topic 4
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TOPIC 4. MONETARY ECONOMICS. MONEY. In the ancient time, where money is not yet introduced,. transactions were done by exchanging one goods with another in a Barter System. Barter Trade System. A barter system is a direct trading or exchanging of goods between one person to another. - PowerPoint PPT PresentationTRANSCRIPT
Azizah Isa 1
TOPIC 4
MONETARY ECONOMICS
Azizah Isa 2
MONEY
Azizah Isa 3
In the ancient time, where money is not yet introduced,
transactions were done by exchanging one goods with another in a Barter System.
Azizah Isa 4
Barter Trade System
• A barter system is a direct trading or exchanging of goods between one person to another.
• Barter system of course does not work successfully in a modern economy.
Azizah Isa 5
Problems in Barter System
• Double Coincidence of Wants.
Azizah Isa 6
Problems in Barter System
• Double Coincidence of Wants.• Value instability
Azizah Isa 7
Problems in Barter System
• Double Coincidence of Wants.• Value instability• Storage are impossible
Azizah Isa 8
Problems in Barter System
• Double Coincidence of Wants.• Value instability• Storage are impossible• Indivisible
Azizah Isa 9
Problems in Barter System
• Double Coincidence of Wants.• Value instability• Storage are impossible• Indivisible• No Standard of unit of account
Azizah Isa 10
Problems in Barter System
• Double Coincidence of Wants.• Value instability• Storage are impossible• Indivisible• No Standard of unit of account• Difficulties in paying debt
Azizah Isa 11
Problems in Barter System
• Double Coincidence of Wants.• Value instability• Storage are impossible• Indivisible• No Standard of unit of account• Difficulties in paying debt
These problems may caused to:
Azizah Isa 12
Problems in Barter System• Double Coincidence of Wants.• Value instability• Storage are impossible• Indivisible• No Standard of unit of account• Difficulties in paying debt
These problems may caused to: waste of time, inconvenience,
cumbersome and difficulties in making an
exchange.
Azizah Isa 13
.Due to limitations in the Barter System,
Money is needed in a modern economy which act as a means of payment in the transaction of goods and services.
Azizah Isa 14
WHAT IS MONEY?
HOW DO YOU DEFINE MONEY?
Azizah Isa 15
Definition of Money
• Money can be anything that is generally accepted by the public as a medium of exchange in the transaction activities.
Azizah Isa 16
Money act as a means of payment:
Money act as:a medium to transfer ownership of goods
and services from one person to another and for the repayment of debts.
Azizah Isa 17
Evolution of Money
As time passed by, the money used varies accordingly to meet the needs and purpose of using money.
In the ancient time Commodity Money is used.For example;
gold, silver, stones, seashells, corns, wool and bones.
Azizah Isa 18
Museum of Bank Negara Malaysia
The different types of commodity money.
Azizah Isa 19
Azizah Isa 20
Azizah Isa 21
Azizah Isa 22
Commodity Money
In the use of gold, for example;
its:
Precious metal such as gold and silver had its
intrinsic value as a full-bodied money.
Thus, if its intrinsic value is stated on its face therefore it is said that:
Face Value = Commodity Market Value.
Intrinsic value = Commodity Market Value.
Azizah Isa 23
Modern Money• But nowadays, in the modern
economy, there are many forms of money:
Fiat money
Azizah Isa 24
2. Fiat Money
Face Value (FV) > Commodity Market Value (CMV)
o Example: coins and paper money (banknotes).o Although its FV is larger than its CMV, but still it
is acceptable as money because of the truth and faith in its acceptance as a legal tender in each specified country .
Azizah Isa 25
• The Ringgit and Sen (as in the picture above) are issued by Bank Negara Malaysia (BNM) as a legal tender in Malaysia.
Azizah Isa 26
Modern Money• But nowadays, in the modern economy,
there are many forms of money:
Fiat money
Bank money
Azizah Isa 27
A form of Near Money – i.e. a financial asset which closely resemble money.
