Money Flashcards
What is Barter?
Meaning of Barter: Barter means direct exchange of one good with another when money is not used as a medium of exchanye.
Define Barter system in the words of stainly Fisher?
Barter economy means the economy in which no good is generally accepted and goods are exchanged with goods:
Define Barter system in the words culberon?
In Barter system, the prices of goods are shown in the form other goods.
Define money in the words of Prof Crowther?
Anything which is generally accepted as a medium of exchange and also performs functions of a standard of value and a store of value is money.
Define money in the words of Prof Keynes?
Money is a thing by which payments of agreement of borrowing and pricing are made and general purchasing power is stored in it.
What is meant by metallic money?
Meaning of metallic money: Money that is made of some metal e.g.. gold, silver, copper or brass etc is called metallic money. This money consists of metallic coins which circulate throughout the country as money.
How many kinds are of metallic money?
There are two kinds of metallic money.
Standard metallic money.
(2)
Token metallic money.
0.8:
Ans:
Explain metallic standard money?
Metallic standard money: It is the metallic coin whose face value is equal to its intrinsic value. Such coin is also called “Full Bodied coin”
one rupee silver coin used in subcontinent from 1835 to 1893 was full-bodied coin.
Q.9: What is meant by token money?
Tuken Money: It is the metallic com whose face value is greater that its intrinsic value. In the present age, Token money is being used in all countries of the world.
What is meant by Paper money?
Meaning of Paper Money: Paper money means notes made of paper which are issued by the government or by the central bank of the country. The notes are legal tender money.
The notes are accepted in general business dealings as medium of exchange:
How many kinds are of paper money?
There are two kinds of paper money.
Convertible paper money.
nie nonvertible paper money.
LONG. Define money and its difficulties
Definition of Barter System
• Barter is defined as the direct exchange of goods or services without using a medium of exchange like money. • Scholarly Definitions: • Stanley Fisher: “Barter economy means the economy in which no good is generally accepted, and goods are exchanged with goods.” • Colberon: “In barter system, the prices of goods are shown in the form of other goods.”
Mechanics of the Barter System
1. How It Worked: • Goods were traded based on mutual agreement. • Example: A weaver might exchange a bolt of cloth for a cobbler’s pair of shoes. 2. Regional Variations: • In agricultural societies, crops were the primary medium of exchange. • Nomadic tribes often used livestock for barter. 3. Customary Practices: • Barter often relied on trust and community bonds. • Example: In smaller communities, people might trade based on verbal agreements or social expectations.
Difficulties of Barter System
- Lack of Double Coincidence of Wants• For a transaction to occur, both parties had to want what the other offered.
• Example: A potter looking for wheat might not find a farmer needing pottery at the same time.
• Impact: This inefficiency made trade time-consuming and hindered economic growth. - Lack of Common Measure of Value• Without a standard measure, determining exchange ratios was difficult.
• Example: How many loaves of bread equal one goat? Different people valued goods differently, leading to disputes.
• Consequences: This lack of standardization limited large-scale trade and economic organization. - Lack of Store of Value• Perishable goods like food could not be stored for future use.
• Example: A farmer with excess milk could not save it for months to trade later.
• Economic Impact: This discouraged saving and hindered the accumulation of wealth. - Indivisibility of Goods• High-value goods could not be divided to facilitate smaller trades.
• Example: A cow could not be split into portions to trade for small items like salt or spices.
• Result: This created trade imbalances and often led to unfulfilled needs. - Lack of Deferred Payments• Future transactions were unreliable due to changes in the value of goods over time.
• Example: Borrowing wheat during a drought and repaying during a harvest season reduced the lender’s benefit.
• Outcome: This discouraged borrowing and lending, limiting economic flexibility. - Difficulty in Transfer of Wealth• Moving physical goods across long distances was impractical.
• Example: A shepherd moving to a new village could not easily transport a flock of sheep.
• Effect: This restricted mobility and the expansion of trade networks.
