Topic 2 What is money

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Money, wealth and income
Wealth – properties that serve to store value – includes not only money but also other assets – e.g. common stocks, land, cars – a stock concept
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Evolution of the Payments System
5. E-money (electronic money) • Debit card - purchase goods and services by transferring funds electronically e.g. EPS
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Evolution of the Payments System
3. Checks (Cheques) • An instruction from you to your bank to transfer money from your account to someone else’s account • Advantage? • Disadvantage?
Commercial papers
bond
High transaction cost
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stock
Low liquidity High return More risky
Real estate
Evolution of the Payments System
1. Commodity money • Money with its own value as a good • e.g. gold • Problems with this payment system? heavy, hard to transport…
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Problems of the barter system
1. It requires a double coincidence of wants 2. costly and time consuming to find trading partners 3. Inefficient 4. Other problems???

Evolution of the Payments System
5. E-money (electronic money) • E-cash – used on the internet to purchase goods and services • By setting up an account with a bank, the consumer can has the e-cash transferred to her PC
• Stored-value card – consumers pay a preset dollar amount up front e.g. Octopus
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Evolution of the Payments System
5. E-money (electronic money) • Smart card – contains a computer chip that allows it to be loaded with digital cash
• Many things have served as money, e.g. gold, silver, cigarettes……
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Money, wealth and income
Money = Wealth = Income ?
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Money, wealth and income
Money – currency, demand deposits, and other items that are used to make purchases – a stock concept
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Store of Value
• Money is the most liquid asset
• Liquidity : relative ease and speed with which an asset can be converted into a medium of exchange
Topic 2 What is Money?
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Students should be able to:
•1. Explain the meaning and functions of money
•2. Describe the evolution of the payments system •3. Describe the difference between the United States and Hong Kong in terms of the definitions of money
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Medium of Exchange
To function effectively, money should be: • Easily standardized to ascertain its value • Widely accepted by buyers and sellers • Easily divisible to make change • Easy to carry • Durable
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Money, wealth and income
Income – A flow of earnings per period of time – a flow concept
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Question for Discussion:
How did people trade before the use of money？
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Evolution of the Payments System
4. Electronic payment • Banks provide websites in which customers can pay bills electronically • Which factors make this possible? • Inexpensive computers and the spread of the Internet • Advantage? • Disadvantage?
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Money and Business Cycles
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Measuring money
• Evidence suggests money play an important role in generating business cycle. • When output is rising, it is easier to get a job; and vice versa
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The Meaning of Money
• Anything that is generally accepted in payment for goods or services. OR • Anything that is generally accepted in the repayment of debts.
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Unit of Account
Money is used to measure value in exchange Without money:
=2 =2 =1.5 / =4 / =3 / =6
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Unit of Account
Without money
Number of prices for 10 goods? 45
The barter system
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The Barter System
• The earliest economies relied on barter • Barter is the direct exchange of goods and services
What problems would arise?
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Functions of Money
Functions of Money
Medium of Exchange
Unit of account
Store of value
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Medium of Exchange
• Money serves as a physical means of conducting transaction • Promotes economic efficiency by minimizing the time spent in exchanging goods and services • Encourages specialization and division of labour
With money
Number of prices for 10 goods? 10
• Transaction costs of exchange ↓
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Store of Value
• Save your income today and spend in the future
• Many assets can perform the same function, e.g. stocks, land, jewelry • Money may not be a good store of value in times of high inflation
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Store of Value
High liquidity Low return Less risky Low transaction cost
currency
Demand deposit
Savings deposit
Negotiable certificate of deposit
Time deposit
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Question for discussion
Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew that there was a possibility that the check might bounce?
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Answer
• Because a check was so much easier to transport than gold, people would rather be paid by checks even if there was a possibility might bounce. In other words, the lower transaction costs involved in handling checks made people more willing to accept them.
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Measuring money
• Why do we need to measure money supply?
• It is because money is linked to changes in economic variables such as business cycle, price level, interest rate, etc. that affect all of us and are important to the health of the economy.
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Evolution of the Payments System
2. Fiat money • Initially, paper currency was convertible into previous metal • Evolved into fiat money – paper currency decreed by governments as legal tender but not convertible • Advantage? • Disadvantage?