Purposes Of Money Flashcards
Define money
Anything that is widely accepted as a means of making payments
What constitutes money?
Coins
Notes
Electronic balances of bank accounts
Define bartering
The trading of goods of services
What are the limitations of bartering?
Relies on a ‘double coincidence of wants’
Relies on the two people agreeing a rate of exchange
What are items that have been used as money in the past?
Rice (Japan) Cattle / grain Pigs Stones Salt Vodka
Issues with using items for money
Some items aren’t durable e.g. Pigs die
Not easily portable e.g. Fei stones
The value of the item itself can vary e.g. When gold is scarce the value rises
Give an example of when people traded using items that represent value as money
In China, spades and knives has an intrinsic value.
Later coins in the shape of spades and knives to represent standard value
Where is bartering still used today?
Informal bartering between friends / neighbours
Bartering websites
Local exchange trading systems (LETS)
What is LETS?
A local network that allows people to exchange goods and services with each other without using money.
Trade using credits
What are the features of money?
Acceptable Recognisable Stable Divisible Durable Portable Scarce but sufficient Homogenous
Define acceptable
Coins and notes are accepted if people have faith that they are worth their face value
Define recognisable
Cash must be recognisable so that people are confident they are receiving genuine coins and banknotes
E.g. U.K. 20p coin has 7 sides, watermarks
Define stable
Money needs to hold its value so people can be confident that the money they accept now will hold the same or a similar amount in the future.
Affected by inflation
Define divisible
Cash must be provided in a variety of denominations so that people can use different combinations to make transactions of different sizes
Define durable
Coins and banknotes need to be strong enough to be used many times before they need to be replaced by the Royal Mint or the Bank of England
Define portable
People must be able to carry the cash they need for everyday use
- > why larger amounts are paper based.
- > chèque books
- > debit cards
Define scarce but sufficient
The Bank of England manages the supply of cash in the economy so that there is enough for people’s transaction needs.
Too much cash -> inflation ( value of money falls )
Define homogenous
All coins and banknotes of a certain denomination need to look and feel the same -> recognisable and acceptable
What are the functions that money must perform?
A unit of account
A means of exchange
A store of value
A means of borrowing and then repaying debt
Why must money be a unit of account?
Money offers a standard measure of financial value.
E.g. Value of goods/services/financial assets a person owns.
Allows people to compare prices between goods
Why must money be a means of exchange?
Money allows people to make payments.
Certain coins and banknotes are legal tender
Why must money be a store of value?
Money is used to store financial value for future use
Why must money be a means of borrowing and then repaying the debt?
People can borrow money to buy goods now that they cannot afford out of current income. -> deferred payment
Define purchasing power of money
The quantity of goods and services the money can buy
How does inflation affect the purchasing power of money?
Inflation reduces purchasing power
How can savers maintain or grow the purchasing power of their money?
By finding a savings interest rate that is higher than the rate of inflation
What factors affect the cost of the same goods in different countries?
Cost of living
Wage rates
Taxation
Where is the majority of money held?
In bank accounts
Which providers offer current accounts?
Banks
Building societies
Post office
What can be done with a current account?
Deposit money
Make payments
Withdraw cash
Issue instructions to provider e.g. Cheques, standing orders, payment card transactions
How do people monitor the value of their current account?
Statements
What is shown on the current account statement?
Incoming and outgoing transactions
Balance at the end of the accounting period
How can people access their current account statement?
Paper based
Electronically e.g. Computer, mobile
Over telephone
Can people use savings accounts to store money for future use?
Yes
How can people borrow money using current accounts?
Overdrafts - for short term use
How are young children likely to use their money?
Spend (make payments)
Save for higher value items
How are young adults likely to use their money?
Spend on living expenses
How are adults likely to use their money?
Spend on living expenses
Spend on ‘fun items’
Borrow to buy a home
Save for future
How are parents likely to use their money?
Borrow money to pay for eg family size car
Spend on living expenses
Spend on gifts for children
Difficult to save
How are middle aged people likely to spend their money?
Saving for old age after having paid off debts
How are retired people likely to use their money?
Spend
Lower income than when they were working
