Who participates in transactions?

In my previous post, I explained that the economy is just a series of transactions. Participants exchange money for goods, services or money they have to repay later (e.g. loans).

And once you break it down to this level, you can see that there are only four basic types of participants:

1. Individuals
2. Companies
3. The State
4. The Central Bank

 

Individuals

These are people like you and me. We:

• consume goods (i.e. buy stuff)
• consume services (like getting a haircut)
• offer our labour for money (i.e. work for a salary)
• save money that we put in savings accounts, stocks etc.

 

Companies

Classic companies

When we think of companies, big multinational organisations like Apple, General Motors or British Airways tend to come to mind first.

And there are lots of smaller companies as well, that sell us goods or services:

• Farmers
• Car dealers
• Hairdressers
• Cleaners
• Private schools etc.

But two more types of enterprises exist: Insurance Providers and Banks

Companies that offer insurances

Insurers trade in probabilities (i.e. the likelihood that something will happen). They collect premiums from many people and promise them to pay some money if their customers get sick, burgled, have their houses flooded etc. Their whole business model is based on the assumption that many people will pay premiums, and only a few will ever claim money under their policy.

Companies that offer money

Banks, credit card issuers, payday lenders etc. are still companies. They work solely for the benefit of their owners and want to increase profits. As companies, they can go bankrupt, merge with others or be bought and sold.

They give you money today, and you promise them to repay it in the future plus interest and fees. This is their product.

 

The State

The State is similar to a company. It buys office supplies, machines and everything else it needs to function like a manufacturer would purchase tools and materials it needs to make products.

The function of the state is to provide services like schools, roads, security (through police and army), justice (through courts) etc. to name a few examples.

And it acts as an insurance provider for social risks like unemployment and health care by providing benefits and regulations.

It pays for these things by raising taxes from individuals and companies or by borrowing money, just like you and I would do.

 

The Central Bank

Most Central Banks are either owned by the government or the other banks in the country.

They are similar to traditional banks in that they make money by lending out money. But their borrowers tend to be only commercial banks.

Central Banks, however, have an official mandate from the government:

• print new money
• keep inflation low
• support economic growth

 

How does this article help me?

In today's world, it is sometimes hard to see how the different elements fit together. And it might be hard to understand what banks or insurance companies do or why the State can’t spend as much money as people would like.

Since everything is just a series of transactions, this means in order to get paid; you need to offer goods or services that others want. This is true for individuals, companies and to some extent, the State.

Banks are not some untouchable fatcat giants. They are companies that want/need to make a profit, and you as a consumer have a choice which bank or credit card company’s services you want to use. Find the service that offers you the best deal.

And understanding how insurance companies make their money helps you understand why it costs more to ensure a risk that is likely to happen (e.g. flooding if you live next to a river) versus a risk that is less likely to happen (e.g. you not being able to take your flight).

 

What will the next article be about?

The next article will be the last one in part I and focus on the questions:

1. What is money? AND
2. Who creates new money?

After the conclusion of this first part, I will explain different financial terms and products for consumers, for example: How does a bank account work? Or What is a stock?

PS: Let me know in the comments if you have any suggestions for financial terms that I should explain in this series.