Functions and Characteristics of Money

Money

• Barter is the earliest form of commercial exchange, exchanging one commodity for another.
• Disadvantages of direct barter include: the difficulty of both parties being present simultaneously, difficulty in matching needs, difficulty in storing some goods, and difficulty in dividing goods into smaller units.
• The emergence of money arose from these barter system problems
• Money's function is as an intermediary of exchange
• Anything generally accepted by society as an exchange medium is considered money.
• Key characteristics of money include: general acceptance amongst members of society, homogeneity of units, divisibility into units appropriate for various transactions, and difficulty in damage.
• Ease of carrying is a critical aspect of modern money; large denominations make it practical to carry significant amounts.
• Difficulty in counterfeiting is an essential characteristic of modern money

Functions of Money

• Measure of value: a common unit to measure the relative prices of different commodities.
• Means of exchange: a medium for transactions
• Store of value: a means to hold wealth that does not spoil or degrade over time.
• Standard for deferred payments: used for loan repayments.

Quantity Theory of Money

• Price level increases proportionally with the increase in the quantity of money.
• Quantity of money decreases, price level decreases.
• Inverse relationship between the amount of money and its value.

Exchange Equation

• Fisher equation explains the relationship between the quantity of money and price level.
• P = (Q * S) / V
  • P = Price level
  • Q = Quantity of money
  • S = Speed of money circulation
  • V = Volume of exchanges (goods, services generated in a time period)

National Income

• National income studies the total economic output of a nation and its distribution.
• Gross Domestic Product (GDP): the total value of goods and services produced within a country's borders in a specific period (e.g., a year).
• Net Domestic Product: GDP adjusted for depreciation of capital goods.

Investment

• Investment is the addition of new productive assets in an economy.
• Important factors influencing investment decisions:
  • Interest rates: lower rates encourage borrowing and investment.
  • Investor outlook and economic expectations: optimistic outlook drives investment.

Economic Organizations

• Commercial Banks:

  • Function as intermediaries, taking deposits, providing loans, facilitate economic activity, and promote investment.

• Central Banks:

  • Regulate money supply to achieve monetary and economic stability.
  • Functions include issuing banknotes, acting as a bank for commercial banks, regulating monetary policy, and overseeing financial institutions.
  • Methods to control money supply include open market operations (buying/selling gov securities), the discount rate (interest rate on loans to commercial banks), and changing the legal reserve ratio.

Consumption and Savings

• Consumption: spending on goods and services for immediate satisfaction.
• Factors affecting consumption and savings:
  • Income distribution
  • Interest rate
  • Saving habits
  • Price level
• Saving: difference between national income and consumption during a specific period.