Introduction to Finance

• Institutions and Markets 
Savings of individuals are accumulated 
in a number of ways by fi nancial institutions that, in turn, make pooled 
savings available to businesses so that they can maintain and grow 
their operations. Savings are gathered by commercial banks and other 
depository institutions. Insurance companies collect premium pay-
ments and pension funds, gather contributions, and invest these funds 
until needed. Mutual funds also play a major role in attracting the sav-
ings of individuals and then investing the pooled funds in securities. 
• Investments 
Governments issue debt securities to fi nance their 
needs and corporations issue both debt and equity securities to 
maintain and grow their businesses. The savings of individuals are 
the primary source for raising fi nancial capital by governments and 
corporations. Capital market securities were covered, with specifi c 
attention given to mortgage loans and mortgage markets. Financial 
institutions gather savings and make the savings available to gov-
ernments and corporations in the primary securities markets. The 
process of determining interest rates for borrowing fi nancial capital 
and pricing new stock issues will be covered as we progress through 
Part 2.
• Financial Management 
Financial managers often must raise addi-
tional amounts of debt and equity funds to fi nance the plans for their 
fi rms. While they may depend somewhat on loans from banks, they 
may also need to attract fi nancial capital by selling bonds or stocks 
either privately or publicly. A decision to raise funds must be accom-
panied with the willingness to pay the required interest rates estab-
lished in the marketplace or selling stock at a market-determined price.
Summary
LO 7.1 
The gross domestic product (GDP) has four major com-
ponents. 1) Personal consumption expenditures (PCE) indicate 
expenditures by individuals for durable goods, nondurable goods, 
and services. 2) Government expenditures (GE) include expenditures 
for goods and services plus gross investments by both the federal 
and the state and the local governments. 3) Gross private domestic 
investment (GPDI) measures fi xed investment in residential and non-
residential structures, producers’ durable equipment, and changes in 
business inventories. 4) The net exports (NE) of goods and services 
is calculated as exports minus imports.
LO 7.2 
The principal sources of federal government revenues (income) 
are Social Security and other retirement taxes; personal income taxes; 
corporate income taxes; borrowing to cover the defi cit; and excise, 
estate, and other taxes. Principal expenditures (outlays) are Social 
Security, Medicare, and other retirement benefi ts; national defense, 
veterans, and foreign aff airs; social programs (including Medicaid); 
physical, human, and community development; net interest on the 
debt; and law enforcement and general government.
LO 7.3 
An economic unit (individuals, corporations, or governments) 
creates savings when all of its income is not consumed resulting in the 
accumulation of cash and other fi nancial assets. The major sources of 
savings are personal savings and corporate savings. Personal saving 
occurs when personal income is greater than personal current taxes 
and personal outlays. Corporate saving occurs when profi ts before 

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