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Chapter 1. the Overview of Money

The document provides an overview of money, defining it as anything generally accepted in payment for goods and services, and distinguishing it from currency, wealth, and income. It discusses the evolution of payment systems from commodity money to fiat money and electronic payments, highlighting their characteristics and functions. Additionally, it explains the functions of money, such as being a medium of exchange, store of value, and unit of account, along with methods for measuring money supply through various monetary aggregates.

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Linh Nguyễn
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28 views15 pages

Chapter 1. the Overview of Money

The document provides an overview of money, defining it as anything generally accepted in payment for goods and services, and distinguishing it from currency, wealth, and income. It discusses the evolution of payment systems from commodity money to fiat money and electronic payments, highlighting their characteristics and functions. Additionally, it explains the functions of money, such as being a medium of exchange, store of value, and unit of account, along with methods for measuring money supply through various monetary aggregates.

Uploaded by

Linh Nguyễn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 1.

THE
OVERVIEW OF
MONEY

MSC. LE THI KIM XUYEN


Table of content

• What is money
• Types of money
• Functions of money
• Measuring money
WHAT IS • Money: anything that is
MONEY generally accepted in payment
for goods or services in the
repayment of debts.
• For eg: Coin, credit card, paper
notes, cheque ?
What is money?

• Money is different from:

• Currency: Coins and paper notes

• Wealth: the total amount of assets used to store value

• Income: flow of earnings per unit of time ( a flow concept)


Evolution of the payment system
• Commodity money: valuable, easily standardized and divisible commodities
• Fiat money: paper money decreed by governments as legal tender
• Cheques: an instruction to your bank to transfer money from your account to someone else’s account
• Electionic payment: payment occur over electronic funds transfer systems (computerized payment – clearing devices) like
• Debit cards
• Automated Clearning house (ACH) transactions
• ATM _ automated teller machines
• E-money
• Emoney (Electronic payment): digital cash used to buy goods and services over the internet (Paypal services)
Commodity money
• A good used as money that has value independent of its use
as money
• Egs: Salt, rice

• Objects: Universally acceptable

• Importatn characteristics: has instrinsic value

• Disadvantages?

_ heavy
_ hard to transport from one place to another
Commodity – back money
• It is a slight variation on commodity money.
• It is paper currency carried a guarantee that it can be
convertible into coins or into a fixed quantity of precious
metal.
_ while commodity money uses the commodity itself as currency
directly, commodity-backed money is money that can be
exchanged on demand for a specific commodity.
_ Ex: under the gold standard: people were not carrying around
gold as cash and trading gold directly for goods and other
services, but the currency holder trade in their currency for a
specified amount of gold
tiền pháp định

Fiat money - PAPER CURRENCY - VND in Vietnam

• Money, such as paper currency, that has no value


apart from its use as money
• Example: the paper currency we use
• Important characteristic: Has no intrinsic value (has
no value apart from its use as money)
• Value of fiat money comes from government
decree.
• What are advantages and drawbacks of paper
Advantages: gov can control money supply easily + value of currency,
money? reduce transactions cost; universally allowed by citizens
Draws: no intrisic value —> gov cannot control the amount of fiat money
—> negative impact to economy
—> print too much —> devaluation
Electronic funds and Electronic cash

• Digital cash from the owner’s bank account

• Transasctions occuring over electronic funds transfer systems, which are computerized payment –
clearing devices like:
• Debit card: enable consumers to purchase goods and services by electronically transferring funds
directly from their bank accounts to a merchant’s account.
• Stored – value card, smart card

• E-cash: is used to purchases goods and services from the internet


Electronic money

• Digital cash people use to buy goods and services over


the Internet
• The best known form of e-money is the Paypal
service.
What can serve as money?

• Commodities must satisfy the following properties to serve as money:

• Widely accepted

• Standardized

• Divisible

• Easy to carry

• Not easily damaged


FUNCTIONS OF MONEY
Medium is most important: instead of using commodity —> reduce
transactions cost —> efficient and effective —> boositing the economy
growth

❖ Medium of exchange
make transactions more efficient
• We use it to buy stuff

❖ Store of value

• Transfers purchasing power from the present to the


future
usse to serrv
❖ Unit of Account

• The common unit by which everyone measures prices


and values
ROLE OF MONEY

LOWER TRANSACTION INCREASE LIQUIDITY IN AN


COSTS ECONOMY
MEASURING MONEY

_ To measure money, we need to a precise


definition that tells us exactly what assets should
be included.
_ Construct monetary aggregates using the
concept of liquidity.
_ Monetary aggregates: Measures of the
quantity of money that are broader than curency
_ M0, MB, M1, M2, M3, M4/L: Not all of them
are widely used and the classifications depend
on the country
MEASURING MONEY
money that can withdraw anytime

• M1 = Currency + traveller’s checks + demand deposits + other checkable deposits.

• M2 = M1 + small denonmination time deposits + savings deposits and money market deposit
accounts + money market mutual fund shares.
• M3 (Broad money) = M2 + large denomination time deposits and repurchase agreements + money
market mutual fund shares (institutional) + Repurchase agreements + Eurodollars.
Note: As of March 2006, The Fed has discontinued M3.
➔Which measure is better? M2 most watched

➔https://www.youtube.com/watch?v=t3413csxEtI
fance: accepted using coin for business transactions not daily transactions —> bitcoin considered mean of an investment tool
—> choose

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