1、Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Part 1 Introduction,This part includes three chapters, which introduce the economic approaches to the major topics of the textbook. Chapter 1 describes the benefits of using an economic approa

2、ch to studying money, financial markets and institutions, and the economy; Chapter 2 tries to explain why modern economies use money, how money affects your decisions, and find easy sources of information about measures of money; Chapter 3 offers an overview of the role played by different elements

3、of the financial system in matching savers and borrowers and providing risk-sharing, liquidity, and information services.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Chapter 1 Introducing Money and the Financial System,Since the summer

4、in 2007, the sub-prime mortgage crisis has broken out in the U.S. Some economists argued that it would be caused by the lower interest rate policy carried out by Greenspan. Because since March, 2001(the new business cycle), Alan Greenspan cut the interest rate 13 times continuously. Financial Innova

5、tions, such as asset-backed securities (ABS), mortgage-backed securities (MBS), etc.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Some Questions,Why should you care about money? Are changes in the money supply responsible for booms and b

6、usts in the economy? What does the financial system do? How are interest rates determined? Why do banks and other financial institutions exist? How do they affect your financial decisions? Should financial markets and institutions be regulated? Who wins and who loses from financial regulation? What

7、causes inflation? Living in a global economy, what do you need to know as a saver and borrower about financial developments outside the United States?,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Financial System and the Economy,The

8、correlation of saverBorrower: The three groups of potential savers and borrowers in an economy are households, business, and governments; IOUsfinancial instruments; A familiar example of a financial instrument is a car loan, which is liability for youyou owe money to the bankand an asset for the ban

9、kit owns the right to receive future payments from you; Open a bank accounta bank act as your go-between by making loans to worthly car buyers.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Ways to Transfer the Funds between Savers an

10、d Borrowers,The govt to allocate funds among the sectors of the economy; The financial services:risk sharing, liquidity, and information; Risk is the degree of uncertainty of an assets return; Liquidity is a measure of how readily one asset can be converted to cash.,Aug. 2008, School of Management,

11、HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Only Thing Constant in the Financial System Is Change,The pace of change in the activities of financial intermediaries accelerated in the 1980s, 1990s, and early 2000s.,Aug. 2008, School of Management, HUST, Zheng Changju

12、n,Aug. 2008, School of Management, HUST, Zheng Changjun,Financial Markets,Financial markets such as the stock and bond markets are one arena in which savers surpluses are transferred to borrowers. Saver can buy stocks and bonds. Business borrowers can obtain funds by issuing stocks and bonds. As we

13、know, investments include to merge a company and to build a new factory (green-field investment).,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Is the Financial System Truly Global?,Three trends toward globalization are of interest: first

14、, business is global; second, financial markets are global; finally, lending is global.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Financial Institutions,Financial intermediaries are institutions such as commercial banks, credits union

15、s, saving and loan associations, mutual savings banks, mutual funds, finance companies, insurance companies, and pension fund that borrow and pool funds from savers and lend them to borrowers. Fig.1 shows that during the 1970s, 1980s, 1990s, and early 2000s, new stock issues accounted for only about

16、 2% of funds raised externally by firms (that is, funds raised over and above firms own profits). Bonds account for more of the funds raised externally but still account for only about 30%. The majority of funds that borrowers raisenearly two-thirdscomes from loans from banks and other financial ins

17、titutions. Households also raise most of the funds they borrow through financial institutions. This role for financial institutions as go-betweens for savers and borrowers is true not only in the United States but also in most industrialized countries.,Aug. 2008, School of Management, HUST, Zheng Ch

18、angjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Money,What is mony? Money is anything that people are willing to accept in payment for goods and services or to pay off debts. Mone

19、y as the medium of exchange. What is monetary policy? Monetary policy refers to the management of the money supply and its links to prices, interest rates, and other economic variables.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Review

20、,Key Terms and Basic Concepts: 1)Financial institutions; 2)Financial instruments; 3)Financial intermediaries; 4)Financial markets; 5)Financial services; 6)Financial system; 7)Money; 8)Money supply; 9)Money policy.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management,

