Chapter 1.

Origins and functions of Money

clothing, shelter through hunting, fishing)

Specialization and exchange - Previously man was sufficient (food, - Need for specialization- to save time and

get convenience. (for e.g. specialized in hunting, construction)

Chapter 1. Origins and functions of Money
Barter System / Direct Exchange

-Definition: Barter is a type of trade where
goods or services are exchanged for a certain amount of other goods or services; no money is involved in the transaction. It can be bilateral or Multilateral as trade

Disadvantages of Barter

Mutual coincidence of wants:

Before any transaction can be undertaken, each party must be able to supply something the other party demands. To overcome this mutual coincidence problem, some communities have developed a system of intermediaries who can store, trade, and warehouse commodities. However, the intermediaries often suffer from financial risk.

2. 3. 4. 5. 6.

The rate of exchange: how to measure? Large indivisible units: chair for cow Consistent quality Perishable commodities Transport and storage of commodities for exchange

Indirect Exchange
- Diagrammatic explanation

few most marketable commodities available (grain bags, salt, cloth etc)

Precious Metals

Usage of bronze , silver, gold , copper etc. Less bulky Durable Consistent Quality

1. 2. 3.

Money and its functions
Money : Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.

Functions of Money
1. Medium of Exchange:
- Willing to accept - Money is universally accepted
3. Standard of Deferred payment
- Many contracts promise to pay fixed sums of money well into the future - borrowing and lending possibilities

2. Unit of Account:
- Measure the relative values of goods and services. - Money is a useful unit of account only if its value relative to the average of all other prices doesn’t change too quickly.

4. Store of Value
- If you do not use all your dollars to buy goods and services today, you can hold the rest to use in the future. - money does not lose much of its value

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