Economics Chapter on Money and Wealth

Study Notes

Anything generally accepted as payment for goods, services, or debt repayment is considered money.
Currency, which includes dollar bills and coins, is one type of money.
Other forms of money include gold, silver, e-money, and electronic cash.

Wealth encompasses all assets that store value, including income, bonds, stocks, land, gold, silver, cars, and houses.
Income refers to the flow of earnings over a specific time period.

Medium of exchange: Money facilitates payments for goods and services, eliminating the need for a "double coincidence of needs" and reducing transaction costs. This encourages specialization in the economy.
Unit of account: Money provides a common measure of value within an economy, simplifying price comparisons and lowering transaction costs.
Store of value: Money retains purchasing power over time, allowing individuals to save and transfer wealth. Other assets also serve this purpose.

The primary function that distinguishes money from other assets is its role as a medium of exchange.
Money is the most liquid asset, meaning it is easily converted into a medium of exchange. However, its value can decline during inflation.

Easy standardization: Money should be easily recognizable and uniform.
Wide acceptance: Money should be universally accepted as payment within an economy.
Divisibility: Money should be easily divided into smaller units for transactions of various values.
Easy to carry: Money should be portable and convenient to transport.
Slow deterioration: Money should retain its physical integrity over time to maintain its value.

Barter economy: Involves direct exchange of goods for other goods without using money. This system is inefficient due to high transaction costs, which represent the effort and time invested in trading.
Commodity money: Valuable and easily standardized commodities, like precious metals or cigarettes, served as money.
Fiat money: Paper money declared legal tender by government authority.
Checks (Cheques): Written instructions to a bank, authorizing the transfer of funds from one account to another.
Electronic money (e-money): Digital form of money stored electronically. Examples include debit cards, credit cards, stored value cards, prepaid cards, and online banking.
Electronic cash: A specific type of electronic money used online for purchases.

Liquidity: The ease and speed with which an asset can be converted into a medium of exchange.

Money plays a crucial role in facilitating economic activity, enabling exchange, measuring value, and storing wealth.
The evolution of payment systems reflects advancements in technology and the increasing efficiency of transactions.
Understanding the different forms of money and their characteristics is essential for comprehending the broader concepts of finance and the economy.