Two-sector Economy

In a two-sector economy, financial markets and financial intermediaries link households and firms. The financial markets provide an opportunity for households to directly transferring savings to investors (firms). The financial market is therefore influential in influencing economic growth because it allows for firms with an opportunity of raising capital, i.e., facilitating the transfer of capital from budget surplus units of the economy to budget deficit units. The market is broadly divided into capital market and money market. The money market offers an opportunity for firms and government to get funds needed to meet short-term financial needs while the capital market provides funds needed to meet the long-term investment needs of businesses and government.  The capital market is into the secondary market (allows subsequent trade of securities) and primary market (allows investors to make an initial issue like IPO).


 

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