Natural Resources, Capital, and Financial Markets

Posted on Feb 19, 2025 in Economy

Market for Natural Resources

In the market for natural resources, the reward (income) in the short term is determined by the assumption that the amount of natural resources in an ecosystem is constant. The price equilibrium depends solely on demand (DDA). This implies that resources are not depleted overnight. Income from human resources is determined not by the price of the resource itself, but by the price derived from using it (i.e., the value of its yield). Therefore, natural resources are assigned a value based on their productivity. Income represents what the owners receive for the use of these natural resources. The price of land increases as agricultural market production of goods and services rises. The supply curve is inelastic because the amount of land is fixed. Remuneration is directly tied to land, and the amount of compensation depends on its demand.

Income Distribution

Income represents the value or price of a production factor (FP) over a period. It is the total income received by workers in exchange for their services. Income distribution is the allocation of income among the owners of production factors in the form of wages, land rent, and interest. It depends on two factors: wage differences and the distribution of wealth.

  • Wage differentials are determined by elements such as: place of work, knowledge, and training.
  • Wealth distribution generates differences between social classes, leading to power imbalances.

Criteria for income distribution:

  • Functional criteria: Refers to income received for work functions, plus a contribution to the company.
  • Sectoral approach: Depends on the sector; there are wage differentials.
  • Spatial or geographical criteria: There are richer or poorer areas.
  • Personal criteria: This is a subjective criterion that depends on the individual (e.g., more education often leads to higher income).

Capital Market (Interest)

Interest is the value of capital services; the price of money. It is also paid for borrowed capital.

Characteristics

  • Demand (Borrowers): Consists of various economic agents seeking to meet their consumption needs (families), investment needs (companies), or public expenditure (government). The demand curve is downward sloping because as interest rates increase, the quantity of capital demanded decreases.
  • Supply (Lenders): Composed of savings (families), retained earnings (firms), and surpluses (government). The supply curve is upward sloping because as interest rates increase, lenders are willing to supply more capital. The equilibrium price (interest rate) and the quantity of capital exchanged are determined by the interaction of supply and demand.

The European Central Bank (ECB), among other functions, provides loans to private banks, which in turn lend money to the public. Lenders (suppliers) accept an offset for spending this money because, in the future, they will receive a higher amount upon loan repayment. Borrowers prefer present consumption over future consumption, which is why they commit future income to repay the principal and interest.

Financial System

The financial system is a set of intermediaries regulated by public bodies (ECB/Bank of Spain) that channel savings towards funding private consumption, investment, and public spending. There are two types of intermediaries:

Banking Intermediaries

These are specialized institutions that mediate between savers (suppliers) and investors (borrowers). They include:

  1. Private Banks:
    • Savings Banks (Caixes d’Estalvis): Specialize in capturing funds from small savers. They operate similarly to private banks but have key differences: they can only sell equity and fixed-income securities, and they engage in charitable activities, unlike private banks.
    • Commercial Banks: Interact with borrowers (demand) and savers (supply). They obtain public funding through deposits and issue fixed-income and variable-income securities, maintaining a cash reserve coefficient.
  2. Public Banks (Bank of Spain – BE): This is the state bank or other financial institutions. It does not deal directly with families and businesses. It provides loans and credits to the government (state) and also lends money to private banks.
Functions of the Bank of Spain (BE)
  1. Action and supervision of the Spanish financial system.
  2. Competencies within the Eurosystem. Its headquarters are in Madrid, but there is a branch in each province of Spain.
The ECB/Eurosystem

Comprises one member from each European country. Its special feature is directing monetary policy. This involves making important decisions, such as determining the money supply (how much money the ECB puts into circulation). Banks decide the interest rate, which represents the cost of money for banks. Monetary policy is planned based on economic studies within the Eurozone. Its headquarters is in Brussels.

Non-Banking Intermediaries

These include institutions like insurance companies.