Understanding Money: Functions, Types, and Value
Understanding Money
Money: Is any merchandise that is commonly accepted by a society as a means to exchange to pay for goods and services.
Features of Money
- Medium of Exchange: Money must be interchangeable. This occurs when it is essentially required to be exchanged for other goods and services.
- Unit of Account: Money must be an accounting unit. This occurs when the value of a good is normally used to express the value of other goods and services.
- Store of Value: Money must be a conservative value. This occurs when the value of the property is stable enough to keep it and use it to trade.
- Standard of Deferred Payment: Money should allow the establishment of payment arrangements and future income.
Types of Money
Commodity Money: Physical goods valued for themselves and used for final consumption.
Metallic Money: A particular type of commodity money with intrinsic value. The physical good used is a metal, usually gold, silver, or bronze, which are minted into coins.
Convertible Paper Currency: Emerges as a document that gives right to a commodity that circulates as a means of payment. Its use generalizes when the money changers gave receipts in exchange for deposited metal in their vaults.
Fiat Money: A loan that involves the commitment of the borrower to repay the amount of notes and coins in circulation. Eg barter.
Foreign Exchange (FX): This is the currency used in one country or region, usually to carry out international transactions. Foreign exchange is accepted as payment beyond the borders of the countries that issued them due to the trust that people have in its value.
The Value of Money
The value of money is measured by the number of goods that are available to him or may acquire in the future; therefore, the value of money is its purchasing power, that is, what you can buy with it. Inflation is the measure that indicates the value of money.
Inflation Rate
The percentage increase in the price level.
Consumer Price Index (CPI)
Indicates the percentage change in the price of goods and services a consumer acquires using what is called the shopping cart.
Means of Payment and Money Supply
The most widely used means of payment are: cash and bank deposits. The amount of money in circulation is the money supply.
Money Supply
The amount of cash (which is called lawful money) and bank deposits (which is called bank money). Bank deposits are divided into demand deposits, savings deposits, and time deposits. The deposits are those with a higher degree of liquidity, since its availability is immediate.
Reserves
Some of the money that is saved in the bank and cannot be paid out, because the law requires a part of the reserves to be mandatory.
Financial Intermediaries
- Savers: Can lend money to those who need funding.
- Debtors: Acquire a debt to those who have lent them money.
The percentage that the total interest on the borrowed money is the interest rate. The loan was formalized in an official document that is named (loan agreement).
Financial intermediaries are institutions that specialize in mediation between economic units. The financial system is formed by the institutions that mediate between applicants and suppliers of financial resources.
Bank Financial Intermediaries
Example: Bank of Spain.
Nonbank Financial Intermediaries
Eg: insurance companies.
Stock Exchange
It is the place to go for public enterprises and institutions that need money to finance their activities, as well as those who are willing to provide it. Participants in the operation of the bags are claimants of capital, capital suppliers, and intermediaries.
In a stock exchange, the institutions issuing the securities with which you seek financing, savers who want to put their money in exchange for a certain return, and those who want to give the values acquired. Those who act as intermediaries between the two are denominators brokers.
The fixed-income securities have a fixed interest rate, and equity securities of interest depend on the benefits. The stock exchanges are regulated, supervised, and controlled by nation states.