WRITTEN REPORT IN INTRODUCTION TO BUSINESS FINANCE AND THE PHILIPPINE FINANCIAL SYSTEM

WRITTEN REPORT IN INTRODUCTION TO BUSINESS FINANCE AND THE PHILIPPINE FINANCIAL SYSTEM

BSA 1- 27 GROUP IV
LEADER: NAYA, ROSELYN O.
MEMBERS: GUITTAP, SANDRINNE C. CRISOSTOMO, JOHN BRYANNE D. SUPLICO, KATHERINE C. DOMINGO, CHLOIE VERONICA COQUIA, JOHN KENNETH

Everybody knows money. Everybody uses money. And everybody touches money. What money really serve for?
Money serves as a medium of exchange, as a store of value, and as a unit of account.
Medium of Exchange
Intermediary of Trade: Money is the mediator of trade
Facilitate Transaction: Money makes transactions easier.
Eliminates the Double Coincidence of Wants Problem: Money is accepted in all transactions as a method of payment. For example, I have bags and I want wallet. I need to look for a person who sells wallet in exchange of bags. But since, money is there, I don't have to look for a person anymore, I just buy wallet to a wallet seller then.
Used for Buying and Selling Goods and Services: This is the common used of money.
Unit of Account
Standard Mathematical Unit of Measurement:
Money is used to measure market value of various commodities and sevices.
Store of Value
Hold its value over time:
Forms of money can be stored and recovered and used for any future purposes.
Attributes of Money
Acceptability: Money needs to be acceptes by all members of society as a valid form of exchange
Durability: Money does not wear out quickly which means it should last a long time.
Homogeneity: Money is homogeneous iand uniform in value and form. Same face value money has the same monetary value.
Divisibility: Money is able to be divided into smaller units so that real value of a product or service can be given.
Portability: Money is easy to carry and exchange from a person to person
Classification of money

Classification of Good Money

Commodity money
The use of specific commodity as a form of money. Barter system.

Representative money
Something that is not in the physical form of currency, but represents the intent to pay money.

Fiat money
Money which has no intrinsic value and cannot be redeemed for specie or any commodity, but is made legal tender through government degree.

Credit/Fractional money
Money redeemable. A system used to create money out of thin air, loans and mortgages.

Token/Subsidiary money
Small change.

What is the significance of Monetary Standard?

A monetary standard is what gives money value. It is important in that it allows the economy to function and for goods and services to be bought and sold.

Types/Kinds of Monetary Standard

Monometallism or Single Standard when only one metal is adopted as the standard money and is made legal tender for all payments.

Bimetallism or Double Standard
If two metals are adopted as standard money, and if a legal ratio is established between the value of the two metals.

Paper Currency Standard (Managed Currency Standard)
Under the system, as the name indicates, the currency of the country will be in paper.

The Philippine Monetary Standard

-It refers to the overall set of laws and practices which control the quality and quantity of money in a country.

A.) Gold Exchange Standard -It refers to a system in which there is neither a gold currency in circulation not gold reserve held for external purposes. The domestic currency of a country is not converted into gold for meeting internal needs, but is converted into the currency of some foreign countries. The external value of the domestic currency unit is determined in terms of the foreign currency. The domestic currency has no direct link with gold. It is linked at a fixed exchange rate with the currency of another country which is convertible into gold. The Philippines adopted this standard in 1904.

B.) Dollar Exchange Standard -provides a fixed rate of exchange between the currencies of participating countries and the U.S. dollar. -The dollar standard provided a common standard creating price stability among the nations who adopted it.

C.) Managed Currency Standard -Currency whose exchange rate is not determined by the free-market forces of demand and supply but instead is maintained at a certain level by the government's intervention through the country's central bank. Almost all currencies are managed to some extent.
-a currency that is subject to governmental control with respect to the amount in circulation and the rate of exchange with other currencies.

Bangko Sentral ng Pilipinas (BSP) is the one who is responsible for this laws and practices.

Theories On the Value of Money

Income Theory The income theory of money (called ITM, hereafter) has been the outcome of the disagreement of these economists with the quantity theorists.

The income theorists, on the other hand, rightly conceived that changes in demand are a result of changes in income rather than of the money supply. The aggregate demand for goods and services is determined by the size of the money income of the community.

A rise in money income places, a larger amount of purchasing power in the hands of people, thereby increasing their demand for goods and services. If the elasticity of production is high, an increase in aggregate demand would raise the level of production and employment without having much effect on prices.
There are an inter-related approaches to the ITM, namely: (i) the Income-Expenditure approach;
The Income Approach: measures the total incomes earned by households in a nation in a year.

The Expenditure Approach: measures the total amount spent on the goods produced by a country in a year.

Cash Balance Theory

According to the cash-balances theory, the value of money depends upon the supply of and the demand for money. The value of money is at any time fixed at that level at which its supply is equated to demand and the variations in its value through time arise out of the changes in either its supply or its demand, or both.

The basic postulate of the cash-balances theory is that the community's demand for money or cash- balances, induced by the transactions and precautionary motives, constitutes a certain proportion of its annual real national income which the community desires to hold in the form of money. Thus, at a given time, the community's aggregate demand for real money balances can be represented as a certain fraction of the annual real national income. It is against the community's aggregate demand for money cash balances that the supply of money is set to determine the level of prices or the value of money. An increase in the demand for money means lesser demand for goods and services, as the people can have larger cash holdings only by reducing their expenditure on goods and services. As a result, the price level will fall and the value of money will rise. Converse will be the case with the fall in the demand for money.
Income Expenditure Approach The development of income-expenditure approach, or simply, the income theory of money as an explanation of the inter-relationships of money, prices and economic activity, has been a landmark in the history of monetary thoughts since World War I and especially since the onset of the Great Depression on 1929. The income theory of money (called ITM, hereafter) has been the outcome of the disagreement of these economists with the quantity theorists. The quantity theorists furnished a weak explanation of the changes in prices and the value of money. It asserted that a change in the aggregate demand for goods and services is caused by a change in the supply of money, and that an increase in money supply would create an increased demand for goods of all kinds and vice versa. There are two inter-related approaches to the ITM, namely: (i) the Income-Expenditure approach; and (ii) the saving and Investment approach. According to the cash-balances theory, the value of money depends upon the supply of and the demand for money. The value of money is at any time fixed at that level at which its supply is equated to demand and the variations in its value through time arise out of the changes in either its supply or its demand, or both. The demand for money determines the aggregate purchasing power of the money supply, it follows that, with a given demand, the purchasing power of each unit of money varies inversely, and the price level directly, with the quantity of money. On the other hand, the supply remaining constant, the value of money depends upon the changes in the demand for holding money or cash-balances. An increase in the demand for money means lesser demand for goods and services, as the people can have larger cash holdings only by reducing their expenditure on goods and services. As a result, the price level will fall and the value of money will rise. Converse will be the case with the fall in the demand for money. The relation between the supply of, and the demand for, money, so conceived is exposed by the advocates of the cash-balances approach, by formulating cash- balance equations, also know as the 'Cambridge equations.' Like the equation of exchange, the cash-balance equations also are identities or definitional equations.