12.1 - The structure of financial markets and financial assets

What are assets?

Things which people or organisations own

What are liabilities?

things which people or organisations owe

What is money?

Primarily a medium of exchange or means of payment, but also a store of value

What are the characteristics and functions of money?

- Medium of exchange

- Measure of value

- Store of value

- Method of deferred payment

How is money a medium of exchange>

without money, transactions were conducted through bartering.

Goods and services were traded with other goods and services, but people did not always

get exactly what they wanted or needed. The goods and services exchanged were not

always of the same value, which also posed a problem. Exchange could only take place if

there was a double coincidence of wants, i.e. both parties have to want the good the other

party offer. Using money eliminates this problem.

How is money a measure of value?

Money provides a means to measure the relative

values of different goods and services. For example, a piece of jewellery might be

considered more valuable than a table because of the relative price, measured by money.

Money also puts a value on labour.

How is money a store of value?

Money has to hold its value to be used for payment. It can be kept for a

long time without expiring. However, the quantity of goods and services that can be bought

with money fluctuates slightly with the forces of supply and demand.

How is money a method of deferred payment?

Money can allow for debts to be created. People can

therefore pay for things without having money in the present, and can pay for it later. This

relies on money storing its value.

What is money supply?

The stock of currency and liquid assets in an economy. It includes cash and money held in savings accounts

What is the difference between narrow money and broad money?

Narrow money is physical currency, whereas broad money includes the entire money supply

What is the money market?

In the money market, liquid assets are traded. It is used to borrow and lend money in the short term.

What is the capital market?

The capital market is where equity and debt instruments are bought and sold. These can then be put to long term productive use by firms and governments.

What is the foreign exchange market?

The foreign exchange market is where currencies are traded, mainly by international banks. It determines what the relative value of different currencies will be

What is the roles of financial markets in the wider economy?

- To facilitate saving

- To lend to businesses and individuals

- To facilitate the exchange of goods and services

- To provide forward markets in currencies and commodities

- To provide a market for equities

What is the deference between equity and debt?

Debt is money which has been borrowed from a lender, which is usually a bank.

Equity is a stock or security which represented interest in owning e.g. a firm, a car to a house. It is when there is no outstanding debt, such as when a loan for a car or mortgage has been fully paid off.