Training in Economics: October 2015

Friday, October 23, 2015

70. Money

Money can be defined in terms of the three functions that it provides.

Money serves as a medium of exchange, as a store of value, and as a unit of account.

Medium of exchange. Money's most important function is as a medium of exchange during transactions. Without money, all transactions of goods and services would have to be conducted through the bartering of actual goods. This will mean the direct exchange of one good or service for another. The problem with barter that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between the two transacting parties. The likelihood of this is small and makes the exchange of goods and services difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services. Metals of various types and other commonly accepted goods have traditionally fulfilled this function. Lately fiat currency have been used. Fiat currency however does not meet the other two functions to the same degree as for example gold. Electronic mediums of exchange are being used increasingly as a medium of exchange.

Store of value. In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money in the form of government issued currency is not the best store of value because it depreciates with inflation but is mandated by governments as the accepted medium.

Unit of account. Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about comparative values.

https://www.youtube.com/watch?v=ZkyBnaYCUhw

https://www.youtube.com/watch?v=EobPnLZiOo8

Functions of Money

Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account.

Medium of exchange. Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.

Store of value. In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.

Unit of account. Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.

The above was plagiarised from: https://www.cliffsnotes.com/study-guides/economics/money-and-banking/functions-of-money

The problem with fiat currencies is that they lose the key functions of money.

Tuesday, October 20, 2015

69. Austrian Business Cycle Theory

Here is an introduction to the Austrian Business Cycle Theory as found on WIKIPEDIA The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank or fractional reserve banks.[1] The Austrian business cycle theory originated in the work of Austrian School economists Ludwig von Mises and Friedrich Hayek. Hayek won the Nobel Prize in economics in 1974 (shared with Gunnar Myrdal) in part for his work on this theory.[2][3]

Proponents believe that a sustained period of low interest rates and excessive credit creation result in a volatile and unstable imbalance between saving and investment.[4] According to the theory, the business cycle unfolds in the following way: Low interest rates tend to stimulate borrowing from the banking system. It is argued that this leads to an increase in capital spending funded by newly issued bank credit. Proponents hold that a credit-sourced boom results in widespread malinvestment. In the theory, a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when the credit creation has run its course. Then the money supply contracts, causing resources to be reallocated back towards their former uses.

The Austrian explanation of the business cycle differs significantly from the mainstream understanding of business cycles and is generally rejected by mainstream economists. Mainstream economists generally do not support Austrian school explanations for business cycles, on both theoretical as well as real-world empirical grounds.

Monday, October 19, 2015

68. Obesity

For millenia people like you and I have been living on the edge of a abyss - hunger, poverty, starvation, death and famine was never far away. Now in many regions of the world this situation has changed so dramatically that enemy no 1 is....OBESITY. We eat to much!

What has changed?

Economic freedom, technology, trade and growth.

There are however still some areas in the world where this level has not yet been achieved. The people of North Korea, Myanmar, Zimbabwe, and other countries that have repressive regimes are still in dire straits. Some countries where human suffering is high, like Cuba and some Latin American countries, are too held hostage by socialist dictators and it will be some time before they too will be able to benefit from the fruits of liberty.

Many erstwhile Communist countries have discarded their antiquated way of thinking and millions of their people have stepped over the poverty line - so much so that the Vietnamese Ministry of Health has issued a warning that people shouldn't be working so hard for flat screen TVs and Cellphones! (I'll be checking the reference for this one).

There seem to be a clear relationship between Economic Growth and other freedoms experienced in a country - governments and policy makers should take note of these and craft their public actions along these lines - enabling the populace to help themselves to the rich takings of economic prosperity - even though they may become fat and happy as a result.

Charl Heydenrych

19 October 2015