-by-step solution

Explanation

When a country's financial system does develop, it leads to its economic development. For example, in the United States, the growth of the financial market gave a pull to the economic development of the US by constructing the railways, canals and others.

One can understand this in terms of the country's level of savings and level of investment spending.When households invest their saved income, like purchasing a bond, stocks, and bank deposit, it makes the funds available for the business.

Borrowing becomes easy for entrepreneurs and governments, which boosts up the investment spending in the economy, which further contributes to generating future income by investing in physical capital like flyovers, hospitals, and others.

A healthy financial system ensures a good amount of investment and savings.