The concept of borrowing money and its importance to the economy

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The concept of borrowing money and its importance to the economy

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Date: Thu, 15 Jan 2009 Time: 4:11 AM
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Many people do not realize how important the concept of borrowing money is to the economy. For most people borrowing money is just an easy way to get a new car or buy a house but for the country economy it is much more.

One of the things we keep hearing on the news is a percent number that symbolizes how fast the economy is growing. Economy growth is important to our lives. Although it sounds like yet another number professional economist use and confused us with in reality the economy growth is a good indicator to the health of the economy.

The health of the economy is important to us all. If the economy is doing well it means there are more jobs and there is more money for us to earn and of course to spend.

It is easier to understand the concept of economy growth and how it relates to borrowing money through an example of the job market. When the economy is growing there are also new jobs created and as employees in the job market we have more options to choose from that usually translate to better wages and benefits.

How are new jobs created? The answer is simple by creating new businesses. For example if a new factory opens in your city it will need to hire all kind of employees from factory floor workers to human resources and financial managers. When the economy is growing new business are created and in return they create more jobs.

How are new businesses created? Except for some rare cases all new business rely in one or another on borrowing money. Usually a group of entrepreneurs decide to start a new business for example a new computer manufacturing factory. They check the market evaluate the potential and write a business plan.

In order to build the factory they need a certain amount of money. The money is used to create the business and to run it to the point when it turns profitable. Most entrepreneurs do not have the cash to spend on such a new business. In turn they go to a bank or another borrower present their case the business plan and the idea and ask for money.

The bank makes a decision based on its evaluation of the new business risk. Usually the higher the risk the higher the interest rate that the bank would collect for the loan. At some point if the risk is too high the bank might decline the loan altogether.

If borrowing money is not available then new business are very hard to create since entrepreneurs do not have the cash to start them. If new businesses are not created the job market stays flat and the economy too. As you can see the concept of borrowing money is crucial for any economical growth. The ability to loan money allows for the creation of new businesses and for growth. Without money borrowing the economy will stay flat and eventually shrink.