What is Money?
What is Money?
2-1
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Understanding the Definition and Functions of Money: A Comprehensive Overview, Assignments of Economics
An in-depth analysis of the concept of money, discussing its various forms, functions, and definitions. It covers commodity money, fiat money, checks, electronic payment, and e-money. The document also explores the role of money as a medium of exchange, store of value, and standard for deferred payment.
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2020/2021
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What is Money?
2- 1
What is Money?
The Evolution of Money & The Collapse of Barter
The Evolution of Money & The Collapse of Barter
Trade
Trade
We study how
We study how
moneyless
moneyless
economies operated and some of
economies operated and some of
the challenges embedded in the system
the challenges embedded in the system
With this we will be able to appreciate the real economic
With this we will be able to appreciate the real economic
value of money in the modern economy value of money in the modern economy
Barter
Barter
is a system of trade in which commodities were
is a system of trade in which commodities were
directly exchanged for another
directly exchanged for another
OR
OR
Barter
Barter
is the direct exchange of goods and services for
is the direct exchange of goods and services for
other goods and services.
other goods and services.
2- 2
What is Money?
The system was costly due to the time wastage in searching for
The system was costly due to the time wastage in searching for
someone (i.e.
someone (i.e. search cost
search cost ) and waiting time (
) and waiting time ( wait cost
wait cost )
Barter trade was coupled with pricing or valuation of the
Barter trade was coupled with pricing or valuation of the
commodities commodities involvedinvolved inin thethe transactiontransaction (i.e.(i.e. MeasurementMeasurement
problems)
problems)
There wasn’t any structured pricing system that could be a
There wasn’t any structured pricing system that could be a
basis for comparing the value of two commodities
basis for comparing the value of two commodities
How many cups of salt should be exchange for a cow?
How many cups of salt should be exchange for a cow?
Barter was coupled with the problem of durability
Barter was coupled with the problem of durability (e.g. the
(e.g. the
exchange of perishable goods got rotten in the course of
exchange of perishable goods got rotten in the course of
searching
searching for someone to exchange with, an addition to cost and
for someone to exchange with, an addition to cost and
inefficiencies
inefficiencies
2- 4
What is Money?
Barter was coupled with portability and divisibility (e.g.
Barter was coupled with portability and divisibility (e.g.
people had to carry a huge item around in search of
people had to carry a huge item around in search of
someone to barter with which also made it impossible for
someone to barter with which also made it impossible for
items to be divided as there was no unit of measurement)
items to be divided as there was no unit of measurement)
Barter was coupled with acceptability and ‘recognisability’.
Barter was coupled with acceptability and ‘recognisability’.
If everybody would just accept anything at all, then there
If everybody would just accept anything at all, then there
wouldn’t be any problem of wants coinciding
wouldn’t be any problem of wants coinciding
People need to recognise your commodity before deciding
People need to recognise your commodity before deciding
on whether to accept it or not
on whether to accept it or not
2- 5
What is Money?
What is money
What is money
Money has been different things at different times, but itMoney has been different things at different times, but it
has
has
always
always
been important
been important
As the word money is used in everyday conversation, it can
As the word money is used in everyday conversation, it can
mean many things, but to economists, it has a very specific
mean many things, but to economists, it has a very specific
meaning meaning
Money can be defined as anything that is generally
Money can be defined as anything that is generally
accepted as a medium of exchange
accepted as a medium of exchange
OR
OR
The sets of assets in an economy that people regularly use
The sets of assets in an economy that people regularly use
to buy goods and services from other
to buy goods and services from other
People
People
OR
OR
What is Money?
Money can be defined as anything that is generally accepted in theMoney can be defined as anything that is generally accepted in the
payment for goods or services or in the repayment of debts
payment for goods or services or in the repayment of debts
Money means different things to different classes of people,
Money means different things to different classes of people,
depending on their
depending on their political persuasions
political persuasions (e.g. monetarism,
(e.g. monetarism,
Keynesianism) and Keynesianism) and motives for holding itmotives for holding it (e.g. to spend or to invest)(e.g. to spend or to invest)
The ordinary person see money narrowly as a sort of immediately
The ordinary person see money narrowly as a sort of immediately
spendable purchasing power; whereas investors, bankers,
spendable purchasing power; whereas investors, bankers,
economists, and governments see it broadly in the form of
economists, and governments see it broadly in the form of varying
varying
degrees of financial liquidity degrees of financial liquidity
Political stance, such as monetarism, Keynesianism, socialism and
Political stance, such as monetarism, Keynesianism, socialism and
communism, also has relevance for the
communism, also has relevance for the importance of money
importance of money
2- 8
What is Money?
If, someone comes up to you and says, “Your money or your
If, someone comes up to you and says, “Your money or your
life”, you should quickly hand over all your currency rather
life”, you should quickly hand over all your currency rather
than ask, “What do exactly do you mean by ‘money’?”
than ask, “What do exactly do you mean by ‘money’?”
o
To define money merely as currency is much too narrow for
To define money merely as currency is much too narrow for
economists
economists
(i) Because checks/checking account deposit are also
(i) Because checks/checking account deposit are also
accepted as payment for purchases, and are considered as
accepted as payment for purchases, and are considered as
money as well
money as well
(ii) Because other items such as savings deposits can, in effect,
(ii) Because other items such as savings deposits can, in effect,
function as money if they can be quickly and easily converted function as money if they can be quickly and easily converted
into currency or checking account deposits.
into currency or checking account deposits.
