Money Banking and Financial Markets - Assignment Example

?Solution Barter system that was earlier popular in world economy involved exchange of goods and products for goods and products. The system was used when money had not developed. Thus there could be no investment of money and the exchange of goods and products occurred with the use of goods and products. However the system encountered certain difficulties. Firstly, needs and wants often did not coincide and thus it became difficult to exchange goods and products. There was a lack of a common measure that could measure the value of the goods for exchange. Thus the entire process of exchange was difficult. Moreover, sub-division of goods was necessary without which the barter system could not take place (Suri, Budhiraja and Rajput 2005). Some of the other problems associated with barter system were in storing the materials that would be used for exchange. Since they were in material forms, they required enough spaces, for example materials like rice, grains, etc. Facilities of credit could not be made available in this system. Also, difficulty was faced in transferring the goods and products from one place to another (Suri, Budhiraja and Rajput 2005). In a barter system, even when the number of commodities would be few, the exchange rates for different products and goods became burdensome (Thomas 2005). The establishment of the monetary system has improved upon the barter system owing to different reasons. The barter system has proved to be a system that caused inconvenience for the reasons mentioned above. With all its associated difficulties, the scope and scale of trade became limited with use of a barter system. The monetary economy eliminated such difficulties. Money could be used for the purchase of products where the value of the goods could be measured and monetary payments done accordingly. In the monetary system, thus goods are exchanged with money. Researchers opined that with the monetary system replacing the barter economy, the feudalistic economic system could be converted into a more active and definite profit-making economic system. Thus the scale of trade started increasing drastically within almost a period of two decades where large number of individuals and groups could take part in commercialization (Karimzadi 2012). The conversion from the barter economy to the monetary economy has proved to improve the economy of the world significantly. With the new system, the economy of the world could be seen to specialize with higher levels of labor divisions as well. While in the barter system only tangible assets could be used for economy; in the monetary economy, money could be included in the list of assets of any individual. Thus savings is possible to be achieved more in the monetary economic system, where investments can be made with the money depending on need and time. With the monetary economy in place, problems with consumption and distribution have been found to be solved, leading to better investment measures in the economy as well (Kolars et al 2013). Thus it can be said that the establishment of monetary economy has improved upon the previous barter economy. Solution 2: Considering the introduction of money in the economic system of the world, all forms of money are actually incorporated. Thus money could be in the form of anything, any goods or products having some intrinsic value, or that which might not have any intrinsic value (Karimzadi 2012). Money does not possess any inherent value of its own. It is valuable because people are in needed, while its supply is limited. Goods and products are the most essential factors in the economy. Money is essential as it allows to purchase or sale such needed goods and products. However, the value of money gets affected or influenced depending on factors like inflation that severely affects trade and business activities and people tend to react badly in such situations. Increase in supply of money leads to conditions like inflation in an economy, resulting to increase in prices of goods and products. Hence, essentially the value of money is determined by the beliefs and reactions of people who are dependent on it (Moffatt 2013). The time value of money is determined by factors such as the price of the money, rates of interest, or the length of the period of time. The time value of money would be zero if there was no rate of interest. Thus with changing rates of interest the time value of money also alters varying the value of dollar in the present with that what would be obtained in the future. Also, with longer time period, the time value of money increases (Pratt 2010). There are certain fundamental factors determining the value of money. These are economic indicators including the gross domestic product, retail sales, industrial production, and consumer price index. With these indicators, the economic state of a country can be analyzed and has direct influence over the price and volume of currency of the country (Kuepper 2013). The different forms of money used in the modern times are metallic money and paper money which are in the form of currencies, and credit money which is the in the form of credit. Depending on the need for expenditure or investment, the form of money is chosen. For example, in case of metallic coins, coins are either standard coins having the same face value as that of their intrinsic value, or they may be token coins as are used in the present times. Token coins have a face value which may not be equal to their intrinsic value. Rather, they may not have any intrinsic value and are made of metals like bronze or copper. These coins can be used for transactions of low values. Paper money is economical and convenient to use. It is also easy to store this form of money. Thus when storage is necessary and the transactions have to be convenient and economical, paper money would be the best form of money that can be used. Credit money is another form that can be used when facilities of banking and modes of payments such as in the form of cheques are available (Priyadarshini 2012). Thus the need for purchase or investment determines the form of money to be used. Solution 3: Since the time of the Second World War till the 1970s and from the 1970s till the present times, there have been several changes in the macroeconomic process of thinking, and thus the policies that have been followed. Economic policies reflected alterations particularly from the countries in the West that started following free-market policies for the economy. This free-market concept eventually led to the rising globalization across the globe. It is owing to such changes in the economy as well as in the politics across the world that the Golden Age of financial order got transformed into neo-liberalism (Mohamed 2008). The economic thinking process across the globe had started to change during the Golden Age led by internationalization of businesses. With the domination being shifted to neo-liberalism liberalization in the market started to get indulged. Following the great depression, there was a need for macroeconomic management to handle instability issues in the