OTHER FORMS OF PAYMENTS:Electronic Funds Transfer, E-money

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Money & Banking MGT411

Lesson 4

OTHER FORMS OF PAYMENTS

Debit Card

The money in your account is used for payments

Works like a cheque and there is usually a fee for the transaction

Credit card

It is a promise by a bank to lend the cardholder money with which to make purchases.

When the card is used to buy merchandise the seller receives payment immediately

The money that is used for payment does not belong to the buyer

Rather, the bank makes the payment, creating a loan that the buyer must repay.

So, they do not represent money; rather, they represent access to someone else's money

Electronic Funds Transfer

Move funds directly from one account to another.

Banks use these transfers to handle transactions among themselves

Individuals may be familiar with such transfers through direct deposit of their paycheques and

the payment of their utility bills, etc

E-money

Used for purchases on the Internet.

You open an account by transferring funds to the issuer of the e-money

When shopping online, instruct the issuer to send your e-money to the merchant

It is really a form of private money.

Stored-value card

Retail businesses are experimenting with new forms of electronic payment

Prepaid cellular cards, Internet scratch cards, calling cards etc

The Future of Money

The time is rapidly approaching when safe and secure systems for payment will use virtually no

money at all

We will also likely see

Fewer "varieties" of currency, (a sort of standardization of money) and

A dramatic reduction in the number of units of account

Money as a store of value is clearly on the way out as many financial instruments have become

highly liquid.

Measuring Money

Different Definitions of money based upon degree of liquidity. Federal Reserve System defines

monetary aggregates.

Changes in the amount of money in the economy are related to changes in interest rates,

economic growth, and most important, inflation.

Inflation is a sustained rise in the general price level

With inflation you need more money to buy the same basket of goods because it costs more.

Inflation makes money less valuable

The primary cause of inflation is the issuance of too much money

Because money growth is related to inflation we need to be able to measure how much money is

circulating

Money as a means of payments

We measure the quantity of money as the quantity of currency in circulation an unrealistically

limited measure, since there are other ways of payments

Alternatively, broadly categorize financial assets and sort them by the degree of liquidity

Sort them by the ease with which they can be converted into a means of payments

Arrange them from most liquid to least liquid

Draw a line and include everything on one side of the line in the measure of the money

Money & Banking MGT411

Where to draw the line?

In reality, we draw line at different places and compute several measures of money called the

monetary aggregates

M1, M2, and M3

M1 is the narrowest definition of money and includes only currency and various deposit

accounts on which people can write Cheques.

Currency in the hands of the public,

Traveler's Cheques,

Demand deposits and

Other chequeable deposits

M2 includes everything that is in M1 plus assets that cannot be used directly as a means of

payment and are difficult to turn into currency quickly,

Small-denomination time deposits,

Money market deposit accounts,

Money market mutual fund shares

M2 is the most commonly quoted monetary aggregate since its movements are most closely

related to interest rate and economic growth.

M3 adds to M2 other assets that are important to large institutions

Large-denomination time deposits,

Institutional money market mutual fund shares,

Repurchase agreements and

Eurodollars

_Symbol

Assets included

Currency

C + demand deposits, travelers' Cheques,

other chequeable deposits

M1 + small time deposits, savings deposits,

money market mutual funds, money market deposit accounts

M2 + large time deposits, repurchase agreements, institutional money market

mutual fund balances

Money & Banking MGT411

Monetary Aggregates

Figures in millions as of March 2005

1. Currency issued

711,997

2. Currency held by SBP

3,188

3. Currency in tills of Scheduled Banks

43,914

4. Currency in circulation (1 2 3)

664,895

5. Scheduled Banks demand deposits

93,272

6. Other Deposits with SBP

4,826

7. M1 (4+5+6)

1,602,423

8. Scheduled Banks Time Deposits

1,037,678

9. Resident Foreign Currency Deposits

172,074

10. Total Monetary Assets (M2)

2,812,175

11. M3

3,833,686

Source: State Bank of Pakistan

Table : The Monetary Aggregates

Monetary Aggregates

Value as of August 2004 (U.S.$ billion)

M1= Currency in the hands of the public

686.2

+ Traveler's checks

7.6

+ Demand deposits

315.3

+ Other checkable deposits

328.5

Total M1

1,337.6

M2=M1

+ Small-denomination time deposits

794.7

+ Savings deposits including money market deposit

accounts

3415.3

+ Retail money market mutual fund shares

735.5

Total M2

6,283.1

M3=M2

+ Large-denomination time deposits

1,036.3

+ Institutional money market mutual fund shares

1,104.7

+ Repurchase agreements

516.6

+ Eurodollars

344.5

Total M3

9,285.2

Money & Banking MGT411

Figure: Growth rates in monetary aggregates

-5

Figure: Money growth and Inflation

-91 1-92 2-93 3-94 4-95 5-96 6-97 7-98 8-99 9-00 0-01 1-02 2-03 3-04

Years

Measures of Inflation

Fixed-weight Index - CPI

Deflator GDP or Personal Consumption Expenditure Deflator

Consumer Price Index (CPI)

Measure of the overall level of prices used to

Track changes in the typical household's cost of living

Allow comparisons of dollar figures from different years

Survey consumers to determine composition of the typical consumer's "basket" of goods.

Every month, collect data on prices of all items in the basket; compute cost of basket

CPI in any month equals

C o s t o f b a s k e t in th a t m o n th

100 ×

C o s t o f b a s k e t in b a s e p e r io d

Money & Banking MGT411

Example:

The basket contains 20 pizzas and 10 compact discs.

Prices

Years

Pizza

CDs

2002

$10

$15

2003

$11

$15

2004

$12

$16

2005

$13

$15

From this table, we can calculate the inflation rate as:

Years

Cost of Basket

CPI

Inflation rate

2002

$350

100.0

n.a.

2003

370

105.7

5.7%

2004

400

114.3

8.1%

2005

410

117.1

2.5%

GDP Deflator

The GDP deflator, also called the implicit price deflator for GDP, measures the price of output relative

to its price in the base year. It reflects what's happening to the overall level of prices in the economy

GDP Deflator = (Nominal GDP / Real GDP) ×100

Years

Nom. GDP

Real GDP

GDP Deflator

Inflation Rate

2001

Rs46, 200

100.0

n.a.

2002

51,400

50,000

102.8

2.8%

2003

58,300

52,000

112.1

9.1%

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