BARTER SYSTEM AND

INTRODUCTION OF MODERN
MONEY
 BARTER SYSTEM
Barter system is an arrangement where goods and
services are exchanged. The precondition of the
barter system to be effective was the existence of a
double coincidence which was a major limitation.

Some of the limitations associated with Barter were;

Double coincidence of wants, the issue of evaluation,
problems of durability, problems of portability,
divisibility and measurability.
 continuation
• Another limitation had to do with
acceptability and recognisability. Example
exchanging gold for a cup of salt.

• This problem calls for a single commodity

that will be used as a unit of measurement to
overcome these problems with direct
exchanging system, hence money.
 MONEY

All sorts of commodities Examples are cowries,

have been used as money gold, silver, sculpture, salt,
at one time or the other. gun powder etc.

Reasons for their

Two commodities importance were;
appeared to be the most
Scarcity, recognisability,
important which were divisibility and constant
gold and silver.
demand.
 MONEY AND ITS FUNCTIONS
Money is any commodity that is generally accepted
as a means of payment for goods and services as well
as the payments of debts. Today, the scope of
modern money include; cheques, notes and coins,
bank deposits, bonds, treasury bills and others.

Money can also be defined based on its functions

thus any commodity that functions as a medium of
exchange, unit of account, store of value and
standard of deferred payment. Unlike gold and silver,
money has no real value but its value is intrinsic.
 FUNCTIONS OF MONEY
• 1. Medium of exchange

• 2. Unit of account

• 3. Store of value

• 4. standard for deferred payment

 Characteristics of money
• 1. Scarcity
• 2. Durability
• 3. Divisibility
• 4. Recognisable value(uniformity)
• 5. Acceptability
• 6. intrinsic value
 INTRINSIC VALUE OF MONEY

To act as money, an item does not need to have an intrinsic

value. This means that it does not have to worth something
in its own right. Example bank notes. An item does not need
to possess many features before it becomes money, the most
important function is the medium of exchange.

Gresham law, “ bad money drives out good”. Eg is using silver

for coins where the face value of the coin is greater than the
silver but when the value of the coin soars exceeding the
face value of the coin making them good money to be out of
circulation. Thus why modern money is FIAT.
 WHAT IS NEAR MONEY
• Near money are those assets that fulfill some
of the functions of money but not all.
• Specifically, near money fulfills the functions
of money as a store of value and is readily
convertible to a medium of exchange but it is
not itself a medium of exchange.
• Example is an investment account or time
deposit.
 KEY TERMS
Legal tender is the
money that must
Coins ; this is a Notes refers to the
be accepted if
metallic money. paper money. Put
offered in
Example 50p, 10p, together, they are
payment or
50 cent. called cash.
settlement of
debt.
But, cheques For transactions,
drawn on bank the general
deposit are not acceptability is not
legal tender. backed by law
Though accepted hence, can’t be.
 DEMAND FOR MONEY
• 1. TRANSACTION
MOTIVE

2. PRECAUTIONARY
MOTIVE

3. SPECULATIVE MOTIVE
 TRANSACTION MOTIVE
• Periodic payments to household in wages or salaries for
people and firms to meet the medium of exchange
function of money, they must hold money balances in
the form of cash and bank deposits to facilitate
exchanges. Thus, payment and receipts are not exactly
synchronized.

• Example, these monies are held as receipts in a form as

bank balance in order to finance their payments until the
next pay day. The amount of money held for these
reasons are called transaction demand for money.
 PRECAUTIONARY MOTIVE
This also arises from money’s function as a medium of
exchange, but it arises because the timing and size of
receipts and payments are uncertain for both firms and
households. As a precaution against unexpectedly high
payments, or low receipts.

firms often hold more money than their minimum

balances needed to run business. The desire to hold
money to accommodate such unexpected fluctuations
in receipts and payment is called the precautionary
motive for holding money.
 SPECULATIVE MOTIVE
This relates to The cost of
In terms of the
the function of holding money
money forgone
money as a store provides
by not buying
of value/wealth. incentive for
some interest
Money has an firms and
bearing
opportunity cost individuals to
assets[bonds]
thus; hold more

Than the We expect any

minimum they surplus to be
need to meet the held in other
P & T motives. form that is there
 SPECIALISATION
Specialisation is the concentration of an individual on a
particular task as well as countries and firms on production
of specific goods and service. For example, firms may
choose to specialise in a particular product such include
McDonalds, KFC and Burger King specialise in fast food
whilst DHL and FedEX are into courier services.

Besides, some countries also specialise in production and

service delivery. India and Bangladesh are noted for
textiles, scotland is famous for their whisky and Vietnam
and Thailand for rice production. These are influenced by
their quantity and quality of resources. These countries
produce at a lower cost with a high demand.
SPECIALISATION OF AN INDIVIDUAL
This is also called division The key reason is to
of labour. Instead of lower cost per unit
producing a whole good produced. It allows
or service, a worker individuals to make the
carries out a particular best use of their skills and
task. abilities.

Workers can also improve

on their skill by doing the Workers may become
task repeatedly which skillful and their earnings
ensures efficiency in may increase
output. Moreover,
DEMERITS OF DIVISION OF LABOUR
• The work may become repetitive and boring.

• Skills may be outdated if there is new technology.

• There is reliance of individuals on others for

production they want but may not. Thus over
specialisation.

• The worker may become deskilled in other areas

thus no room for flexibility and versatility.