The financial sector

What is barter?

Barter is the exchange of goods and services without the use of money

What is money?

Money is anything that is generally an acceptable means of exchange

What is commodity money?

Give example

Consists of money that are in themselves valuable

Eg. gold, silver 

What is Token Money(Fiat money)?

give example

These are items that serve as money but which have no value in themselves

Eg. the paper money is made with

What is ment but the term “legal tender”?

Give example

Anything recognized by law as a means to settle public or private debts

Eg. tax payments

What are 3 advantages of barter

• Enables disposal of surplus production

• Increases the variety of goods available to an individual

• Simple and effective

What are 3 disadvantages of barter

• Can only happen if there is a double coincidence of wants 

• The value of exchange can be unequal

• difficulty in dividing goods fairly

Characteristics of money

• must be portable 

• must be acceptable or be a means of exchange 

• must be durable 

• must be legal tender 

Functions of money 

• medium of exchange 

• store of value 

What is the Money supply 

Money Supply is defined as the total stock of money in the economy at a particular point in time. 

The supply of money in the economy is determined by the Central Bank. 

What is the monetary base

Which M is it?

Give example

Monetary base is the most liquid form of money 

It is M0 

Example: cash, notes, coins

What is Narrow Money

Which M is it?

Give example

This consists of all the notes and coins in circulation 

It is M1

Example: deposits on which cheques can be drawn, Travelers cheques 

What is Broad Money

Which M is it?

This consists of saving accounts in financial institutions

and money market accounts

It is M2

What is the financial sector?

What is Financial intermediaries?

That part of the economy involved in the financial businesses.

Financial intermediares acts as a link between spenders and savers

They are involved with money transactions and provide finance to individuals, firms and governments

2 Example of the financial sector

• commercial banks

• central bank

Example of other bank and non bank financial institutions 

• credit unions 

• insurance companies 

• stock exchange

What are some functions of the financial sector

• attracts funds from business and private individuals 

• provides the government with a source of funds for investment purposes 

• provides the private sector with a source of funds for investment purposes 

• provides individuals with a source of funds for spending

• it provides compensation reduces risk

What are financial instruments

Monetary contracts between parties

Examples of financial instruments

• cash

• notes 

• bonds 

• deposits 

What is the informal sector?

Part of the economy where the economic activities are not under official control

(not regulated by the central bank)

What are some features of the informal sector

• Not a part of Official business activity 

• Not included in national income statistics 

• Workers do no pay taxes and are considered unemployed 

What is the importance of the informal sector?

• provides jobs reduces unemployment 

• stimulates entrepreneurship activity 

• source of informal financing