Money

Money

Money

1. Clarifying some misunderstandings

In our everyday lives we often refer to “money” as one of three things:

• Coins and paper money (currency);
• A person’s wealth;
• A person’s income.

When economists refer to money, they have a different connotation in mind: “Money is anything that is generally accepted in payments for goods or services or in the repayment of debts.”

2. Functions of money

Although economists disagree on the functions of money, they mostly define 4 functions

• Money acts as a medium of exchange;
• Money is used as unit of account;
• Money is a store of value;
• Money as liquidity

Money as a medium of exchange

Imagine an economy without money – a barter economy – where all goods and services would have to be exchanged directly for each other. Such an exchange requires, what is known as, the “dual coincidence of wants”: both trading partners have to offer a good or service that the other demands. Otherwise no trade occurs. On the other hand, bartering a good agains money facilitates the whole process. Certainly a precondition for such a situation is thaqt for a particular good to fulfill the function of money, it must be accepted throughout the economy as a medium of exchange.

To work as a medium of exchange, money must be - portable, durable, divisible, widely accepted, and its quality should be easy to verify.

Money as a unit of account

Money is the most common measure of economic value in an economy. Prices of goods and services are typically not indicated relative to all other goods and services, but are usually referenced to a single „numeraire” good, namely money. Again this creates a huge informational and – therefore – cost advantage over a barter economy,

Money as a store of value

The third function of money reflects its capacity to maintain part of its value over time.

Individuals use part of their income for consumption, and part of their income for saving. There are numerous assets that can be used for saving. Bonds, stocks, houses, even consumption goods are often held to postpone consumption. Money is merely one of them.

Many of these assets have clear advantages over money – they provide some other benefits e.g. interest or accommodation. Money on the other hand may lose its value through inflation.

So why do people hold money for saving purposes in the first place? The answer to that question is liquidity.

Money as liquidity

The fourth and finaly function of money, i.e. as means of liquidity, is important for an economy to move beyond a simple system of bartering. Money is easily traded for something which one may wish to purchase - the reason for this is that it is universally recognised and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter.

3. The coins and banknotes of your country

As from 1 January 2008, Malta joined the euro area and the euro became Malta’s national currency. There are eight euro coins in circulation. The 1 cent, 2 cent, 5 cent, 10 cent, 20 cent and 50 cent as well as the €1 and €2. All the coins differ in terms of size, weight, material, colour and thickness. Their edges change according to the denomination. Each one of the coins is easily identifiable, even for the visually impaired.

The coins with the highest denomination – those of the €1 and €2 – are bi-metal. The coins of medium denomination – that is, those of 10 cent, 20 cent and 50 cent – are of Nordic gold colour, whilst those of low denomination – that is of 1 cent, 2 cent and 5 cent – are of red colour with a copper composition.

On the common European side there is a map of Europe, as well as the 12 stars of the European Union. The maps of Europe found on the 10 cent, 20 cent and 50 cent, as well as on the coins of €1 and €2, have been modified to show the 2004 enlargement. As for the national sides of the euro coins, every country has its own national symbol or image.

In the case of Malta, the national sides are the eight-pointed Maltese cross, the Emblem of Malta and the altar at Mnajdra prehistoric temple. Although the national sides are different for all euro area countries, all the euro coins can be used in all parts of the euro area. The images of the Euro Coins and Notes in use in Malta is available on the European Central Bank Website

4. Money in international context

The meaning of foreign exchange

Almost every nation has its own national currency for making and receiving payments within its own borders. But for payments across national borders, foreign currencies are usually needed. Thus, to engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. Simply saying: there is need for “foreign exchange” transactions—exchanges of one currency for another. “Foreign exchange” refers to money denominated in the currency of another nation. Any person who exchanges money in his own nation’s currency for money in another nation’s currency acquires foreign exchange. (Here you can find all circulating currencies of the world)

Exchange rates

Exchange rates express how many units of foreign currency one unit of home country currency equals: 1€ = 1,4272$ or 1€ = 0,8069.

Depreciation is a decrease in the value of a currency relative to another currency. A depreciated currency is less valuable (less expensive), and therefore can be exchanged for (can buy) a smaller amount of foreign currency.

If $1/€1 changes to $1.20/€1 it means that the dollar has depreciated relative to the euro. It now takes $1.20 to buy one euro, so that the dollar is less valuable. In this case the euro has appreciated relative to the dollar it is now more valuable.

Glossary

ATM - Assets - Bankruptcy - Barter - Bonds - Borrowing - Budget - Capital Gain - Capital Loss - Childrens Savings Account - Collective Investment Scheme - Creditor - Currency - Debt - Deposit - Dividend - Eviction - Expenses - Financial planning - Foreclosure - Foreign Currency Account - Goal - Growth - Income - Inflation - Interest - Interest Rates - Liquidity - Loan - Maturity Date - Money - Needs - Notice Savings Account - Online Savings Account - Overdraft - Per Annum - Processing Fees - Risk - Savings - Savings Account - Savings Account Named in Euro - Securities - Shares - Wage garnishment - Wants - Withdrawal - Yield

Further reading:

1) Teaching your children how to save and spend - MFSA publication

2) Top 10 finance hints for young adults - MFSA publication

3) Money Fact Sheet

Weblinks:

• European Central Bank

• Central Bank of Malta - Monetary Policy

Links to Module 2

• Savings and Investments

• Running a bank account

• Means of Payment