Understanding the Difference Between Economics and Finance

Finance is a broad term encompassing matters relating to the economic administration, development, and measurement of funds and investments. A lot of confusion is often caused by the use of the two distinct terms, finance and economics, because in actuality they are related but have different objectives. Finance is concerned with managing resources and analyzing the cost involved in producing an output and managing financial risk. Economics, on the other hand, is concerned with economic activities as a whole-and all of its implications, such as distribution of income and wealth, inflation, deflation, and potential growth.

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Finance is intimately connected with accounting, and much information about funds is required to make effective financial management decisions. Accountsants determine the value of assets, liabilities, and ownership interest by tracking changes in the balances of funds over time. They then compare these balances to a variety of economic indicators to determine whether current levels of activity are consistent with the future expectations of those resources. While financial management involves a number of complex and minute decisions, the concepts are often easily applied to daily business operations.

The ultimate goal of the planner or manager is to maximize the value of the firm through maximum utilization of investment capital and through an understanding of the risks and rewards associated with personal and corporate funds. In this way, both theoretical and practical considerations help a manager to determine how to allocate resources to earn the greatest return. This combination of theoretical and practical research results in the effective management of financial assets and portfolios, and consequently the efficient allocation of external resources to meet the demands of the day.