ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
THE MODULE
TITLE: MONEY IN THE NATION’S ECONOMY
WHAT IS THE MODULE ALL ABOUT?
Module 2 focuses on the role and significance of money in the
economy. LIST OF TOPICS TO BE STUDIED IN THE MODULE
⮚ Lesson 1. Money and its Evolution
⮚ Lesson 2. Money and its Significance
⮚ Lesson 3. Characteristics of Good Money
⮚ Lesson 4. Kinds of Money
⮚ Lesson 5. Bank Money and Currency
⮚ Lesson 6. Money and the Economy
INTENDED LEARNING OUTCOMES (ILO)
At the end of this module, the students would be able to:
1) Define, discuss and understand the concepts, functions, characteristics, and
importance of money in the monetary system of the country.
2) Know and explain the relationship of money and the economy.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
LEARNING CONTENT
MONEY IN THE NATION’S ECONOMY
INTRODUCTION
Money is the most important invention of modern times. It has undergone a
long process of historical evolution. Human beings passed through a stage when
money was not in use and goods were exchanged directly for one another. Such
exchange of goods for goods was called Barter Exchange.
Barter as a form of exchange is not only utterly inadequate but, moreover,
crude and cumbersome to meet the needs of our modern life. For this reason, man
on his road to development and progress introduced the use of a very important
commodity purposely designed to eliminate the shortcomings that characterize every
barter transaction, like the need for a double coincidence of demand and equality in
value of the things entering the exchange transaction. That commodity is known as
money.
Lesson 1 – MONEY AND ITS EVOLUTION
The inconveniences and drawbacks of barter
led to the gradual use of a medium of exchange.
If we study history of money we shall find that all
sorts of commodities like seashells, pearls,
precious stones, tea, tobacco, cow, leather, cloth,
salt, wine, etc. have been used as a medium of
exchange (i.e., money).
It is called Commodity Money. Inadequacy
of commodity money led to the evolution of
metallic money (gold and silver). The problem of
uniformity of weight and purity of precious metals led to private and public coinage.
This process was finally taken over by the state as one of its essential features
and ultimately commodity money gave way to Paper Money which means currency
notes. Nowadays, use of paper money has almost become universal along with coins
made of copper, bronze or nickel, etc.
The process of evolution of some better medium of exchange still continues.
As the volume of transactions increased, even paper money started becoming
Inconvenient because of time involved in its counting and space required for its safe
keeping.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
This led to introduction of Bank Money (or credit money) in the form of
cheques, drafts, bills of exchange, credit cards, etc. These days plastic money in the
form of debit cards are becoming popular. Thus, bank money has become the most
important form of money in modern times because it is not only a very convenient
form of money for large payments, but also eliminates risks and is durable.
Lesson 2 – MONEY AND ITS SIGNIFICANCE
Without doubt,
everyone will agree in the
observation that regardless
of the form of political
organization existing in any
particular country, money is
both essential and
indispensable to the full
development of trade.
Money is of vital
importance
to the operation of the national and
international economy. Money plays
an important role in the daily life of a
person whether he is a consumer, a
producer, a businessman, an
academician, a politician or an
administrator.
Functions of Money
a. By serving as a medium of exchange, money removes the need for double
coincidence of wants and the inconveniences and difficulties associated with
barter. The introduction of money as a medium of exchange breaks up the
single transactions of barter into separate transactions of sales and purchases,
thereby eliminating the double coincidence of wants. This means that money is
widely accepted as a method of payment. Example: When you go to the
grocery store, you are confident that the cashier will accept your payment of
money.
b. By acting as a unit of account, money becomes a common measure of value.
The use of money as a standard of value eliminates the necessity of quoting
the price of apples in terms of organs, the price of organs in terms of nuts, and
so on. Money is the standard of measuring value and value expressed in
money is price. The prices of different commodities are expressed in terms of
so many units of dollars, rupees, pounds, etc. depending on the nature of
monetary unit in a country. The measurement of the values of goods and
services in the monetary unit facilitates the problem of measuring the
exchange values of goods in the market. In short, money is a yardstick - the
device we use to measure value in economic transactions.
c. Money acts as a standard of deferred payments. Under barter, it was easy to
take loans in goats or grains but difficult to make repayments in such perishable
articles in the future. Money has simplified both taking and
repayment of loans
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
because the unit of account is durable. It also overcomes the difficulty of
indivisibility of commodities.
d. By acting as a store of value, money removes the problem of storing of
commodities under barter. Money being the most liquid asset can be kept for
long periods without deterioration or wastage.
e. As reserve or guaranty for solvency under the system of partial reserves, that
serves to bolster the confidence and trust of the public in the banking system. A
sizeable amount of reserves assures their customers or investors that such
businesses or banks could meet any emergencies at any moment’s notice.
