Money and its Function

Learning objectives
 Definition
 Function
 Classification
 Characteristics of money
Barter system
 A trade or exchange of goods or services without using
money.
 Today barter no longer exist except perhaps between
friends .
Disadvantages of bartering
 In order to barter , each person had to have goods or
services that the other person wanted .
 Both items had to be of equal value.
 The goods being exchanged had to be carried around –
very awkward if the goods were heavy or bulky
Money
 Money is any thing which is widely accepted as a
payment for goods and services.
Functions of money
 A medium
 A measures
 A store
 A standard
Medium of exchange
 People use money to exchange goods
 Money makes transaction easier
 Money remove the need for double coincidence of
wants
Measures of value

 Money measure values of goods and service in the unit

of account
 A unit of account is a standard numerical unit of
measurement of the market value of goods , services
and other transactions.
Store of value
 The value from consuming goods can be stored in
several different ways , one of the best is money .
 If you don’t want to spend your money now you can do
it latter.
 However inflation weakens the ability of storing value
of money .
Standard of deferred payments
 Future payments for current buying now , paying
latter.

 Inflation adjustment : interest rate .

Classification of money
 Commodity money
 Fiat money
 Bank money
 Commodity money
 Its value come from what made of it .
 it is object that have value in themselves as well as
value in their use as money.
 Commodity money is a good whose value serves as the
value of money.
 Commodity money has been replaced with fiat money
.
Commodity money
 Gold
 Silver
 Copper
 Shells
 Cattle
 Candy
Fiat money
 An other name representative money , it does not have
real value in its self.
 Its value comes from either the commodity it stands
for or government regulation or law.
Example
 Paper money
 Coins
 Bank notes
 Cards
Bank money
 Bank money consist of the book credit that banks
extend to their depositors.
 Transactions made using checks drawn on deposits
held at banks involve the use of bank money .
 DD , checks, credit & debit cards
Plastic money
 Plastic money is a term that is used in reference to the
hard plastic cards we use every day in place of actual
bank notes .
 Credit card
 Debit card
 Prepaid cash cards
Characteristics of money
 Durability
 Divisibility
 Portability
 Non counterfeit ability
 Limited supply
 Acceptability
 Valuable
Durability
 It retains the same shape form and substance over an
extended period of time
 It does not easily decompose , degrade, or otherwise
change form.
Divisibility
 Means money can be divided into small increments
that can be used in exchange for goods of varying
values.
 For an item to function as the medium of exchange ,
which can be used to purchase a wide range of
different goods with a wide range of different values ,
then it must be divisible the smaller the division the
better.
Portability
 Means that money can be easily moved from one
location to another when such movement is needed to
complete exchanges.
Non counterfeit ability
 Means that money cannot be easily duplicated.
 A given item cannot function as a medium of exchange
if everyone is able to print up or “make up” a batch of
money any time that they want.
Limited supply
 Means the restriction on the amount of money in
circulation
 Respective country’s government has the responsibility
to control / maintain an adequate money supply to
the market based on their monetary policies.
Acceptability
 Every one must be able to use the money for
transaction.

 Money is universally accepted any where in the world

as a universal mean for transaction
Valuable
 Generally holds value over time