Yesterday I talked about the price changes in financial markets and ordinary markets follow some different rules, today I want to discuss the interaction between the prices in financial markets and the prices in ordinary markets.
My understanding is that the prices in financial markets represent the demand for the supply side. When investors believe there is more production in the future, the prices in financial markets are likely to increase. Such increase in the demand for more investment on the supply side could be caused by several reasons. Firstly, it could be caused by an increase in the demand side, as when more demand appears in the market, the market price increases and it can attract more investment in the field. Secondly, it could be caused by an increase in the expected returns in the future. If it is caused by the first reason, the prices in financial markets and ordinary markets move in the same direction with similar degrees. Under such circumstance, we can say that the price changes in ordinary markets lead to price changes in financial markets, as the increase in demand in ordinary markets is the cause. If it is caused by the second reason, the prices may move in the same direction; however, the prices in financial markets are likely to increase with greater degrees than the prices in ordinary markets. Under this situation, usually, price changes in financial markets do not affect the prices in ordinary markets, as the prices in financial markets are influenced by the expected returns in the future but the expected returns in the future do not affect the utilities gained from consumption in ordinary markets so have no influence on prices in ordinary markets.
Overall, the ordinary market price changes could have impacts on the financial market prices but the price changes in financial markets have limited influence on the ordinary market price level.
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