Examples: Current/Demand Deposits in banks (cheques),
Credit Cards, Debit Cards, Stored Valued Cards, Smart Card ATM Cards and Saving Accounts.
3. Bank Money
Azizah Isa 28
Modern Money• But nowadays, in the modern economy,
there are many forms of money:
Fiat money
Bank money
Electronic Money
Azizah Isa 29
4. Electronic Money/ e-money / e-purse / e-cash.
Transfer of money electronically made over the internet.The acceptance of electronic payment in the transactions via internet.Example: e-cash and e-cheques
Azizah Isa 30
“Money is what money does”
• What does money can do for you?
Azizah Isa 31
• MONEY can does its FUNCTION for you.
Azizah Isa 32
What are the FUNCTIONS of MONEY ?
Azizah Isa 33
Four Main Functions of Money:
As a Medium of Exchange
Azizah Isa 34
Four Main Functions of Money:
As a Medium of Exchange As a Standard Measurement / unit
of account
Azizah Isa 35
Four Main Functions of Money:
As a Medium of Exchange As a Standard Measurement / unit
of account As a Store of Value
Azizah Isa 36
Four Main Functions of Money: As a Medium of Exchange As a Standard Measurement / unit
of account As a Store of Value As a Standard of Deferred Payment
Azizah Isa 37
1. As a Medium of Exchange
• For transactions purposes – in purchasing and selling of goods and services.• It act as an instrument – to make payment or to
receive payment in the transfer of ownership.
Azizah Isa 38
2. As a Standard of Measurement• Can be used in measuring the value of
goods and services in terms of its monetary value.
• Have a standard monetary units (RM) – as a unit of account.
For e.g. RM1, RM2, 0.50 cents 0.20 cents etc.
• Comparing relative value of goods and services transacted.
Azizah Isa 39
3. As a Store of Value
• For saving purposes
– as a store of wealth.
• Has the ability to hold its value
– has the non-perishable
criterion.
• Can reserve for the purpose of future purchasing.
Azizah Isa 40
4. As a Standard of Deferred Payment
• As a means of settling debts maturing in the future.
• As money acts as a unit of account and store of value, it makes easier to settle debt.
• Lenders make loans and buyers repay loans with money.
Azizah Isa 41
Four Main Functions of Money:
As long as inflation does not exist in an economy, money may does its functions successfully.
Azizah Isa 42
Four Main Functions of Money:
As long as inflation does not exist in an economy, money may does its functions successfully.
It is said that,
“money is what money does.”
Azizah Isa 43
LETS THINK OF
• WHAT MONEY CAN BUYS?
Azizah Isa 44
CAN MONEY BUYS
ANYTHING THAT YOU WANT?
Azizah Isa 45
CAN MONEY BUY YOUR TRUE LOVE?
CAN MONEY BUY YOUR FRIENDSHIP?
Azizah Isa 46
LETS THINK OF WHAT ACTUALLY MONEY CAN
DO FOR YOU?
Azizah Isa 47
5 minutes rest ,
Please !
Azizah Isa 48
Money as the Most Liquid Asset
• According to the Liquidity Approach : Money is the most liquid asset.
• All assets have some degree of liquidity, but some have more than others.
• Indeed, money is perfectly liquid although in the real world money is not absolutely liquid.
• Refer to a Simple Liquidity Spectrum.
Azizah Isa 49
A Simple Liquidity Spectrum
More liquid
Less liquid
CASH (most liquid asset)
CURRENT ACCOUNT
OTHER BANK DEPOSITS
DEPOSITS AT NON-BANKS
SHORT-TERM SECURITIES
LONG-TERM SECURITIES
PHYSICAL ASSETS (least liquid asset)
Azizah Isa 50
Liquid Assets and Near Money
• Liquid Assets refer to any financial instruments that can be converted into money easily.
• The most liquid asset is the cash – coins and notes.
Azizah Isa 51
Liquid Assets and Near Money
• Near Money are those financial instruments or assets which are readily convertible into money.
• Examples are;
current deposits (cheques),
savings deposits,
short term bills.
