Today we’re going to discuss about money and finance. As economics is not about money. Economics is not about getting rich quickly. Rather, you trade off the things you own for the things you want. For example, I have this lottery but I want this pizza, do you want to trade me? No way! Imagine that you live in a world without money and that you are a dentist who wants to buy a car.
First, you need to find a group of auto workers, who need dental treatment. If these workers do not want dental services and prefer to receive compensation in another body. As flat screen televisions, you should look for TV manufacturers whose teeth hurt. Try posting this on Craiglist. This is called a “barter system” and it takes a lot of time and energy. Of course, many still trade barter, but we use the money in most transactions. It is a more effective way of working. People who need dental care will pay the money. You will be able to use to buy a car. Economics indicates that money serves three main goals:
First, it operates a “medium of exchange”, Where it is generally accepted to pay for goods and services. This method of exchange means that we are not part of the barter system.
Second, money can be used as a stored value. The reason a dentist usually does not accept baked goods or food. Is that he can’t save it to go and buy a car, Bananas also spoil quickly in a deposit box. Money is also used as an arithmetic unit. We do not measure the value of cars with bananas, cakes or root canals. We use money because it is a standard measure that allows us to calculate the relative value of things. Most people assume that money is the government’s banknotes and coins. Coins have been used for thousands of years and are a great example of money. In practice, however, money is everything that can be used as an exchange. For example, cigarettes were used as money in prisons until smoke-free laws were put in place. Now, prisoners use postage stamps and even small mackerel boxes as currency.
The animals, such as cows and sheep, and grain bags were used as money. Some societies even used feathers or shells. The indigenous people of Yap Island in the Pacific Ocean. They used money called “rai stones”. It was big round limestone tablets. The largest one is three meters wide and weighs four tons. The bottom line is that what economists consider to be money Is anything that is accepted as an exchange. It’s something that has changed a lot over time. Today, banknotes and coins are used as cash because they are easy to carry Durable and hard to fake. But a lot of cash today does not end up in pockets and wallets Or bags or trolleys. It is transmitted electronically. People receive their money increasingly through checks or direct deposits in their banks. A lot of our money is not tangible, it is digital and is on a bank’s computer. As long as that computer is protected Zombies of the end of the world do not cut off electricity. The financial system in your country is working the right way Then that electronic money will do whatever it’s supposed to do.
Bitcoin A Digital Money
Another form of digital money that we often hear about is Bitcoin. Bitcoin is a virtual currency not issued or regulated by a particular country. Some people accept it as a form of payment, many economists consider it cash. Unlike other electronic currencies, Bitcoin does not need a bank. So people can theoretically purchase goods unidentified. This is preferred for people who do not trust central banks and people who want to buy illegal items online. This illegal trade means law enforcement and lawmakers are also interested in Bitcoin. Bitcoin is not limited to online drug deals. There is a great risk involved in trading Bitcoin. That is, people buy Bitcoin in the hope that you will get them back at a profit, This makes Bitcoin a speculative asset. It limits their use in buying and selling real services and goods.
Can Bitcoin or another virtual currency become a universal payment method in the future? Who knows! But if someone wants to pay me ten Bitcoin coins for this lottery, I’m okay. An important question here is: What makes these papers of great value for cash flow? In the past, every dollar was issued by the US government It could be collected for a certain amount of gold. That was called the “gold standard.” It meant that the government could not issue more money than it had in gold reserves.
In the 1930s, the United States decided to ignore the gold standard Which caused some people panic because there is nothing concrete to support the money. It is important to remember that money, whether it is cash or gold Or small mackerel packs, all built around confidence. Nobel Prize winning economist Milton Friedman said: “Green leaves have value because everyone thinks they have value.” With this in mind, the gold standard or even the mackerel standard Money may not make them more valuable or reliable. Many economists agree on this, which is why countries do not use the gold standard. There are calls from some politicians to return him But this will most likely never happen. We apologize, Ron Paul. Well, I know we’ve said that economics is not about the stock market But now it is time to explain what it is and why it is so important.
