Chapter 10Money and Banking

Essential

Question

The guiding question that the entirety of Chapter 10 is centered on asks

How well do our financial institutions serve our needs?

Chapter 10

Section 1: Money

Essential

Question

Our guiding question for this particular section on Money

asks:

HOW DOES MONEY SERVE THE NEEDS OF OUR

SOCIETY?

In order to best answer this question, copy down the

concept web on the following slide, and fill it in as we

move through our presentation

$ Money $

USES

SOURCES

OF VALUE

CHARACTERISTI

CS

The Three

Uses of Money

Though we may "define" money in our own unique ways,

there are economists who would define money

differently.

They do so according to money's three uses.

Economists define money as anything that serves as a

medium of exchange, a unit of account, and a store of

value

Money as a Medium of Exchange

A Medium of Exchange is

anything that is used to

determine value during the

exchange of goods and

services.

Money as a Medium of ExchangeHow did people exchange goods or services prior

to the invention of money???This Photo by Unknown author is licensed under CC BY.

Money as a Medium of Exchange

Prior to the invention of money or a formalized currency, people engaged in

the direct exchange of one set of goods or services for another.

This was known as a barter system.

Barter is a verb, referring to the exchange itself

Ex- my brother Joseph REALLY wanted my 4Ocean hydroflask, but I was not

willing to part with it. He bartered with me, offering me an Adidas jacket

that was too big for him to keep. Needless to say, I happily accepted the

trade.

What are the

inherent problems

with bartering??

Money as a Medium of Exchange

The issue with bartering boils down to value. What one person finds valuable, another may not.

Or perhaps, both parties may indeed find the items, goods, or services in question to BE of value, but with VERY different ideas as to how much.

How can one quantify personal value on something that another may not?

Ex- what if the aforementioned hydroflask was of great, personal value to me, perhaps given to me by a long-distant friend or visiting foreign relative? Then Joseph would have had to come up with something of considerable value, perhaps

more than the jacket was worth in my eyes (and maybe not even then would I have traded with him).

Mini-Life Lesson From Zarbalas That No

One Asked For

For those of you who are seeking careers in sales, marketing, advertising

(which is really just marketing, isn't it?), business in general, or really any

career path that involves having to leverage, understand that value as we just

discussed, is crucial.

A sales representative (for example) has to BUILD value in their product or

service.

If they do this successfully, and help you to understand why their product or

service is worth YOUR time and money, then the transaction is successful.

If they cannot, then no value is built, you have no desire to purchase what it is

that they're selling, and everyone is frustrated that they wasted their time.

Food for thought...

Money as a Unit of Account

"In addition to serving as a medium of exchange,

money serves as a Unit of Account.

That is, money provides a means for comparing the

values of goods and services."

Ex- comparing the price of a shirt across multiple stores

where it is sold. Money gives this shirt its worth, as

expressed by the cost at these stores.

What are some examples

of money around the

world??

This Photo by Unknown author is licensed under CC BY-SA-NC.

World Currencies

THE UNITED STATES- DOLLARS

AND CENTS

THE UNITED KINGDOM-POUNDS

JAPAN- YEN RUSSIA- RUBLES MEMBERS OF THE EU- EUROS

Money as a Store of Value

Money serves as a Store of Value in that it keeps its value if you decide to

hold onto it, rather than spending it.

When you save money, it retains its value (inflation/deflation aside). $5 will

always be $5.

When an economy experiences inflation or a general increase in prices, then

money still retains its value, but that value may not add up to as much in

terms of what it is able to purchase.

Ex- before inflation, $5 may be able to purchase a combo meal at a fast food

restaurant. But after inflation, that same $5 may not be able to afford the whole

combo, which is now $7, as prices have gone up.

The Six Characteristics of Money

The Six

Characteristics

of Money

Many objects have been used throughout history as a form of currency, including

Cattle

Fish

Furs

Precious stones

Porpoise teeth

Rice

Sea shells

Tulip bulbs

And Olive oil

However, there are characteristics today that define what counts as currency, and what does not. Many, or likely all of the above, would not count as currency according to these characteristics.

