TAILIEUCHUNG - Ten Principles of Economics - Part 55

Ten Principles of Economics - Part 55. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 25 SAVING INVESTMENT AND THE FINANCIAL SYSTEM 559 operating the mutual fund charges shareholders a fee usually between and percent of assets each year. A second advantage claimed by mutual fund companies is that mutual funds give ordinary people access to the skills of professional money managers. The managers of most mutual funds pay close attention to the developments and prospects of the companies in which they buy stock. These managers buy the stock of those companies that they view as having a profitable future and sell the stock of companies with less promising prospects. This professional management it is argued should increase the return that mutual fund depositors earn on their savings. Financial economists however are often skeptical of this second argument. With thousands of money managers paying close attention to each company s prospects the price of a company s stock is usually a good reflection of the company s true value. As a result it is hard to beat the market by buying good stocks and selling bad ones. In fact mutual funds called index funds which buy all the stocks in a given stock index perform somewhat better on average than mutual funds that take advantage of active management by professional money managers. The explanation for the superior performance of index funds is that they keep costs low by buying and selling very rarely and by not having to pay the salaries of the professional money managers. SUMMING UP The . economy contains a large variety of financial institutions. In addition to the bond market the stock market banks and mutual funds there are also pension funds credit unions insurance companies and even the local loan shark. These institutions differ in many ways. When analyzing the macroeconomic role of the financial system however it is more important to keep in mind the similarity of these institutions than the differences. These financial institutions all serve the same goal directing the resources of .

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