Finance and economics are disciplines that are often presented and taught as separate and distinct but in the real sense they are interrelated, and they inform as well as influence each other. It is often hard to tell the difference between the two. Both finance and economics are concerned with the study of money and the economy. Thus, they significantly influence the market and as such are considered relevant disciplines especially to investors.
What the subjects involve
Economics is a social science that studies the production, consumption, and distribution of products with an intent of showcasing the way economies function and how their agents interact. Economics is considered to be more oriented towards mathematics and its quantitative nature makes it focus more on the overall economy.
On the other hand, Finance concentrates on the study of prices and current market trends, interest rates, money flows, and financial markets. It is deemed to stem out of economics. As such, it is not surprising that some notable academic achievements have been made by persons with a background in economics. However, on a broader perspective finance is concerned with notions such as rates of return, the cost of capital, the time value of money and optimal financial structures as well as the quantification of risks.
Usefulness of the disciplines
Individuals with economic background are essential in giving guidance and influence when making policies at national levels. Their influence in the policy making is as a result of critically analyzing and understanding how consumers and producers respond to various changes such as a change in taxation, government regulation and spending among other variations in the economy. Economics help investors understand the potential consequences associated with national policies and events on business conditions. Through this understanding, investors can be in a position to predict microeconomic conditions as well as identify the implication of such predictions on various markets such as the stock market. The forecast of these effects enables the investors to position themselves appropriately.
As earlier stated, finance goes a further step to expound on the theories established in economics by setting up the theoretical understanding and providing real models that allow the pricing of risk and valuation of future cash flows. For instance, economics provides an explanation that price levels in the market are as a result of the forces of demand, marginal costs in production as well as marginal utility.
However, in real practice, it is often difficult to use these factors to determine price levels realistically. In investments as well, economics provides an explanation that money ought to be invested in a manner that will produce the best risk-adjusted return but finance figures out how the money can be invested to generate the desired return. In addition to that, finance also provides investors and business managers with an understanding of how to evaluate business proposals and most efficiently allocate capital.
In the aspect of career opportunity, finance is considered to be more advantageous compared to economics. Those with an educational background in finance mainly have jobs in the financial industry working as bankers, analysts, fund managers, insurers among others. In some cases, an educational background in finance can also help individuals attain senior management positions in companies and corporations.
Those with an educational background in economics often pursue careers in academics teaching students the principles of economics, but most importantly this helps them focus on conducting research in this field to develop new theories and explanations of how markets operate. Economics also provides career opportunities in investment banks, consultancy firms as well as other corporations. Their work mainly relates to determining projections of growth, interest rates, and inflation among others and these projects in turn help to influence decisions in companies and corporations.
Both disciplines play as huge role in the markets. The information provided by economists concerning GDP, inflation and deficits influence the decisions of most investors especially bond investors, this can be seen on trading forex platforms such as CMC Markets. On the other hand, finance is instrumental in the financial market as it is mostly concerned with assessing the value of financial instruments such as those used in the determination of fair value for a broad range of investment projects. The emergence of new financial products has also significantly affected the markets.