Financial Assets Vs Real Assets

Hi,

This blog tries to explain the readers meaning of real and financial assets, how financial assets facilitate to create real assets, and the reasons why real assets alone matters in determining the net wealth of the nation.

Let me begin with the term ‘Investments’. Investments are current commitments of money and other resources in expectation of future earnings or benefits. Material wealth (also known as productive capacity) of an economy is determined by goods and services produced in that economy.

Corporations use real assets such as land, building, equipment etc. to produce goods and services. Other than these tangible assets, intangible assets such as knowledge, trademark, patents etc. are also used.

Corporations need finance to obtain real assets. Hence, to raise sufficient funds (also known as capital) they sell securities such as stocks, bonds etc. These securities have claim to the income generated by real assets or on real asset itself. These securities are known as financial assets.

Financial assets, unlike real assets, do not contribute directly to the productive capacity of the economy.

Why real assets alone matter in determining the net wealth of the nation and why not financial assets?

National wealth comprises of net wealth of all the households and corporations. Financial assets of a household usually comprises of fixed deposits with banks, stocks, bonds etc. For the issuer of such securities claims are established. Hence, financial assets and financial liabilities are aggregated (netted).

For example, when a household makes a fixed deposit with a bank an asset is created. However, for the bank it is a liability as it has created an obligation to repay the deposit at a future date. When these financial assets and liabilities are aggregated real assets alone will remains as national wealth.

In my next blog, types of financial assets will be discussed.