money’s 3 functions in any economy: means of exchange a store of purchasing power a measure of...
TRANSCRIPT
Money’s 3 Functions In Any Economy: Means of exchange A store of purchasing power A measure of value
12.1 - Money and Its Uses
Without money, people must exchange products: barter Essentially a trade
Money – Means of Exchange
Safe and accessible store of wealth Money’s major advantage is liquidity – the ease with
which it can be turned into a means of payment Opportunity Costs still occur OC of someone holding income is sacrificing the
wealth they could have earned if it were converted to a stock or bond
Money – Store of Purchasing Power
Provides buyers with a unit of account – a pricing standard that allows all products to be valued consistently
EX. If Apples are $2 / kilogram and Oranges are $4 / kilogram, you can say that Oranges are twice as expensive as Apples
If your system involves barter, it’s more complicated A clock might be exchanged for 100
apples, 50 oranges, 20 loaves of bread, 2 haircuts or something else
A barter economy is difficult to measure
Money – Measure of Value
Deposit-Takers: Institutions/Businesses that accept funds provided by savers and lend these funds to borrowers Chartered Banks and Near Banks (more on next slide)
Not all funds flowing into the institution flow out Deposit-takers also keep on hand a cash reserve, so
depositors can withdraw funds when they request them
The Canadian Financial System
Backbone of Canada’s financial system Federal government allows them to sell a wide range
of services Top 6: Royal Bank of Canada (RBC), Toronto-Dominion
(TD) Canada Trust Bank, Scotiabank, Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and National Bank of Canada
The bank system is an oligopoly
Chartered Banks
Have more specialized services Most important: Trust Companies, Mortgage Loan
Companies and Credit Unions Trust Companies administer various types of
accounts, e.g. estates and trust funds Mortgage Loan Companies specialize in granting
mortgages Credit Unions are non-profit institutions that take
deposits and grant loans to their members
Near Banks
The supply of money is made up of: currency and some deposits
Currency: paper notes (e.g. $20 bill); coins produced by Royal Canadian Mint Provides users with anonymity when making purchases
Deposits: classified according to their use Demand Deposits: accounts of funds to which depositors
have immediate access Notice Deposits: accounts of funds for which deposit-
takers may require notice before withdrawals can be made Term Deposits: accounts of funds to which depositors
have no access for a fixed period of time Foreign Currency Deposits: accounts of funds held by
Canadian residents that are valued in foreign currency
The Supply of Money
Economists and government decision-makers use five common definitions for money: M1, M1+, M2, M3 and M2+
M1: the narrowest definition of money, consisting of currency outside chartered banks and publicly-held demand deposits at chartered banks
M1+: an alternate narrow definition of money, consisting of M1 plus chequable notice deposits at chartered banks and near banks
M2: a broader definition of money, consisting of M1 plus notice deposits and personal term deposits at chartered banks
Money Defined
M3: the def’n of money consisting of M2 plus non-personal term deposits and foreign currency deposits at chartered banks
M2+: def’n of money consisting of M2 plus corresponding deposits at near banks and some liquid assets
Economists view M1+ as the most accurate measure of the money supply
Some economists prefer the other measures however
Money Defined Cont’d
Credit Card provides user with opportunity to buy goods and services with instantly borrowed funds
These are essentially short-term loans If loans are paid on-time and in-full, there will be no
interest
Role of Credit Cards
Debit Card allows payment through instant transfer of funds
Buyer’s account is instantly reduced by amount of purchase
Retailers must pay for a computer system to track debit transactions Thus, they pass this on to consumer as a higher price on
products
Role of Debit Cards