Money:object that is generally accepted as a method for payment for goods and services and repayment of debts.
We need money as every individual is not self-sufficient – cannot produce everything we want. Therefore, a person has to specialize in a particular skill or process resulting in division of labour. Exchange of goods and services is therefore needed. Money is needed to overcome the problems of barter.
Specialisation: Individuals specialize in the tasks and productive activities that they are best at doing. This results in a surplus of items which they make. Therefore, they need to trade with producers of other products to obtain other goods.
Devision of labour: Worker focuses on one particular task resulting in higher output As the worker is more committed, they will commit lesser mistakes. They become more efficient. Increase production of number of goods.
Why need to exchange? Not everyone is self-sufficient – cannot produce everything we want. So that this allows greater variety of goods and services to circulate around, satisfying more needs and wants.
Problems with barter
Barter: exchanging one good or service for another
1. Fixing the rate of exchange
- In a barter system the value of each and every good must be expressed in terms of every other good, subjective
2. Finding someone to swap with
- double coincidence of wants
- before two people can barter, they must both want the good that the other person can provide.
3. Trying to save
- Perishables?
- Example, apple will not become fresh and will spoil over time.
The main limitations of barter is that it is reliant on a double coincidence of wants. This means that exchanges can only take place when two people each want the good the other person has. Money is much more flexible and allows people to buy whatever they wish as long as they have enough money to finance a transaction.
Functions of money (Purpose and what it is used for)
1. Money is a medium of exchange - Money overcomes the need of double coincidence of wants - Money is a legal tender and is generally accepted in exchange for goods and services
2. Money is a unit of account - Just as a ruler measures length, money measures value. The “value” of every good and services is measured against one commodity – money rather than pencils or carrots.
3. Money is a store of value - Money can only lose its value in times of inflation when its purchasing power falls.
4. Money is a means of deferred payment - When you don’t pay a good or service immediately but later.
- If it is a barter trade, it can be confusing and open to cheating - Encourages trade and reduces the worry of giving credit.
Characteristics of money (Special features – appearances)
1. Acceptability
-must be generally accepted
-Pigs (Would muslims accept it?) 2.Durability
-Money must be hard wearing and durable so that it may act as a store of value. (Apples – still fresh when kept for long? Is it still apples if you keep it? – decompose)
3. Portability
-Able to be carried around easily (Can you fit cows in pockets) (Can cows be carried around easily?) 4. Divisibility
-Money should be able to divide large values to small – easy for trade, small purchases or give change without losing value. 5. Scarcity
-Only if money is scarce would people value it Banks: Financial intermediaries bringing together
1. Customers who want to save their money 2. Customers who want to borrow money 3. Lend money to firms, businesses to finance their spendings, investments
Functions of commercial banks:
1.Accepting deposits of money and savings
2.Providing insurance
3.Providing financial and tax planning advice
4. Exchanging foreign currencies
5. Operate pension funds
6. Making personal and commercial loans
Other types of commercial banks include: Credit Unions Mutual societies Investment banks Islamic banks
Interest rates: cost of borrowing money/return in savings
Borrowers want to lower rate: they do not have to repay much more than what the banks loan them Savings want a higher rate: save more, get more estimated around 0.5%
Central banks: Monetary authority of Singapore Role of central bank:
1.Issue notes and coins
- print currency, replace old currency
2. Manages payment to and from the government-bank of government
3.Supervises banking systems, regulating the conduct of banks, holding their deposits and transferring funds between them - make sure banks are conducting their business properly
- decides which organizations can become banks - It holds the deposits of commercial and other banks - To settle the millions of cheques, debit card and other payments made by their customers
4.Lender of last resort - If one bank run into difficulties meeting payments - prevents banks from running out of money and going bankrupt
5. Manages notional debt - Government runs out of money, - Helps the government to repay the debt
6. Manages the nation’s gold and foreign currency reserves
7. Operates the government’s monetary policy - Sets interest rates
-play a role in determining how people save/spend money
Notes compiled and created by Jayden Lai With reference to Complete Economics for Cambridge IGCSE & O level Textbook Third edition by Brian Titley & Helen Carrier national debt
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