Such reserves are usually in spot cash or securities which are easily converted
to cash.
f. Under barter, it was difficult to transfer value in the form of animals, grains, etc.
from one place to another. Money removes this difficulty of barter by facilitating
the transfer of value from one place to another. A person can transfer his
money through draft, bill of exchange, etc. and his assets by selling them for
cash at one place and buying them at another place.
Lesson 3 – CHARACTERISTICS OF GOOD MONEY
1. General Acceptability: A good money material must be generally acceptable.
People should not hesitate to exchange their goods for the material. Precious
metals like gold and silver are always acceptable.
2. Portability: A satisfactory money material must be of high value for its bulk.
Since it has to be moved about from place to place, it must be possible for us
to carry it from one place to another without difficulty, expense, or
inconvenience. Precious metals such as gold and silver are satisfactory in this
regard. Even paper money is ideal in this regard. Iron, for instance, would not
be satisfactory in this respect.
3. Cognizability: The material used as money should be easily recognizable.
Gold and silver, for example, can be easily recognized by their color and
heavy weight for small bulk.
4. Durability: The material used as money should not deteriorate. The early forms
of money such as corn, fish, and skin were unsuitable in this regard. Gold
coins will last many hundreds of years.
5. Divisibility: The material must be capable of division without difficulty and
without loss of value on account of division. Metals have this advantage. 6.
Homogeneity/Uniformity: All coins of the material should be of the same quality.
One coin should not be superior to another. Coins of different sizes, designs,
shapes and materials were used.
7. Utility: This meant that the object or commodity could be used not only as
money but in its own original form.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
8. Malleability: A material must be capable of being molded without much
difficulty. Even if a material is divided into a number of pieces, they must be
capable of being reunited without loss. Gold is excellent for such purposes.
9. Stability of Value: This is another important quality of a good money material.
Commodities, which are subject to violent changes in supply and demand, are
unfit for money. For, the value of money, like any other thing, is determined by
its supply and demand. If there are violent changes in its supply and demand,
its value is not likely to be stable. Since money is used as a store of value and
standard of deferred payments, it cannot perform these two functions well, if
there is no stability of value for money. If money goes on losing its stability of
value, it will not be accepted as money.
10.Convertibility: That is exchangeable in terms of its equivalent in other money.
Lesson 4 –
KINDS OF
MONEY
COMMODITY MONEY
Under a modern
monetary
system, commodity money
appears
in metallic form, the face value of
which approximates that of the
value of the metal itself. As such,
commodity money, unlike other
forms of money, possesses intrinsic
value. This means that it could be
used either as a commodity (bullion) or as a medium of exchange (money) without
any loss in value.
Commodity money is the simplest and, most likely, the oldest type of money. It
builds on scarce natural resources that act as a medium of exchange, store of value,
and unit of account. Commodity money is closely related to (and originates from) a
barter system, where goods and services are directly exchanged for other goods and
services. Commodity money facilitates this process because it acts as a generally
accepted medium of exchange. The critical thing to note about commodity money is
that its value is defined by the intrinsic value of the commodity itself. In other words,
the commodity itself becomes money. Examples of commodity money include gold
coins, beads, shells, spices, etc.
CREDIT MONEY
Credit money may be described briefly as in the nature of a promissory note.
A government note is the government’s promise to the bearer standard money on
demand. A bank note is a similar promise of a bank. The value of credit money is
therefore essentially equal to the value of standard money, provided of course, that
no expense, delay or other difficulties are encountered in its redemption. However,
from the moment certain obstacles are placed or encountered in the process of
redemption, the value of credit money will depreciate in terms of
standard money.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
PAPER MONEY
Paper money is a country's official, paper currency that is circulated for the
transactions involved in acquiring goods and services. The printing of paper money is
typically regulated by a country's central bank or treasury in order to keep the flow of
funds in line with monetary policy. Paper money tends to be updated with new
versions that contain security features and attempt to make it more difficult for
counterfeiters to create illegal copies.
FIAT MONEY
Fiat money is a government-issued currency that isn't backed by a commodity
such as gold. Fiat money gives central banks greater control over the economy
because they can control how much money is printed. Most modern paper
currencies, such as the U.S. dollar, are fiat currencies. One danger of fiat money is
that governments will print too much of it, resulting in hyperinflation.
CRYPTOCURRENCIES (BITCOIN)
Cryptocurrencies are a way to link the behavior of
a central bank with a peer-to-peer protocol to exchange
money digitally. In a sense, Bitcoin is the first triple-entry
bookkeeping system as it allows anyone to trade directly
with another peer and to keep records of their
transactions in one public, pseudo-anonymous ledger.
The really cool thing about Bitcoin – something that helps
the coin stand out against most other currencies, digital
monies, or even other cryptocurrencies – is the fact it uses the first distributed
consensus algorithm that allows for:
a) Immutability of transactions and the central ledger
b) No double-spending by participants
c) Fault-tolerance
d) Open participation
e) High levels of security
Lesson 5 – BANK MONEY AND CURRENCY
Bank Money is a medium of exchange consisting chiefly of checks and drafts.
