The environment as a source of ideas and opportunities · The business and economic environment
The Financial System, the Business, and Innovation
The bakery in your neighborhood wants to buy a new oven, but it doesn't have the money. At the same time, many families in the neighborhood have some pesos saved up and don't know what to do with them. How do they find each other? That is what the financial system is about.
Financial intermediation
Look at the full circle: money goes from families to the bank, from the bank to the business, and comes back, with interest, to the bank and from there partly to the families. Everyone gains something: families, a return on their savings; the bank, the difference between what it charges and what it pays; the business, the capital to grow.
The price of a loan is called interest (or an interest rate, when it is expressed as a percentage of the money lent).
This system doesn't work on its own. The Bank of Mexico (Banxico) is the country's central bank: it issues bills and coins, sets monetary policy (for example, it sets the benchmark interest rate), and oversees the payment system. In addition, banks and savings associations operate under official supervision, to make sure the money of savers is protected.
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Explain what the financial system is and what its basic function is: what does it do with the money of people who save, and to whom does it lend it? Give an example from…
Explain what the financial system is and what its basic function is: what does it do with the money of people who save, and to whom does it lend it? Give an example from your neighbourhood.
The diagram shows how money travels from savers to a business through a bank, but one of the streams is covered with a question mark. a) State what travels along the…
The diagram shows how money travels from savers to a business through a bank, but one of the streams is covered with a question mark.
a) State what travels along the covered stream (the firm returns something to the bank, and from there something reaches the households) and explain what the price of that loan is called.
b) Explain what the households, the bank, and the firm gain in this circuit.
The local bakery wants to buy an oven worth $\$120\,000…
The local bakery wants to buy an oven worth $\$120\,000$ that would allow it to sell twice as much bread. It does not have that money saved. Explain its options (a bank loan, waiting years to save up, looking for business partners) and what it gains and risks with each option.
The student cooperative at the school asks the PTA for a microloan of $\$4\,000$ to buy materials for the market, to be repaid in $4…
The student cooperative at the school asks the PTA for a microloan of $\$4\,000$ to buy materials for the market, to be repaid in $4$ months at a simple interest rate of $5\ \%$ per annum.
a) Calculate how much interest the cooperative will pay in total and how much it will return to the PTA.
b) Analyse whether you think this is a good way to secure funding compared to selling advance tickets or having each member contribute money, stating one risk of each alternative.
Where to keep your savings: the fixed-term deposit
On the other side of the counter there are decisions too: at which institution is it best to leave your saved money? A common option is the fixed-term deposit (or term investment): you hand over an amount to an institution and agree not to withdraw it for a period of time, for example a year. In exchange, the institution pays you interest.
With the same amount and the same term, the higher rate gives more money. But the rate is not the only thing that matters:
What the institution does with your money: a large bank lends mostly to large companies; a cooperative or savings and loan association usually lends to members and businesses in its own community.
Who decides: in a cooperative, the members vote; in a commercial bank, its shareholders decide.
Safety and term: the money is tied up, and it is wise for the institution to be authorized and supervised by the country's financial authorities.
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Your family has $\$12,000$ in savings and is hesitating between three institutions to open a $1…
Your family has $\$12,000$ in savings and is hesitating between three institutions to open a $1$-year fixed-term deposit:
Listed commercial bank: offers a return of $3.0\ \%$ APR. Its loans finance large corporations and global projects seeking maximum profit for its shareholders.
Credit cooperative (caja rural): offers $2.2\ \%$ APR. By statute, it reinvests most of its funds in SMEs and cooperatives in the local area, and customers can become members with voting rights.
Ethical bank: offers $1.2\ \%$ APR. It publishes the destination of all its loans, which exclusively finance social impact and ecological transition initiatives.
a) Your cousin claims: "The only rational choice is to pick the institution that pays the most; it doesn't matter what the bank does with the money as long as it's covered by the Deposit Guarantee Scheme". Refute his stance by explaining what externalities (positive or negative) each of the three institutions' credit allocation models generate in the real economy of your local area.
b) Calculate the annual opportunity cost (in pesos) of choosing the credit cooperative and choosing the ethical bank instead of the commercial bank. Justify under what economic conditions and family values it would make sense to forego that return.
A business is socially responsible when it thinks about more than just profit. Classify these actions by a juice factory as responsible or irresponsible and justify your…
A business is socially responsible when it thinks about more than just profit. Classify these actions by a juice factory as responsible or irresponsible and justify your answer: (a) buying fruit from local farmers at a fair price; (b) dumping pulp residue into the river to save money; (c) hiring local residents with training included; (d) advertising 'natural juice' when it contains $40\ \%$ added sugar.
Distinguish product innovation from process innovation using two examples from a bakery: (a) inventing a gluten-free bread that did not exist before; (b) changing the…
Distinguish product innovation from process innovation using two examples from a bakery: (a) inventing a gluten-free bread that did not exist before; (b) changing the kneading method to take half the time. Add your own example of each type applied to your school.
Ten years ago in your town hardly anyone travelled by bike; today there are cycle lanes and bike-sharing schemes, and thousands of car journeys have disappeared. Explain…
Ten years ago in your town hardly anyone travelled by bike; today there are cycle lanes and bike-sharing schemes, and thousands of car journeys have disappeared. Explain what that innovation consisted of (was it technological, business model, or social?) and name two social transformations it has brought about.
Starting a business in your community: the solidarity economy and culture
No project lands in a vacuum: it lands in a neighborhood, in a culture, and on a planet. That is why many business ideas are born from looking at your surroundings with fresh eyes.
These forms are connected to what you saw in this section: a savings and loan association or cooperative is a financial institution where the members are both savers and owners. The tianguis (open-air market) in your neighborhood is an example of a local economy: people from the area sell regional products, and the money stays in the community.
Culture is also a territory for starting a business: crafts from Oaxaca, pan de muerto and cempasúchil flowers for Day of the Dead, the music of a patron saint festival. These are opportunities that exist only in your surroundings, and many are financed with personal savings, contributions from partners, or cooperatives.
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A highly profitable fashion company applies for a large loan. It manufactures in sweatshops with harsh conditions and pollutes heavily, but it is guaranteed to repay the…
A highly profitable fashion company applies for a large loan. It manufactures in sweatshops with harsh conditions and pollutes heavily, but it is guaranteed to repay the money.
a) Argue for and against the bank lending them the money.
b) Explain what a bank that claims to be socially responsible would do in this case, and what pressures it would face internally (profit) and externally (customers, regulations).