1. MAKE MONEY FROM MONEY FINANCIAL SERVICES Finance is about connecting people who have more money than they need with people who need more money than they have and will use it productively Borrowing and lending – an old story Modern banking system emerged in the 14th century, in northern Italy. The word “bank” comes from the Italian word for “bench” City-states: Venice and Florence most developed; international trade Medici Bank, 1397: Financed long-distance trade. Great size, decentralized, deposits for lending Economics of Banking: A Bank is an example of intermediary economies of scale: many legal loan contracts lead to decreases in per unit cost diversification of risk: banks invest your money in a collection (portfolio) of assets, so decrease risk asset transformation: risky assets are turned into safer assets for investors - Borrowing short and lending long - A run on the bank - Bill of exchange - Clusters, network externalities

2. MONEY CAUSES INFLATION THE QUANTITY THEORY OF MONEY  Jean Bodin (1530-1596)  More money is put into the system → people wish to buy more goods and services → too much money chasing too few goods → leads to price rises → money causes inflation  other factors for behind the inflation: 1.Demand for luxuries 2.Scarcity of goods for sale due to exports and waste 3.Restriction of the supply of goods through monopolies 4.The rulers adulterating the coins  The first important statement of quantity theory of money  Nominal price – Real price  Irving Fisher (1867-1947) MV = PT (Fisher equation) - M: quantity of money - V: velocity of circulation - P: general price level - T: transactions

3. MONEY CAUSES INFLATION THE QUANTITY THEORY OF MONEY  This equation becomes a theory when we make assumptions about the variables in the equation. 1. V is assumed to be constant 2. T is the volume of transactions also assumed to be constant; full employment assumption 3. A one-off change in M leads to an increase in P  Neutrality of money: no effect on output and employment  John Maynard Keynes (1883-1946): - in the short run money affects output and employment; in the long run it is probably neutral. - V is not constant; it rises in booms when inflation is high and falls in recessions when inflation is low. - Money is not only a medium of exchange, but also a store of value: buys goods, for security and future investment  Milton Friedman (1912-2006): demand for money depends on wealth

4. PROTECT US FROM FOREIGN GOODS PROTECTIONISM AND TRADE  Wealth is gold → exports bring in gold → imports cause gold to be lost → imports shuld be restricted  Thomas Mun (1571-1641): export more than you import  Adam Smith: free market, free trade, all nations will get rich  Protectionism: the economic policy of restraining trade between countries through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations  China: Large trade surplus, huge reserve of foreign exchange

5. PROTECT US FROM FOREIGN GOODS PROTECTIONISM AND TRADE Mercantilism : is an economic theory and practice, dominant in Europe from the 16th to the 18th century, that promotes governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. Mercantilism includes a national economic policy aimed at accumulating monetary reserves (silver and gold) through a positive balance of trade. Historically, such policies frequently lead to war and also motivate colonial expansion. Mercantilist theory varies in sophistication from one writer to another and has evolved over time. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy. Other policies have included: 1.Building overseas colonies 2.Forbidding colonies to trade with other nations 3.Monopolizing markets with staple ports 4.Banning the export of gold and silver, even for payments 5.Forbidding trade to be carried in foreign ships 6.Export subsidies 7.Promoting manufacturing with research or direct subsidies 8.Limiting wages 9.Maximizing the use of domestic resources 10.Restricting domestic consumption with non-tariff barriers to trade.

6. THE ECONOMY CAN BE COUNTED MEASURING WEALTH  Economy can be measured  William Petty (1623-1687) : Rather than logical reasoning he decided to express himself only in terms of number, weight, or measure  He calculated population size, personal spending, wages per person, the value of rents > total wealth