Unit 1 PDF: The Concept of Money

 Distinguish between mainframe banks and specialized banks  Explain the basic similarity/dissimilarity between community and micro finance banks  Mention and explain the objectives of Mortgage banks 7.0 References: Akpan, I. ( 1999). Fundamentals of Finance. Uyo: Mod...

 Distinguish between mainframe banks and specialized banks  Explain the basic similarity/dissimilarity between community and micro finance banks  Mention and explain the objectives of Mortgage banks 7.0 References: Akpan, I. ( 1999). Fundamentals of Finance. Uyo: Modern Business Press. Akpan, E. S. (2001). Nigerian Financial Institutions; in Mbat, D. O. (ED). Topical Issues in Finance.Uyo: Domes Associates Publishers. Ekezie, E. S. ( 1997). The Elements of Banking, Money, Financial Institutions and Markets.Onitsha: AFRICAN-FEP Publishers. Igweike, K. I. (2005). Law of Banking and Negotiable Instruments. Onitsha: AFRICANA- FIRST Publishers. Jumbo, C. O. (2003). Elements of Banking. Owerri: Barlow Publishers. MODULE 2 THE DEVELOPMENT OF MONEY Unit 1 The Concept of Money Unit 2 The Evolution of Money Unit 3 The Nigerian Money Market UNIT 1 THE CONCEPT OF MONEY CONTENT 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Definition of Money  3.2 Functions of Money 3.3 Characteristics of Money 3.4 Demand for Money 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Reference/Further Reading 1.0 Introduction The term money is commonly used in the course of our daily activities, from our marketplaces to our schools and even our homes; the concept of money resonates as a recurring decimal. It has become the most popular yardstick with which we measure value and transact our business activities. To the lay man money may simply mean the physical cash with which he carries out his daily transactions, but to professionals engaged in the management of money, it may refer to a number of financial instruments which is acceptable as a medium of exchange and settlement of debts. 2.0 Objectives This unit furnishes the reader with a panoramic overview of the concept of money, the reader should after studying this unit be able to  State and explain the functions of money  Discuss the distinguishing features of money  Explain the reasons for demanding money 3.0 MAIN CONTENT 3.1 What is Money? Money is anything that is generally acceptable for the purchase of goods and services. Economist have defined money as anything generally acceptable in payment for goods and services or in settlement of debts. David Humes, Adam Smith, Ricardo etc. considered money in terms of influence in international trade relationship. However, the definitions of money can be categorized into namely  Institutional definition (Pre-Keynesian)  Function definitions Institutional Definition of money From this Economic stand point, for money to be generally acceptable, it must backed up by the institutional force of law. The property of money if to most important factor. Owing to this argument the definition of money should be based on; i. Its meaning in the sense of wealth ii. Its meaning in the sense of property iii. It’s meaning in the sense of education. An example of institutional definition is that of Irving who defined money as “any properly right which is generally acceptable in exchange”. Functional Definition of money This economic stand point defined money in terms of function, it performs: These functions include  Medium of exchange  Store of value  Units of Accounts  Standard of deferred payment An example of functional definition of money is; Money is that which is universally acceptable in an economy by sellers of goods and services as payment for goods and services and by creditors as payment for debts. Function of Money The function of money can be classified into  Primary functions  Secondary functions Primary Function Medium of Exchange: This means that money is generally acceptable by buyers and sellers in exchange of goods and services (i.e. as a medium of payment). This function of money is dependent on its acceptability (i.e. infact that the individual trust that when try want to send it, it will be acceptable in exchange for goods and services). As a medium of exchange individual can sell their output to money and use that money to make purchases. It is however important to note that money as a medium of exchange eliminate the inconveniences and difficulties of trade by border especially the mid for a double coincidence of want Money as a measure of value (units of accounts): This refers to as money’s side in determining to value or price of product. Just as height is measured with a tape in terms of meters, kilometer so the value of goods and services can be measured in monetary terms. Money provides a comfortable unit for comparing value regardless of size or kind, hence, money is the yard stick with which people keep their account, determine, income, profits, losses, prepared budget etc. It is however important to note that sine money is the yardstick by which economic choices are measured, it is necessary that this yardstick is as fixed and stable as possible, as successive in fluctuations in the purchasing power of money can negatively affect forecast and planning. For example the monetary unit used in measuring value in Nigeria is the Naira, in USA it’s the Dollar, and this units enable individuals to compare the relative value of goods and services. Secondary Function of money   Store of value: This means that is a store of