Money:Introduction

Xu Hu Texas A&M University

Currencies around the world !

Chinese Yuan

US dollar Japanese

Yen

British Pound

Indian Rupee

??????

One observation of the use of “money”

Selling a used laptop on eBay

Some Buyer on

the Internet

Pay via deposit transfer

Brian

An increase in the Brian ‘s checking account balance

Withdraw some cash (green papers) from his checking account

Buy a Mac

• What’s the nature of money?

• How money comes into the existence? (The origins of money)

• What kinds of function money plays?

Shell Shang Dynasty 1766-1050 BC

“Bu” and “ Dao” Chun Qiu, Zhan Guo770 – 221 BC

Farm Tools : Spade , Knife

Coins made by copper

“Jiao zi”Song Dynasty 960–1279 AD

Coins made by silver

Money: Functions

• medium of exchangewe use it to buy stuff

• store of valuetransfers purchasing power from the present to the future

• unit of accountthe common unit by which everyone measures prices and values

Medium of Exchange

Justin Michael

Brian

Imagine a barter economy without medium of exchange, i.e., an economy in which there is no one commodity universally acceptable and people accept this commodity as payment not because they will “consume” the commodity and derive some utility from it but because they can use it to purchase something else.

beer

cornfish

Double Coincidence of Wants

JustinMichael

Brian

Beer

corn fish

Coin

Corn

Coin

Fish

CoinBeer

Brian

Justin

Michael

Mon Tue Wed

Brian

Justin

Michael

Mon Tue Wed

Redeem

or (Repay)

Bill of Exchange

Store of Value

• This function can justify the use of precious metals as money.

• Some precious metal is used for saving, store of value, while it may NOT be used as a medium of exchange.

• Why use money to store the value? There are some other ways to save.

Unit of account

• If some commodity is used as a unit of account, it does not have to enter the transaction.

Brian Justin

=?

Money: Types

1. fiat money (Legal Tender law)– has no intrinsic value– example: the paper currency we use

2. commodity money– has intrinsic value– examples:

gold coins, cigarettes in P.O.W. camps

Discussion Question

Which of these are money? a. Cash

b. Checks

c. Deposits in checking accounts (“demand deposits”)

d. Credit cards

Fiat Money

• View money as a stock, i.e., asset.

• Why people will hold fiat money, since it does not yield interests?