21、 HUST, Zheng Changjun,Chapter 2 Money and the Payments System,Meeting the Needs of Exchange with Money Money is an integral of all modern economies. Why? A partial answer is that money allows the economy to operate more efficiently and hence improves the standard of living. To see why this is so, co

22、nsider what life would be like without money.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Barter,Trade takes place at commodity-pairwise trading posts with a budget constraint enforced at each transaction, so that there is a role for a

23、carrier of value between trading posts. Walras (1874) forms the picture this way(assuming m distinct commodities): “we shall imagine that the place which serves as a market for the exchange of all the commodities (A), (B), (C), (D) .for one another is divided into as many sectors as there are pairs

24、of commodities exchanged. We should then have m(m1)/2 special markets each identified by a signboard indicating the names of the two commodities exchanged there as well as their . rates of exchange.”.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng

25、Changjun,A barter economy with only 100 goods would have 4950 prices; one with 10,000 goods would have 49,995,000 prices. We can calculate it by the formula as follows: n(n1) 2,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Government Allo

26、cation,Another option is to sidestep voluntary trade and use government allocation to distribute goods and services. In this system, a central authority collects the specialized output of each individual producer and distributes it to others according to some plan.,Aug. 2008, School of Management, H

27、UST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Money (Summarized),Money has four key functions that make it the most efficient means of trade: It acts as a medium of exchange. It is a unit of account. It is a store of value. It offers a standard of deferred payment.,Aug. 2

28、008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Medium of exchange,Money refers to anything that is generally accepted as payment for goods and services or in the settlement of debts, also called the medium of exchange.,Aug. 2008, School of Manag

29、ement, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Unit of account,This means a way of measuring value in the economy in terms of money. When an economy uses a commodity such as gold, then each good (such as wheat, chairs, and boats) has a price in terms of gold.,Aug.

30、2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Store of value,Money allows value to be stored easily, resulting in a store of value: if you do not use all your accumulated dollars to buy goods and services today, you can hold the rest for futur

31、e use. Money is also an asset, or a thing of value that can be owned. What is the rich? We often say that individuals in Forbes magazines list of richest Americans have a lot of money. We dont really mean that they have a lot of currency in their pockets ( or hidden away in their mansions or yachts

32、) but that they own valuable assets, such as stocks, bonds, or houses. Money, like other assets, is a component of wealth, which is the sum of the value of liabilities. However, only if an asset serves as a medium of exchange can it be called money.,Aug. 2008, School of Management, HUST, Zheng Chang

33、jun,Aug. 2008, School of Management, HUST, Zheng Changjun,Store of value(contd),Income: the flow of earnings over a period of time Although wealth and income are important measures of value, we do not use these terms interchangeably with money in this book. i.e., the amount of money an individual ha

34、s is represented by the stock of currency and currency substitutes (such as checking account deposits or travelers checks) owned, not by the stock of wealth or a monthly or yearly salary or flow of income. Money is not the only store of value. Any assetshares of General Motors stock, Treasury bonds,

35、 real estate, or Renoir paintings, for examplerepresents a store of value. Indeed, financial assets offer an important benefit relative to holding money because they generally pay a higher rate of interest or offer the prospect of gains in value. Other assets (such as a house) also have advantages r

36、elative to money, as they provide services (such as a place to sleep).,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Why, then, would you bother to hold any money?,The answer goes back to liquidity, or the ease with which a given asset ca

37、n be converted into the medium of exchange. Usually, people divide the money into three types:M0, M1, M2.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Standard of deferred payment,Money can facilitate exchange at a given point in time by

38、 providing a medium of exchange and unit of account. It can facilitate exchange over time by providing a store of value and standard of deferred payment.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Purchasing Power,The value of money de

39、pends on its purchasing power, the ability of money to be used to acquire goods and services. In a country, the purchasing power is reflected on the prices of goods and services (based on what those currencies will buy in their nation of origin). In the world, purchasing power parity (PPP) is a meth

40、od used to calculate exchange rates between the currencies of different countries. PPP exchange rates are used in international comparisons of standard of living.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Purchasing Power (contd),How