Case Studies and Examples of Barter
1. Indigenous Communities: • Native American tribes bartered fur and maize with European settlers in exchange for tools and weapons. 2. Modern-Day Barter: • In times of economic crisis, barter resurfaces. Example: During hyperinflation in Zimbabwe, people exchanged goods like bread and soap directly.
Advantages of the Barter System
1. Simple and direct form of trade. 2. Fostered community bonds and cooperation. 3. Encouraged the production of essential goods over luxuries.
Limitations Leading to the Introduction of Money
1. The inefficiencies of barter highlighted the need for a standardized medium of exchange. 2. Early forms of money included commodity money (e.g., shells, salt, precious metals).
Comparison with Modern Trade Systems
1. Barter vs. Money Economy: • Money provides a common measure of value, store of wealth, and facilitates deferred payments. 2. Barter in Digital Age: • Barter platforms like online trade exchanges have modernized the concept, though money remains the primary medium of trade.
Conclusion
The barter system was a crucial stepping stone in the evolution of human trade. While it served early societies well, its inherent inefficiencies—lack of double coincidence of wants, absence of a common measure of value, and difficulties in storing and transferring wealth—highlighted the need for a better system. This led to the creation of money, which revolutionized trade and became the foundation of modern economies.
As Prof. Marshall stated, “Money is the center around which economies revolve,” a sentiment that underscores the importance of transitioning from barter to monetary systems for the advancement of trade and economic stability.
LONG. Define money and describe its functions.
Money and Its Functions
Introduction
Money is one of the most significant inventions of human civilization, transforming the way trade and commerce are conducted. It overcame the inefficiencies of the barter system and brought standardization, ease, and efficiency to economic transactions. In this essay, we will define money, examine its evolution through various stages, and explore its functions in detail.
Definition of Money
Money is defined as any item or verifiable record that is widely accepted as payment for goods and services and repayment of debts in a specific economy. Below are some notable definitions of money from prominent economists:
1. Prof. Walker:
“What performs the functions of money is money.”
This definition emphasizes the functional role of money but lacks detail about its nature and components.
2. Prof. Kent:
“Anything which is widely accepted as a medium of exchange and a standard of value is money.”
This definition highlights two key functions: a medium of exchange and a standard of value.
3. Prof. Crowther:
“Anything which is generally accepted as a medium of exchange and also performs the functions of a standard of value and a store of value is money.”
This definition is considered comprehensive as it includes all primary functions of money.
4. Prof. Keynes:
“Money is a thing by which payments of agreements of borrowing and pricing are made and general purchasing power is stored in it.”
Keynes’s definition is broader, incorporating the concept of purchasing power and its role in future payments.
Evolution of Money
The evolution of money reflects humanity’s continuous efforts to improve trade and commerce. Money evolved through several stages, each addressing the drawbacks of its predecessor:
- Commodity Money• Definition: In ancient times, commodities with intrinsic value were used as money. These included items such as grains, cattle, salt, and spices.
• Selection Criteria: Cultural, economic, and geographical factors influenced the choice of commodities. For example, in coastal areas, seashells were used, while in agricultural societies, wheat or rice served as money.
• Drawbacks:
• Lack of uniformity in value (e.g., one cow is worth different amounts to different people).
• Difficulty in storage and transportation (e.g., perishable goods like milk and fish).
• Impracticality for large-scale trade. - Metallic Money• Definition: Metals such as gold, silver, and copper replaced commodities due to their durability, divisibility, and intrinsic value. Coins were minted to standardize the weight and value of metallic money.
• Advantages:
• Easier to store and transport.
• More durable and universally accepted.
• Drawbacks:
• Limited supply of precious metals.
• Inconvenience in handling large amounts (e.g., transporting large quantities of silver). - Paper Money• Definition: Paper money emerged as a more convenient alternative to metallic money. It was introduced as government-issued currency notes backed by the state.
• Advantages:
• Lightweight and easy to carry.
• Facilitated large-scale trade and commerce.
• Present Use: Today, paper money is the primary medium of exchange in most countries, issued by central banks. For example, the State Bank of Pakistan issues currency notes in Pakistan. - Credit Money• Definition: In modern economies, credit money refers to payments made through instruments like cheques, credit cards, and bills of exchange.
