Eco 531 - Chapter 3

ECO 531- CHAPTER 3
MONEY AND PAYMENT SYSTEM

◼Meaning of money
◼Functions of money
◼Measuring money
◼Evolution of the payment system
MEANING OF MONEY
◼Also referred to as money supply.

◼It is defined as anything that is generally
accepted as a medium of exchange or in
the repayment of debts.
f uN cT iO n m on ey !
!
◼ Money is an important instrument in any monetary
economy in that it performs four specific functions,
which overcome the problems of barter trade.
1. Medium of Exchange
2. Store of value
3. Unit of Account (measurement of value)
4. Standard of Deferred Payment
1. MEDIUM OF EXCHANGE
◼ That is generally accepted by people in exchange for

goods and services (g&S). Money enables us to buy
and sell g&S.
◼ Money as a medium of ex. removes the inconvenience
and inefficiency of the barter system.
◼ Its also eliminated the need for a double coincidence
of wants because generally people could now accept
money in exchange for g&S.
2. STORE OF VALUE
◼ Refer to any commodity that can be held in order to

enable people to buy and sell it at different places.
◼ Therefore, money acts as a store of value.
◼ Money can be held in reserve for future spending.
◼ The value can be held over time for as long as the
value does not fall.
3. UNIT OF ACCOUNT (MEASUREMENT OF
VALUE)
◼ Value of g&S exchanged in the economy are measures

and expressed by money.
◼ In other words, society finds it convenient to use
monetary units as a yardstick for measuring g&S.
◼ The Ringgit is used to measure the value of g&S in
Malaysia.
◼ Money as a unit of account provides the basis for
keeping accounts, and calculating profit and loss.
4. STANDARD OF DEFERRED PAYMENT
◼ A large number of transactions relate to future contractual

payments, which are stated in terms of the monetary unit,
money.
◼ Therefore, money serves as a unit or standard of deferred
payment or in terms of which all future payments are
expressed.
◼ Money makes it possible for people to make a contract or an
agreement to exchange goods or settle debts in the future.
◼ However, money as this function is satisfactory only if its value
or purchasing power remains stable over time.
c
s t i e r
c s r t a a C
i h
e
y n Mo
◼ Durable – an item must be able to withstand being used

repeatedly.
◼ Easily divisible into larger or smaller amount.
◼ Comparatively scarce, procuring them required effort.
◼ Homogeneous - Every item of the commodity was exactly like
every other item.
◼ Convenient - It was easy to carry enough around to made
trades for other commodities.
o ney s u ppL
y
m
◼ Basically, every country has its own supply of money

which is used in the making of transactions.
◼ The methods used to measure money supply are called
◼ M1-Narrow money
◼ M2-Near money Plus MI
◼ M3-Broad Money
M1
◼ Is the narrowest definition of the supply of money.

◼ also a money transaction in which the money is directly used
for transactions.
◼ Consists:
◼ Currency- includes coins and paper money issued by BNM. Also call fiat money.
◼ Checkable Deposits- checking account balances kept in commercial bank, which
are convertible into cash on demand by writing cheques. These are known as
demand deposits – current account – current deposit
◼ M1 = Coins + Paper Money + Demand Deposit in Commercial
Banks (checkable deposit, traveler’s check)
M2
◼ Is a broader definition of the supply of money because it consists of M1 and

near money.
◼ Near money are items that are highly liquid financial assets such as saving
accounts, fixed deposits, negotiable certificates of deposits (NCD) in
commercial banks and BN certificates.
◼ Is also called quasi money.
◼ M2 consist of the following:
◼ M2 = M1 + Fixed and Saving Deposit in Commercial Banks + Negotiable
certificates in Com. Bank + repo in Com. Bank + Bank Negara Certificates
+ Short Term Money Market Investment.
◼ Near Money (Quasi Money)= M2-M1
M3
◼ Is measure of money supply which is the broadest in definition.

