By Mr. LAU san-fat/ver 2004 CH2-Money-SV 1 CH2-Money HK Certificate of Education Examination.

By Mr. LAU san-fat/ver 200By Mr. LAU san-fat/ver 20044

CH2-Money-SVCH2-Money-SV 11

CH2-MoneyCH2-Money

HK Certificate of Education HK Certificate of Education ExaminationExamination



The Barter EconomyThe Barter Economy

In a barter economy, without money, one In a barter economy, without money, one good was directly exchanged for another.good was directly exchanged for another.

Problems/Disadvantages of Barter:Problems/Disadvantages of Barter:– lack of double coincidence of wantslack of double coincidence of wants

very costly to find trading partnersvery costly to find trading partners

– most commodities are indivisiblemost commodities are indivisibletransactions of less than one unit of the commodity transactions of less than one unit of the commodity is highly impossibleis highly impossible



The Barter EconomyThe Barter Economy

no common measure of valueno common measure of value– trades are hindered by too many exchange rattrades are hindered by too many exchange rat

eses

InconvenienceInconvenience



Functions of MoneyFunctions of Money

Money is anything that is generally Money is anything that is generally accepted as a medium of exchange.accepted as a medium of exchange.

Functions of money:Functions of money:1.1. As a medium of exchangeAs a medium of exchange

2.2. As a unit of account/a common measure of As a unit of account/a common measure of valuevalue

3.3. As a store of valueAs a store of value



Functions of MoneyFunctions of Money

Functions of money:Functions of money:4. As a standard of deferred payment4. As a standard of deferred payment

Future payments expressed in terms of moneyFuture payments expressed in terms of money

‘‘means’ of deferred payments means’ of deferred payments ‘standard’ of ‘standard’ of deferred payments (e,g, credit card)deferred payments (e,g, credit card)

5.5.As a means of paymentAs a means of payment– e.g. money, cash coupons & bank drafte.g. money, cash coupons & bank draft



The Evolution of MoneyThe Evolution of Money

Commodity money, e.g. shell, salt & metalCommodity money, e.g. shell, salt & metal– Problems: inconvenience & inadequate metalProblems: inconvenience & inadequate metal

ss

Convertible paper moneyConvertible paper money– Fully convertible into the same amount of gold Fully convertible into the same amount of gold

& silver& silver

Fiat money/Non-convertible money/Token Fiat money/Non-convertible money/Token money(i.e. coins & banknotes) money(i.e. coins & banknotes)




Deposit moneyDeposit money– Demand deposits (in current account)Demand deposits (in current account)– Savings depositsSavings deposits– Time/Fixed deposits (with fixed period of Time/Fixed deposits (with fixed period of

maturity)maturity)– Negotiable/Transferable certificate of Negotiable/Transferable certificate of

deposits, CDsdeposits, CDs




Deposit moneyDeposit money– Factors affecting choice of bank deposit:Factors affecting choice of bank deposit:

1. Liquidity: degree of ease of drawing money out 1. Liquidity: degree of ease of drawing money out – With Easy Pay System & Automatic Teller Machines With Easy Pay System & Automatic Teller Machines

(ATM), savings & demand deposits become the most (ATM), savings & demand deposits become the most liquid deposits while time deposits are the most illiquid liquid deposits while time deposits are the most illiquid deposits.deposits.

2. Interest earning2. Interest earning– CDs & time deposits carry higher interest rates while CDs & time deposits carry higher interest rates while

time deposits almost zero.time deposits almost zero.

3. Certainty of earnings3. Certainty of earnings– CDs & time deposits guarantee the amount of interest CDs & time deposits guarantee the amount of interest

earned while the interest rates for savings & demand earned while the interest rates for savings & demand deposits varies frequentlydeposits varies frequently




Electronic moneyElectronic money– Certain instruments or cards (e.g. EPS card & OctoCertain instruments or cards (e.g. EPS card & Octo

pus card) used for making payments through an elepus card) used for making payments through an electronic system (e.g. ETC, Money Link, JETCO)ctronic system (e.g. ETC, Money Link, JETCO)

– The amount of money billed will be directly transferrThe amount of money billed will be directly transferred from the consumer’s account into that of the selled from the consumer’s account into that of the sellerer

– As a means of paymentAs a means of payment– Making money less important in daily transactions bMaking money less important in daily transactions b

ut not leading to ‘moneyless’ societyut not leading to ‘moneyless’ society



Are Credit Cards money?Are Credit Cards money?

As a medium of exchange?As a medium of exchange?– No as it acts as a temporary medium of exchaNo as it acts as a temporary medium of excha

nge onlynge only

As a unit of account?As a unit of account?– No the value of commodities is never expressNo the value of commodities is never express

ed in terms of credit cardsed in terms of credit cards

As a store of value?As a store of value?– No as it does not have any value or purchasinNo as it does not have any value or purchasin

g power in itself. g power in itself.



Are Credit Cards money?Are Credit Cards money?

