Unit 1 The nature and role of money

Pre-reading tasks

Practice the reading of the following words.

Medium ['mi:dɪəm]

nonessential [̗nɒnɪ'senʃl]

supply [sə'plaɪ]

coincidence [kəυ'ɪnsɪdǝns]

require [rɪ'kwaɪə]

scarce [skeəs]

measuring ['meʒərɪŋ̗]

quantity ['kwɒntətɪ]

society [sə'saɪətɪ]

invariable [ɪn'veərɪəbl]

trustworthy ['trʌstwɜ:ðɪ]

routine [̗ru:'ti:n]

cheque [tʃek]

liability [̗la(ɪ)ə'bɪlətɪ]

issue ['ɪʃu:]

immediately [ɪ'mi:dɪətlɪ]

Make sure you can read these international words correctly and translate them into Russian.

Inflation, combination, situation, barter, resources, efficient, monetary, collectively, private, illegal, standard, definition, balance, classification, reserve, commercial, calculate, liquidity, separate, manager, assortment, identical.

Give the verb forms of the following words.

Facility, combination, coincidence, degradation, supplier, recognition, willing, existence, simple, consumption, changeable, successful, additional, repaid, restriction, specification, following, survival, collectively, individual, depository, acceptable, financial, directly, advancement, invariably, withdrawal, obligation.

Read the following words paying attention to the stress displacement and translate them.

to 'differ – 'different – diffe'rential – to diffe'rentiate

to coin'cide – co'incident – coinci'dental

'policy – po'litical – 'politics – 'politician

'government – govern'mental

'instant – instan'taneous

'circular – circu'lation

'particle – par'ticula

'flexible – flexi'bility

'similar –simi'larity

'social – so'ciety

Read the text and be ready to do the exercises.

Text a whatismoney?

The Economics Glossary defines money as: Money is a good that acts as a medium of exchange in transactions. Classically it is said that money acts as a unit of account, a store of value, and a medium of exchange. Most authors find that the first two are nonessential properties that follow from the third. In fact, other goods are often better than money at being intertemporal stores of value, since most monies degrade in value over time through inflation or the overthrow of governments.

So money isn't just pieces of paper. It's a medium of exchange that facilitates trade. Suppose I have a Wayne Gretzky hockey card that I'd like to exchange for a new pair of shoes. Without the use of money, I have to find a person, or combination of people who have an extra pair of shoes to give up, and just happen to be looking for a Wayne Gretzky hockey card. Quite obviously, this would be quite difficult. This is known as the double coincidence of wants problem. The double coincidence is the situation where the supplier of good A wants good B and the supplier of good B wants good A. The point is that the institution of money gives us a more flexible approach to trade than barter, which has the double coincidence of wants problem (also known as dual coincidence of wants).

Since money is a recognized medium of exchange, I do not have to find someone who has a pair of new shoes and is looking for a Wayne Gretzky hockey card. I just need to find someone who is looking for a Gretzky card who is willing to pay enough money so I can get a new pair at Footlocker. This is a far easier problem, and thus our lives are a lot easier, and our economy more efficient, with the existence of money.

In the nineteenth century money was mainly gold and silver coins. These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes) which also serve as a medium of exchange. To use a commodity money, society must either cut back on other uses of that commodity or devote scarce resources to producing additional quantities of the commodity. But there are less expensive ways for society to produce money. A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money. A $10 note is worth far more than as a 3х6 inch piece of high-quality paper. Similarly, the monetary value of most coins exceeds the amount you would get by melting them down and selling off the metals they contain. By collectively agreeing to use token money, society economizes on the scarce resources required to produce money as a medium of exchange. Since the manufacturing costs are tiny, why doesn’t everyone make $10 notes? The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal. Society enforces the use of token money by making it legal tender. The law says it must be accepted as a means of payment. However, laws cannot always be enforced.

In modern economies, token money is supplemented by IOU money. An IOU money is a medium of exchange based on the debt of a private firm or individual. A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank owes you money. You can write a cheque to yourself or a third party and the bank is obliged to pay whenever the cheque is presented. Bank deposits are a medium of exchange because they are generally accepted as payment.

