Difference Between Finance and Economics
Finance and economics are two different concepts that are somewhat interrelated with one another and economics is basically concerned with the consumption, exchange of products and services, production, transfer of wealth, etc whereas finance is concerned with the full utilizationhttps://www.db.com/
In simple terms, economics and finance are just two sides of one coin. If you want to succeed in finance, you need to know economics well. Economics is more about finding the equilibrium point of demand & supply, understanding average cost and marginal costAverage Cost And Marginal CostThe average cost is the per-unit production cost of the goods produced during a period. In contrast, marginal cost is the value of increase or decrease of total production cost during a specific period if there is a change in output by one extra unit., finding differences between fixed cost & variable cost and many such theoretical concepts; finance, on the other hand, is the right extension of these concepts. Thus, it’s often been seen that people who have made their mark in finance have often had an economics background.
More succinctly, economics creates the foundation on which finance builds the house. So, if you want to finance professionals, you need to know economics well to understand the complexity and vastness of finance.
In this article, we will look at each of these disciplines separately and then try to compare two so that you can make an informed decision in regards to your career.
If you’re ready, let’s get started right away.
- Comparative Table
- Key Differences
- Primary Tasks or Roles
- Work-Life Balance
Key Differences Between Finance and Economics
Economics and finance are two different disciplines on the basis of their scope of work. Of course, they are inter-related and no matter what you choose, you would occasionally need to refer back to some parts of both of these subjects once in a while. But they’re different. Let’s understand how different they are –
In simple terms, economics is a social science that helps in the management of goods and services subject to the production, consumption and other factors directly or indirectly affecting them. Basically, there are two types of the economics you need to know microeconomics and macroeconomics – microeconomics talks about a single unit or business and macroeconomics deals with industry as a whole. There are huge demands of economists in the consulting firms, private banks as well as public sectors.
On the other hand, finance is also a science of managing funds subject to three main factors – time, the risk involved in the transaction and liquidity. There are many branches of finance and as you go deep in this subject, you will realize that there are more things to learn.
For example, you would start with corporate finance to have your fundamentals strong. Then depending on whichever field you choose, you need to learn financial analysis, financial modeling and valuation, project finance, quantitative finance, risk management, portfolio management, investment analysis and many more. Many people confuse finance with accounting. But finance is much vast than accounting. To learn the fundamentals of finance, you need to have a basic understanding of accounting, but the scope of finance is much more than accounting. If you’re good at maths and logical reasoning, you would be able to make your mark in the financial field.
Now new ideas are born out of two separate but different ideas. So if you want to do well in any one of them, it’s better that you learn the basics of the other. For example, if you decide to go for a financial domain, the basic knowledge in economics will help you understand complex issues and you will be able to connect two separate ideas and form concepts while studying. On the other hand, if you decide to go to economics, it will definitely help if you know the fundamentals of finance. Even as an economics student, you will get to know the practical aspect of how firms work in the real world.
The world of education is vast. But still, there is a basic structure you can follow if you want to enter the world of economics or finance.
#1 – For Economist
Being an economist is a great profession. Of course, there are some things you may dread like repetitive research, depending more on theoretical dimensions than taking a practical approach; however, once you become an economist, your growth would be dynamic and if you wish to learn and be a better economist (top of the curve), you would get all the opportunities to be so.
But what you need to do to become an economist?
Now there are two things.
- First, you need to decide what you want to become – a top-notch economist or a professional who looks at his profession to earn his living. Let’s say you want to become a top-notch professional. So you need to earn your bachelor’s degree in economics where you will study business, management, and economics.
- But to be top-notch or better to say top 10% of economists in the world, you need to the power of knowledge. So you need to go for a master’s degree as well which you will be able to complete within two years.
- And then finally, it’s better if you earn a Ph.D. as well. Once you’re a Ph.D., your opinions and judgments would be valued much more than a mere bachelor degree holder or master degree holder.
So here’s a chart you should look at as career requirements of an economist –
#2 – For Finance Professional
Finance professionals are much diverse than economists profile. Even many economics graduates often go for the finance domain because they feel that they want to explore more practical aspects of the business than devising theoretical models.
So if you want to go into the finance domain, what would be your educational requirements? Let’s have a look at the diverse opportunities.
The basic thing about finance is that first, you have your bachelor’s degree. It’s always better if you complete your bachelor in finance, accountancy, economics or mathematics. These subjects can be the foundation for your future course of action. There are many options. From the myriad of opportunities, you need to decide in which direction you would like to go.
- Investment professional: If you want to go for the investment professionals, the best thing to do is to go for the CFA course. CFA exam will not only equip you for becoming an investment professional, but it will also help you become an expert in investment analysis, market analysis and how to pick the right investment opportunities for your clients.