As a standard of deferred payment?As a standard of deferred payment?– No as future payments cannot be expressed No as future payments cannot be expressed

in terms of credit cardsin terms of credit cards

Conclusion:Conclusion:– Credit cards are NOT money but are Credit cards are NOT money but are

classified as money substitutes.classified as money substitutes.



Qualities of Good MoneyQualities of Good Money

1.1. DurableDurable

2.2. PortablePortable

3.3. DivisibleDivisible

4.4. HomogeneousHomogeneous

5.5. Scarce or in restricted supplyScarce or in restricted supply



Currencies in Hong KongCurrencies in Hong Kong

Notes are issued by three licensed banks Notes are issued by three licensed banks (the HongKong and Shanghai Banking Cor(the HongKong and Shanghai Banking Corporation Ltd., the Standard Chartered Banporation Ltd., the Standard Chartered Bank, and the Bank of China) & the Hong Konk, and the Bank of China) & the Hong Kong Monetary Authority.g Monetary Authority.Coins are issued by the HKSAR governmeCoins are issued by the HKSAR governmentntBanknotes and government coins are legal Banknotes and government coins are legal tender. tender.



Issuing Banknotes in HKIssuing Banknotes in HK

Note-issuingBanks

Exchange Fund

1. Surrender US$1

2. Receive a Certificate of Indebtedness3. Obtain the right to issue HK banknotes of HK$7.8

• HK’s currency system is called Foreign Exchange Standard.



Money Supply in Hong KongMoney Supply in Hong Kong

Money Supply definition M1Money Supply definition M1= currency (i.e. notes & coins) in public circulation= currency (i.e. notes & coins) in public circulation

+ demand deposits with licensed banks+ demand deposits with licensed banks

Money Supply definition M2Money Supply definition M2=M1 =M1

+ time deposits with licensed banks+ time deposits with licensed banks

+ negotiable certificates of deposits issued by+ negotiable certificates of deposits issued by

licensed banks & held by the non-bank publiclicensed banks & held by the non-bank public





+ deposits with restricted licensed banks & + deposits with restricted licensed banks &

deposit-taking companiesdeposit-taking companies


restricted licensed banks & deposit-takingrestricted licensed banks & deposit-taking

companies held by the non-bank publiccompanies held by the non-bank public




Money Supply definition M1Money Supply definition M1= currency (i.e. notes & coins) in public circulation= currency (i.e. notes & coins) in public circulation + demand deposits with licensed banks+ demand deposits with licensed banks– M1 emphasizes the function of medium of exchangeM1 emphasizes the function of medium of exchange

Money Supply definition M2Money Supply definition M2=M1 =M1 + time deposits with licensed banks+ time deposits with licensed banks + negotiable certificates of deposits issued by+ negotiable certificates of deposits issued by licensed banks & held by the non-bank publiclicensed banks & held by the non-bank public– M2 emphasizes the function of store of valueM2 emphasizes the function of store of value





+ deposits with restricted licensed banks & + deposits with restricted licensed banks &

deposit-taking companiesdeposit-taking companies


restricted licensed banks & deposit-takingrestricted licensed banks & deposit-taking

companies held by the non-bank publiccompanies held by the non-bank public– M3 emphasizes the function of store of valueM3 emphasizes the function of store of value



Total Money Supply DefinitionTotal Money Supply Definition

Total money supply definition M1Total money supply definition M1=M1(HK$) + M1(foreign currency) =M1(HK$) + M1(foreign currency)

Total money supply M2Total money supply M2 =M2(HK$) + M2(foreign currency)=M2(HK$) + M2(foreign currency)

Total money supply M3Total money supply M3=M3(HK$) + M3(foreign currency)=M3(HK$) + M3(foreign currency)



Effects of Payment by Phone SEffects of Payment by Phone Service (PPS) on Money Supplyervice (PPS) on Money SupplyCase 1: debit demand deposits and credit savingCase 1: debit demand deposits and credit savings depositss deposits– M1 decreasesM1 decreases– M2 remains unchangedM2 remains unchanged– M3 remains unchangedM3 remains unchanged

Case 2: debit demand deposits and credit demaCase 2: debit demand deposits and credit demand depositsnd deposits– M1 remains unchangedM1 remains unchanged– M2 remains unchangedM2 remains unchanged– M3 remains unchangedM3 remains unchanged



Effects of Payment by Phone SEffects of Payment by Phone Service (PPS) on Money Supplyervice (PPS) on Money SupplyCase 3: debit saving deposits and credit savings Case 3: debit saving deposits and credit savings depositsdeposits– M1 remains unchangedM1 remains unchanged– M2 remains unchangedM2 remains unchanged– M3 remains unchangedM3 remains unchanged

Case 4: debit savings deposits and credit demanCase 4: debit savings deposits and credit demand depositsd deposits– M1 increasesM1 increases– M2 remains unchangedM2 remains unchanged– M3 remains unchangedM3 remains unchanged

By Mr. LAU san-fat/ver 2004 CH2-Money-SV 1 CH2-Money HK Certificate of Education Examination.

Documents

functions of money money

terms of money

drawing money

money link

credit cards money

lau sanfatver

illiquid deposits

store of value slide