3.1 Money and Finance

The importance of money. Money is the product of a long period of development. Having money enables people, communities and firms in modern economies to specialize in the production of those G&S they are best suited to, and subsequently use the money earned to buy all other G&S they may need or want from other producers.Without money, specialization and exchange will be difficult and therefore far fewer G&S will be produced and fewer wants will be satisfied.
Describe the functions of money. Medium of exchange. Money is a good that is generally acceptable in exchange for all other G&S without having to search/seek for someone who is willing to barter. It overcomes the problem of needing a double coincidence of wants. Trade is brought about by two transactions with money being used in each.
Describe the functions of money. Measure of value. Using money facilitates producers and consumers engaged in trade to avoid the problems of fixing prices of G&S in terms of all other G&S. All goods have a price expressed in terms of one single product-money. Money is a unit of account used to measure and compare the value of different G&S.
Describe the functions of money. Store of value. One of the problems with barter is that many goods are difficult to save either because they encompass excessive space or lose their value over time because they perish. Unless prices are rising rapidly, money tends to hold its value over time, allowing people to save in order to make purchases at a later date. Some people save by storing valuable antiques and works of art, items that we do not regard but which can be exchanged in return for money in the future, since as the prices of goods rise over time, purchasing power of money, or what it will buy, is reduced. When prices rise rapidly due to inflation, money will fail to be such a good/optimum store of value.
Describe the functions of money. Means of deferred payment. When a person purchases goods on credits the consumer has the use of the good without having to pay for them immediately. The consumer can pay after some time in the near future after receiving the goods. In the case of hire purchase, payment is made through instalments dissipated over a number of months or years. Credit in a barter system would be rather confusing and open to cheating. Using money to pay later overcomes these problems and henceforth, encourages people to engage in trade, reducing the worry of giving credit.
Characteristics important for a good money to possess. Acceptability. (ALL) Anything can be used as money as long as it is generally acceptable. Present money is token money- piece of paper or metal worth much less than face value printed upon it.
Characteristics important for a good money to possess. Durability. (DAY) Any good used as money must be hard-wearing. Coins and notes, or the commodity must be strong and durable so they may act as a store of value.
Characteristics important for a good money to possess. Portability. (PEOPLE) Money should be easily portable. Paper notes are lightweight.
Characteristics important for a good money to possess. Divisibility. (DIE) It must be possible to divide money of a large volume into smaller values to make small purchases or to give change, which is why notes and coins have different face values for purchasing G&S with different prices.
Characteristics important for a good money to possess. Scarcity. (SAD) Good money must be limited in supply/scarce if people and firms are to value it as a good to be used in exchange.
Describe the need for exchange. In a barter system trade is difficult as there is no guarantee of a fair rate of exchange. People are unable to specialize to their full potential and have to spend time and effort producing a range of G&S in order to increase the chances of trading successfully for things they need, meaning that much less is produced by whole economies than if they specialized in the production of those G&S they are best able to produce. Money encourages specialization by making trade simpler, enabling an economy to increase its national output and income and allow people to enjoy a much higher standard of living. In turn, the economy specializes more money needed to finance an increasing amount of production and trade. Money is needed by consumers, firms and governments to make payments to hire labour and purchase other resources, and G&S. Banking system can provide this money and make it easier to make payments. Therefore, as output of an economy grows the more trade occurs, so banking system must develop and create more money.
Generally acceptable forms of money. – Cash/notes and coins with different face values are generally accepted and recognized as money in all economies.- Savings in banks and other financial institutions can be classified as money because one day, deposits can be withdrawed to be exchanged for wanted G&S.
DEFINE Money Supply Total value of bank deposits (as well as in other financial institutions) and notes and coins circulating in an economy.

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