To be accepted in exchange, money has to be a store of value. Nobody would accept money as payment for goods supplied today if the money was going to be worthless when they tried to buy goods with it tomorrow. But money is neither the only nor necessarily the best store of value. Houses, stamp collections and interest-bearing bank accounts all serve as stores of value. Since money pays no interest and its real purchasing power is eroded by inflation, there are almost certainly better ways to store value.

Finally, money serves as a standard of deferred payment or a unit of account over time. When you borrow, the amount to be repaid next year is measured in pounds sterling. Although convenient, this is not an essential function of money. UK citizens can get bank loans specifying in dollars the amount that must be repaid next year. Thus the key feature of money is its use as a medium of exchange. For this, it must act as a store of value as well. And it is usually, though not invariably, convenient to make money the unit of account and standard of deferred payment as well.

As for what constitutes money and what does not, The Federal Reserve Bank of New York gives the following definition: "The Federal Reserve publishes weekly and monthly data on three money supply measures - M1, M2, and M3 – as well as data on the total amount of debt of the nonfinancial sectors of the U.S. economy... The money supply measures reflect the different degrees of liquidity – or spendability – that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers’ checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada."

So there are several different classifications of money. Note that credit cards are not a form of money. Note that money is not the same thing as wealth. We cannot make ourselves richer by simply printing more money.

Comments:

IOU (Iowe you) money – деньги, полученные по закладной

Match a line in A with a line in B (as in the text).

A	B
1. double 2. scarce 3. purchasing 4. give 5. commodity 6. bank 7. depository 8. repurchase 9. flexible 10. manufacturing	a) no interest b) money c) resources d) power e) approach f) institutions g) account h) coincidence i) costs j) liabilities

Match the definitions and try to remember them.

1) Money	is (are) mean(s) serve(s)	a) different degrees of liquidity.
2) Money supply measures		b) money which value greatly exceeds its cost of production.
3) Token money		c) an exchange of goods.
4) Bank deposit		d) a bank debt.
5) Commodity money		e) a double coincidence of wants problem.
6) Barter		f) a medium of exchange.
7) Transaction		g) ordinary goods with industrial uses.

Match up the words with a close meaning.

1. transaction 2. demand 3. restrict 4. different 5. store 6. amount 7. definition 8. convenient 9. medium 10. liability 11. essential

a) save, keep b) limit c) quantity, value, size d) request e) obligation, commitment f) determination, specification g) proper, appropriate, suitable h) necessary, most important, fundamental i) means, way, surroundings, environment, middle j) various, diverse k) bargain, deal

Try to remember the following word combinations.

banking	account	банковский счет
annual		годовой отчет
credit		кредитный счет
checking		текущий счет
final		итоговый отчет
additional	payment(s)	дополнительный платеж
cash		наличный платеж
interest		выплата процентов
bonus		выплата премии
currency		валютные расчеты
farm	commodity	сельскохозяйственный товар
finished		готовая продукция
money		денежный товар
natural		натуральный продукт
scarce		дефицитный товар

Suggest 5 word combinations with each of the following terms and translate them using the dictionary.

Money, consumption, purchase, value.

Form words with opposite meaning using the negative prefixes un-, in-, dis-, de-, non-, im- and translate them into Russian.

Count

efficient

balanced

measured

financial

perfect

acceptable

experienced

successful

productive

payment

proper

appreciate

achievable

identical

probably

natural

flexible

reliable

profitable

stability

Find sentences in the text with the following discourse markers: thus, since, as, though, although, as well, as well as, as for, against and translate them into Russian.

Look through the text again and answer the following questions.

1. What are the functions of money in the society?

2. Will you give examples of commodity money?

3. What is the difference of commodity money and token money?

4. Why did the society agree to use token money?

5. Why is private money production illegal?

6. When is it said that you have a bank deposit?

7. What can you do with a cheque?

8. Is money the best to store? Why?

9. What are M1, M2 and M3?

10. Why is money not the same as wealth?

Summarize the information of the text and render its essentials.

Render the text into English.