CH2-Money
HK Certificate of Education
Examination
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
1
The Barter Economy
In a barter economy, without money, one
good was directly exchanged for another.
Problems/Disadvantages of Barter:
– lack of double coincidence of wants
very costly to find trading partners
– most commodities are indivisible
transactions of less than one unit of the commodity
is highly impossible
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
2
The Barter Economy
no common measure of value
– trades are hindered by too many exchange
rates
Inconvenience
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
3
Functions of Money
Money is anything that is generally
accepted as a medium of exchange.
Functions of money:
1. As a medium of exchange
2. As a unit of account/a common measure of
value
3. As a store of value
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
4
Functions of Money
Functions of money:
4. As a standard of deferred payment
Future payments expressed in terms of money
‘means’ of deferred payments  ‘standard’ of
deferred payments (e,g, credit card)
5.As a means of payment
– e.g. money, cash coupons & bank draft
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
5
The Evolution of Money
Commodity money, e.g. shell, salt & metal
– Problems: inconvenience & inadequate
metals
Convertible paper money
– Fully convertible into the same amount of gold
& silver
Fiat money/Non-convertible money/Token
money(i.e. coins & banknotes)
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
6
The Evolution of Money
Deposit money
– Demand deposits (in current account)
– Savings deposits
– Time/Fixed deposits (with fixed period of
maturity)
– Negotiable/Transferable certificate of deposits,
CDs
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
7
The Evolution of Money
Deposit money
– Factors affecting choice of bank deposit:
1. Liquidity: degree of ease of drawing money out
– With Easy Pay System & Automatic Teller Machines
(ATM), savings & demand deposits become the most
liquid deposits while time deposits are the most illiquid
deposits.
2. Interest earning
– CDs & time deposits carry higher interest rates while
time deposits almost zero.
3. Certainty of earnings
– CDs & time deposits guarantee the amount of interest
earned while the interest rates for savings & demand
deposits varies frequently
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
8
The Evolution of Money
Electronic money
–
–
–
–
Certain instruments or cards (e.g. EPS card &
Octopus card) used for making payments through
an electronic system (e.g. ETC, Money Link,
JETCO)
The amount of money billed will be directly
transferred from the consumer’s account into that of
the seller
As a means of payment
Making money less important in daily transactions
but not leading to ‘moneyless’ society
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
9
Are Credit Cards money?
As a medium of exchange?
– No as it acts as a temporary medium of
exchange only
As a unit of account?
– No the value of commodities is never
expressed in terms of credit cards
As a store of value?
– No as it does not have any value or
purchasing power in itself.
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
10
Are Credit Cards money?
As a standard of deferred payment?
– No as future payments cannot be expressed
in terms of credit cards
Conclusion:
– Credit cards are NOT money but are
classified as money substitutes.
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
11
Qualities of Good Money
1. Durable
2. Portable
3. Divisible
4. Homogeneous
5. Scarce or in restricted supply
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
12
Currencies in Hong Kong
Notes are issued by three licensed banks
(the HongKong and Shanghai Banking
Corporation Ltd., the Standard Chartered
Bank, and the Bank of China) & the Hong
Kong Monetary Authority.
Coins are issued by the HKSAR
government
Banknotes and government coins are legal
tender.
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
13
Issuing Banknotes in HK
1. Surrender US$1
Exchange
Fund
2. Receive a Certificate
of Indebtedness
3. Obtain the right to
issue HK banknotes
of HK$7.8
Note-issuing
Banks
• HK’s currency system is called
Foreign Exchange Standard.
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
14
Money Supply in Hong Kong
Money Supply definition M1
= currency (i.e. notes & coins) in public circulation
+ demand deposits with licensed banks
Money Supply definition M2
=M1
+ time deposits with licensed banks
+ negotiable certificates of deposits issued by
licensed banks & held by the non-bank public
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
15
Money Supply in Hong Kong
Money Supply definition M3
=M2
+ deposits with restricted licensed banks &
deposit-taking companies
+ negotiable certificates of deposits issued by
restricted licensed banks & deposit-taking
companies held by the non-bank public
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
16
Money Supply in Hong Kong
Money Supply definition M1
= currency (i.e. notes & coins) in public circulation
+ demand deposits with licensed banks
– M1 emphasizes the function of medium of exchange
Money Supply definition M2
=M1
+ time deposits with licensed banks
+ negotiable certificates of deposits issued by
licensed banks & held by the non-bank public
– M2 emphasizes the function of store of value
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
17
Money Supply in Hong Kong
Money Supply definition M3
=M2
+ deposits with restricted licensed banks &
deposit-taking companies
+ negotiable certificates of deposits issued by
restricted licensed banks & deposit-taking
companies held by the non-bank public
– M3 emphasizes the function of store of value
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
18
Total Money Supply Definition
Total money supply definition M1
=M1(HK$) + M1(foreign currency)
Total money supply M2
=M2(HK$) + M2(foreign currency)
Total money supply M3
=M3(HK$) + M3(foreign currency)
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
19
Effects of Payment by Phone
Service (PPS) on Money Supply
Case 1: debit demand deposits and credit
savings deposits
– M1 decreases
– M2 remains unchanged
– M3 remains unchanged
Case 2: debit demand deposits and credit
demand deposits
– M1 remains unchanged
– M2 remains unchanged
– M3 remains unchanged
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
20
Effects of Payment by Phone
Service (PPS) on Money Supply
Case 3: debit saving deposits and credit savings
deposits
– M1 remains unchanged
– M2 remains unchanged
– M3 remains unchanged
Case 4: debit savings deposits and credit
demand deposits
– M1 increases
– M2 remains unchanged
– M3 remains unchanged
By Mr. LAU san-fat/ver 2004
CH2-Money-SV
21