MONEY_AND_FINANCE

Why Do We Need Money?Money is essential for facilitating trade in goods and services that individuals cannot produce on their own due to various limitations including resources, skills, or time. The concept of self-sufficiency is unrealistic in modern economies where individuals and businesses specialize in certain trades or crafts. For instance, a skilled carpenter may not have the time to grow food or produce clothing, necessitating the need to exchange services or goods with others. This specialization leads to a web of trading needs that money simplifies by acting as a universally accepted medium of exchange.

Barter SystemThe barter system is the direct exchange of goods and services without the use of money. While it can function in small, close-knit communities, several challenges arise:

• Double Coincidence of Wants: This term refers to the difficulty in finding someone who not only has what you want but also wants what you have to offer. For example, if you wish to trade a loaf of bread for a tool, you must find someone who desires bread and has the tool to trade.

• Valuation Issues: Determining the relative value of disparate goods can be complicated (e.g., deciding how many apples are worth one cow); such negotiations can lead to conflicts and inefficiencies in trade.

Functions of MoneyMoney serves multiple, vital functions:

• Medium of Exchange: Money enables the buying and selling of goods and services, streamlining transactions compared to barter.

• Store of Value: Money retains its value over time, allowing individuals to save for future expenditures. For instance, $100 today will likely still hold value in purchasing power tomorrow.

• Measure of Value: Money provides a standard metric for pricing; this helps in comparing the value of different goods and services easily.

• Means of Deferred Payment: Individuals can use money for future payments, establishing a common understanding of value over time.Money must effectively address the limitations of barter to enhance economic efficiency.

Characteristics of Good MoneyFor money to be effective and widely accepted, it must possess certain characteristics:

• Acceptable: It should be recognized and accepted widely as a medium of exchange.

• Durable: Money should be able to withstand physical wear and tear; paper money and coins are designed for durability.

• Portable: Individuals must be able to easily carry and transfer money.

• Divisible: It should be easily divisible into smaller units to facilitate transactions of varying sizes.

• Scarce: Money must exist in limited quantities to maintain its value; excessive supply can lead to inflation.

What Is Money?Money includes a range of instruments, such as physical notes, coins, and digital bank deposits.

• Near Money: Refers to assets like bank deposits that can be quickly converted into cash to facilitate immediate transactions.

Financing Economic ActivityBanks play a crucial role in economic development by lending to individuals, businesses, and governments, enabling them to finance various expenditures.

• Investment Mechanisms: Stocks can be issued and sold on the stock market, representing an essential way for companies and governments to secure long-term funding for growth and operations.

The Banking SystemBanks act as essential financial intermediaries in the economy by connecting savers who want to deposit their money with borrowers who need funds.

• Interest Rates: Banks offer interest on deposits to encourage saving; the interest serves as an incentive and is subject to change based on various economic factors. The cost of borrowing is reflected in the interest rates set by banks, which are influenced by the central bank's base rate.

Saving MoneyIndividuals who deposit money in banks earn interest, which accumulates over time. Understanding how rates affect savings is crucial; for example:

• Example: Saving $1,000 at an annual interest rate of 3% yields $30 after one year, demonstrating how time and interest work together to benefit savers.

Borrowing MoneyWhen individuals or businesses borrow money from banks, they incur costs in the form of interest.

• Example: A $10,000 loan at an interest rate of 5% means that the borrower must repay $10,500 within one year, illustrating the cost of borrowing after considering bank operations and risks.

Role of a Central BankCentral banks play a pivotal role in maintaining currency stability and controlling the overall money supply within an economy.

• Functions: The Bank of England serves as the bankers' bank by supervising financial institutions and facilitating interbank transactions while acting as a lender of last resort during financial crises.

• Example: The Central Bank of Indonesia also issues its currency, manages national debts, and oversees monetary policy to regulate economic stability.

Issuing StockStock represents a way for corporations or government entities to raise capital by selling shares.

• Shareholder Rights: Investors who purchase shares receive dividends and share in the corporation’s profits, effectively holding ownership stakes within the company. Governments may also issue bonds as a way to generate funds, with repayments made over time with interest.

The Stock MarketStock exchanges, both national and international, facilitate the buying and selling of shares and bonds. The global connectivity of stock markets allows for vast capital movement and investment opportunities.

Importance of the Stock MarketA functional stock market is vital for enabling trade of stocks and bonds, which influences both investment levels and capital accumulation across the economy. Without a robust stock market, there could be significant challenges for governments and businesses in raising essential funds, severely hindering economic activity.

Determinants of Share PricesThe fluctuating prices of shares are driven by several factors:

• Expected Dividend Payouts: Anticipations regarding regular dividends influence investor purchasing decisions.

• Market Dynamics: Demand and supply mechanics within the market directly impact pricing stability.

• Company Performance: Indicators like earnings reports and profit forecasts noticeably affect investor sentiment and valuations.

Stock Market ConditionsUnderstanding market conditions is key for investors:

• Bullish Market: Characterized by rising stock prices and optimistic sentiment among investors, encouraging more investment.

• Bear Market: This phase shows falling stock prices, often accompanied by pessimism from investors, leading to reduced trading activity.

Why Do We Need Money? Money facilitates trade by acting as a universally accepted medium of exchange, essential in economies where individuals specialize in certain trades.

Barter System is the direct exchange of goods and services without money, but it faces challenges like the double coincidence of wants and valuation issues.

Functions of Money:

• Medium of exchange

• Store of value

• Measure of value

• Means of deferred payment

Characteristics of Good Money: (Acceptable, Durable, Portable, Divisible, Scarce)

What Is Money? It includes notes, coins, and digital deposits, with near money being assets convertible to cash.

Financing Economic Activity: Banks lend funds, enabling investments and financing.

The Banking System: Connects savers and borrowers, influenced by interest rates determined by central bank policies.

Saving & Borrowing Money: Savers earn interest, while borrowers incur costs through interest payments.

Role of a Central Bank: Ensures currency stability and controls money supply, acting as a lender of last resort.

Issuing Stock: Corporations raise capital by selling shares; investors gain shareholder rights.

The Stock Market: Facilitates trading of shares and bonds, driving economic activity.

Determinants of Share Prices: Influenced by dividend expectations, market dynamics, and company performance.

Stock Market Conditions:

• Bullish: Rising prices and optimism

• Bear: Falling prices and pessimism.

Why Do We Need Money? Money facilitates trade by acting as a universally accepted medium of exchange, essential in economies where individuals specialize in certain trades.

Barter System is the direct exchange of goods and services without money, but it faces challenges like the double coincidence of wants and valuation issues.

Functions of Money:

• Medium of exchange

• Store of value

• Measure of value

• Means of deferred payment

Characteristics of Good Money: (Acceptable, Durable, Portable, Divisible, Scarce)

What Is Money? It includes notes, coins, and digital deposits, with near money being assets convertible to cash.

Financing Economic Activity: Banks lend funds, enabling investments and financing.

The Banking System: Connects savers and borrowers, influenced by interest rates determined by central bank policies.

Saving & Borrowing Money: Savers earn interest, while borrowers incur costs through interest payments.

Role of a Central Bank: Ensures currency stability and controls money supply, acting as a lender of last resort.

Issuing Stock: Corporations raise capital by selling shares; investors gain shareholder rights.

The Stock Market: Facilitates trading of shares and bonds, driving economic activity.

Determinants of Share Prices: Influenced by dividend expectations, market dynamics, and company performance.

Stock Market Conditions:

• Bullish: Rising prices and optimism

• Bear: Falling prices and pessimism.