Chapter 9 MONEY Q.1. What is barter? Explain the difficulties of Barter system. Ans: Trade of goods with other goods without using money is called barter. This system was in practice before the invention of money. Following are the problems/difficulties of barter: • Lack of double coincidence of wants: The main difficulty of barter system is the lack of double coincidence of wants. In a barter system a person who wants to exchange his goods must find some person who is willing to exchange his commodity with his commodity. For example, a person possessed wheat, which he wanted to exchange for cloth. He could not succeed in acquiring cloth until he met someone who not only had cloth but was also willing to exchange with wheat. • Lack of store of value: The barter system suffered the lack of storing the value. There is no way of storing of wealth for a long period. Some commodities lose their value with the passage of time. Some commodities, such as milk, fish, vegetable, wheat, and cotton lose value with the passage of time. Such commodities could not store for a long period. • Lack of measure of value: It was very difficult to measure the value of the goods with other goods as we can measure the value of everything with the help of money today. Because, there was nothing that could measure the value of each good commonly. For example, it was difficult to tell how much milk should be given to get 1 kg of wheat. • Lack of transfer of value: In barter, people had been facing challenges in transferring wealth from one place to another due to heavy weight and size of the goods stored as wealth. • Lack of divisibility of certain goods: Some of the goods lose value if divided into small pieces/units e.g table, goat etc. A person who has goat could not make small pieces of a goat to get 1kg of vegetable. Therefore, some people who had indivisible goods had been facing problems in exchange. What is Money? Ans: According to Crowther “ Anything that is generally accepted as a medium of exchange and acts as a measure and store of value" is called money. Another definition of economics: Money is a matter of functions four. A Medium, a measure, a standard and a store. Kinds of Money 1. Metallic money: Coins made of metal are called metallic money. Every country has its own coins. e.g. Rs 1, 2 and 5 coins in Pakistan are an example of metallic money. Kinds of Metallic Money Full-bodied coin/standard money: If the face value of the coin is equal to the value of metal used in the coin, it is called standard money or full-bodied coin e.g at the time of independence, Rs. 1 coin were full bodied because the value of silver used in the coin was equal to Rs.1. Token money: If the face value of the coin is greater than the actual value of the metal used in the coin, then it is called token money. All the existing Pakistani coins are token money 2. Paper Money: The currency notes made of paper are called paper money. Every country has its own paper money. In Pakistan, Rs.10, 50,100,500,1000 and 5000 notes are paper money. Kinds of Paper Money: Convertible: Those currency notes which can be converted into gold and international currencies from the office of the central bank are called convertible paper money. All the currency notes in Pakistan are convertible paper money. Inconvertible: Those currency notes which cannot be converted into gold and international currencies from the office of the central bank are called inconvertible paper money. In the past Rs. 1 notes were inconvertible paper money 3. Credit Money: Credit means loan. Cheques, bank draft, credit cards etc are the examples of credit money. These are also known as instruments of credit. Commercial banks create credit. Cheque: An order from the account holder in the name of bank to pay the amount mentioned in the cheque. Bank Draft: A cheque drawn by a bank on its own funds. We can transfer/pay money to another account through bank draft. We pay the money to the bank to get the bank draft ready. Bank charges small fees to make the bank draft. Bill of exchange: A promissory note where one person promises to pay the specified amount in future. Businessmen use bill of exchange the get goods on credit. Kinds of Metallic Money Full-bodied coin/standard money: If the face value of the coin is equal to the value of metal used in the coin, it is called standard money or full-bodied coin e.g at the time of independence, Rs. 1 coins were full bodied because the value of silver used in the coin was equal to Rs.1. Token money: If the face value of the coin is greater than the actual value of the metal used in the coin, then it is called token money. All the existing Pakistani coins are token money. Kinds of Paper Money: Convertible: Those currency notes which can be converted into gold and international currencies from the office of the central bank are called convertible paper money. All the currency notes in Pakistan are convertible paper money. Inconvertible: Those currency notes which cannot be converted into gold and international currencies from the office of the central bank are called inconvertible paper money. In the past Rs. 1 notes were inconvertible paper money What is Legal Tender? The official currency of any country that no one can refuse to accept, is called legal tender. In Pakistan, only Pak Rupees are legal tender. It is backed by the constitution of Pakistan. US $ is legel tender in USA. Cheque: An order from the account holder in the name of bank to pay the amount mentioned in the cheque. Bank Draft: A cheque drawn by a bank on its own funds. We can transfer/pay money to another account through bank draft. We pay the money to the bank to get the bank draft ready. Bank charges small fees to make the bank draft. Bill of exchange: A promissory note where one person promises to pay the specified amount in future. Businessmen use bill of exchange the get goods on credit. https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap- financial-sector/definition-measurement-and-functions-of-money-ap/v/functions-of- money Video link that explains money and its functions Q. Define Money. Explain its functions. Ans: According to Crowther “ Anything that is generally accepted as a medium of exchange and acts as a measure and store of value" is called money. Another definition of economics: Money is a matter of functions four. A Medium, a measure, a standard and a store. Following are the functions of money: Thus, Anything is Money, which is generally acceptable as a medium of exchange, and at the same time it must act as a measure and a store of value. Anything implies a thing to be used as money need not be necessarily composed of any precious metal. The only necessary condition is that, it should be universally accepted by people as a medium of exchange. Money performs five important functions :- • Medium of exchange : Money acts as a medium of exchange as it's generally accepted. On the payment of money, purchase of goods and services can be made i.e. goods and services are exchanged for money. Money bifurcates buying and selling activities separately so it facilitates the exchange transactions. • Measure of value : Money is a common measure of value so it is possible to determine the rate of exchange between various goods and services purchased by the people. Exchange value of commodity can be expressed in terms of money. For e.g. we can say that 10 metres of Cotton Cloth cost $220 dollars or Rs.10,000 rupees only. • Store of value : Money acts as a store of value. Money being generally acceptable and its value being more or less stable, it is ideal for use as a store of value. Being non-perishable and also comparatively stable in value, the value of other assets can be stored in the form of money. Property can be sold and its value can be held in money and converted into other assets as and when necessary. • Standard or Deferred payment : Money is also inevitably used as the unit in terms of which all future or deferred payments are stated. Future transactions can be carried on in terms of money. The loans, which are taken at present, can be repaid in money in the future. The value of the future payments is regulated by money. • Transfer of value : Value of any asset can be transferred from one person to another or to any institution or to any place by transferring money. The transfer of money can take place irrespective of places, time and circumstances. Transfer of purchasing power, which is necessary in commerce and other transactions, has become available because of money .