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MBF Chapter 01

The document discusses the barter system and its problems, including the lack of a double coincidence of wants between traders and the absence of a common measure of value. It then defines money and explains its key functions as a medium of exchange, unit of account, and store of value. The origins and evolution of different forms of money throughout history are also outlined, from commodity money to paper money backed by metals to modern fiat currency not backed by commodities but declared legal tender by governments.

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Masood khan
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76 views

MBF Chapter 01

The document discusses the barter system and its problems, including the lack of a double coincidence of wants between traders and the absence of a common measure of value. It then defines money and explains its key functions as a medium of exchange, unit of account, and store of value. The origins and evolution of different forms of money throughout history are also outlined, from commodity money to paper money backed by metals to modern fiat currency not backed by commodities but declared legal tender by governments.

Uploaded by

Masood khan
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 01

1
Barter system
• Definition:
‘Direct exchange of goods against goods without use of
money is called barter exchange.’
An economy based on barter exchange (goods for goods)
is called C.C economy.

In such an economy, a person gives his surplus good and


gets in return the good he needs.

For example, when a weaver gives cloth to the farmer in


return for getting wheat, this is called barter exchange.
Problems of Barter Exchange:

1.  Lack of double coincidence of wants:


Double coincidence of wants means what one person
wants to sell and buy must coincide with what some
other person wants to buy and sell.
‘Simultaneous fulfillment of mutual wants by
buyers and sellers’ is known as double coincidence of
wants’

Note: exchange can be only possible when there


double coincidence of wants.
2. Measure of value

• In barter, there is no common measure (unit) of


value. Even if buyer and seller of each other
commodity happen to meet, the problem arises in
what proportion the two goods are to be
exchanged.
• When thousands of articles are produced and
exchanged, there will be unlimited number of
exchange ratios. Exchange ratios will creates
many difficulties.
3. Deferred payment:

• There is problem of borrowing and lending. It is


difficult to engage in contracts which involve future
payments.

• As a result, future payments are to be stated in


term of specific goods or services. But there could
be disagreement about the quality of the good.
4. Storing wealth for future uses

• It is difficult for the people to store wealth in the


form of goods like cattle, wheat, potatoes, etc.
Holding of stocks of such goods involves costly
storage and deterioration.

Note: most of the goods are perishable and can


not be kept for future.
5. Lack of divisibility

• In barter system the good can not be


divided into small denomination.
Meaning of Money & Barter

• Examples
– livestock
– Wheat
– Conch
– Barley
– Shells
– Commodity Money
– Metals

– Coins
– Paper Money

8
The Origins of Money

• Money has evolved over time, taking various different


forms:
 Metallic money: unlike today’s coinage, the market
value of the metal was equal to the face value of
the coin.

 Paper money: paper money was backed by


precious metal and was convertible on demand. It
was often referred to as bank notes because it
was issued by commercial banks.

9
The Origins of Money

 Fractionally backed paper money: once goldsmiths


and banks discovered they did not need to keep
one ounce of gold in their vaults for every claim on
one ounce, they began to issue more money
redeemable in gold than the amount they held in
their vaults.
 Fiat money: paper money or coinage that is neither
backed by nor convertible into anything else, but is
decreed by the government to be acceptable as
legal tender.
10
Definition of Money

• Definition of money can be classified into different


aspects;

1. Descriptive Definition
• Revolves around the function of money.
• “Anything that is generally accepted as medium of
exchange, measure and store of value.”
2. Legal Definition
• Revolves around the government concept of money.
• “Anything which is declared by the state as money is
money.”
11
The Nature of Money

What is Money?
• Money is a medium of exchange — it is generally
acceptable as payment for goods and services.
• If there were no money, goods would have to be
directly exchanged for each other — a system of
barter.
• But barter is very inefficient because of the double
coincidence of wants — this is not a problem when a
general medium of exchange is used.
12
The Nature of Money

• Money is also used as a store of value. Unless there is


very high inflation, money retains its value.
• Finally, money is used as a unit of account. It is the unit
of measure we use to keep our financial accounts.

Functions of Money
1. Medium of Exchange
2. Unit of Account
3. Store of Value
13
To act as money, must be

• Measurable
• Divisible
• Widely accepted
• Portable
• Durable
• Stable

14
Money is a Unit of Account

• Money is used to measure value


• Money as measure of value means that money works
as a common denomination, in which values of all
goods and services are expressed.
– if something costs $5, not that much valuable
– if something costs $500, that’s valuable

15
Money is a Store of Value

• Use money to save,


accumulate wealth,
buy commodities later
• Money is liquid asset

• Money is NOT always a good store of value


-- political instability
-- poor economy
-- high inflation
16
Forms of Money

• Commodity money
has its own value as a good
Ex: gold & silver coins

• Fiat money
no value other than fact that
it’s accepted
in exchange for goods and
services 17
Forms of Money

• Fiat money is more efficient

• Commodity money has opportunity cost:


you could use it
for something else

18
Forms of Money

• Debit & Credit Cards


– NOT money
– Payment mechanisms that access money

19

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