Azizah Isa 52
Categorization of Monetary Aggregates
NARROW MONEY
BROAD MONEY
BROADER MONEY
A Measure of Monetary Aggregates according to a Diamond Spectrum.
Azizah Isa 53
NARROW MONEY, M1Also known as Transaction Money – can be used to make direct payments.M1 constitute of: Currency in Circulation (coins and paper money/notes/bank notes) Banks Till Money Current Deposits Traveler’s Checks issued by non-bank
companies. Other Checkable Deposits
Azizah Isa 54
BROAD MONEY, M2M2 constitute of: M1 + Fixed Deposits Saving Deposits Repurchase Agreements (REPOs) Negotiable Instrument of Deposits (NIDs) Bank Negara Certificate all of which are held at commercial banks only.
Azizah Isa 55
BROADER MONEY, M3 broader medium of exchange and as a store
of value. Constitute of:
M2 +Fixed DepositsSaving DepositsREPOsNIDs all of which are held at other financial
institutions.
Azizah Isa 56
MONEY SUPPLY
Fiat money (coins and notes)Banks Till MoneyCurrent DepositsTraveler’s Checks.Other Checkable Deposits
M1
Fixed DepositsSaving DepositsREPOsNIDs
M2M3
Held at commercial banks only)
Held at commercial banks & other financial institutions.
Narrow Quasi Money (M2 – M1)
Broad Quasi Money (M3 –M1)
Azizah Isa 57
Quasi Money
• Less liquid money which excludes the M1.• Consists of fixed and savings deposits and
other financial instruments offered by financial institutions, such as NIDs and REPOs.
• Narrow Quasi Money = M2 – M1• Broad Quasi Money = M3 – M1
Azizah Isa 58
Exercise 1: Question To PonderITEMS RM mil
Coins 13,300
Fixed deposits in other financial institutions 26,880
Savings deposit in commercial banks 44,660
Fixed deposits in commercial bank 55,600
Negotiable certificates 25,000
Savings deposit in other financial institutions 25,580
Current deposits in commercial bank 30,650
Azizah Isa 59
Calculate:
a. Bank Notes if Fiat Money is RM39,000 millions.
b. M1
c. M2
d. M3
e. Narrow quasi-money
f. Broad quasi-money
g. Give 4 functions of money.
Azizah Isa 60
ANSWERS:
a. Bank Notes if Fiat Money is RM39,000 millions.
Bank Notes/dollars + coins = 39,000 mil.
Bank notes = 39,000 – 13,300
= 25,700 mil.
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ANSWERS:
b. M1 = fiat money/cash + Current deposits in commercial/cheques.
= 39,000 + 30,650
= 69,650 mil.
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ANSWERS:
c. M2 = M1 + Savings deposit in commercial bank
+ fixed deposits in commercial bank + Negotiable certificates.
= 69,650 + 44,660 + 55,600 + 25,000
= 194,910
Azizah Isa 63
ANSWERS:
d. M3 = M2 + Fixed deposits in other financial institutions + Savings
deposits in other financial institutions.
= 194,910 + 26,880 + 25,580
= 247,370
Azizah Isa 64
ANSWERS:
e. Narrow quasi-money = M2 – M1
= 194,910 – 69,650
= 125,260 mil.
Azizah Isa 65
ANSWERS:
f. Broad quasi-money = M3 – M1
= 247,370 – 69,650
= 177,720 mil.
Azizah Isa 66
FISHER’S QUANTITY THEORY OF MONEY
• is given by: the Equation of Exchange / Fisher’s identity MV = PT M = money in circulation V = velocity of money P = price T = number of transactions (goods produced).
Look in Manual, page 71: topic 6 (Inflation)
Azizah Isa 67
FISHER’S QUANTITY THEORY OF MONEY
• Fisher’s assume that V and T are constant in a specific period of time.
• Therefore, any changes to an increases in money(M) would lead to a higher increase in price (P) or inflation in an economy.
• Excess of money supply would caused to inflation.
Take this note
Azizah Isa 68
FISHER’S QUANTITY THEORY OF MONEY
• If, price increases by 10 %, Money supply will increase by 10% too.
