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