41、to express the purchasing power()? 1) Inflation;( We can understand this concept according to the economies of China from 2004 to now) the basic cause is the surplus of liquidity. 2) Deflation;( We can make sense Chinas economies from 1998 to 2003) the basic cause is lack of the demand. 3) Hyperinfl

42、ationvery high inflation ratessay, in excess of 50% per month. ( We can say it is a severe inflation, i.e. the economy deteriorates sharply ),Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,Purchasing Power (contd),How to express the purcha

43、sing power()? We may use the price index to define the value of money. The very often used price indices are CPI, PPI and WPI.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,What Can Serve as Money?,What makes a good suitable to use as a m

44、edium of exchange? Therere five criteria: The good must be acceptable to (that is, usable by) most traders; It should be of standardized quality, so that any two units are identical; It should be durable, so that value is not lost by spoilage. It should be valuable relative to its weight, so that am

45、ounts large enough to be useful in trade can be easily transported. Because different goods are valued differently, the medium of exchange should be divisible. Q: Is the Euro a success?,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Pa

46、yment System,The evolution of the payments system The payments system has evolved over time from precious metals to currency and checks electronic funds transfer services. Definitive money is money that does not have to be converted into a more basic medium of exchange, such as gold, silver, or Fede

47、ral Reserve Notes.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Payment System (contd),Commodity Money As we mentioned above, in earlier time, traders used precious metals such as gold and silver as media of exchange. These physical

48、goods were the dominant means by which trade was accomplished and were known as commodity money. gold standard/silver standard/bimetallic standard Q: What are the characteristics of commodity money?,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Ch

49、angjun,The Payment System (contd),Fiat money Fiat is a Latin, It means order or warrant. The terms fiat currency and fiat money relate to types of currency or money whose usefulness results, not from any intrinsic value or guarantee that it can be converted into gold or another currency, but only fr

50、om a governments order (fiat) that it must be accepted as a means of payment. Harper, who is an economist of Australia defined the fiat money as follows: Fiat money has not only no particular value in use, it doesnt even really have a value in exchange except that which is decreed that it would have

51、.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Payment System (contd),Fiat money is a subset of general credit money . Fiat money is not necessary or always used for large countries. An economy may function on credit money which is n

52、ot fiat money, such as United States paper currency during periods when the U.S. did not have a central bank.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Payment System (contd),Checks Checks promises to pay definitive money on deman

53、d are drawn on money deposited with a financial institution. They can be written for any amount and are more difficult to use fraudulently than currency or precious metals are. Therere two costs to use the checks: 1)converting (transferring) cost, i.e., one should transfer the check to the money. 2)

54、information cost, i.e., the time and effort required for the seller to verify whether the check writer (the buyer) has a sufficient amount of definitive money on deposit to cover the amount of the check.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zhe

55、ng Changjun,The Payment System (contd),Electronic Funds and Electronic Cash Electronic telecommunication breakthroughs have improved the efficiency of the payments system, reducing the time needed for clearing checks and the costs of paper flow for making payments. ATMs; POS (using debit cards). On

56、Oct.18, 1995, Security First Network Bank (SFNB) is the first bank to provide online-banking. In 1998, Royal Bank of Canada (RBC) took over SFNB by using $20,000,000(20 million).,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management, HUST, Zheng Changjun,The Payment S

57、ystem (contd),To summarize, the efficiency of the payments system, which increases as the cost of settling transactions decreases, is important for the economy. Suppose that the banking system broke down and all transactionscommercial and financialhad to be carried out in cash. You would have to car

58、ry large amounts of cash to finance all your purchases and would incur additional costs for protecting your cash. No bank credit would be possible, severely harming the financial systems role in matching savers and borrowers.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of

59、 Management, HUST, Zheng Changjun,The Payment System (contd),Thus disruptions in the payments system increase the cost of trade and credit. Many economists, for example, blame the collapse of the banking system for the severity of the Great Depression of the 1930s. The efficient functioning of the economys payments system is a significant public policy concern. Governments typically regulate the medium of exchange and establish safeguards to protect the payments system.,Aug. 2008, School of Management, HUST, Zheng Changjun,Aug. 2008, School of Management,