- Management professional: You can also choose to become a management professional by doing MBA in finance from a reputed college or university. If you can pursue your MBA degree from a top-notch university, you would be able to get into the investment banking profession or corporate finance of any large corporation. After doing an MBA, you would become more of a business professional than a core-finance professional.
- Risk management professional: You can also choose to go for the FRM exam, CRM exam, ERM exam and many other risk management courses like actuaries so that you can become a risk management professional within few years of constant learning and practice.
- Accountant: You can also decide to go for CA, CPA or any other accounting courses to become a public accountant or else you can join in a private bank as well.
As a finance professional, the opportunities are endless. The above are the most sought after and these are the courses student choose the most. You can also go for other courses like CS (Company Secretary-ship), Cost Accountancy, Management Accountancy, etc.
Primary Tasks or Roles
Let’s talk about the main responsibilities of an economist and finance professional.
#1 – Primary Tasks of an Economist
Even if it seems that an economist is mostly dealing with theoretical jargon, however, she also needs to analyze and interpret a huge sample of data.
- An economist’s main work revolved around giving advice to the various stakeholders in regards to economics.
- She also needs to gather the data, comprehend various sampling techniques to conduct surveys and creating different econometricEconometricEconometrics refer to applying economic theories, statistical inference and mathematics for the economic policymaking and forecasting the future trends. It analyzes the historical and real-world data to conduct statistical tests and hypothesis. techniques to forecast trends.
- Once the forecasting is done, she needs to analyze and interpret the trends and come to a conclusion of how a firm’s strategy needs to be changed (if at all).
- Her duties also include writing various technical and non-technical reports to send across to top management so that they can take proper actions toward changing product policies, the sustainability of business and many such other factors.
- An economist also needs to give various presentations on her research, analyses, and interpretations to top management executives so that they can make informed decisions about the business.
#2 – Primary Duties of Finance Professional
Now, the finance profession is very diverse and as students can choose different professions and each profession would have different key tasks, it’s difficult to pinpoint only a few primary tasks for all of them. So, we will give a brief overview of the primary tasks of financial management professionals. The primary tasks may be different in case you choose to go to other financial domains.
Let’s talk about the primary tasks of financial management professionals –
- The main responsibility is to source funds from the market. It may be in the form of a direct loan from financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. or conducting IPO if it’s the first time or selling more shares to the existing and new shareholders for more funds.
- Once the funds are arranged, it’s time to invest the money in the business. This is also a huge concern about financial management professionals. They need to know exactly where to invest so that the business gets maximum ROI from the investment.
- If the business makes a profit, how to distribute the profit (if at all) or to plow back for reinvestment in the businessReinvestment In The BusinessReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio. should be one of the most important duties.
- Finally, the finance management professional needs to write reports or present his findings to the top management to get approval so that he can go ahead and carry on with his primary responsibilities.
Usually, economists have a great work-life balance as their work acts as a support to management decisions. That doesn’t mean that the work of economists is not important. However, it doesn’t need to be urgent all the time, throughout the year.
In the case of finance professionals, the work-life balance varies from profession to profession. For example, if you are an investment banking professional, your work-life balance will be none. You won’t get weekends to rest and to spend time with your families; even some days you need to spend overnight at the office to meet the requirements of clients. On the other hand, if you’re an equity research analystEquity Research AnalystAn equity research analyst is a qualified professional who interprets financial information and trends of an organization or industry to provide recommendations, opinions, reports, and projections on the corporate stocks to facilitate equity trading., you will achieve a good work-life balance. And you will also get ample opportunities to spend your weekends with your inner circle and work pressure is usually much lesser than investment banking professionals. So the work-life balance depends on which financial domain you pick as your profession. See – Investment Banking Job
According to the salary.com, an economist earns around the US $121,357 per annum as an average salary. So you can understand that the pay is amazing. Let’s have a glance at the chart below to get an overall idea about the compensation of the economist.
From the above chart, it’s clear that if you can reach the top 10% of the curve as an economist, you will earn around the US $173,686 per annum.
Let’s look at the compensation of financial management professionals.
From the above chart, it’s clear that finance management professional earns around the US $84,800 per annum on an average. As it’s just revolving around one dimension of compensation, we will try to look at different aspects of it and that is experience wise compensation.
Let’s have a look.
Finance vs Economics Video
Finance and Economics can be very different in terms of career, skills, exit opportunities, etc. A typical economics graduate needs to complete a master’s and a Ph.D. to get an excellent career opportunity. However, finance graduates can complement their graduation by taking certification courses like CFA, FRM, PRM to boost their chances of climbing up the Finance career. There are somehow focused options in economics, however, in finance, there is a broad variety of choices to choose from.
So Opt the one that interests you the most!
This has been a guide to Finance vs Economics. Here we discuss how finance and economics are interrelated and educational requirements to become a professional. You may also have a look at the following articles –