Ch 3.1 Money

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Money and Finance The individual as producer, consumer and borrower Chapter 3.1


Learning objectives? describe the functions of money and the need for exchange describe the functions of central banks, stock exchanges, commercial banks

Why do we need money?:

Why do we need money? To exchange for those goods and services we each need and want but are unable to produce for ourselves, because we are not self-sufficient (individually we cannot produce everything we need and want) we specialize in those tasks and productive activities we are best able to do and therefore need to trade with producers of other products http://


Barter Barter involves exchanging goods and services, i.e. ‘ payment ’ for one product is made with another Problems with barter are : finding someone to swap with (there must be a double coincidence of wants) ► ◄ how to agree values (how many apples to one cow, and how much cheese for one apple?)

The functions of money:

The functions of money a medium of exchange a good store of value a measure of value a means of deferred payment IOU $20 To overcome the problems of barter a money must be: Prices

The functions of money:

The functions of money A medium of exchange If we have money we don’t need to search for a person that is willing to barter We don’t need the double coincidence of wants Prices A measure of value All products have a price expressed in terms of one single product called money They don’t have to remember how many apples they should give for a loaf of bread! Money is a unit of account used to measure and compare the value of different goods and services and used to express their prices

The functions of money:

The functions of money A store of value When you barter you have the problem of saving goods – they take up space or perish With money can be saved and tends to hold its value (apart from during periods of inflation) Prices A means of deferred payment Credit in a barter system would be very difficult and open to cheating With money a person can buy goods on credit (defer payment). The person can have the goods but pay later.

Choosing a good money:

Choosing a good money A good money must be: acceptable to others in payment for goods and services durable so that it is not worn down or damaged easily though frequent use portable so that it is easy to carry around divisible into smaller units and values scarce , otherwise if it is freely available it will be of little or no value to others

What is money?:

What is money? Notes and coins + bank deposits Bank deposits are ‘ near money ’ because they can be withdrawn to provide cash to make payments reasonably quickly


You are going to make a presentation that over the next 3 lessons that looks at Banking and the Stock Exchange This presentation needs to include 3 sections Central Bank What is it and what does it do? Commercial Bank What is it; what does it do?; how would you chose which bank? Stock Exchange What is it; what does it do; how does it work? Your presentations must be Colourful Include video/s Only include short bullet points – no long boring text!! You can put notes in the notes section to help you when you present but you must not read these out word for word

Financing economic activity:

Financing economic activity Banks lend money to people, firms and government organizations to finance their spending Stock can be sold on the stock market to provide long-term finance for companies and governments

The banking system:

The banking system Banks are financial intermediaries : they bring together customers who want to save their money with customers who want to borrow it

The price of money:

SAVING MONEY Banks need money to make loans Banks offer savers interest to encourage them to save their money in savings accounts The interest rate is a reward for saving money Savers may be offered higher interest rates for long-term savings The price of money … is the interest rate (expressed as a % per unit of money) The base rate of interest in an economy is set by the central bank or the government. It is the rate which the central bank will charge banks for lending them money if they run short of cash. For example: to attract savings, a bank offers its customers annual interest of 3% a person who saves $1,000 in a savings account for one year will receive $30 in interest at the end of that year

The price of money:

The price of money For example : a small firm borrows $10,000 repayable in one year the interest rate is 5% per year the total repayable at the end of the year = $10,500 BORROWING MONEY The interest rate is the cost of borrowing money Lending money to people and firms involves administrative costs and risks of non-repayment. Banks must cover these costs to make a profit The longer the term of the loan and the greater the risk of non-repayment the higher the interest rate charged Interest charges also compensate bank s for price inflation which will reduce the value of the money they have tied up in loans

The role of a central bank:

The role of a central bank The central bank is at the centre of the banking system in most economies The main function of a central bank is to maintain the stability of the national currency and the money supply The Bank of England THE BANKERS ’ BANK S upervis es the banking system and regulat es the conduct of banks Holds the accounts of banks and transfers money between them Is lender of the last resort to banks if they run short of money

The role of a central bank:

The role of a central bank The Central Bank of Indonesia THE GOVERNMENT ’ S BANK Issues notes and coins Manages the national debt Manages payments to and from the government Manages the nation ’ s gold and foreign currency reserves Operates the government ’ s monetary policy


For homework watch these videos on the Bank of England The BofE is typical of a central bank so this will give you a good idea of the role of a central bank https :// d0-8tr6DGo https:// q6OVHJbQ https:// https://

Issuing stock:

Issuing stock Stock is the name used to describe money raised by a joint stock company or corporation, or a government. Joint stock companies sell shares to raise permanent capital . Shares never have to be repaid. The people and organizations that buy shares become the owners or shareholders of joint stock companies. Each share held in a company entitles its owner to a share of any company profits. This payment from profits is called a dividend. A government sells loan stocks or bonds to raise money for a fixed period of time, sometimes up to 25 years or more. Bonds are repaid with interest at the end of their term.

The stock market:

The stock market A stock exchange , or bourse, is a business organization that enables individuals, companies and governments to buy and sell loan stocks and company shares on the global stock market. The stock market is the global market for the buying and selling of new and second-hand government stocks and company shares. The stock market brings together all those individuals and organizations willing and able to buy stocks and shares and all those individuals and organizations willing and able to sell them.

Why is the stock market important?:

Why is the stock market important? Far fewer stocks and shares would be traded if the individuals and organizations that bought them were unable to sell them on at a future date to other investors so they could get their money back. If governments and companies cannot sell their newly issued stocks and shares they will be unable to raise the capital they need to finance their activities. There will be less economic activity. Fewer goods and services will be produced.

What determines share prices?:

What determines share prices? Shareholders are likely to receive bigger dividend payouts Demand for shares in the Alpha Company increases The market price and quantity of shares traded in the Alpha Company increase Dividend payments to shareholders may fall The market supply of shares in the Beta Company increases as shareholders attempt to sell their shares The market price and quantity of shares traded in the Beta Company falls The Alpha Company is expected to announce a significant increase in annual profits A fall in orders at the Beta Company sparks fears of falling profits and factory closures

Stock market conditions :

Stock market conditions A bullish market Share price index Stock market prices are rising A bear market Share price index Stock market prices are falling

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