3 Microeconomic decision makers

3.1 Money and banking -

3.1.1 money

The forms, functions and characteristics of money

3.1.2 banking

. The role and importance of central banks and commercial banks for government, producers and
consumers.

MONEY

History of Bartering

The history of bartering dates all the way back to 6000 B.C. when Mesopotamian tribes introduced the
concept to the Phoenicians. Goods were exchanged for each other in the absence of money, including
things like tea, salt, weapons and food. As time went on, bartering continued to evolve, with Colonial
Americans trading pelts, crops and muskets.

The first metal money dates back to 1000 B.C. China. These coins were made from stamped pieces of
valuable metal, such as bronze and copper. Early iterations of coins were also used by ancient Greeks,
starting around 650 B.C.

Over time, these coins would evolve to be made from the silver and gold we associate with money
today. Coins were a huge milestone in the history of money because they were one of the first
currencies that allowed people to pay by count (number of coins) rather than weight.

While the first paper money was created in China in 700 to 800 A.D., it would be a long time before
paper currency was commonly used. According to Brittanica.com, the first country to use paper money
was China, but it was only used until about 1455.

The first bank in the U.S., The Bank of the United States, was established in 1791.

BARTER

Meaning - Exchanging goods for goods

Problems of barter system

1.Fixing a rate of exchange – each good will be expressed in terms of other good

2.finding someone to swap – double coincidence of wants

3.perishable goods - Difficult to store and exchange .

How money helps in specialization and exchange ?

It is difficult to produce everything we need.So every firms /individual specialize in what they
produce .Division of labour – each worker specialize in what they do .

So people need money to exchange /trade .

Barter has many drawbacks .In order to specialize and overcome the problems of barter money was
introduced .

Q: Explain how money helps in specialization and trade ?

Functions of money

1.Medium of exchange – money can be used when there is no double coincidence of wants .

2.Unit of account -measure of value ,can engage in trade by fixing value of goods in terms of money .

3.store of value – money tends to hold value ,if prices are no increasing rapidly

4.means of deferred payment – can be paid in instalment /later period of time .

FEATURES OF GOOD MONEY

1. Acceptability

2.Durability

3.Divisibility

4.scarcity

5.portable

Money market

Functions of central bank

produce a chart which clearly shows the different functions and roles of a central bank in an economy

1.issue notes and coins for nation’s currency

2.manages payment to and from government

3.manage national debt

4.supervises banking system

5.lender of last resort

6.manages nation’s foreign currency reserves

7.operates monetary policy

How do banks earn revenue ?

1.Charging interest on loans

2.charge fees for provision of other financial service

3.making investments

Types of banks

1.commercial banks

Functions of commercial bank

1.accept deposits ,money and savings

2.make personal and commercial loans

3.buy and sell shares for customers

4.provide insurance

5.operate pension fund

6.provide tax planning advice

7.excahnge foreign currency