The Stock Market
The stock market is part of something much bigger than the financial system. To understand the financial system, you have to imagine two different groups,
First, there are the lenders, Sometimes they are institutions that have a lot of money. The lenders may also be ordinary people like you and me. We ordinary people will need money in the future to retire. Or enrolling our children in universities or traveling on vacation on Yap Island. So we need a way to convert the money that we now have into more money in the future.
The second group is borrowers, and there are several types of borrowers. First, there are other families who want to borrow money to buy things like a car or a house. There are businesses that have a great idea for a new product but are facing a problem. That is, they need money to make that product. She will have money after selling the product. Now, they need to borrow money that they invest in capital Mechanisms, tools, and factories. They will pay that money back when they sell the product. In short, they need to purchase materials to produce other materials. Third, there are governments that need to borrow money Because she spends more than she gets used to.
Lenders And Borrowers In Financial System
So, we have lenders who now have money and want to convert it into more money in the future. We have borrowers who need money now and will repay it in the future. The financial system is a network of institutions, markets and contracts bring these two groups together. Lenders put money in the financial system that it lends to borrowers, These borrowers pay back those loans with interest, which makes the lenders worth the trouble.
Let’s start by reviewing the matter: There are three ways for this trade to happen, the first is banks, Where a lender puts money in a bank Then the bank lends that money to a family that wants to buy a house, Or for a business that wants to expand, And when those borrowers pay interest on their loans, the bank takes a portion of that money To cover its costs and give the rest to the depositor. The second way to deal between lenders and borrowers is through the bond market, Where a large government or institution that needs to borrow money sells bonds to lenders, The bond is, in short, a debt declaration document in which the borrower agrees to pay regular interest. He promises to pay off the full amount borrowed at a specified date in the future. If that lender decides that he prefers to take the cash now He is free to sell that bond to a third party. The third way lenders interact with borrowers is by … well, the stock market. Let’s say Jacob and I wanted to expand our lemonade company. We have no money to do that. In this case, we can sell shares, which are, in short, shares of the company’s ownership. The lender gets the shares and we get the money. And if our company wins in the future and becomes a huge lemonade company, We will share some of those profits with shareholders, Or shareholders can sell shares at higher prices. Either way, they make money if the company makes a profit.
So, there is a common factor between banks and bonds. That is, they trade in something called “religion.” If you got loans from a bank or if you’re a government that sells bon. The amount you have to pay is scheduled. In almost all cases, you are obligated to pay back the amount you borrowed. With a specified amount of interest. Shares, on the other hand, are known as “equity”. If the company makes high profits, the shareholders get more money, and if the company goes bankrupt, the shareholders will get nothing.
The volatility in the stock market is not reliable indicators, on knowing the economic situation. The changes in the stock market are mostly reactions On real or just noticeable changes in economic fundamentals, Such as consumer confidence, unemployment, and GDP growth. Bonds and stocks are also a common factor. They are traded in the markets as financial instruments, Where bonds are debt instruments and stocks are equity instruments, But both are traded securities with many buyers and sellers. Banks, on the other hand, are financial institutions You help the Federal Deposit Guarantee Corporation guard our money While loans are provided to individuals and shops.
So why do we need this complex financial system? Why doesn’t a person take their savings and loan them directly? If you want to lend your life’s savings to your neighbor to establish his creative smartphone business, do so. But this is a big risk. So it is better to use a financial system. Financial markets that trade in instruments such as stocks and bonds It allows borrowers to use the crowdsourcing to borrow the money they need, That is, they raise their capital from a lot of investors and thus they distribute the risk. Banks do the same thing, as small deposits collect thousands of people And you use it to make loans. Like the Kickstarter but better Because you get money instead of email thanks. From the lenders perspective, the financial system allows them to distribute their savings On tens or hundreds of different loans. A few companies may go bankrupt and a few people may not pay back their car loans But these losses will be offset by borrowers who repay their loans, You don’t have to put all your eggs in one basket.
So, this is the money in the financial system. The thing that we have to remember is that these are not just public matters or none of our business. Almost all of us are lenders and borrowers at some point in our life. Understanding lending and borrowing is very important. While it may seem like you are borrowing from an unidentified organization. My money may be borrowed from that unknown institution. I will want to get it back if I find no one accepting this lot as a payment.