Bank deposits – more strictly, individual deposits subject to check – are medium of
exchange, and indeed it appears that in the modern industrial nations, bank deposits
bear the larger part of the burden of this fundamental monetary function. This is
because of the safety and convenience of using checks or bank money, termed as
demand deposits. Indeed, checks which are nothing more than a means of
transferring the ownership of demand deposits are generally acceptable as a medium
of exchange. Furthermore, demand deposits can be converted immediately into their
equivalents in terms of paper money and coins on demand. This makes demand
deposits for all practical purposes the equivalent of currency.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
Thus, it could be stated categorically that money = demand deposits +
currency (coins and paper money). One brief distinction may, however, be noted.
Currency is essentially government-created money while demand deposits are
bank-created money. In addition to currency and demand deposits, there are
various forms of property which can be converted easily into currency or demand
deposits. Savings deposits, short-term government savings bonds are forms of what
are called “near money”. Assets which are somewhat less liquid, such as long-term
government bonds, insurance policies with cash surrender or loan value and
promissory notes of individuals and corporations could be designated as “almost
near money”. There are really is no sharp line between near monies and other
tangible assets.
Lesson 6 –MONEY AND THE ECONOMY
Modern society is organized on a financial or pecuniary level. In performing these
major functions, one cannot escape the fact
that money served not only as an important
but, moreover, an essential tool
of economic activity.
With good justification, our present
economic system has been described as
money economy. There is hardly any
aspect of economic life that is not affected
by money. Very few, indeed, are able to
satisfy their wants without the use of
money (and of course, complemented by
credit).
Briefly observed, however, to the individual business man, the decision as to
what to produce, and how much of it to produce, is based entirely on monetary
considerations. Goods will be produced only when the businessman is optimistic and
convinced that he will be able to sell them at a price sufficient enough to leave a
satisfactory margin of profit. This desire for monetary profit, in essence, is the most
powerful force motivating economic activity.
In our economic society, we rely largely on money and prices to keep
production and consumption in step with each other and price changes are expected
to help bring adjustments where they are necessary. Within an exchange economy,
one sells his services or the products of his labor – in the market for money, and then
exchanges the money to receive for the objects of his desires. In so far as production
is intended for the market, a large volume of demand for one kind of goods enables
man to specialize in the production of that kind of goods. In fact, our economy, men
are compelled to specialize. The effect of specialization is the skill to do more job
easier, better, cheaper and quicker. Whereas, under a more primitive order society,
production was dependent upon individual needs and specific orders, goods are now
produced for sale in the market in anticipation of an expected demand. The producer
need not have a direct contact with those who actually want and consume his goods.
Money, in effect, has freed production from the fetters of specific
individual demand.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
Does money therefore benefit only the producers? The answer is: Far from it.
While it is to the self-interest of the producer to continue in production, on the other
hand, consumers must be
provided with a supply of
good for their use and
satisfaction. The
aggregate of a country’s
goods resulting from
production make up for its
national income.
For further readings,
visit
https://www.youtube.com/wat
ch?v=qgC5m47TM0I
https://www.youtube.com/wat
ch?v=nKW3x6NvWq0
SUMMARY OF MODULE 2 – MONEY IN THE NATION’S ECONOMY
Money is an economic unit that functions as a generally recognized medium of
exchange for transactional purposes in an economy. Money originates in the form of a
commodity, having a physical property to be adopted by market participants as a medium of
exchange.
Money serves as a medium of exchange, unit of account, standard of deferred
payments, store of value, reserve or guaranty for solvency, transfer of value. Money must be
generally acceptable, portable, cognizable, durable, divisible, with uniformity and utility,
malleable, with stability of value and convertible.
In today’s generation, the economy uses commodity money, credit money, paper
money, fiat money and cryptocurrencies and even bank money.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
References:
Pagoso, Cristobal M. (2010), Money, Credit and Banking,
Miranda, Gregorio S, (2004): Essentials of Money, Credit and Banking (Revised
Edition)
https://www.investopedia.com
You may now
proceed to the
next module of
this course. I
hope you have learned some information if not a lot in the
lessons discussed earlier.
Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 2
Name: _______________________________ Score: _______ Year and Section:
__________ Date: ________
INTENDED LEARNING ACTIVITY
Explain why money is important to individuals, businesses and to
the financial system of the country? Give examples to support your
answer.
Scoring Rubrics:
26-30 points The answer is well-written, organized and the idea is
very relevant to the question and has no grammatical
or spelling errors.
16-25 points The answer is fairly written, and the idea is almost
relevant to the question and has one grammatical
or spelling error.
11-15 points The answer is somewhat relevant to the questions
and has two to three grammatical or spelling errors.
6-10 points The answer is unclear and has four grammatical
or spelling errors.
1-5 points The answer does not address the question and
has more than five grammatical or spelling
errors.
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Course Code: Fin 154
Descriptive Title: MONETARY POLICY AND
CENTRAL BANKINGInstructor: Mary Rose Supsup Abaniz
