MONEY
1. Definition
Money is defined as something that is generally accepted as payment for good or services as well as
payment of debts.
- currency - consists of paper bills and coins. This is one type of money. Currency is the narrow
definition of money.
- wealth - this is the total collection of pieces of property. Wealth includes not only money but also
other assets such as bonds, common stock, art, land, furniture, cars and houses.
- income - is a flow of earning per unit of time. Money, by contrast, is a stock.
1. Functions of money
1) Medium of exchange - it is used to pay for good and services.
2) Unit of account - money is used to measure value in an economy.
3) Store of value - this is used to save purchasing power from the time income is received UNTIL the
time it is spent. This function is useful because most of us do not want to spend our income
immediately upon receiving it, but rather prefer to wait until we have time or desire to shop.
2. Payment systems
The earliest was commodity money - mainly heavy coins. After that, fiat money emerged - these are the
paper currency decreed by the governments.
Checks - these are instructions from you to your bank to transfer money from your bank account to
someone else’s account when she deposits the check.
Electronic payments - nowadays banks provides websites at which you just log on, make few clicks and
transmit your payment electronically.
E–money - these are money that exist only in electronic form. Debit card - with these cards consumers
can purchase good and services by electronically transferring funds directly from their bank accounts to
a merchant’s account.
FINANCIAL SYSTEMS
1. Function on Financial Markets
Financial markets perform the essential economic function of channeling funds from households, firms
and governments that have saved surplus funds by spending less than their income TO those that have a
shortage of funds because they wish to spend more than their income.
The flows of funds from lender-savers to borrower-spenders happen via two routes:
1) direct finance - here the borrowers (the spenders of the money) borrow funds directly from
financial markets by selling securities (financial instruments). Securities are assets for the person
who buys them but they are liabilities or debts for the individual who sells them
2) indirect finance - here a financial intermediary borrow funds from the lender-savers and then
uses these funds to make loans to borrower-spenders
2. Structure of Financial Markets
How can you obtain funds in a financial market? There are 2 ways:
1. the most common is to issue a debt instrument, such as bond or mortgage, which is contractual
agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular
intervals (interest and principal payments) until a specified date (the maturity date) when a final
payment should be made. The maturity of a debt instrument is the number of years until that
instrument’s expiration date.
a. short term debt instrument - when the maturity is less than a year
b. long term debt instrument - when the maturite is 10 years or more
c. intermediate-term debt instrument - when the maturity is between one and 10 years.
2. the second method of raising funds is by issuing equities, such as common stocks,
which are claims to share in the net income (thats the income after expenses and
taxes) and the assets of a business. → if you own one share of common stock in a
company that has issued one million shares, you are entitled to 1 one-millionth
of the firm’s net income and one millionth of the firm’s assets. Equities often
make periodic payments (dividents) to their holders and are considered long-term
securities because they have no maturity date.