economy. National capitalism was suggested as a solution in this situation where the government was responsible to ensure employment and increasing domestic activities. This could also include control over trade policies and flows in the capital. It was under the policy of the U.S. to put off the national capitalism in the country. Thus with a re-alignment of coalition governments and power, the Roosevelt management had come into charge (Mohamed 2008). Following the formation of the new administration, the businesses involved within the country took concern to bring into forefront their risks of being controlled by national economists and their policy making. There were opposing views among the businesspeople and the supporters of the national capitalism. Liberalism was not been supported by the US and Britain policies that wanted to have control over the flow of capital. However the US Congress did not support the lack of freedom of the country’s actions. Thus proposals by the US and Britain started to be refused and rejected. Bankers dominated the economic policies after the death of Roosevelt (Mohamed 2008). There were new officials who wanted to re-establish the conventional policies of the economy. With the financial crisis in the year 1947, their plans of convertibility failed. The political scenario reflected lack of cooperation between the US and the European governments. Increased economic relations and open markets were parts of the strategy that US wanted to follow in order to turn around the shift towards national capitalism and likely development of socialism in Western Europe that they had feared. A Marshall Plan was planned to increase the dependence of the European countries over the US. However, this plan was not enough to sustain the economic links in the country (Mohamed 2008). With the rise of the Eurodollar market, it became difficult for the European countries to maintain closed markets and gradually open markets were welcome following internationalization. Thus changes were occurring and neo-liberalism gradually came into existence with different economics crises and events occurring one after another. Although the industry had earlier opposed to this system of the economy, yet with the political and economic conditions changing over the years, the industry too had welcome the change from the Golden Age of financial order to neo-liberalism. Labor relations were consequently developed with opening of trade and international competition. The nature of management and the processes of investment also altered significantly. There have been considerable alterations in finance and industry as a result of the conversion from the Golden Age to neo-liberalism. National capitalism could not be imagined in the present times where total employment is one of the major factors of the macroeconomic management across the globe (Mohamed 2008). Thus the most essential economic and political factor that led to the transformation from the Golden Age of financial order to neo-liberalism was the global financial crisis. The conversion not only included neo-liberalism but also the economics of the neo-classics. Unemployment had become a crucial problem during the global financial crisis of 2007, where people were also recorded to remain undernourished as they could not afford the high prices of foods. With such drastic conditions resulting from the crisis, several questions had arisen that put doubts on the existing economic system in the country and across the globe. It was mostly due to the deregulation in the financial markets that the global crisis had taken place (Bresser-Pereira 2010). Records reflect the Federal Reserve Bank of the US had maintained interest rates at a low level during 2001, 2002 that could be attributed to the increasing credit limits leading to crisis. In order to gain stability in the financial condition of a country, it is essential that credits are limited, which was not observed during the recent economic crisis, particularly with the US, as it initiated. The capitalism theory that was followed and proved to be successful in the country and had also been started to be followed in other countries, has largely been found responsible for the crisis as they could not prove to be stable and the process led to deregulation. The primary features of the Golden Age included “regulated financial markets, financial stability, high rates of economic growth, and a reduction of inequality” (Bresser-Pereira 2010). This needed a change based on the deteriorating conditions of the economic system owing to such dominance and neo-liberalism came into play the features of which include “rates of growth fell, financial instability increased sharply and inequality increased” (Bresser-Pereira 2010). Although the Golden Age of financial order was influencing the world with capitalism, the intentions of the system were to increase the economic growth across the globe. However, the change in the macroeconomic thinking and the political conditions led to the urge and need for neo-liberalism that is represented as finance-based capitalism. The new form of economy was based on financial globalization. Thus the change from the Golden Age to neo-liberalism could be attributed to cater to the needs of a certain section of people who benefitted while the system proved to be unsympathetic for the poor. In other words, the conversion was supported with intentions to gain artificial wealth, depending on the economic and political scenario that existed during the Second World War (Bresser-Pereira 2010). References Bresser-Pereira, L.C. (2010) The global financial crisis, neoclassical economics, and the neoliberal years of capitalism. Regulation. [Online]. Available at: http://regulation.revues.org/7729 [Accessed 30 July 2013]. Karimzadi, S. (2012) Money and Its Origins. London: Routledge. Kolars, J.F. (2013) Four Studies on the Economic Development of Turkey. London: Routledge. Kuepper, J. (2013) Fundamental Factors that Affect Currency Factors. Yahoo. [Online]. Available at: http://finance.yahoo.com/education/currencies/article/106077/Basic_concepts_for_currencies_markets [Accessed 29 July 2013]. Moffatt, M. (2013) Why does money have value? About. [Online]. Available at: http://economics.about.com/cs/neoclassical/a/value_of_money.htm [Accessed 28 July 2013]. Mohamed, S. (2008) Economic Policy, Globalization and the Labor Movement: Changes in the Global Economy from the Golden Age to the Neoliberal Era. Global-labour-university. [Online]. Available at: http://www.global-labour-university.org/fileadmin/GLU_Working_Papers/GLU_WP_No.1.pdf [Accessed 30 July 2013]. Pratt, J. (2010) Financial Accounting in an Economic Context. New Jersey: John Wiley & Sons. Priyadarshini, S. (2012) What are the Forms of Money in a Modern Economy? Preservearticles. [Online]. Available at: http://www.preservearticles.com/2012020222472/what-are-the-forms-of-money-in-a-modern-economy.html [Accessed 28 July 2013]. Suri, R.K., Budhiraja, J.K. and N. Rajput (2005) A Text Book Of Isc Economics, Volume 1. India: Pitambar Publishing. Thomas, L.B. (2005) Money, Banking and Financial Markets. Connecticut: Cengage Learning. Read More