Lesson 5 - Value of Money

Theme : macro economic - studies aggregate output, employment and general PRICE level.

Key learning objectives :


a) What is MONEY? what are its characteristics.
b) What is the value of money, how is it determined?
c) What are the factors that affect VALUE of money.
d) How supply of money(cause) causes inflation(effect).
e) Forex and its impact.

Think of problems in trade before money was invented.
People barter trade.
Eg : a farmer who has a cow and want chicken and rice, need to trade with a chicken farmer and a rice farmer. (to get chicken rice)

i) how do to determine one cow is worth how many chickens.
How do they determine how many chickens can be exchange for 1 cow. How many bags of rice can be exchange for 1 cow.

ii) What if the chicken farmer has a small family and only need 1 cow leg and do not have refrigerator?

iii) What if the cow farmer wants to exchange for rice, but the rice farmer does not eat cow?

iv) What about the banana farmer who has a bumper crop and wants to exchange but no one need so much bananas. The bananas will rot over time.

Money resolves many of these problem . Thus money must :

a) act as medium of exchange
a labourer is paid a wage and he used this to exchange for food/other services
b) has store value
money received today can be used in the future. If banana is used as money,what will happen to its value?
c) is a measure of value (ie if it is a $10 note, it is worth $10)
serve as a common denominator of price and income. Eg : newspaper cost $1.00, students are paid $50 per day to work in exhibition.

d) fungibility : easily exchangeable.

e) divisible : unlike the cow which is not easily divisible.

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VALUE DETERMINED.
If the cow farmer exchange one cow for 5 chickens and both farmers are happy to exchange,that become value of 1 cow.

If tomorrow the cow farmer wants 10 chickens for 1 cow and both farmers are happy to exchange, that become value of 1 cow.

So : value for something is established when both parties are willing and happy.

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Think of the chips, box of chocolate and box of sweet - value of money is relative.

Eg : 6 month ago : box of chocolate : need 10 chips, box of sweet need 10 chips
Now : box of chocolate : need 12 chips, box of sweet need 12 chips
so value of chip???? - gone down.

6 month ago : box of chocolate : need 10 chips, box of sweet need 10 chips
Now : box of chocolate : need 12 chips, box of sweet need 10 chips
so value of chip???? - remain the same, value of choc went up.

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Look at demand and supply of money ($).
If supply of money goes up (shift to right),VALUE of money goes down.
VALUE of money goes down, prices of goods/services goes up (ie inflation).
Thus supply of money goes up (ie Government print more money), value of money goes down and cause inflation.

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FOREX

Value of 2 currencies is determined by demand and supply for the currencies.
In Singapore :
eg : If demand for Australian $ goes up ((because Singapore importers import more AU goods, many Singapore students go to study in AU and need to pay fees in AU$, many Singaporeans travellers goes to AU, AU$ will appreciate in value (ie go up) versus Singapore $.(ie more Singapore $ needed to exchange for AU$1.)

How are people affected :

a) Food( grapes, oranges, chocolate) from AU will cost more.
b) Your parent has to use more SIngapore $ to pay for your fees.
c) Travellers has to pay more for hotels etc.


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Good Book : Principles of Economics - Schaum's Outline series.
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