Money, Banking, Saving and Investing Economics Chapter 8

Money and Banking Objective: Agenda: CBM #4 (Ch 7-8) Oral Presentations Market Structures Chapter 8 ppt + Notes Exit Activity – Origins of Money SWBT identify the roles of money, banking, and financial institutions in the U.S. economy

Grandma Imagine your Grandma gives you $5,000! What would you choose to do with your money? Why? What other options would you consider? In the long term, do you think this would be the wisest choice? Throughout life, you will face many decisions about your finances – everyday! Understanding the basic rules of spending, saving and investing will help you make wise choices.

How do these words help you answer the question: Bank Asset Credit card Debit card Saving Interest Principal Investing Diversification How do these words help you answer the question: “How should you spend, save and invest your money?” At the end of our lesson look back and see if your definitions are correct

Red Paper Clip http://www.youtube.com/watch?v=BE8b02EdZvw Did Kyle MacDonald use “money” to get his house? 8 minutes

What Makes Money…Money? Money – anything that is generally accepted as a means of payment 3 Functions of Money: Medium of Exchange – legal tender Standard of Value (one scale – US$) Store of Value – holds its value over time -- purchasing power (quantity of goods and services that can be bought with a particular sum of money) Economists define money as anything that is generally accepted as payment Did MacDonald use money? – maybe, but he relied on coincidence and publicity to get what he wanted With what we traditionally believe to be money, producers will gladly accept it in exchange for goods and services Economists describe money according to its main functions and characteristics Medium of exchange – enables us to carry out trade and commerce easily Ex: rather than trying to find someone to accept a dozen pair of flip flops for a backpack, you can hand the clerk a quantity of dollars Dollars are the established medium of exchange in the US – legal tender – they must be accepted as money for purchases and as payment of debt. I can’t refuse dollars and only accept pesos or euros Standard of Value: allows us to measure and compare the value of goods and services using one scale – dollars Ex: image two stores advertisements – one store advertises a backpack for 9 pairs of flip flops, the other for 5 T-shirts Without a standard of value, how do you know which backpack costs more? Store of Value – holds value over time – banana is a poor store of value because it spoils quickly – rotten bananas have lost most of their original value Money holds its value over time – purchasing power – quantity of goods and services that can be bought with a particular sum of money Ex: you have $5 in your pocket, it will buy $5 worth of goods and services today, as well as tomorrow You will always be able to buy $5 worth of pencils – the number of pencils $5 buys might change

Money Has 6 Main Characteristics Throughout the ancient Mediterranean, traders accepted salt as a medium of exchange Roman soldiers received salt as their salarium -- salary Acceptability As we talk about these characteristics, think about how they apply to a substance that was widely accepted as money in the ancient world – Salt 1. Acceptability – in order to buy something, a seller must be willing to accept what you offer as payment

Money Has 6 Main Characteristics In the ancient world, salt was scarce in most places – yet demand was great Preserved food Used in religious ceremonies Scarcity made it valuable Traded equally with gold in Africa Scarcity Whatever is used as money needs to be scarce enough to be valued by buyers and sellers Many cultures have used gold and silver as a medium of exchange – scarcity of metals adds to their value

Money Has 6 Main Characteristics Salt is portable to some extent Imagine lugging several large bags of salt to the mall How messy is it to buy a pair of jeans for three cups of salt? Portability To be convenient money must be portable – coins and bills Salt fails the portability test today, but was easy and light to carry in the ancient world

Money Has 6 Main Characteristics In the ancient world (and today) salt can last a long time – but only if kept dry How would you feel if a rainstorm washed away your fortune? Durability Durability – for money to be a store of value it must be durable – withstand physical wear and tear Transferred from person to person Salt fails the durability test

Money Has 6 Main Characteristics Divisibility A bag of salt can be easily split into smaller parts This divisibility made it useful medium of exchange To be useful as a medium of exchange , money must be easily dividable into smaller amounts Imagine an economy that uses glass bowls as a medium of exchange Buyers in that economy would be unable to buy anything worth less than a glass bowl, because the seller would be unable to provide change – broken shards of glass would be too dangerous to use

Money Has 6 Main Characteristics Uniformity Like dollar bills, in the ancient world, all salt was pretty much the same A dollar is a dollar is a dollar Consider an economy where the pumpkin is the medium of exchange Pumpkins come in all sizes – could large pumpkins be exchanged for more goods than small pumpkins? How would producers and consumers agree on the value of a pumpkin? Historically, salt had most of the characteristics of a useful medium of exchange – not so much today.

A Brief History of Money Commodity Money – gold, silver, salt, tobacco, cattle – goods that had value in trade Bank: a business that receives deposits and makes loans Commodity money was used for thousands of years all around the world Precious metals have been the most preferred During the Renaissance in Europe merchants needed a safe place to store their gold and silver – developed Banks Loan: transaction in which a lender gives money to a borrower who agrees to pay it back

A Brief History of Money Commodity Backed Money – banknotes given in exchange for gold and silver Banknotes – forerunners of printed money issued by governments Paper Money today is no longer backed by gold or silver – now its called fiat money (based on govt regulation or law) US Dollars are backed by the full faith and credit of the US Government

What Counts as Money Today? Currency – bills and coins circulating throughout the economy What else counts as money? -- Assets Liquid assets – anything that can be easily converted to cash Checkable deposits – deposits in checking accounts Travelers Checks – not used much anymore When I say money, what do you think of ???? CASH – another world for currency Asset – anything owned that a market assigns value to Liquid assets – easily convertible, like stocks and bonds, foreign currency Checks are not money – they are instructions to a bank to pay money to someone – the deposits they access are money – checkable deposits

What Else Counts As Money? Are savings accounts considered money? No, it is “near money” not used to directly buy things Are Credit Cards Money? No, credit is an arrangement that allows you to buy now with borrowed “money” but pay later Are Debit Cards Money? No, they are similar to checks, they instruct a bank who to pay

Exit Ticket Using your class notes, complete the handout on The Origins of Money List and define the 3 functions of money Then consider former mediums of exchange and analyze each in terms of how well it functions as money

Complete the Diagram and hand it in Exit Ticket: Complete the Diagram and hand it in