monetary

• Money


  Anything that is generally accepted in payment for goods or services or in the repayment of debts
• Money is distinct from income (a flow of earnings per unit of time) and wealth (total collection of pieces of property that serve to store value)
• Liquidity


  The ease with which an asset can be exchanged for other assets
• Money has perfect liquidity
• Basic functions of money


  • Medium of exchange
  • Unit of account
  • Store of value
  • Standard of deferred payments
• Medium of exchange function of money


  • Eliminates much of the time spent exchanging goods and services
  • Allows people to specialize in what they do best
  • Avoids the problem of double coincidence
  • Allows freedom of choice
• Unit of account function of money


  • Provides a unit of measurement in terms of which the values of goods and services exchanged in the economy are measured and expressed
  • Enables an orderly pricing system which is essential for rational economic calculation and choice, and transmitting economic information among individuals
• Store of value function of money


  • Money is the most liquid asset of all because it is the medium of exchange and does not have to be converted into anything else to make purchases
• Standard of deferred payments function of money


  • Permits the easy transfer of resources out of their less desired (less productive, less profitable) uses and into their more desired (more productive, more profitable) uses
• Evolution of money and the payments system


  1. Commodity money (precious metals, other valuable commodities)

  2. Paper currency (initially convertible into coins or precious metal, later fiat money)

  3. Electronic money (checks, electronic transfers, digital currencies)
• Commodity money is very heavy and hard to transport
• Paper currency has the advantage of being much lighter than coins or precious metal, but it can be accepted as a medium of exchange only if there is some trust in the authorities who issue it
• Paper currency and coins are easily stolen and can be expensive to transport because of their bulk if there are large amounts
• Commodity money


  A precious metal or any other valuable commodity used as money
• Commodity money is very heavy and hard to transport from one place to another
• Paper currency


  Pieces of paper that function as a medium of exchange
• Fiat money


  Paper currency decreed by governments as legal tender but not convertible into coins or precious metal . It includes notes and coins
• Advantages of paper currency


  • Much lighter than coins or precious metal
  • Can be accepted as a medium of exchange if there is trust in the authorities who issue it and counterfeiting is extremely difficult
• Checks


  Allow transactions to take place without the need to carry around large amounts of currency
• Advantages of checks


  • Reduce transportation costs associated with the payments system
  • Improve economic efficiency
  • Allow transactions for large amounts
  • Reduce loss from theft
  • Provide convenient receipts for purchases
• In its microeconomic role, money permits the society to achieve a more efficient allocation of resources.


  Money facilitates the flow of resources in to their most efficient uses.
• Barter requires a double coincidence of wants. Each of us must find someone else who both wants the goods we have and has the goods we want.


  bartery
• a commodity to be accepted as money, it must meet the following criteria.

  i)        Standardization – it must be easily standardized, making it simple to ascertain its value.

  ii)     It must be widely accepted 

  iii) Divisibility – It must be divisible so that it is easy to make a change   iv) Portability – it must be easy to carry

  v) Durability – it must not deteriorate quickly 
• The formula for telling us the number of prices we need when we have N goods is the same formula that tell us the number of pairs when there are N items. It is

   

                                                   N *( N-1)/2
• The importance of money as a store of value depends on the rate of increase of the general price level as compared to urgency for liquidity (VM) =1/1+ Π , where Π − inflation rate
•  the choice of the particular commodity to be used as money was determined by factors such as:

   

  1.      Location of the community 

  2.      Climate 

  3.      Culture

  4.      Economic development etc of the community.
•  


  Seigniorage is the profit that governments (monetary authorities) derive from the issuing of coins and notes.
• 
  

  two problems with a payments system based on checks.

  it takes time to get checks form one place to another and the second problem is For checking accounts that earn interest it takes several business days before a bank will allow you to make use of the funds from a check that you have deposited.
• According to official records it was since the third century A.D (during the reign of King Endybis and Aphilas) that Axumite kingdom was using its own coins for both internal and external trading, although coins might have existed many years before
• With the fall of the kingdom, however, the coins were disappeared from circulation and since then, in Ethiopia, various commodities like a bar of salt (amole), cloth, beads etc had been used as money
• The most important and widely spread one, however, was the salt. Until, the emergence of Maria Theresa, salt was the most popular medium of exchange
• Even after the introduction of Maria Theresa in to Ethiopia salt continued to exist as one of the popular medium of exchange
• Metallic money used in Ethiopia

  • Maria Theresa
  • Coins of Menelik II
  • Coins of Haileselassie I
  • Lire
  • East African shilling
  • Present type of coins
• Maria Theresa Thaler


  Coin first minted in Vienna in 1751 to commemorate the coronation of Maria Theresa as empress of Austria, introduced into Ethiopia by traders between the late 18th and early 19th century, served as a medium of exchange until 1945
• The first national coin was minted by Emperor Menelik II, in 1893
• Menelik's coins were replaced by the new metallic coins issued in July 1933 bearing the image of Emperer Haileselassie
• Paper money was issued by the bank of Abyssinia for the first time in 1914, but failed to get acceptance since the people were familiar only with the metallic coins
• Paper money was again issued by the bank of Ethiopia (the successor of the Bank of Abyssinia) in 1932, these notes were 100 percent backed by gold deposits
• Following the restoration of independence in 1941, many foreign currency started to be used as medium of exchange including Italian Lire, the Maria Theresa Dollar, the east African Shilling, the Indian Rupee, and the Egyptian Pound
• It was only in July 1945 that the Ethiopian government issued the new national currency-Birr