Welcome! Today in our economics class, we will be looking at “Money and Trade by trade by barter”. Do have a great moment studying with us.
Topic: Money As A Means Of Exchange
Learning Objectives: By the end of the lesson, the learners should be able to:
- Define the terms money and trade by barter;
- State the problems or disadvantages of trade by barter;
- Narrate the historical development of money;
- State the characteristics of money;
- State the functions of money;
- Identify the similarities and differences between money and trade by barter;
- List and explain the forms or types of money.
Money is anything that is generally acceptable as a medium of exchange and in the settling of debts. Money can also be defined as anything that is generally acceptable as a means of payment.
Trade By Barter
Trade by barter may be defined as a form of trading in which goods are exchanged directly for other goods without the use of money as a medium of exchange. For example, if someone has yam and is in need of beans, he must locate somebody who has beans and is in need of yam. Trade by barter has many setbacks..
Problems Or Disadvantages Of Trade By Barter
i. Problems of double coincidence of wants: This involves looking for someone who is in need of what you have and at the same time has what you need. To do this amounts to a very serious problem.
ii. No fixed rate of exchange: There is the problem of exchange rate determination between two products. Different rates of exchange have to be determined to cover every transaction before it can take place, e.g how much of yam will exchange for beans.
iii. Wastage of time and effort: Barter system leads to waste of time and energy because one has to search for somebody to exchange the goods with.
iv. Problems of indivisibility: Many goods cannot be divided into small convenient units because they are heavy and indivisible so it does not encourage divisibility.
v. Problems created by bulkiness of some goods: Some of the goods to be exchanged are so bulky that one finds it difficult to carry them about.
vi. No room for deferred payment: In trade by barter, there is no room for deferred payment. One cannot collect certain goods and hope to pay another day. Barter requires immediate settlement.
vii. It discourages borrowing and lending: Borrowing and lending under trade by barter is practically impossible as there is no standard unit of measurement.
viii. It discourages large scale of production: As a result of the difficulties in the system of exchange by barter, it therefore leads to people producing goods only for themselves and that of the immediate family. In other words, trade by barter encourages self sufficiency hence it limits specialisation of labour.
ix. Difficulty in storing wealth: The barter system, unlike money, does not encourage storage of wealth. It is difficult to store wealth or value, especially where perishable goods like yams and fresh tomatoes are involved.
Historical Development Of Money
Money originated as a result of the various difficulties that arose from trade by barter. In the olden days, different commodities served as money in different countries. Cattle, cowries, shells, tobacco, salt and beads were used as media of exchange or commodity money, in one period or another. Later, precious metals like silver and gold were used. The amount of metals were weighed out whenever a payment was to be made. With time, the metals were cut into pieces of definite weights and so coins of limited face value were issued.
The use of paper money originated from the use of receipts issued by goldsmiths in exchange for deposits of precious metals. The receipts became bank notes and the goldsmiths became bankers.
In recent times, people started accepting inconvertible paper money as medium of exchange. Over the years, different forms of money have been introduced to facilitate exchange. For anything to serve as money, it must enjoy people’s confidence and legal backing.
Qualities Or Characteristics Of Money
1. General acceptability: Money must be generally acceptable by all in the society or country as a means of exchange. This shows the confidence people have in money.
2. Portability: The object that serves as money must be something that can easily be carried about from one place to the other, which means such object has to be light in weight.
3. Relative scarcity: Money must be relatively scarce, that is, it must not be too many so as not to lose its value.
4. Homogeneity: Each unit of money must be the same size, colour and quality and be the same nationwide.
5. Durability: The object that will serve as money must be able to last long, it must not be a perishable commodity, it must be able to stand the test of time.
6. Stability: The value of money must be stable. The stability of its value will help business to be predictable and encourage lending and borrowing of money.
7. Divisibility: Money must be capable of being divided into smaller units, e.g #100, #50, #20 etc to enable it to purchase both high and low priced commodities.
8. Recognizability: Money must be easily recognised and identified by the totality of the people in the society. It must not be easily counterfeited.
9. No intrinsic value: The commodity that should serve as money must have little or no value in itself as opposed to its value of exchange.
