Lecture 4 Money turnover and cash flows Money and Credit Lecture 4 Money turnover and cash flows

Content 1. Money turnover and cash flows. Definition, meaning and structure. 1.1. The essence and structure of money turnover. 1.2. Money turnover model. Cash flows and their balancing. 2. Economic fundamentals of money turnover. 2.1. The structure of money turnover. 2.2. Law of money circulation.

Main definitions: cash flow money turnover money market to issue money financial intermediaries money circulation fiscal sector velocity of circulation …………..

1.1. The essence and structure of money turnover The process of social reproduction is continuous, so the movement of money, which serves this reproduction, is continuous too. Taken by itself, this process of continuous movement of money between the subjects of economic relations in social reproduction is the money turnover.

Main features of money turnover on the micro and macro level: Money turnover on the micro level It serves the turnover of certain individual capital. Money is one of the functional forms of capital, is the part of wealth of individual capital owner. Money, needed to serve the turnover of individual capital, are already at some owner’s disposal. If they are not enough, additional means can be mobilized from the money market. Money turnover on the macro level It serves the circulation of total capital of society at all stages of social reproduction: the production, distribution, exchange and consumption. So often it is called the total money turnover. Money operate solely as money and are not a functional form of capital. Therefore, their amount in circulation cannot be considered as a part of the country wealth. Money supply formation, that is necessary to serve the overall money turnover, is made with the help of existent money in circulation. Money market becomes an internal part of its turnover and provides the redistribution of existent money supply.

The need for additional issue of money can be caused by several factors: growth of gross domestic product – to implement this the banking system should expand the lending of turnover participants rising of net imports / excess of imports over exports decreasing of redistributive function of the money market, hereupon the available money supply will slowly rotate and cannot provide all the needs of turnover other factors that may slow down the movement of money through the channels of turnover

The total turnover of money is not a sum of money turnovers within individual capitals. It is an independent economic phenomenon, which is directly related to the process of social reproduction in general.

1.2. Money turnover model. Cash flows and their balancing The model reflects the movement of receipts and expenditures of four groups of subjects of money turnover: firms, domestic households, government, financial intermediaries. The objects of products` market are: goods, works, services which are produced are subject to selling in this reproductive cycle. The objects of resources` market are: things, which have not been the manufacturing products (such as land), or were produced and sold in previous cycles of reproduction and therefore are not included in the volume of national product.

The market of resources 4 types of markets: where the produced national product by firms is selling The market of products where firms buy necessary resources for production (labor, land, buildings, etc.) The market of resources where free money are selling The money market provides connection with exterior world (by export and import operations and inflow / outflow of capital) The world market

Conditional assumptions in the money turnover model: 1. the private property dominates in the economic system, so all inputs are owned family households, which sell them through the market of resources; 2. for the same reason most firms are owned by family households and therefore all the profits of firms come to them in the form of dividends as payment for resources; 3. in connection with the assumption 2, the government gets all tax revenues only from family households in the model; 4. the government has an opportunity to cover all costs not covered by revenues of net taxes by funds from the domestic money market, that does not resort to issue central bank`s loans or borrow it on the world market; 5. in connection with the assumption 2, all investment needs of firms are satisfied by mobilization of funds from the domestic money market; 6. in streams, reflecting the savings of family households, net savings and loans are accounted, i.e. excluding counter flows associated with the return of loans and deposits, as well as the payment of interests; 7. in streams, which connect the domestic market with the world market, only payments that mediate net exports or net imports are reflected.

The model of total money turnover. Global market MARKET OF GOODS MONEY MARKET (financial intermediaries) CENTRAL BANK GOVERNMENT MARKET OF RESOURCES 15 16 1 2 5 4 8 FAMILY HOUSEHOLDS FIRMS 10 3 11 12 7 9 13 6 14 The model of total money turnover. Domestic market

Fiscal and budget circulation 2. Economic fundamentals of money turnover. 2.1. The structure of money turnover. Money turnover Money circulation Fiscal and budget circulation Credit circulation

Money circulation Equivalence One-sided Straightness The money circulation serves the sphere of exchange (exchange relations). The main features of money circulation are: Equivalence instead of money, which seller transfers to buyer, products with equivalent value are purchased One-sided the money received by seller should not be returned to its previous owner Straightness results in a constant moving of money away from that subject of turnover which used it to buy products, as well as the next subject spends it for new purchases

Fiscal and budget circulation The money circulation is nonequivalent. The main features of fiscal and budget circulation are: Nonequivalence Instead of money payment the payer does not receive the real equivalent in the form of goods or services. Some part of profits of economic agents defined by laws is removed as taxes and other obligatory payments. This part goes to the state, which spends money for the performance of its functions.

Credit circulation The money circulation is reversible. The credit turnover serves the sphere of redistributive relations in which the property of subjects is not alienating, but only transfers for temporary use (for example, when money is put on a bank deposit), or changes their form (for example, when buying securities). The movement of money in this case has reversible nature, when the owner returns the money within a specified period and also receives income in the form of interest or dividend.

2.2. Law of money circulation The law of money circulation: the amount of money needed for circulation varies in direct proportion to the sum of commodity prices, including sold on credit, and matured payments except mutual obligations, and inversely proportional to the velocity of money: M=(PQ-a+b-c)/V where M - the amount of money required for circulation; PQ - sum of the prices of goods and services; a - the sum of the prices of goods sold on credit; b - matured payments; c - balanced out obligations; V - velocity of turnover of currency. The law was formulated in relation to the conditions of the metal standard. Its action extended to the circulation of paper money, but only changed into metal.

V=(T+S)*Q/M0 Velocity of money The velocity of cash circulation is reflected by the following statement: V=(T+S)*Q/M0 where V – velocity of cash circulation; T – commodity circulation; S – services provided for payment; Q – amount of goods and services; M0 – amount of cash in economic turnover. This index allows observing the relationship between the mass of money in circulation and the intensity of their usage. The increase of this index indicates the maintenance of commodity circulation with smaller amount of cash.