The Six Characteristics of Money

Durability

Objects used as currency must withstand the

test of time, and be relatively invulnerable to

wear and tear.

Though delicious when used correctly, olive

oil does not last nearly as long as a coin would,

or even a paper bill.

The Six Characteristics of Money

Portability

How portable is the potential currency in

question?

How easy is it to take with you?

Have you ever tried taking cattle around with

you with the intent to exchange it for another

good or service? You get my point...

The Six Characteristics of Money

Divisibility

Money must be able to be easily divided into separate, smaller

denominations.

This is why we have larger and smaller bills, and coins in the United

States

Back in Colonial times, Americans would cut Spanish dollars into as

many as eight pieces, called "pieces of eight" (Pirates of the

Caribbean 3 reference?)

Today, we can "break" a twenty or larger bill into two $10 bills or

four $5 bills, without having to tear the $20 in half or in quarters

(respectively)

The Six Characteristics of Money

Uniformity

Every piece of currency with equal value must be the same

That is, every $5 must be the same, otherwise there would be a

discrepency in value.

Back in the day, if one was trading (or bartering, see how I

brought it back?) using dried fish as their currency, then one dried

fish might be small and thus gets you an apple in exchange for it,

whereas a larger dried fish one may purchase you a chicken tender

pub sub. See the problem? Currency must be uniform.

The Six Characteristics of Money

Limited Supply

Money cannot come from some unlimited supply, there must

instead be a quantified store of it circulating through an economy.

If your island trades in rare pebbles that are only found on a

particular beach on the island, but then someone discovers a

whole horde of those same pebbles located in a mine, then they

lose their value, as now anyone can get their hands on the not-so-

rare pebbles.

To regulate the supply of money, economies ought to have

governing bodies or agencies to preside over this. In the United

States, we have the ______________ ___________ to do this. We'll

learn more about them later.

The Six Characteristics of Money

Acceptability

This is perhaps the simplest of the characteristics, but money

must be acceptable.

If you go somewhere and attempt to purchase lunch with your

vintage holographic Pokémon cards from the late 90's, the

cashier may give you a funny look before asking you to leave.

People, businesses, services MUST find your

currency acceptable, otherwise it is virtually worthless (except

to you of course... those Pokémon cards are PRICELESS...)

Sources of Money's Value

Money must fit all of the characteristics we just described.

However, they must also be valuable. But what makes money

valuable? The answer depends on whether money is commodity,

representative, or fiat.

Sources of Money's Value

Commodity Money

A commodity is an object

Thus, Commodity Money consists of objects that have

value in and of themselves and that are also used as money.

Ex- in days of yore (and in some cases today), folks would

trade in cattle. Cattle is the commodity here.

With that all being said, does Commodity Money fit the

characteristics that we just discussed? Is it therefore proper

money?

Sources of Money's Value

Representative Money

Representative Money makes use of objects that have value solely because the owner can exchange

them for something else of value.

Ex- your brother borrows $20 from you, and gives you an IOU note for $20 that he'll pay you back.

In actuality, that scrap of paper holds no value

Yet, the promise that he'll pay you back your $20, THAT is what makes it valuable

Early forms of this were bills of credit, or ownership receipts for things owned by the receipt-holder such as gold, silver, or even land.

What would you guess the main issue was/is with Representative Money?

Sources of Money's

Value

Fiat Money

Quite simply, Fiat Money refers to how

legit your currency is. A fiat is an order or

decree. So when you examine a piece of

money, note the legal tender inscribed on

it- that's the fiat.

Now, let's review!Please mark your answers to the

following questions below your notes

Identify the

three uses of

money

This Photo by Unknown author is licensed under CC BY.

Economists use six characteristics to judge how well an item serves

as currency. List these characteristics.

This Photo by Unknown author is licensed under CC BY-ND.

Describe how American

dollars are divisible

This Photo by Unknown author is licensed under CC BY-NC-ND.

Salt has been used as

money in the past in

some societies. Is salt

an example of

commodity money or

representative

money? Explain.

This Photo by Unknown author is licensed under CC BY-SA.

Well done! Your COMPLETE answers to these

questions, as well as your completed concept web will count as separate, equally

valuable class work grades for Quarter IV :)