Functions of Money
i. Medium of exchange: Money can serve as a medium through which people can exchange goods and services. Money can be used to buy different variety of goods and services. This facilitates the means of exchange. It came into use as a result of the inadequacies of the barter system. Money is therefore widely acceptable as payment for debts.
ii. Standard of deferred payment: Since money can be stored, it can be accumulated to pay debts that are fixed in terms of money. Money can serve as a medium by which business transactions on credit can be settled in the future. The use of money makes it possible for payments to be deferred from the present to some future date.
iii. Unit of account: In serving as a unit of account, it becomes practically possible for individuals and companies to keep accounting record of their transactions in bank statements, ledgers and invoices.
iv. Store of value: Money is a good store of value because wealth can be stored for future use. When there is no inflation, money stored or saved retains its value for many years.
v. As a means of value: The value of goods and services are expressed by prices, therefore money is used as a yardstick to measure and compare the worth of goods and services as well as occupation.
Similarities And Differences Between Money And Other Commodities Used For Exchange In Trade By Barter
i. There is fluctuation in the value of money and other commodities.
ii. Money and other commodities are used for exchange.
iii. Both money and other commodities have their respective markets.
iv. Both are demanded by people.
v. The prices of both are determined by the forces of demand and supply.
vi. They are all regarded as commodities
i. Money is generally acceptable while other commodities are not
ii. Money is portable while other commodities may not be portable
iii. Money is relatively scarce while other commodities are not
iv. Moeny is homogenous while other commodities are not.
v. Money is durable while other commodities are not.
vi. Money is stable while other commodities used in trade by barter are not
vii. Money is divisible into small units while other commodities are not.
viii. Money is easily recognised by the people, other commodities are not.
ix. Money has no intrinsic value while other commodities have intrinsic value.
x. Money is used as a medium of exchange other commodities are not.
Forms or Types of Money
1. Coins: Coins are precious metals made of silver, which have a defined amount if metallic content. They also have an official stamp of authority placed on them. Coins are homogeneous and indestructible, e.g 5k, 25k, #1 etc.
2. Commodity money: This is the type or money which has value as both money and commodity. Commodity money is valuable for its own sake since it can be put to some other uses. They can be used as medium of exchange, e.g gold, diamond, cattle, beads etc.
3. Bank noted: These are slips of paper or currency issued by the central bank. Paper money originated from the receipts issued by goldsmiths to those who deposited precious metals, e.g gold, with them for safe keeping. These are in denominations and are portable, e.g #50, #100 etc
4. Partial money: These are representative of money which may be legal tender. They are acceptable within a certain restricted area.
Partial money is not made mandatory for acceptance by all the people. They are not backed by law and examples include petrol vouchers, tickets, cheques, etc.
5. Legal tender: A legal tender is any means of payment by which a trader is compelled by the law of a state to accept in settlement of debt, e.g Dutch mark. This is money which has the backing of the law and it is an offer to reject it.
6. Token money: This is a form of money with a face value which is greater than the value of the metal content. Token money has a face value in excess of its metal content, i.e, the intrinsic value is less than the face value.
7. Deposit money: This is a form of money kept in the accounts of the bank. Any money saved in the bank will be credited to the account of the depositor. The money in the deposit can be transferred through the use of cheque. Cheque is just an order to pay somebody and not to be considered as money.
8. Flat money: Flat money is any money the government has declared to be legal tender but is not backed by reserve. Paper money is flat money since it can no longer be redeemed for gold and its intrinsic worth is almost nil.
9. Fiduciary note: Fiduciary note is an issued bank note not backed by gold but by government securities.
10. Representative Money
Representative money, also called near or quasi money assets, refers to materials used as money which may not be legal tender. They are acceptable to a certain extent as they lack the qualities possessed by money. They are not made compulsory for acceptance by all the people and above all they are not backed by law.
Examples of representative money include:
i. Money order
ii. Bank order
iii. Credit transfer
iv. Mail and telegraphic transfers
v. Bill of exchange
vii. Postal order
viii. Promissory note
ix. Bank drafts
x. Certified cheques
Done studying? See All Previous Lessons In Economics.
Take a quick test on this lesson!
- Define the terms money and trade by barter.
- State the problems or disadvantages of trade by barter.
- Narrate the historical development of money.
- State the characteristics of money.
- State the functions of money.
- Identify the similarities and differences between money and trade by barter.
- List and explain the forms or types of money.
- What is representative money?
- Mention examples of representative money.
Questions answered correctly? Kudos!!
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