There have been economies since the dawn of civilization civilization but economics is a recently developed field of study originating as a social science during the eighteenth century Economics is the study of how a society’s resources are shared in order to create wealth Defined as the total sum of all possessions including financial assets minus total liabilities liabilities wealth can be measured in terms of money Every purchase in a store is an exchange Someone has a product that he or she trades for someone else’s money In preindustrial societies people exchanged goods and services services directly without money in a process called barter A person might exchange something he or she made say shoes for a shirt that someone else made Or they might both exchange their shoes and shirts for 10 pounds 4 5 km of wheat grown by a farmer and then split the wheat This process of exchange was very simple It resembled how some people trade baseball cards or comic books today In a modern society however with millions of people people and hundreds of thousands of products and services the barter system becomes impossible The complications would be endless and overwhelming To get rid of barter and to simplify exchange money was invented With the invention of money came the creation of banks which are institutions that deal in money and its substitutes Banks accept deposits make loans and derive a profit from the difference in the interest paid to lenders 4 INTRODUCTION
The invention of money changed the old system of bartering into the cash-for-goods exchange that people commonly use today depositors and charged to borrowers respectively From these deposits the bank makes loans to individuals businesses businesses government agencies and other banks Banks also profit from fees charged for services such as checking accounts credit cards and mortgages Many banks now offer a number of other investment products and financial services including retirement accounts annuities mutual funds and investment management Governments print currency and declare it to be money It is mandated to be the official medium of exchange within 5
Money Banking and Finance the nation The ways governments distribute and manage their nation’s money is referred to collectively as finance This includes overseeing the circulation of money granting credit making investments and creating banking facilities We also use the term finance to describe the way money is managed by individuals banks and corporations Put a bit more simply finance refers to how we raise and manage money so that it can be spent for specific purposes Money management often comes in the form of loans and credit Investment is another type of financing Depending Depending on what parties are involved finance can be described as personal business or public 6
CHAPTER ONE The Exchange Process Barter is when a person exchanges one good either an item or a service directly for another When people use money on the other hand the exchange is indirect A family spends money to buy a car This common transaction is easy to understand understand We may not normally think of this in the reverse the person who sells the car is buying money which can be used as a substitute for all possible products and services HOW AND WHY MONEY WORKS Money was invented more than four thousand years ago People who wanted to trade goods and services gradually realized that exchange would be easier if there were some single commodity that everyone would accept as valuable valuable Gold silver and copper were all valued for their many uses and they were highly prized because of their scarcity 7
