What is Money?
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Basics of Money and Banking
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What is Money?
- 1. LESSON # 1
- 2. In this lesson we shall learn… 1. What is Money? 2. What does it do? 3. Where does it come from? 4. What role does a Bank Play?
- 3. Let’s start by answering
- 4. There could be several possible answers! IS MONEY IS MONEY MONEY IS MONEY IS But ‘None’ Defines ‘Money’ functionally. All of these are ‘Perspectives’ and are correct.
- 5. is what Does It is a Medium of Exchange
- 6. But everything that can be exchanged for value is not money
- 7. These things aren’t generally acceptable as ‘ Medium Of Exchange’ and hence don’t qualify as ‘Money’
- 8. (anything that is generally accepted as payment) is more efficient than (trading goods/services for goods/services)
- 9. Why isn't it a good idea for me to try to pay my home electricity bill by giving economics lectures to people at the power company?
- 10. Barter requires a double coincidence of wants You want the good/service that the other guy has to offer, and he wants the good/service that you have to offer
- 11. Money performs certain Essential Functions For anything to qualify as ‘ Money’ it must performs all Essential Functions.
- 12. FUNCTION # 1 MEASURE OF VALUE Money measures the value of various goods and services which are produced in an economy.
- 13. FUNCTION # 2 MEDIUM OF EXCHANGE Money facilitates transactions of goods and service as a medium of exchange.
- 14. FUNCTION # 3 STANDARD OF DEFERRED PAYMENTS Money, besides being the basis of current transactions, is also the basis of deferred payments.
- 15. FUNCTION # 4 STORE OF VALUE Money helps people store surplus purchasing power and use it whenever they want.
- 16. Given that I'm paying the power company with money, why would it probably be a waste of time to drive down to their office (which is 40 miles away) and pay in cash?
- 17. Because it's inconvenient and I don't need to. It's much easier to write a check and mail it in, or to have money debited from my bank account
- 18. Since the funds in your checking account balance are easily available for spending (through an ATM withdrawal, a debit card, online bill payments, etc.), they count as money, too.
- 19. BANK DEPOSITS CASH IN CIRCULATION Are the main form of money in our society
- 20. BANK is a financial institution that accepts deposits and makes loans.
- 21. Principles of Money & Banking
- 22. PRINCIPLE # ONE
- 23. PRINCIPLE # TWO
- 25. PRINCIPLE # FOUR
- 26. PRINCIPLE # FIVE
- 27. T R I M S Time Risk Information Market Stability
Notas do Editor
- In this lesson, we shall learn. What is money? What does it do? Where does it come from? And. What role does the bank play?
- Let’s start by answering. What is Money?
- Money means different things to different people. There could be several possible answers. Some health-conscious would people regard money as useless and instead say, Health is Money. Others more disciplined might consider Time as Money. A conscientious person would take money for greed. And an spiritual hermit would declare money as evil. All of these are perspectives and are, therefore, correct. Bit none defines money functionally.
- In fact, Money is what money does. The most fundamental function of money is that it is a medium of exchange of values. People sell things for money and then use that money to buy things they need. Car dealers, sell cars in exchange for money. And with this money, they buy goods and services they need. Same goes for all other business activities. I am a banker. I provide my professional services to my employer in return for a salary which is paid to me, every month, in the form of money. And with this money, I pay for my household expenses, and save some. This is what money does. So, things which are generally acceptable to all, for settlement of their transactions, as a medium of exchange, is called money.
- But money is certainly more than just a Medium of exchange. Everything that can be exchanged for value is not money. Let’s look at some examples.
- Take the example of your handset phone. It can surely be exchanged for another mobile phone or, may be, in some cases, with other gadgets or devices. Similarly your Car, or, Motorbike, or your laptop computer. All of these assets are valuable, and can be sold in exchange for other assets. But, certainly, not as freely as it’d be required for these assets to be, money. You cannot, go around holding your cell phone, every month, buying groceries for your household in exchange. Similarly, I’d shocked if my employer gives me a motorbike or a laptop, in discharge of my next month’s salary, or if a patient gives his car keys to the surgeon, in payment of his fees. I’d be called crazy, if I parked my car in garage, as savings, for son’s higher education. All of these things, and majority of other things that we use in our daily life, although useful, are not generally acceptable as Medium of Exchange. Therefore these do not qualify as Money.
- Money is more efficient than barter.
- Why isn't it a good idea for me to try to pay my home electricity bill by giving economics lectures to people at the power company?
- The power company might not want my lecturing services. But, suppose for a minute that the company did. Then we'd have a "double coincidence of wants" - I want their heating services, and they want my lecturing services, and a trade could be arranged. Still, that probably wouldn't be very efficient, since I already have a job and not much free time. There's a much easier way to pay my bill - I can pay with money. --Paying with money is more convenient and less time-consuming.
- Money performs certain essential functions. For anything as money, it must perform all essential functions.
- Money measures the value of various goods and services which are produced in an economy. In other words, money works as unit of value or standard of value. In barter economy it was very difficult to decide as to how much volume of goods should be given in exchange of a given quantity of a commodity. Money, by performing the function of common measure of value, has saved the society from this difficulty. Now the value of various goods and services are expressed in terms of money such as Rupees. 10 per meter, Rupees. 8 per kilogram etc. In this way, money works as common measure of value by expressing exchange value of all goods and services in money in the exchange market. By working as a unit of value, money has facilitated modern business and trade.