purchasing power over periods of time. For example it is easier for a fisher man to stop the wealth accrued from the sales of his fishes that to stop the fish itself. The recover or holder of money can choose between sending his purchasing power (intermediate payment) or saving it (deferred enjoyment). Saving money assumes various forms but the most prevalent involves holding either money itself (i.e. currency or demand deposit) or money substitutes (savings deposit, treasury bills etc). Although there are two assets such as stock, land , jewelry and properties of which have a good number of advantages over money as a store of value such as asset suffer the problem of illiquidity that is the ease with they are converted into a medium of exchange. Money is the most liquid asset because it does not meet to be converted to anything else inorder to make exchange/purchase.  Standard of Deferred Payment: Money plays an important role in debt settlement. The existence of money has simplified both the landing and the repayment process. Debts are ordinarily expressed. In monetary terms a scenario in the barter system where an individual takes a lot in fishes, it would be difficult to set the term of repayment in commodities other than fishes. Money base eased the process with which people can take and making loan be its short, medium or long term. 3.3 Characteristics of Money For money to perform its functions, it must possess certain availabilities/attributes these attributes include;  General acceptability: No item/commodity can satisfactory serve as money. If it is not widely acceptable as a means of exchange amongst the individuals in a community, country or region. Gold evolved to become a prevalent medium of exchange because it was highly demanded and universally accepted in order to ensure acceptability. Money must be a legal tender, accepted by government for tax purpose.   Scarcity: This entails money supply is limited relation to demand and the productive capacity such that money losses its value, it also ensures that people could have to sacrifice something (i.e. opportunity cost) in order to own money.  Stability: It is important that the value of money remains relatively stable, this is very important because money is supposed to be a store of value and a standard of deferred. When the value of money falls i.e. the purchasing power of money is weaken both savers and lenders loose as a Naira worth today might not be a naira’s worth tomorrow. However the effect of inflation has makes it difficult for money to be absolutely stable. Yet the fluctuations in the value of money should not be successive  Divisibility: In order to facilitate transactions (especially small transaction a good currency should be divisible into smaller units for example N1000 can be divided into 20 units of 5 naira notes, 10 units of 10 naira notes etc.  Portability: Money should easy to more around for the purpose of business transaction. Thus reducing the stress and cost of moving it around  Cognisability: For anything to serve as money it must be easily recognized, they should look alike such that individuals are able to identity counterfeits in circulation.  Homogeneity: Closely linked to cognisability is homogeneity, this means that each unit of a commodity must look alike as much as possible, exactness enhances people’s confidence in a currency.  Durability: This is essential because money is supposed to be a store of value of the item. 3.4 Demand for Money This refers to the motives why economic units (i.e. household films, government) hold cash and other monetary aggregates. The demand for money is said to be derived because economic units do not demand money for its own sale but for the goods and services money providing. According to John Maynard there are three (3) motives for demanding money namely;  Transaction motive  Precaution motive  Speculative motive Transaction motive: This refers to a desire to hold money for the purpose of exchange for currently needed goods and services that is for the purpose current expenditure and day to day transactions. Precaution motive: This refers to the desire hold cash in order to meet expenditure arising from unforeseen circumstances or emergencies. Thus include all expenditure arising from event not previously planned for such as unexpected illness, drastic fall in sales price etc. Speculative motive: This refers to a desire to hold cash in order to take advantage of emerging future opportunities e.g. investment opportunities in the stock exchange. 4.0 Summary We have seen that money is anything which facilitates business transactions by acting as a means of exchange, we now know that for an object to be called money it must possess certain properties such as acceptability, homogeneity etc. finally we have also learnt about functions of money and about the reasons why people demand money. 5.0 Conclusion: Money as we have learnt, is anything generally accepted as a means of exchange and in settlement of debts, the concept of money stretches beyond a nation's currency but negotiable instruments. However currency notes are un arguably the most acceptable for business transaction, hence its popularity. 5.0 Tutor- marked Assignment o What is money? Intrinsic value and real value? o Why do people demand for money? o What are the basic attributes money should posses? o Briefly discuss the functions of money? 7.0 References: Akpan, I. ( 1999). Fundamentals of Finance. Uyo: Modern Business Press.