• Fisher’s equation is given as an identity, where both sides must be identical.
• Therefore, there will always be a direct and same change of Money Supply with Prices (assuming that V and T are constant.)
Take this note
Azizah Isa 69
Relationship of Money and Prices• When there is inflation (price rises), it is
said that , the value of money falls since the purchasing power of money falls.
• the purchasing power of dollar money is said to fall as price increases.
Azizah Isa 70
Purchasing Power of Money
• is the ability of money that is used in acquiring goods and services.
• So, the Value of Money is determined by the quantity of goods and services you can purchased with it.
• If price rises, then a given sum of money will afford to buy less amount of goods and services.
Azizah Isa 71
Purchasing Power of Money
For example: with RM50 note here,
you can spent and purchased
5 flasks which cost you RM10 each.
RM10.00
Take this note
Azizah Isa 72
Purchasing Power of Money
For example:
with RM50 note here,
you can spent and purchased
5 flasks which cost you RM10 each.
But, let say now, PRICE RISES to
RM25 each.
Instead now, you can buy only 2 flasks.
RM25.00
Take this note
Azizah Isa 73
Purchasing Power of Money
• It is said that, when price increases, the
power that you have to purchase goods with the same amount of money that you have is said to be less now;
In other words, the value of money falls.Take this note
Azizah Isa 74
Changes in Purchasing Power or changes in the
Value of Money
may affect money’s usefulness and its ability to serve all the main functions of money.
• Households lost their believe and acceptance of money if hyperinflation are expected to occur.
Azizah Isa 75
Effects of Inflation on its Function:
May affects all the four main functions of money:Lost its ability as a role of a Medium of
Exchange – inflation reduced the purchasing power of money.
Affects its usefulness as a Store of Value –lost of trust and believe in savings money.
Defeat the function as a Standard of Measurement thus, cannot serve as a Standard of Deferred Payment.
Azizah Isa 76
To Measure Value of Money
Price Index (PI) is used to measure the change in the value of money over time.
• If there is an increase in PI from 100 to 120 for example, it is said that inflation had rises by 20 %.
• As price increases (inflation), value of money falls. The higher the inflation the lower is the value of money.
Azizah Isa 77
In Islamic perspective:
• cost for holding money is minimum.• Speculation purpose in Islam was still allowed
but is limited to certain condition following the Islamic principles.
• Demand for money for transaction purpose is because Muslims spends for sufficient expenditure only.
• Excess money is used for investment purposes.
Azizah Isa 78
Islamic view regarding speculation• The Syariah Law of Islam provides detailed
instructions for the Muslims for conducting their business affair.
• In general, the requirements are as follows: a) All business transactions must be free
as possible from riba, gharar, unfair speculation, and deceit or dishonesty.
b) Production relations are based on the principle of trust, mutual benefit and cooperation.
Azizah Isa 79
Risk takings:
• However, in Islam; speculation in the form of risk takings is still
being allowed - as to attain profit as well as for the benefit or welfare of the society.
• But, speculative activities that involve riba must be avoided.
• Muslims are not allowed to freeze their wealth. The objective of risk taking or investment is
not only to attain profit but Islam emphasis on the welfare of the society.
Azizah Isa 80
Riba is prohibited
• Speculations must not have any element of riba.
• It refers to the excession to wealth and an addition to the principle or capital stock or increment on capital, such as the interest payment on the principle savings and interest-bearing credits available that sometimes is expensive than they could afford which denied the aim to serve for the welfare of the society.
•
Azizah Isa 81
“Gharar” sale
• The “Gharar” sale is a kind of sale in which uncertainty is involved,
• such as the sales of goods and services they have not produced.
• It involves speculative risk in the contract.
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• non-physical delivery and riba.
In Islamic framework, although speculation is not lawful, but should not involve for the reasons such as:
Instead, for an interest that is paid on loans, profit-sharing such as mudharabah, murabahah and al-baibithamin-ajil could be the solutions for investment loans in Islam.
Azizah Isa 83
End of the Show
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