Money

Back to: ECONOMICS SS1

 

Welcome to class! 

In today’s class, we will be talking about money. Enjoy the class!

Money

Trade by barter

Before the invention of money, goods were exchanged for goods. This system of exchanging good and services for other goods and services is termed trade by barter. The rigidity of the system led to the introduction of money

Therefore the barter system may be defined as the direct system and practice of exchanging goods for goods and service for services.

Problems/disadvantages of barter

1. The problem of double coincidence of wants
2. Problem of assessing the value of commodities
3. Problems of divisibility
4. It wastes time and efforts
5. It discourages large scale production which is dependent on a large market
6. The problem of storage or saving
7. The problem of no fixed rate of exchange
8. The problem of the bulkiness of some goods
9. No room for deferred payment

Evaluation

1. Define barter system
2. List five problems of a barter system

Definition of money

Money may be defined as anything that is generally accepted as a medium of exchange for making payments, settlement of debts or other business obligations within a defined territory. The legal definition of money says, ‘It is what the law says it is’.

Origin/historical development of money

Money originated as a result of the problems of trade by barter. In the olden days, different commodities have served as money in different countries of the world, such commodities as cattle, cowries, shell, tobacco, salt and beads.

Later, precious metal like silver and gold were used. The use of paper money originated from the use of ‘Receipts’ issued by Goldsmiths in London in exchange for deposits of precious metal. The receipts became banknotes and the Goldsmiths became the bankers.

In recent time, people started accepting inconvertible paper money as a medium of exchange. For anything to serve as money, it must enjoy people’s confidence

Characteristic/qualities of money

1. Acceptability: must be acceptable to people of a community or country
2. Homogeneity: must be same in all parts of the countries where acceptable
3. Recognizable: people should be capable of identifying original from counterfeit
4. Divisibility: ability to be divided into smaller units to facilitate small and big transactions (#1000,#500,#200,#100,#50,#20,#10,#5,#1,50k etc.)
5. Portability: it must be easy to carry around too long and short distances
6. Scarcity: it must be relatively scarce but not too scarce e.g. Gold and silver
7. Durability: it must stand the test of time against wear and tear or suffer under mutilation
8. Stability: it must be stable to encourage lending and borrowing and make the business become predictable
9. Storability: it must have the ability to be stored for a long time without losing its value
10. Controllable supply: Supply must be controllable by the central bank to maintain its value

Evaluation

1. Briefly explain the origin of money
2. State five characteristics of money

Functions of money

1. As a medium of exchange: money facilitates the exchange of goods and services. Without money, we will probably have the trade by barter with it problems.
2. As a unit of account: money serves as a common unit of account for easy and accurate calculation of worth of goods
3. As a measure of value: money serves as a parameter used to measure the relative value of goods and services.
4. As a store of value: money makes it possible to save now for later use. As a farmer cannot store his perishable goods so also a teacher or doctor his service but by selling their services for money, the value received can be stored for future use.
5. As a standard for deferred payment: money makes it possible for payment to be deferred from now till a later date. It also facilitates future contracts to be carried out effectively.

Kinds/Types of money

1. Commodity Money: these are commodities that are generally accepted as a medium of exchange. They have two values – the money value and intrinsic value (commodity value) these commodities include cowries, gold, diamond, silver etc while some still exist some have gone out of use.
2. Metal Coin: this is metal money with the definite amount and weight issued and stamped by the central authority responsible for the issuance of money in a country. E.g. Nigeria has Kobo, Ghana has Pesewa etc.
3. Bank Deposit: this is the money one keeps in his bank account for safekeeping which can be given back to the owner on demand by cheques as a means of payment.
4. Representative Money:- are partial money which may not be legal tender, e.g. cheque, bank draft, petrol voucher, ticket, etc.
5. Paper Money: is the banknote which is the slip of paper or currency issued by the central bank, e.g. N50, N100, N200
6. Legal Tender: is any means in payment by which a trader is compelled by the law of a state to accept in settlement of a debt.
7. Token Money: is a form of money with a face value which is greater than the value of the metal content
8. Fiat Money: is any money the government has declared to be legal tender but is not backed by a reserve
9. Fiduciary Note: is an issued banknote not backed by gold but by government securities.
10. Plastic Money: are usually in the form of plastic hence it is sometimes called plastic money. They serve as a temporary medium of exchange but do not convey final settlement as it is done when money is used, e.g. credit card, value card, debit card, cash card ( ATM card), E-purse (Smart card), POS (point of service or sales), etc.

Evaluation

1. List five functions of money
2. Explain types of money

Reading assignment

1. Amplified and Simplified Economics for SSS by Femi Longe pages 228-236
2. New Approach to Economics By K.U. Nnadi and A.B. Falodun Chapter 13 pages 120 – 130
3. Fundamentals of Economics by R.A.I. Anyanwuocha page 173

General evaluation

1. What is labour force?
2. Explain four factors affecting the size of a country’s labour force
3. Explain the factors that determine the level of wages in your country.
4. Define term unemployment.
5. Highlight the effect of unemployment on an economy

Theory

1. Briefly account for the setbacks of trade by barter system
2. Explain the functions of money

 

In our next class, we will be talking about the Financial Institution.  We hope you enjoyed the class.

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