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TOPIC 4. MONETARY ECONOMICS. MONEY. In the ancient time, where money is not yet introduced,. transactions were done by exchanging one goods with another in a Barter System. Barter Trade System. A barter system is a direct trading or exchanging of goods between one person to another.
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TOPIC 4 MONETARY ECONOMICS Azizah Isa
MONEY Azizah Isa
In the ancient time, where money is not yet introduced, transactions were done by exchanging one goods with another in a Barter System. Azizah Isa
Barter Trade System • A barter system is a direct trading or exchanging of goods between one person to another. • Barter system of course does not work successfully in a modern economy. Azizah Isa
Problems in Barter System • Double Coincidence of Wants. Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account • Difficulties in paying debt Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account • Difficulties in paying debt These problems may caused to: Azizah Isa
Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account • Difficulties in paying debt These problems may caused to: waste of time, inconvenience, cumbersome and difficulties in making an exchange. Azizah Isa
Due to limitations in the Barter System, . Money is needed in a modern economy which act as a means of payment in the transaction of goods and services. Azizah Isa
WHAT IS MONEY? HOW DO YOU DEFINE MONEY? Azizah Isa
Definition of Money • Money can beanythingthat isgenerally acceptedby the publicas a medium of exchangein the transaction activities. Azizah Isa
Money act as a means of payment: Money actas: • a medium to transfer ownershipof goods and services from one person to another • and for the repayment of debts. Azizah Isa
Evolution of Money As time passed by, the money used varies accordinglyto meet the needs and purpose of using money. In the ancient time Commodity Moneyis used. • For example; gold, silver, stones, seashells, corns, wool and bones. Azizah Isa
The different types of commodity money. Museum of Bank Negara Malaysia Azizah Isa
Commodity Money • In the use of gold, for example; its: • Precious metal such as gold and silver had its intrinsic valueas a full-bodied money. • Thus, if its intrinsic value is stated on its face therefore it is said that: Face Value = Commodity Market Value. Intrinsic value = Commodity Market Value. Azizah Isa
Modern Money • But nowadays, in the modern economy, there are many forms of money: Fiat money Azizah Isa
2. Fiat Money Face Value (FV) > Commodity Market Value (CMV) • Example:coins and paper money (banknotes). • Although its FV is larger than its CMV, but still it isacceptable as moneybecause ofthe truth and faithin its acceptance as a legal tender in each specified country . Azizah Isa
The Ringgit and Sen (as in the picture above) are issued by Bank Negara Malaysia (BNM) as a legal tender in Malaysia. Azizah Isa
Modern Money • But nowadays, in the modern economy, there are many forms of money: Fiat money Bank money Azizah Isa
3. Bank Money • A form ofNear Money– i.e. a financial asset which closely resemble money. • Examples:Current/Demand Deposits in banks (cheques), Credit Cards, Debit Cards, Stored Valued Cards, Smart Card ATM Cards and Saving Accounts. Azizah Isa
Modern Money • But nowadays, in the modern economy, there are many forms of money: Fiat money Bank money Electronic Money Azizah Isa
4. Electronic Money/ e-money / e-purse / e-cash. Transfer of money electronically made over the internet. The acceptance of electronic payment in the transactions via internet. Example:e-cash ande-cheques Azizah Isa
“Money is what money does” • What does money can do for you? Azizah Isa
MONEY can does its FUNCTION for you. Azizah Isa
What are the FUNCTIONS of MONEY ? Azizah Isa
Four Main Functions of Money: • As a Medium of Exchange Azizah Isa
Four Main Functions of Money: • As a Medium of Exchange • As a Standard Measurement / unit of account Azizah Isa
Four Main Functions of Money: • As a Medium of Exchange • As a Standard Measurement / unit of account • As a Store of Value Azizah Isa
Four Main Functions of Money: • As a Medium of Exchange • As a Standard Measurement / unit of account • As a Store of Value • As a Standard of Deferred Payment Azizah Isa
1. As a Medium of Exchange • For transactions purposes– in purchasing and selling of goods and services. • It act as an instrument – to make payment or to receive payment in the transfer of ownership. Azizah Isa
2. As a Standard of Measurement • Can be used in measuring the value of goods and services in terms of its monetary value. • Have a standard monetary units (RM) – as a unit of account. For e.g. RM1, RM2, 0.50 cents 0.20 cents etc. • Comparing relative value of goods and services transacted. Azizah Isa
3. As a Store of Value • For saving purposes – as a store of wealth. • Has the ability to hold its value – has the non-perishable criterion. • Can reservefor the purpose of future purchasing. Azizah Isa
4. As a Standard of Deferred Payment • As a means of settling debtsmaturing in the future. • As money acts as a unit of account and store of value, it makes easier to settle debt. • Lenders make loans and buyers repay loans with money. Azizah Isa
Four Main Functions of Money: As long asinflation does not existin an economy, money maydoes its functions successfully. Azizah Isa
Four Main Functions of Money: As long asinflation does not existin an economy, money maydoes its functions successfully. It is said that, “money is what money does.” Azizah Isa
LETS THINK OF • WHAT MONEY CAN BUYS? Azizah Isa
CAN MONEY BUYS ANYTHING THAT YOU WANT? Azizah Isa
CAN MONEY BUY YOUR TRUE LOVE? CAN MONEY BUY YOUR FRIENDSHIP? Azizah Isa
LETS THINK OF WHAT ACTUALLY MONEY CAN DO FOR YOU? Azizah Isa
5 minutes rest , Please ! Azizah Isa
Money as the Most Liquid Asset • According to the Liquidity Approach :Money is the most liquid asset. • All assets have some degree of liquidity, but some have more than others. • Indeed, money is perfectly liquid although in the real world money is not absolutely liquid. • Refer to a Simple Liquidity Spectrum. Azizah Isa
A Simple Liquidity Spectrum More liquid CASH(most liquid asset) CURRENT ACCOUNT OTHER BANK DEPOSITS DEPOSITS AT NON-BANKS SHORT-TERM SECURITIES LONG-TERM SECURITIES PHYSICAL ASSETS(least liquid asset) Less liquid Azizah Isa
Liquid Assets and Near Money • Liquid Assetsrefer to any financial instruments that can be converted into money easily. • The most liquid asset is the cash – coins and notes. Azizah Isa