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MONEY SYSTEMS AROUND THE WORLD. Question…. What is money?. Money and Currency Systems. Money is anything people will accept for the exchange of goods and services. Question…. What characteristics does all money have? (5). 5 main characteristics of $.

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What is money?

money and currency systems
Money and Currency Systems
  • Money is anything people will accept for the exchange of goods and services.

What characteristics does all money have? (5)

5 main characteristics of
5 main characteristics of $

1. Acceptable - people must be willing to accept it for what they are selling.

2. Scarcity - if the item being used as money is plentiful, it will not retain its value. As items used for money become common, they lose their buying power.

5 main characteristics of1
5 main characteristics of $
  • Durable- items used as money in the past (such as farm products) spoiled or got damaged.

- Gold and silver are commonly used as money because they are durable (first made into coins in the seventh century B.C.).

5 main characteristics of2
5 main characteristics of $
  • 4. Divisible - most nations have different units of money - five dollar bill, ten dollar bill, quarters, nickels, dimes, and pennies.
    • You can’t divide a cow

without killing it.

5 main characteristics of3
5 main characteristics of $
  • 5. Portable - as people became more mobile throughout history, they demanded a form of money that was portable.
    • The earliest known paper currency was issued by banks in China in the eleventh century.
three functions of money
Three Functions of money
  • Medium of Exchange - people are willing to accept money in exchange for goods and services.
  • Money makes business transactions easier as opposed to trading for goods and services.
three functions of money1
Three Functions of Money
  • Measure of Value– money is the common denominator in order to value the variety of goods and services available to people.
  • Without money, it would be difficult to put a value on such things as food and clothing. It helps us compare prices for different items.
three functions of money2
Three Functions of Money
  • Store of Value - most people do not spend all of their money. Hence, money can be saved for future spending

How does money cause problems for international business transactions?

Answer: Companies want to be paid in the currency of their home country.

the reason for foreign exchange
The Reason for Foreign Exchange
  • As a result, the money of one country must be changed into the currency of another country.
  • Foreign exchange is the process of converting the currency of one country into the currency of another country.

The exchange rate is the amount of currency of one country that must be traded for one unit of the currency of another country.

    • Changes on a daily basis due to conditions and perceptions
    • Supply and demand: if currency is a solid store of value, people will accept it as payment and its value will increase.
    • country is having financial difficulties, its currency is likely to lose value
three factors affecting foreign exchange
Three Factors Affecting Foreign Exchange
  • Currency exchange rates between countries are affected by three main factors:
    • Balance of Payments: + = currency is rising/constant
    • Political Stability: Uncertainty in a country reduces the confidence businesspeople have in its currency. ( i.e. election, rebellion, new laws, etc.)
three factors affecting foreign exchange1
Three Factors Affecting Foreign Exchange
  • 3) Economic Conditions:
    • All countries are susceptible to inflation and interest rate increases.
    • When prices increase and the buying power of the country’s money declines, its currency will not be as attractive.

Question: Why do inflation and interest rates affect foreign exchange?

three factors affecting interest rates
Three Factors Affecting Interest Rates
  • Money Supply and Demand- when more people want to borrow than to save money, interest rates increase.

- If money is available, but no one is borrowing, interest rates decline.

three factors affecting interest rates1
Three Factors Affecting Interest Rates
  • Risk- the higher the risk associated with a loan, the higher the interest rate charged.
three factors affecting interest rates2
Three Factors Affecting Interest Rates

c) Inflation- as prices rise, the buying power of money declines, so lenders charge a higher interest rate.

- Lenders need to collect more money for a loan when inflation is present so they can cover the lost buying power of the currency they receive in later payments from the borrowers.