Splitland is a developing economy with two distinct regions. The northern region has great investment opportunities, but the people who live there need to consume all of their income to survive. Those living in the south are better off than their northern counterparts and save a significant portion of their income. The southern region, however, has few profitable investment opportunities and so most of the savings remain in shoeboxes and under mattresses. How could the development of the financial sector benefit both regions and promote economic growth in Splitland?

Question

Grayson Wilson

Business

18 August, 23:47

Splitland is a developing economy with two distinct regions. The northern region has great investment opportunities, but the people who live there need to consume all of their income to survive. Those living in the south are better off than their northern counterparts and save a significant portion of their income. The southern region, however, has few profitable investment opportunities and so most of the savings remain in shoeboxes and under mattresses. How could the development of the financial sector benefit both regions and promote economic growth in Splitland?

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Taylor Eaton · Answer 1

Answer: The presence of a financial intermediary would reduce the information costs that may have prevented the southerners from lending directly to the northerners in the past. This would promote economic growth.

Explanation: Information is key in modern societies.