Chapter 16 Money

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Chapter 16 Money
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Barter

• People exchange goods directly for goods.
• The barter system of exchange is very
  inconvenient and costly. Money was invented to
  reduce the cost of exchange.

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Inconveniences of barter

• 1. The double coincidence of wants
• Each person needs to have the goods wanted by the
  other person.

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Inconveniences of barter

• 2. Higher cost of agreeing to an exchange ratio
• Higher cost in agreeing to an change ratio
  because goods differ in features and qualities.

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3. Inconvenience of barterLack of a common
measure of value

• Thinking
• How many exchange ratios if there are
• 2 goods ,
• 3 goods,
• 4 goods or
• 50 goods ?

• The use of money greatly reduces the number of
  exchange ratios, and hence lowers the cost of
  exchange?

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Inconvenience of barter 4. Inconvenience of
storing wealth

• Thinking
• If you sell machinery and get vegetables in
  return as your wealth, what do you think your
  wealth be after a week?

• The act of purchase cannot separated from an act
  of sale. This creates inconvenience in storing
  wealth

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Thinking Time

• Exchange with the use of money differs from
  barter exchange in that the former
• A. is controlled by the government but the latter
  is not.
• B. has a price for each good but the latter has
  not.
• C. Does not require the double coincidence of
  wants but the latter does.
• D. involves competition but the latter does not.

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Definitions and functions of money

• Money is anything that is generally acceptable as
  a medium of exchange for settling transactions or
  debts.

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Functions of money

• 1. As a generally acceptable medium of exchange
• 2. As a store of value
• 3. As a standard of deferred payment
• 4. As a unit of account.

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Thinking Time

• Do you think Credit cards is a kind of money?

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Types of money

• 1. Commodity money
• Physical goods are used as a generally accepted
  medium of exchange for settling transactions.
• e.g. cattle, silk, gold, silver

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Types of money

• 2. Convertible paper money
• Convertible paper money is money that is
  convertible into gold and silver.

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Types of money

• 3. Inconvertible money
• They cannot be converted into commodity such as
  gold or silver.

• Thinking
• Do you think money and coins are convertible or
  inconvertible money?

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Types of money Inconvertible money

• Notes and coins are fiat money .
• Inconvertible
• Legal tender
• Legal tender (????)
• Sellers or creditors must accept in settlement of
  transactions and debts.

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Types of money Bank Deposits

• 1. Demand deposits
• Demand deposits are the money people put into
  their current account

• 2. Savings deposits
• Savings deposits are the money people put into
  their savings account

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Types of money Bank Deposits

• 3. Time (or fixed) deposits
• Time deposits are the money people put into their
  fixed deposit account

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Thinking Time

• Compare the use of demand deposit and currency in
  circulation in terms of
• a) general acceptability
• b) convenience in transactions involving large
  amounts

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Types of money NCD

• Negotiable certificates of deposit (NCDs)
• Fixed deposit period
• The interest rate on NCDs can be floating or
  fixed
• Negotiable (i.e. transferable)

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NCDs and Time deposit

• Time deposit

• NCD

• 1. Fixed deposit period
• 2. The interest rate on NCDs can be floating or
  fixed
• 3. Negotiable (i.e. transferable)

• ?

• ?

• ?

• ?

• ?

• ?

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Types of money Electronic money

• Electronic money refers to the money stored
  electronically in certain cash cards such as
  Octopus.

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Thinking Time

• Do you think savings deposits (EPS system) can be
  served as a medium of exchange?

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Properties of money

• Thinking
• What do you think are the basic properties of a
  good money?

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Properties of money

• 1 Generally acceptable
• 2. Limited in supply
• 3. Durable
• 4. Portable
• 5. Divisible
• 6. Homogeneous

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Thinking Time

• Suggest THREE reasons why gold is often said to
  be a better form of money than paper money

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Thinking Time

• Cheques are preferred to banknotes and coins when
  used as a medium of exchange in large
  transactions because cheques are more
• A. durable
• B. generally acceptable.
• C. scarce
• D. portable

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Money Supply M1

• M1 Cp Dd
• Cp currency in public circulation
• Dd demand deposits

• Currency supply
• Cp Cm
• Cm currency in monetary sector

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Money Supply M1

• M1 Cp Dd
• M1 is based on the function of money as a medium
  of exhcnage

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Money Supply M2

• M2 M1 Ds Dt NCBB
• M1 Cp Dd
• Ds savings deposits with licensed banks
• Dt time deposits with licensed banks
• NCBB negotiable certificates of deposit issued
  by licensed banks held outside the monetary sector

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Money Supply M2

• M2 M1 Ds Dt NCBB
• M2 is based on the function of money as a store
  of value

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Thinking Time

• Demand deposits are included in both M1 and M2
  because they are good stores of value. Is this
  correct?

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Money Supply M3

• M3 M2 DRLB NCDRLB DDTC NCDDTC
• DRLB time deposits placed with restricted
  licensed banks
• NCDRLB negotiable certificate of deposit issued
  by restricted licence bankds held outside the
  monetary sector
• DDTC time deposits placed with deposit-taking
  companies
• NCDDTC negotiable certificates of deposit issued
  by deposit-taking companies held outside the
  monetary sector.

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Money Supply M3

• M3 is based on the function of money as a store
  of value

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Thinking Time

• If Peter withdraws 3000 from his savings deposit
  account. He then puts 500 into his demand
  deposit account and keep the rest is cash.
• What are the immediate effects on M1 and M2

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Thinking Time

• Mr. Chan paid 200,000 in cash to buy from Mr.
  Wong a certificate of deposit issued by a
  deposit-taking company. Mr. Wong then deposited
  this 200,000 into his savings account. The
  immediate effects are
• 1. M1 decreases by 200,000
• 2. M2 remains unchanged
• 3. M3 increases by 200,000
• A. 1 2 B. 1 3
• C. 2 3 D. 1,2 3

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The issue of currency in Hong Kong

• Thinking
• What are consisted in the currency of Hong Kong?

• Hong Kong Currency consists of coins and notes.

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The issue of currency in Hong Kong

• Thinking
• Which banks issue notes in Hong Kong?

• Hong Kong Currency are issued by
• 1. HSBC
• 2. Bank of China (Hong Kong) Ltd. (BOC)
• 3. Standard Chartered Bank Ltd. (SCB)

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The issue of currency in Hong Kong

• Thinking
• Which institution issue 10 notes coins in Hong
  Kong?

• The Hong Kong Monetary Authority (HKMA)?????

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The currency issuing process
Send US to HKMA

• Three note-issuing banks

HKMA
US1HK7.8
Buy Certificate of Indebtedness
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The currency issuing process

• Thinking
• What is the linked exchange rate in HK?

• US1 HK 7.8