- Right from the beginning, money has been performing an important function as medium of exchange in the society. Money facilitates transactions of goods and service as a medium of exchange. Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods to the consumers in exchange of money. In the same way, all sections of society sell their services in exchange of money and with that buy goods and services which they need. Money, working as medium of exchange, has eliminated inconvenience which was faced in barter transactions. However, money can operate as medium of exchange only when it is generally accepted in that role. Bank money can be treated as money simply on the basis of their general acceptability for they are highly useful.
- Modem economic setup is based on credit and credit is paid in the form of money only. In reality the significance of credit has increased so much that it will not be improper to call it as the foundation stone of modem economic progress. Money, besides being the basis of current transactions, is also the basis of deferred payments. Only money is such a commodity in whose form accounts of deferred payments can be maintained in such a way so that both creditors and debtors do not stand to lose.
- It was virtually impossible to store surplus value under barter economy; the discovery of money has removed this difficulty. With the help of money, people can store surplus purchasing power and use it whenever they want. Saving in money is not only secure but its possibility of being destroyed is very less. Besides, it can be used whenever need be. By facilitating accumulation of money, money has become the only basis of promoting capital formation and modern production technique and corporate business facilitated there from.
- Given, that I'm paying the power company with money, would it be wise to drive down to their office (which is 40 miles away) and pay in cash?
- Because it's inconvenient and I don't need to. It's much easier to write a check and mail it in, or to have money debited from my bank account. In majority of cases, however, you can pay the bill at your nearest bank’s counters.
- Money is not just cash anymore. Since the funds in your checking account balance are easily available for spending, through an ATM withdrawal, a debit card, or online payments, they count as money too.
- Banks make the monetary system a lot more efficient by reducing our need to carry a lot of cash. People have long tended to use checks instead of cash for large purchases and bills. Innovations in banking like debit cards, direct deposit, and automatic bill-paying reduce that inconvenience even further, and also reduce such bank-related inconveniences of time spent standing in line at the bank, writing checks, or visiting the ATM. So, then, MONEY may be the common thread in our economy, but BANKS make the supply of money a lot more plentiful than it would otherwise be. Banks also make the "payments system" a lot more efficient.
- Since, our lives revolve around transactions, which involve money, banks pervade our daily lives in more ways than, probably, we can imagine. But, what exactly is a bank? Simply put, bank is a financial institution that accepts deposits, collects payments for its customers, facilitates payments, and make loans.
- Now. Let us learn the 5 core principles of money and banking.
- A dollar today is worth more than a dollar a year from now. Why is this? (Several reasons: inflation erodes the buying power of money over time; having the money now means you can spend it now; having the money now means you can invest it and turn it into more money.) The reason we focus on is the interest that you can earn on your money when you set it aside. The longer you set it aside, the more interest you earn. Later, we'll relate this principle to the concept of present discounted value of future payments, or what they're worth today taking into account the interest you could be earning in the interim. --An important aspect of the time value of money is that interest compounds over time. Ex. in book: a $10,000 car loan, at 6%. If you repaid the entire loan in one lump sum a year later, you'd pay $10,600 (original amount plus $600 interest). But in the example, the loan is to be paid off in monthly payments over four years, or 48 monthly payments of $235, and the total repayment is $11,280. Why? Interest compounds, or accumulates, from month to month.
- For securities like stocks and bonds, the higher the risk, the higher the return has to be. For individuals, minimizing the risk of such things as accidents, illness, and theft is worth the expense of monthly insurance premiums. (A note on usage: "Risk" refers to your potential losses, financial and otherwise, not merely to the probability of unwanted events. For example, fire insurance might not reduce the likelihood of your house burning down, but it will compensate you for the damage from your house burning down.)
- This rather general sentence relates to money, banking, and finance because we live in a world of imperfect information. It is hard for financial transactions to take place when one or both parties lack adequate information about the other, because one party could easily end up getting burned. As a result, banks and other financial institutions that make loans gather a considerable amount of information about their potential borrowers before advancing them money. The collection and provision of company financial information by government agencies like the Securities and Exchange Commission can aid the growth of financial markets by making them more transparent, thus reducing the information barrier for potential investors. Recent advances in computer and communications technology have greatly helped the spread of financial information, thereby paving the way for the growth of important new financial markets like the junk-bond market.
- Financial institutions and markets, by connecting savers with borrowers, allow for people's leftover money (savings) to be channeled into productive investment in capital (e.g., new technology, machinery, buildings). Financial markets for assets like stocks and bonds allow some companies, especially well-established companies, to obtain funds for new capital investment more cheaply than they could borrow from a bank. Other, less-established companies that cannot get approved for a bank loan can raise money by selling bonds in the junk-bond market (though at higher rates of interest, because these bonds are riskier, and risk requires compensation).
- As against turmoil, and uncertainty, where people tend to live on a daily basis, cannot take long-term views as the situation changes too quickly, stability supports growth and prosperity.