CH 14 - Money and its role Flashcards
- Define barter system?
Barter system means exchange of one kind of goods and services for another kind of goods and services. There was no involvement of money in barter system. When one good is exchanged for another good without use of money, we call it trade through barter system.
give examples of barter system
(a) In the past traders from Europe used to trade goods such as fur and crafts in return for perfumes and silk from the Eastern part of the world.
(b) In many tribal societies in India families used to exchange labour services in return for food and other labour services. For example, if a family needs labourers to harvest crop then another family would come to provide the service with the promise that it will get the same type of help in return either for harvesting crop or roofing house etc. This type of practice is still prevalent today in remote tribal areas of India.
Define double coincidence of wants?
Double coincidence of wants mean that if one wants to exchange some good with another person then the latter must also be willing to exchange his good with the first person. for example, a person wants cloth and he has rice with him to offer in return. Then he can exchange rice for cloth with another person who has cloth and who also wants rice. In practical life, such situation may or may not arise.
Give two difficulties associated with barter system?
- Lack of division of goods: Certain goods are not physically divisible into small pieces. For ex - a person possesses a cow and he wants items, such as cloth, food grains etc. There is no way to divide the cow into smaller pieces without killing it and therefore, defeating the purpose of a cow. Also, how much grains, cloth etc is the cow worth? there is no way of finding its exact worth as the cow cannot be divided into smaller pieces.
- lack of divisibility of goods: under the barter system, it was difficult to equate the values of different goods which were traded because of a lack of a common unit of measurement.
For ex- it will be very difficult to determine the amount of cow required to trade for some specific amount of food grains or some yards of cloth. It is because a cow can never become a common measure of value. This problem is the same for all other goods. - Deterioration of goods - A good looses its original quality and value if it is stored for a long period. Many goods, such as salt, vegetables etc, are perishable. Hence, goods were never accepted for trading in future because they could not be used as store of value. This also implies that no good can be used for the purpose of lending and borrowing.
the need for money arose due to the failure of __________ _______.
Barter System
how did the need for money arise?
The barter system could not continue for long because as human civilisation progressed, people realised that there has to be some common medium of exchange which can be easily carried, stored, and used to express value of a good. This led to the need of money. Hence the need for money arose due to the failure of barter system.
Define Money
Money is defined as something which is generally accepted by the society as a medium of exchange which can act as unit of account, can store value and be used for repayment of debt.
What are the functions of money?
- Give the meaning of value of good?
The value of a good is determined by multiplying its price with quantity sold in the market.
Value of good = Price of the good × Quantity of the good.
Write a short note on currency notes in India?
In India, we have paper notes in the denomination of 1,2, 5, 10, 20, 50, 100, 500 and 1000. These currency notes are named as Rupee (Singular) or Rupees (Plural). The symbol of Rupee is ‘’. For smaller denominations, we have coins called “Paisa”, such as 50 paisa where 50 paisa is equal to half of one rupee. Now coins up to Rs.20 denominations are in circulation in India. The currency notes and coins which are in circulation are guaranteed by the government of India.
name the functions of money
- Medium of Exchange
- Measure of Value
- Store of Value
- Making Payments in Future
explain money as a medium of exchange
The primary function of money is that it acts as a medium of exchange. This means that people can buy or sell goods and services with the help of money. Money is received by the seller who sells the good. Money is paid by the buyer who buys the good from the seller.
Example:You pay Rs.10 to buy a pen. The seller receives Rs.10 from you by selling the pen. So a pen is exchanged for Rs. 10.
Explain money as a measure of value
Money serves as unit of account or common measure of value. The value of a good is determined by multiplying its price with quantity sold in the market. Since the price is expressed in monetary units, the value of a good is also expressed in monetary terms.
Example: Let price of rice be Rs. 20 per Kilogram. One bag full of rice weighs 25 Kilograms. Then the value of the bag of rice is Rs. 20X25= Rs. 500
Explain money as a store of value
As medium of exchange you can pay money to buy goods. This means if you have money, you have the power to purchase a good or a service. So money has purchasing power. The value of the good is contained in that purchasing power. Hence value of good is indirectly stored in money you hold. Similarly as a seller of good you receive the money which means value of good you sold comes back to you through money.
Example: Sushila has got some mangoes which she sells to a buyer for Rs. 250. This means a value of Rs. 250 was exchanged. The buyer, who purchased the mangoes, has the purchasing power to give Rs. 250 as value. Hence a value of Rs. 250 was stored in the money received by Sushila as a seller. Sushila could not have stored mangoes but she can definitely store money which has stored the value of Rs. 250.
explain money for making payments in future
