Characteristics of money
Functions of Money
For money to be successful it needs to perform several key functions or purposes.
Central banks act as the government’s bank and are not accessible for individuals and businesses (except commercial banks).
Commercial banks are the high street banks that we are familiar with such as HSBC, Barclays and Citibank. Profit maximization is their main aim and they are usually privately owned. They traditionally make most of their money by offering savers a lower rate of interest than they charge for lending out that money to others as loans. Individuals and businesses are their customers and they provide a range of services:
Stock exchanges play an important role in economies since they facilitate the buying and selling of shares in Public Limited Companies. This enables companies to raise capital for investment. Stock exchanges regulate the selling of shares and provide a secure marketplace.
Only Public Limited Companies can trade shares on the stock exchange. To buy and sell shares companies and individuals must use a stockbroker. A stockbroker is someone who is registered to trade in the stock exchange on behalf of clients.
Why buy shares?
Generally the higher the amount of money offered as pay, the more attractive the job is likely to be. The method of payment and performance incentives are also likely to influence the decision.
Trade unions are organisations that represent workers’ rights. Workers become a member a trade union and then the union will negotiate with employers for improved working conditions, working hours and pay increases. The NUT (National Union of Teachers) and Unison are examples of strong trade unions in the UK.
Trade unions are effective since they often represent a significant proportion of a firms workers. This gives them more influence than if individual workers negotiated separately. The representation of many workers is called collective bargaining.
It also benefits employers since they can deal with a much smaller number of people in making decisions that affect the entire workforce.
If wages levels are pushed too high and not matched by an increase in productivity then this will increase costs for the firm and make it less competitive. This may lead to unemployment – which would be against the interests of the trade union and its workers.
It is possible for trade unions to try and raise the wages for its members through restricting the supply of workers. This can be achieved by requiring specialist certifications or qualifications. Its members refuse to work any overtime hours, or even go on strike (refusing to come into work at all).
Trade unions need to be relaistic since theur actions may also be damaging to the workers since they may find the firm retaliates in some way (through loss of benefits or future unemployment for example).
Specialisation in the sense of individuals refers to the worker focusing their training and experience on a specific part of the production process.
There are several ways in which people save and different reasons for saving. Reasons for saving
Those on low wages will inevitably spend a large proportion of their income on necessities. This leaves little money for luxuries and saving. People receiving higher incomes are unlikely to spend significantly more on the necessities and subsequently have a larger proportion of their income available for saving.
Borrowing money is likely to feature in most people’s lives at some point. Most people borrowmoney to buy their first house. Others borrow money more frequently to purchase smaller items such as cars and to pay for holidays.
Interest rates affect borrowing. These represent the cost of borrowing money. If interest rates are it will dissuade people for borrowing money since the repayments will be high. If however interest rates are low then borrowing becomes cheap and many people will be enticed to buy now and pay later through borrowing.
Peoples’ motivation for spending is usually linked to the level of disposable income that they have. If disposable income decreases for any reason, people are likely to reduce their level of spending.
Interest rates often affect spending. If interest rates are rising or high, loans become expensive and people are unlikely to borrow money for large purchases. If interest rates are low or credit is easy to obtain people are likely to increase their expenditure level.
High income groups are likely to spend a larger amount than lower income groups, but importantly this larger amount usually represents a lower proportion of their income. Someone who receives double the income of another person is unlikely to consume twice as much food, water and electricity. This leaves them with more income to save and/or spend on luxuries of they wish.