• Use in Business: Credit money facilitates large transactions in sectors like industry and commerce.
• Advantages:
• Speeds up economic transactions.
• Reduces the need to carry physical money.
• Examples: Payments via digital wallets, bank transfers, and credit cards.
Functions of Money
Money performs several critical functions that make it an indispensable part of the economy:
- Medium of Exchange• Definition: Money serves as a universally accepted intermediary for buying and selling goods and services.
• Importance:
• Simplifies trade by eliminating the need for a double coincidence of wants (as required in barter).
• Facilitates large-scale production and distribution.
• Example: A worker earns wages in money, which they use to purchase goods and services. - Measure of Value• Definition: Money acts as a common standard for determining the value of goods and services.
• Importance:
• Simplifies the process of pricing and comparing goods.
• Enables fair trade by providing a clear standard.
• Example: If a kilogram of wheat costs $2 and a meter of cloth costs $10, their relative value is easily understood. - Store of Value• Definition: Money retains its value over time, allowing individuals to save and use it in the future.
• Importance:
• Overcomes the perishability of goods (e.g., milk, vegetables).
• Encourages saving and investment.
• Example: A farmer can sell crops today, save the money, and use it later to buy seeds for the next planting season. - Standard for Future Payments• Definition: Money facilitates borrowing and lending by serving as a standard for deferred payments.
• Importance:
• Ensures consistency in value over time.
• Encourages credit transactions, boosting economic growth.
• Example: A customer takes a loan of $5,000 and repays it in installments using money. - Transfer of Value• Definition: Money makes it easy to transfer wealth from one person or place to another.
• Importance:
• Simplifies property transactions and migration.
• Example: A businessman can sell property in one city, receive payment in money, and buy property in another city. - Unit of Account• Definition: Money is used as a standard unit for recording and calculating economic transactions.
• Importance:
• Facilitates bookkeeping and financial planning.
• Example: A company’s profit and loss are calculated in monetary terms. - Government Revenues and Payments• Definition: Money is the basis for government financial activities.
• Importance:
• Simplifies tax collection, fines, and public expenditures.
• Example: Governments collect taxes in money and use it to pay salaries and fund public projects.
Conclusion
Money is a cornerstone of modern economies. From its evolution as commodity money to the sophisticated credit systems of today, money has consistently addressed the inefficiencies of earlier trade methods. Its primary functions—medium of exchange, measure of value, store of value, and standard for future payments—have streamlined economic activity, fostering growth and development. As economies continue to evolve, the role of money remains central, adapting to technological advancements while retaining its fundamental purpose.
Long. Describe the kinds of money
KINDS OF MONEY
Money can be categorized into the following types:
- Metallic Money
Money made of metals like gold, silver, copper, or brass is called metallic money. It consists of coins issued by the government through the mint and circulates as currency.
Types of Metallic Money:
• Standard Metallic Money: Coins whose face value equals their intrinsic value (the market value of the metal they are made of). For example, the silver one-rupee coin used in the subcontinent from 1835 to 1893. • Token Metallic Money: Coins whose face value is greater than their intrinsic value. For instance, the one-rupee coin in Pakistan has a face value of 100 paisas, but the value of the metal used is far lower.
- Paper Money
Notes made of paper, issued by the government or the central bank, are called paper money. These are legal tender and are widely accepted for transactions.
Types of Paper Money:
• Convertible Paper Money: Notes that can be exchanged for standard metallic money (e.g., gold, silver) or foreign currency. In Pakistan, all notes issued by the State Bank of Pakistan are convertible. • Inconvertible Paper Money: Notes that cannot be converted into gold, silver, or foreign exchange but are still legal tender. For example, the one-rupee note in Pakistan was inconvertible paper money.
- Credit Money
This type of money has no legal backing but circulates based on trust. Examples include cheques, drafts, credit cards, and bills of exchange. These represent a promise to pay at a later date rather than immediate cash exchange.
- Legal Tender Money
Money that is legally accepted and must be accepted in payments. Refusal to accept it is punishable by law.
