O Level Revision : Commerce - Money
Money is anything that is generally acceptable in the exchange of goods and services. Forms of money include: notes and coins - only these two forms are legal tender; cheques; coupons; gift vouchers
Money is anything that is generally acceptable in the exchange of goods and services. Forms of money include: notes and coins - only these two forms are legal tender; cheques; coupons; gift vouchers.
- Barter is the direct exchange of goods for goods, goods for services, or services for services without money as a medium of exchange.
- Barter is the exchange of wealth for wealth. For example, meat can be exchanged for maize, and guns for cloth.
The problems of barter
Double coincidence of wants
- Two exchanges must coincide.
- Double coincidence rarely occurs.
- Wastes time.
- - Goods are held for long period of time.
- - Numerous intermediaries required to get final choice of goods.
- Absence of standard measure of value
- Goods or services` values differ.
- Much time required to bargain.
- Supply and demand mechanisms determine the exchange ratios.
- Lack of divisibility
- Some goods are not divisible and sub-divisible into small units. For example goats and cattle bartering have no fractions of each.
- Compromise required, based on supply and demand.
- Storage of wealth
- No proper and convenient means of storing wealth or value.
- Physical deterioration, e.g. perishables.
- Changes in tastes.
- Technological changes in production appreciate or devalue the good or service.
- Deferred payments
- No satisfactory unit in terms of which contracts about future payments are to be written.
- Deferred or future payments cannot be written in terms of specific goods.
- Goods values, sizes and qualities may increase or decrease and render difficulties of future payments.
- Goods and services not transportable conveniently from one place to another.
- Distances may be long.
The use of a standard measure, divisible into manageable small units largely replaces bartering. Barter is cumbersome. The use of money is global.
- Money is anything that is generally acceptable in the exchange of goods and services.
- Forms of money include: notes and coins - only these two forms are legal tender; cheques; coupons; gift vouchers
Features/characteristics of money
- Acceptable means of exchange
- Standard pricing
- Agreed value for goods and services
- Eases all forms of business transactions
- Acceptable for all forms of transactions in trade
- Available in small units
- Varied denominations of coins and notes, for example 1c, 5c, 10c and $1, $2, $5, $100
- Change readily available
- Smallest payments are possible
- Has long life
- Ability to maintain quality
- Little deterioration over time
- Resistant to wearing out fast
- Convenient sizes to carry
- Small to insert into a purse or pocket
- Features are distinct and unique
- Size, colour and portraits make money recognisable
- Consistent value year after year
- Credible and acceptable within society
- Value fluctuates due to inflation
- Balanced in supply
- Inflation might increase money supply
- Each denomination is unique
- Denomination has same size, structure, texture, colour, value and identity
- -Denominations are inscribed uniquely
Functions of money
- Medium of exchange and debt settlement
- Creditors accept money for its value in exchange for goods and services.
- Money thus gives control over trade of goods and services.
- Suppliers accept it for payment of goods and services; trade is easy, simple, fast and efficient.
- Unit measure of value
- Goods and services are priced.
- -All transactions are reduced to the common denominator of price, and comparative exchange values are easily assessed.
- Store of value
- It can be saved and thus wealth can be stored in a form other than that of the physical item which one produces.
- Standard for future payments
- The value of money enables contracts to be made in advance.
- Goods and services can be offered on credit.
Multiple choice questions
- What is barter?
- It is the buying of goods for cash.
- It is the buying of goods on credit.
- It is the exchange of goods for goods.
- It is the selling of goods for cash.
- What is the disadvantage of barter?
- Goods are indivisible.
- Exchange ratios cannot be determined.
- Goods cannot be swapped.
- Needs coincidence of wants.
- The features of money are
(i) acceptability. (ii) divisibility. (iii) durability.
- (i) and (ii) B. (ii) and (iii)
- (ii) and (iii) D. (i), (ii) and (iii)
- Money is a
(i) bill of exchange. (ii) store of value .
(iii) standard for future payments.
- (i) and (ii) B. (i) and (iii)
- (ii) and (iii) D. (i), (ii) and (iii)
- Which has legal tender?
- Cheques and coupons B. Coins and notes
- Vouchers and orders D. Bearer cheques and notes
- Explain the advantages and disadvantages of barter.
- What are the forms of barter?
- What is the importance of barter in Commerce?
- Explain the functions of money.
- Explain any five features of money.