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Management (MGT)
Chris Bovaird

Management Chapter 18: Understanding Money and Banking What is Money? Money: any object generally accepted by people as payment for goods and services (usually stamped metal or printed paper; but can also include commodities, ex. Salt, wool) The Characteristics of Money 1. Portability: modern currency is lightweight and easy to handle 2. Divisibility: modern currency is easily divisible into smaller parts with fixed values for each unit (ex. CDN dollar can be divided into 4 quarters, 10 dimes, 20 nickels, 100 pennies < or any combinations of those) 3. Durability: modern currency does not spoil or die, if it wears out it can be easily replaced 4. Stability: paper value fluctuates over time but is considerably more stable than other commodities (ex. Value of fish rises and falls with the fishing season) The Functions of Money Barter economy: economy in which goods are exchanged directly for one another o Inefficient because seller must find buyer who is willing to trade for the specific goods that the seller has (barter trade accounted for half the business transactions in Russia in the late 1990) 1. Medium of exchange: way of buying and selling things without inefficiency of barter system 2. Store of value: in the form of currency, money can be used for future purchases, therefore stores value 3. Unit of account: money allows us to measure the relative values of goods and services (all products can be valued and accounted for in terms of money) Credit Cards: Plastic Money? Not included in M-1 or M-2, credit cards are a substitute of money, not a store of value Some cards charge annual fees, all charge interest on unpaid balances (around 11-20%) Merchants who accept credit cards pay fees to card issuers (about 2-5% of total credit-sales) The Canadian Financial System Businesses need stable financial institutions to underwrite modernization and expansion, and individuals need them to handle currency Financial Institutions The main function of financial institutions is to ease the flow of money from sectors with surpluses to those with deficits o A bank can issue financial claims against itself by making available funds for chequing and savings accounts, its assets will be mostly loans invested in individuals and individuals (and in government securities) The financial community in Canada was divided into 3 legal areas (the four financial pillars): chartered banks; alternate banks such as trust companies or credit unions; life insurance companies and other specialized lending and saving intermediaries such as factors, finance companies, venture capital firms, mutual funds and pension funds; investment dealers The four pillars began to crumble when changes to the Bank Act allowed banks to own securities dealers, insurance companies, subsidiaries selling mutual funds and banks are now allowed to sell insurance Financial Pillar 1 Chartered Banks Chartered Bank: a privately owned, profit seeking form that serves individuals, non-business organizations, and businesses as a financial intermediaries Canada has a branch banking system where few bank has thousands of branches, US has thousands of banks with few branches Services Offered by Banks Pension services: banks help customers establish savings plans for retirement (serve as financial intermediary by receiving funds and investing them as directed by customers, also provide information on investment possibilities Trust services: the management of funds left in the banks trust- making bill payments, managing investment possibilities, estates of the deceased (for a fee) International Services: currency exchange, letters of credit and bankers acceptances o Currency exchange: exchanging Canadian dollars for the currency of another country or vice versa o Letter of credit: a promise by a bank to pay money to a business firm if certain conditions are met o Bankers acceptance: a promise that the bank will pay a specified amount of money at a future date
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