Types of Legal Tender Money:
• Limited Legal Tender Money: Money that can be used for payments only up to a specific limit. For example, in Pakistan, coins worth up to 20 rupees are considered limited legal tender. • Unlimited Legal Tender Money: Money that has no limit on its acceptance. All notes and coins of 50 paisas or more in Pakistan are unlimited legal tender.
- Near Money
Assets that cannot be used for daily transactions but can easily be converted into cash when needed. Examples include:
• Savings deposits
• Time deposits
• Government securities
• Shares of companies
Although they are not cash, they can be converted to money relatively quickly.
- Money of Account
This is the unit of money used to express the value of goods and services. In Pakistan, the money of account is the rupee, as all prices are expressed in rupees. Every country has its own money of account (e.g., the US has the dollar, the UK has the pound, and Saudi Arabia has the rial).
It is not necessary for money of account to exist as a physical currency.
- Foreign Exchange
Certain currencies are stable and widely accepted internationally. These are called foreign exchange and are used in international trade. Examples include:
• American Dollar
• British Pound
• Japanese Yen
Describe the characteristics of good money.
CHARACTERISTICS OF GOOD MONEY
A good form of money must possess the following characteristics:
- General Acceptability
Money must be widely accepted as a medium of exchange. People should be willing to trade their goods and services for it without hesitation.
• Gold and silver have historically been globally accepted due to their value.
• Modern currency notes, backed by the government and protected by law, also possess general acceptability.
- Durability
Good money must be durable and not perishable, ensuring it can be stored for long periods without losing value.
• Gold, silver coins, and currency notes are durable and maintain their usability over time.
- Homogeneity
All units of money must be identical in size, weight, and quality.
• For example, gold or silver coins of the same weight and size have the same value.
• Similarly, currency notes of the same denomination are homogeneous.
- Divisibility
Good money must be easily divisible into smaller units without losing value.
• This allows people to use smaller denominations for low-value transactions.
- Convertibility
Money must be easily transformable into other forms, such as different denominations, with the necessary inscriptions like the government’s name, value, and issue date.
- Recognizability
Good money should be easily recognized.
• Even illiterate individuals should be able to distinguish genuine money from counterfeit.
• Coins and notes should clearly display their value for easy identification.
- Reasonable Quantity
Money must exist in a balanced supply.
• It should neither be so scarce that it cannot meet the economy’s needs nor so abundant that it loses its value.
- Stability
The value of good money should remain stable over time.
• Frequent fluctuations in value discourage its use in transactions.
- Resistance to Forgery (Continued)
Good money must be difficult to counterfeit or forge.
• If money can easily be forged, it will harm the national economy by reducing trust in the monetary system.
• Security features like watermarks, holograms, and special inks on modern currency notes help prevent forgery.
- Portability
Good money must be easy to carry and transport without significant inconvenience.
• Coins and currency notes are lightweight and portable, making them ideal for transactions.
• Heavy and bulky items, such as commodities used in ancient times, do not fulfill this characteristic.
- Elastic Supply
Good money must have a supply that can be adjusted according to the needs of the economy.
• The government or central bank should be able to increase or decrease the supply of money to match the economic demand and prevent inflation or deflation.
- Universality
Good money should be universally acceptable for trade, both within the country and internationally.
• Currencies like the U.S. Dollar or Euro serve as international standards due to their global recognition and trust.
- Liquidity
Money must be highly liquid, meaning it can be quickly and easily used to purchase goods or services without losing value in the process.
• Unlike assets such as land or jewelry, which require time and effort to convert into spendable value, money provides immediate liquidity.
- Economic Value
The material used for money should hold some intrinsic economic value, though this is more applicable to metallic money like gold and silver.
• Modern paper money may not have intrinsic value but is backed by the government’s assurance.
Conclusion
For any economy, it is essential that money possesses these characteristics to fulfill its role as a medium of exchange, a store of value, a unit of account, and a standard for deferred payments. Ensuring these qualities helps maintain trust and stability in the monetary system, which is vital for economic growth and development.
