Chapter 2...18 2.4 Wicksell problem Ch 2–Nature of Money • The issue with the Barter economy is the double coincidence of wants • Models of this type can lead to the emergence

Chapter 2

The Nature of Money

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Learning Outcomes

➢ General functions of Money

➢ Means of Payment

➢ Unit of account

➢ Store of value

➢ The Wicksell problem

➢ Characteristics of a suitable of a means of payment

➢ Different types of money

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2.1 What is Money?

Anything which is in general use, and

generally accepted, as a form of exchange and

a means for performing transactions

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2.2 Functions of Money

Ch 2– Nature of Money

Means of Payment

• Money being used to pay for items purchased or to settle any debts.

• If something is a means of payment, there is no further claims on the parties

concerned

Medium of exchange

• “An object which is taken in exchange, not on its own account. . . not to be

consumed by the receiver or to be employed in technical production”

• A medium of exchange need not necessarily be a means of payment. Ex:

Debit cards

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Means of Payment Vs. Medium of Exchange

• Cash

• Debit Card

• Credit Card

• Cheque

• Mobile Money

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Money as a unit of account

• money acting as a measure of exchange value, money

• The essential point about this function is that money is acting as a common

denominator

• Money is simply acting as a unit of measurement in the same way that

metres measure length and kilograms measure weight.

• Greatly reduces the number of exchange ratios between goods and services.

7Ch 2– Nature of Money


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Money as a store of value

• Money serves as a store of value

• Money permits the separation in time of the act of sale from the act of

purchase.

• The existence of a means of payment enables a person to sell a good

without simultaneously having to buy another good in exchange.


Real Estate

Fixed Deposits

Stocks

Savings Accounts

Cash

Liquidity

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2.2 Types of Money


• Commodity Money

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2.2 Problem with Commodity money


Key Shortcoming

Double coincidence of Wants

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2.2 Barter Economy – It’s not just

something in the past..


A Dozen Puffins Will Get You 800 Mackerel

a barter system has sprung up among zoos andaquariums to trade animals without using money.They even do it with species that aren'tendangered. But barter can be complicated.

For example: The New England Aquarium inBoston was recently in the market for somelookdown fish, and they knew of an aquarium inNorth Carolina that was willing to trade some.

The folks in North Carolina wanted jellyfish andsnipe fish. The New England aquarium had plentyof jellyfish — but no snipe fish

Link

http://www.npr.org/sections/money/2014/09/12/347659683/a-dozen-puffins-will-get-you-800-mackerel-inside-the-weird-economy-of-zoos

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2.2 Types of Money


• Fiat Money

• Money that has physical substance but no intrinsic

value.

• The value of fiat money is reinforced in society by

the attribute of being `legal tender

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Legal Tender

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Legal Tender

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2.2 Types of Money


Credit Money

• Credit money is a claim on another

person or institution.

• Credit money is also known as `inside

money’.

• Credit as a means of payment - Only

when all parties concerned are entirely

confident the bank will not fail, will such

transfers be a means of payment.

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2.4 Wicksell problem


• The issue with the Barter economy is the double coincidence of wants

• Models of this type can lead to the emergence of indirect barter.

• In indirect barter a trader accepts a good not because she or he wants to

consume it but because of the possibility that it may result in a future

trade.

• Barter, commodities are acquired not for consumption but for the purposes

of making future exchanges.

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• In a Barter Economy, because of the double coincidence of wants, no trade

could take place

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• The Wicksell problem arises due to a lack of trust between agents


2.4 The role of Trust in Money

What would you trust more?


2.4 The role of Trust in Money

It’s not only Central Banks that issue currency

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2.5 Properties of Money


• Durability

• Portability

• Homogeneous

• Divisibility

• Recognisability

• Acceptability

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2.5 Properties of Money


`When an object is more readily acceptable to other people in the economy, it is

more likely that each individual will desire it and accept it as a medium of

exchange. - Kiyotaki & Wright

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2.6 Other Issues to think about


• Is bitcoin and e-currency money?

• Is it a means of payment as well as a medium of exchange

Right now, Bitcoins are effectively irrelevant when compared with the larger paymentssystem, but those who anticipate it expanding to be widely used might ask how sure they arethat private monies of this type would actually remain private. Once big enough to be termeda success, any such currency would attract more attention from governments than a cursorySenate hearing.

• Will it still be money if it is no longer tied to a Central Bank?

• Smart Money & Annonymity

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Do you require a central Bank to issue Money?

▪ Goodhart argues that states have essentially always been in control of monetary systems.He emphasizes that governments have always viewed seigniorage as a useful form ofrevenue and are unlikely to allow this source of revenue to be replaced by a private sourceof money.

▪ Only when governments standardized and verified such coins – and provided security formints – were coins widely used as a medium of exchange. Goodhart notes that much ofthe Roman empire went from a monetary economy back to barter after the empire’sdecline. Bitcoin enthusiasts may believe that problems with security and verification areless likely to affect a digital currency. Time will tell us the extent to which that is true.

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Cashless Society

August 2018 - CB Chief calls on financial sector IT experts to collaborate toachieve ‘less cash’ economy

“The Central Bank is fully supportive of digitalisation and the use of new

technologies to promote a less cash society in Sri Lanka through the use of new

cashless payment mechanisms such as digital banking accounts, smart mobile

apps, mobile wallets, QR code payments, nickname-based payments, initiatives on

e-commerce payments and cross border payments,”

– Dr. Indrajit Coomarswarmy

Read More: Daily FT

http://www.ft.lk/financial-services/CB-Chief-calls-on-financial-sector-IT-experts-to-collaborate-to-achieve--less-cash--economy/42-661580

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2.6 A world without money?



Recap & Learning outcomes


End of Chapter Questions


Further Resources

BooksGoodhart – Money, Information & Uncertainty

DocumentaryNiall Fergurson – Ascent of Money

https://www.youtube.com/watch?v=X1sjFHEl5GI

https://www.youtube.com/watch?v=X1sjFHEl5GI

Documents

Chapter 2...18 2.4 Wicksell problem Ch 2–Nature of Money • The issue with the Barter economy is the double coincidence of wants • Models of this type can lead to the emergence