FIN 211.docx

BASIC CONCEPTS OF MONEY History of Money **Barter System** - At the beginning, *there was no money*. - People engaged in barter, the **exchange of merchandise for merchandise**, without value equivalence. - *Disadvantage:* No common measure of value among the items bartered **Commodi...

BASIC CONCEPTS OF MONEY History of Money **Barter System** - At the beginning, *there was no money*. - People engaged in barter, the **exchange of merchandise for merchandise**, without value equivalence. - *Disadvantage:* No common measure of value among the items bartered **Commodity Money** - Some commodities, for their utility, came to be more sought than others are. - Accepted by all, they assumed the **role of currency**, circulating as an element of exchange for other products and used it to assess their value. - E.g. Cattle, Salt, Cowry, Cloth - *Disadvantage:* Inconvenient for commercial trades, indivisible, and easily perishable **Metal** - As soon as man discovered metal, it was used to made utensils and weapons previously made of stone. - At the beginning, metal was **used in its natural state**, and later under the form of ingots and, still, **transformed into objects**, from rings to bracelets. - *Advantages:* The possibility of treasuring, divisibility, easy of transportation and beauty, metal became the main standard of value*.* - *Disadvantage:* The metal so traded required weight assessment and assaying of its purity at each transaction.  Money in the Form of Objects **Metal** - Metal items came to be very valued commodities. - The increased value of these objects led to its use as money and the circulation as money of small-scale replicas of metal objects. **Ancient Coins** - In the 7^th^ century B.C., the first coins resembling current ones appeared: - - - **Gold, Silver, and Copper** - The first metals used in coinage were gold and silver.  - In primeval civilizations, Babylonian priests, knowledgeable about astronomy, taught to people the close relationship between ***gold and the sun***, ***silver and the moon***. This led to a belief in **the magic power of such metals** and of objects made with them. **Paper Money** - In the Middle Ages, the keeping of values with goldsmiths, persons trading with gold and silver items, was common. The goldsmith, as a guaranty, delivered a receipt. - With time, these **receipts came to be used to make payments**, circulating from hand to hand, giving origin to paper money. **Monetary System** - The **set of coins and bank notes used by a country form its monetary system**. - Normally, [higher values are expressed in notes while smaller values are represented by coins]. ***Why?*** The current world trend is that daily expenses be paid with coins. Modern metallic alloys enable coins to be more durable than notes, making them more appropriate to the intense use of money as change. - The countries, through their central banks, control and guarantee the issue of money. The set of notes and coins in circulation, the so-called **monetary mass**, is constantly renewed through the process of sanitation, substitution of worn out and torn notes. **Checks** - As coins and notes ceased to be convertible into precious metal, money became more **dematerialized and assumed abstract forms**. - One of these forms is the check that, for **simplicity of use and security offered**, is being adopted by an increasing number of people in their day-by-day activities. **eCash** - Also known as electronic cash, is **a form of digital currency** that allows secure, anonymous, and untraceable transfer of funds. - It **uses complex encryption algorithms** to ensure that transactions are secure and can't be intercepted or tampered with. Note: Money, whatever the form it has, is not valuable for itself, but for the goods and services it may purchase. Significance of Money **Consumption** - Nowadays people receive their incomes in terms of money. - This **facilitates in exercising free choice of consumption**. **Production** - Money is not a factor of production, yet it facilitates production. - Money (through price mechanism) **indicates to producers the type and quantity of goods they should produce**. **Trade** - Money constitutes basis of price-mechanism and, thus, **helps in determining prices** of goods and services through the forces of demand and supply. **Public Finance** - Governments require resources to run the administration smoothly for which they **impose taxes and charge fees, fines,** etc. - Without money, taxes received will be in the form of goods which may or, may not be useful from government\'s point of view, e.g., shoemaker paying tax in the form of shoes and farmer in the form of vegetables. - But taxes received in money give freedom to government regarding choice of things which government needs for the developmental purposes. **Foreign Trade** - With the help of money, we can transact not only those goods which are **produced domestically but also those which are produced by other countries**. - The possibilities of exports and imports with the help of money has resulted in expansion of international trade and cooperation. Functions of Money **Medium of Exchange** - Money is a common item that societies **use to exchange value and facilitate trade**. - *Ex:* You can purchase goods and services with the money as a method of payment. **Store of Value** - With no immediate wants or needs, we can **save or invest our money to spend it in the future by holding it** in a store of value. - Without a store of value, we have to spend our money immediately, even if we don\'t have anything we need to buy. Also, we increase wasteful spending and can\'t save for the future. - **What Makes a Good Store of Value?** - A good store of value will preserve (or grow) purchasing power over time. ***Purchasing power*** is how much stuff I can buy with my money. - *Ex:* If I work today and earn 25 dollars, I can hold on to the money before I spend it because it will hold its value until tomorrow, next week, or even next year. **Unit of Account** - Money is acting as a unit of account (**common measure of value**). - With a common unit of measurement, we can easily track changes in wealth and compare the prices of goods or services. Characteristics of Money **Divisible** - Money must be easily divided into small parts (\$20 can be two \$10) so that people can purchase goods and services. **Durable** - Money must be able to withstand the wear and tear of many people using it. **Portable** - Money must be easy to carry. **Acceptable** - Money must be widely accepted as a medium of exchange. **Scarce** (Limited Supply) - Money must be relatively scarce and hard for people to obtain. **Stable** - Money\'s value must remain relatively constant over long periods of time. Kinds of Money **Commodity Money** - A good used as money that also has value independent of its use as money. - Ex. Gold, Silver, other precious metals **Fiat Money** - Money, such as paper currency, that is authorized by a central bank or governmental body does not have to be exchanged by the central bank for gold or some other commodity. - Ex. Philippine peso, Canadian dollars, Chinese yuan, British pounds Money and the Economy **Economics** - Is a social science which is concerned with the proper allocation and efficient use of scarce resources to satisfy human wants and needs. Resources are limited; however, human wants and needs are unlimited. Goals of the Economy **Full Employment** - A situation in which those who are able and willing to work can get jobs. - **⬆ Employed ⬆ Gross National Product** (GNP - Gawa ng Pinoy \| GDP - Gawa Dito Pinas) - Investment creates employment; money is the source of investment. **Economic Growth** - The best input of economic growth is people. The development of the people *through education and training* is the real economic development. However, money is needed to educate and train people. **Price Stability** - Price Stability does not mean prices remain constant or do not change. Rather, it is a situation where price fluctuation is smooth. - An abrupt rise in prices is not favorable to the: - - ***Why can't we print more money?*** ⬇ Supply ⬆ Demand = Decrease in prices ⬆ Supply ⬇ Demand = Increase in prices **Balance of Payments and Exchange Rate Stability** - Balance of Payments refers to the accounting record of a country's financial transactions with other countries. Exports \> Imports = Surplus BOP Exports \< Imports = Deficit BOP - A country with surplus BOP acquires more foreign currencies like the US dollars. When the supply of dollars is greater than the demand for dollars, the exchange rate of the dollar decreases. **Economic Efficiency** - Efficiency is productivity. It is making the best use of resources to maximize output and minimize waste. - Modern technologies are the advantage of rich countries. However, in poor countries, *social equity is more relevant than economic efficiency*. Their most pressing problem is the creation of millions of jobs - Productivity growth is the key to economic growth **Equitable Distribution of Wealth and Income** - Equitable means fair or just. - There is an equitable distribution of wealth and income if the gap between the rich and the poor is narrow, and when every member of the society experiences a decent standard of living and a dignified existence. - Ensuring a fair distribution of economic resources among the population. - **Taxation is one of the social equalizers**.