◼ Its consist
1. M2
2. Savings and fixed deposits in other financial institutions.
◼ The difference between M2 and M3 is the savings and fixed deposits in
other banking institutions. Other financial or banking institutions in
M’sia are Merchant Banks, BIMB, Finance Companies and Discount
Houses.
◼ M3 = M2 + Fixed and Saving Deposit in Other Financial Institutions
(Bank Islam Malaysia Bhd, Bank Simpanan Nasional) + Large Time
Deposits + Repurchase Agreement (Repo) in other financial inst.
WHY IS IT NECESSARY TO HAVE MORE THAN
ONE MEASURE OF MONEY SUPPLY?
◼ The financial system continually introduces new financial

instruments and methods of making transactions that require
redefinition of money supply from time to time.
◼ For ease of control/coordination/supervision. For example, different
monetary aggregates (M1, M2 and M3) can be used as guide for
monetary policy actions.
◼ For ease of setting up monetary objectives/targets.
◼ Act as data collection for various purposes such as research findings,
policy planning, velocity analysis, and other trend synopsis.
◼ Act as one of economic indicators.
EVOLUTION OF THE PAYMENT SYSTEM
◼ 1. BARTER ECONOMIES
❑ Pure BARTER system
◼ Is a direct exchange of g&S for other g&S.
◼ This create a problem of double “coincidence of wants”.
◼ This mean that two individuals must, by coincidence, own and desire
to trade g&S.
❑ Organized BARTER (trading-post Economies)

◼ Organization of specific trading arrangements.
◼ To eliminate or lessen the problem of double coincidence of wants.
(Group 1)
EVOLUTION OF MONEY (CONT’D)
b. BANK MONEY
• If money is issued by banks, it is known as bank money, i.e

check.
• Checks is an instruction from customer to their bank to transfer
money from their account to someone else’s account when they
deposits the check.
Problems:
• It takes time to get checks from one place to another.
• All the paper shuffling required to process checks is costly.
(Group 4)
c. ELECTRONIC Monies
◼ Electronics Monies (e-money) are becoming increasingly important.
◼ E-money is money that exists in electronic form.
◼ There are several forms of e-money:
i. Debit cards
◼ Looks like a credit card.
◼ Enable users to purchase goods by electronically transferring funds
directly from their bank accounts to a merchant’s banks. The value
of the card will depend on your bank’s account balance.
◼ An example in Malaysia is the BSN Matrix card.
(Group 5)
ii. Stored-value card

• also look like debit & credit cards but differ in that they contain a fixed
amount of digital cash.
• The simplest stored-value card is prepaid cards.
• A more sophisticated stored-value card is known as smart card. It contains

a computer chip that can be loaded with digital cash from its owner’s bank
account whenever needed.
• Smart cards can be loaded from ATM machines, PC, or specially equipped
telephones.
• An example is a London-based Mondex Corp., which started running test in
1995. It not only can transfer funds between consumers and retailers or
between the consumer and the bank, but also between individuals.
(Group 6)
iii. Electronic cash

◼ also known as e-cash. It is a form of electronic money
that can be used on the Internet to purchase g&S.
◼ A consumer gets e-cash by setting up an account with
a bank that has links to the Internet and then has the e-
cash transferred to his/her PC.
◼ Example: Cimb clicks, maybank2u
(Group 7)
iv. Electronics Checks

• This e-money allows users of the Internet to pay their bills
directly over the Internet without ever sending a paper check.
• The user (MR. A) has his PC write the equivalent of a check
and then sends the electronic check to the other party (Miss B),
who in turn sends it to her (Miss B) bank.
• Once the recipient’s bank (Miss B) verifies that the electronic
check is valid, it transfers money from the originator’s bank
recipient’s (Miss B).
(Group 8)
ARE WE MOVING TO A CASHLESS SOCIETY?
◼Several factors work against the

disappearance of the paper system..

Eco 531 - Chapter 3

Uploaded by

Copyright:

Available Formats

Eco 531 - Chapter 3

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Eco 531 - Chapter 3

Uploaded by

Copyright:

Available Formats

ECO 531- CHAPTER 3

MONEY AND PAYMENT SYSTEM

◼Also referred to as money supply.

◼ That is generally accepted by people in exchange for

◼ Refer to any commodity that can be held in order to

◼ Value of g&S exchanged in the economy are measures

◼ A large number of transactions relate to future contractual

◼ Durable – an item must be able to withstand being used

◼ Basically, every country has its own supply of money

◼ Is the narrowest definition of the supply of money.

◼ Is a broader definition of the supply of money because it consists of M1 and

◼ Is measure of money supply which is the broadest in definition.

◼ The financial system continually introduces new financial

❑ Organized BARTER (trading-post Economies)

• If money is issued by banks, it is known as bank money, i.e

ii. Stored-value card

• A more sophisticated stored-value card is known as smart card. It contains

iii. Electronic cash

iv. Electronics Checks

◼Several factors work against the

You might also like