WHAT IS MONEY?

Monetary Economics

Meaning of Money

Money income (flow of earnings per unit of time) wealth (total collection of pieces of property/assets) Money anything that is generally accepted in payment for goods or services or in the repayment of debts

Functions of Money A. Medium of Exchange

promotes economic efficiency by eliminating much of the time spent in exchanging goods and services (transaction costs) eliminates double coincidence problem - money is the lubricant in the functioning of the economy - what sellers generally accept and what buyers generally use to pay
Before money was invented people engaged in barter exchanging goods and services directly with other goods and services Barter requires a double coincidence of wants have to find someone who wants exactly what I have and has exactly what I want Only applicable in small economies where it is not difficult to find someone to trade with

- it promotes efficiency by allowing people to specialized in what they do best

Meaning of Money
For a commodity to function effectively as money it has to meet several criteria 1. Easily standardized making it simple to ascertain its value (uniform design) 2. Must be widely accepted - in all parts of the country 3. Must be divisible so that it is easy to make change (denominations: 20,50, 100 etc, coins) 4. It must be easy to carry light, small enough 5. It must not deteriorate quickly - durable

Meaning of Money

Functions of Money cont. B. Store of Value - An asset that can be used to transport purchasing power from one time period to another - You can keep your earrings in the form of money until the time you want to spend it Other stores of Value: antiques, paintings, jewels Money has several advantages: a. It comes in convenient denominations and easily portable/easy to carry b. It is easily exchanged for goods at all times

Money disadvantages: The value of money falls when the prices of goods and services increase Ex. When the price of chips the rise from P15-30 the value of the product falls half

Liquidity Property of Money relative ease and speed with which an asset can be converted into medium of exchange

Meaning of Money
Functions of Money cont. C. Unit of Account - It is used to measure the value in the economy - a standard unit that provides consistent way of quoting prices Ex. Book quoted at P800.00 not 1 pair of shoes, 10 kilos of tilapya, 4 chickens

Evolution of the Payments System

Payments System method of conducting transactions in the economy
Precious metals: gold & silver Paper assets: checks and currency Electronic Money

Two General Types of Monies: Commodity and Fiat A. Commodity Monies items used as money that also have an intrinsic value and have some other use Ex. Gold can be used directly to buy things Other uses: Jewels, ornaments, dental fillings Problem: Very heavy, hard to transport

Evolution of the Payments System

B. Fiat Money or Token Money items disguised as money that are intrinsically worthless Ex. Peso Bills The public accepts paper money as means of payment and as a store of value because the govt declared it as legal tender legally it must be accepted as payment for debts
.this note is legal tender for all debts public and private. Used to pay taxes

The government cant just print lots of money as it wants, increase in money supply will lead to currency debasement decrease in the value of money

Evolution of the Payments System

Currency debasement cont
Previous Money Supply P100 million = 1 M, 100 peso bills Current Money Supply Double the money supply 2 M, 100 peso bills *Now the true value of a 100 peso bill is divided into half P50.00

Evolution of the Payments System

C. Electronic Money (e-money) money that is stored electronically Several Forms a. Debit Cards enable consumers to purchase goods by electronically transferring funds directly from their bank accounts to a merchants account Ex. In grocery stores Debit card swiped, amount of purchases automatically deducted from bank account *ATM can be a debit card

Evolution of the Payments System

C. Electronic Money (e-money) cont. b. Stored-value Card contains a fixed value of digital cash Ex. MRT/LRT tickets, Timezone cards (reloadable), c. Electronic Cash is a form of electronic money that can be used on the internet to purchase goods or services

Common Measures of Money

Two Most Common Measures of Money (how much money is there in the economy) M1: Transactions Money - Money that can be directly used for transactions/buy things - M1 stock measure (measured at a point in time) ie. daily
M1 Currency held outside banks Demand Deposits Peso bills and coins Checking accounts Can be easily converted into money

Travelers Checks and other checkable deposits

*Any deposit acct with a bank or financial institution on which a check can be written *Negotiable order of withdrawal (NOW) accts Automatic Transfer Savings (ATS) accts

Common Measures of Money

M2: Broad Money - M1 + near monies (close substitutes for transactions money such as saving acct and money market accts) Savings acct cannot be used for transactions directly but can be easily converted into cash or transfer into a checking acct Money Market accts/money market mutual funds buy and sell securities/stocks bonds M2 is larger in qty than M1, it is more stable