2- 10
What is Money?
o
To define money merely as currency is much too narrow for
To define money merely as currency is much too narrow for
economists economists
(i) Because checks/checking account deposit are also accepted
(i) Because checks/checking account deposit are also accepted
as payment for purchases, and are considered as money as well
as payment for purchases, and are considered as money as well
(ii) Because other items such as savings deposits can, in
(ii) Because other items such as savings deposits can, in
effect, function as money if they can be quickly and easily
effect, function as money if they can be quickly and easily
converted into currency or checking account deposits.
converted into currency or checking account deposits.
Income
Income :
o
How much money do you make a month?How much money do you make a month?
o
If someone says “Sheila would be a wonderful catch; she has a
If someone says “Sheila would be a wonderful catch; she has a
good job and earns a lot of money”
good job and earns a lot of money”
What is Money?
From the above examples, although money is not
From the above examples, although money is not
necessarily income or wealth, we know that money can
necessarily income or wealth, we know that money can
represent different things. The most common scenario
represent different things. The most common scenario
associated with money is
associated with money is
currency
currency
(or
(or
cash
cash
NB: Keep in mind that the use of the term
NB: Keep in mind that the use of the term
money
money
or
or
money supply
money supply
in this course
in this course
refers to anything that is
refers to anything that is
generally accepted in payment for goods and services or
generally accepted in payment for goods and services or
the repayment of debts and is distinct from income and
the repayment of debts and is distinct from income and
wealth
wealth
2- 13
What is Money?
Characteristics of Modern Money
Characteristics of Modern Money
The following are some of the characteristics a commodity needsThe following are some of the characteristics a commodity needs
to possess to perform the roles of money efficiently: to possess to perform the roles of money efficiently:
Acceptability
Acceptability
- (people must be willing to accept it as a means
- (people must be willing to accept it as a means
of payment for goods and services, and in the
of payment for goods and services, and in the settlement of debt)
settlement of debt)
Durability
Durability
- (must last a reasonable length of time before
- (must last a reasonable length of time before
deteriorating)
deteriorating)
Divisibility
Divisibility
- (to function as money an asset must be capable of
- (to function as money an asset must be capable of
division into smaller units to accommodate
division into smaller units to accommodate transactions of direct
transactions of direct
value)
value)
2- 14
What is Money?
Forms of Money (Evolution)
Forms of Money (Evolution)
We can better appreciate the functions of money and the forms it
We can better appreciate the functions of money and the forms it
has taken over time by looking at the has taken over time by looking at the evolution of the paymentevolution of the payment
system,
system, the method of conducting transactions in the economy
the method of conducting transactions in the economy
This is important because money has taken many forms throughout
This is important because money has taken many forms throughout
the history of mankind and it is continuing to evolve as of today.
the history of mankind and it is continuing to evolve as of today.
The payment system has evolved over time, at one extreme,
The payment system has evolved over time, at one extreme,
precious metals such as gold were used as money (or means of
precious metals such as gold were used as money (or means of
payment), later paper assets or money (such as currency and
payment), later paper assets or money (such as currency and
checks are used
checks are used
This evolution and where the payment system is heading has
This evolution and where the payment system is heading has
implications for how money will be defined in the future
implications for how money will be defined in the future
What is Money?
Many different commodities has been used to represent moneyMany different commodities has been used to represent money
(or currency) in our society. They include (or currency) in our society. They include tobaccotobacco ,, goldgold ,, silversilver ,,
cows
cows ,
coffee
coffee ,
paper money, checking account, electronic money
paper money, checking account, electronic money
etc.
etc.
By this, several forms of money are known:
By this, several forms of money are known: Commodity money,
Commodity money,
Fiat/Token money, Checks, Electronic Payment, E-Money
Fiat/Token money, Checks, Electronic Payment, E-Money
o
Commodity Money
Commodity Money :
Money that takes the form of a commodity withMoney that takes the form of a commodity with intrinsic valueintrinsic value ..
Something Something thatthat performsperforms thethe functionfunction ofof moneymoney andand hashas
alternative, non-monetary uses, alternative, non-monetary uses, e.g.e.g. gold orgold or silversilver
From ancient times until several hundred years ago, commodity
From ancient times until several hundred years ago, commodity
money functioned as the medium of exchange in all but the most
money functioned as the medium of exchange in all but the most
primitive societies
primitive societies
What is Money?
Something that serves as money but has no other important
Something that serves as money but has no other important
uses, e.g. paper money (i.e. currency and coins) that function
uses, e.g. paper money (i.e. currency and coins) that function
as medium of exchange
as medium of exchange
Initially, paper money curried a guarantee that it was
Initially, paper money curried a guarantee that it was
convertible into coins or into a fixed quantity of precious
convertible into coins or into a fixed quantity of precious
metal
metal
However, currency has evolved into
However, currency has evolved into
fiat money
fiat money
, paper money
, paper money
decreed by government as legal tender but not convertible
decreed by government as legal tender but not convertible
into coins or precious metal
into coins or precious metal
Paper currency has the advantage of being much lighter
Paper currency has the advantage of being much lighter
than coins or precious metal, but it can be accepted as a
than coins or precious metal, but it can be accepted as a
medium of exchange only if there is some trust in its use
medium of exchange only if there is some trust in its use
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