O Level Revision : Commerce - Money

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.

Barter

• 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.

2. Absence of standard measure of value

• Goods or services` values differ.
• Much time required to bargain.
• Supply and demand mechanisms determine the exchange ratios.

3. 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.

4. 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.

5. 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.

6. Transportation

• 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

• 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

1. Acceptability

• 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

2. Divisibility

• 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

3. Durability

• Has long life
• Ability to maintain quality
• Little deterioration over time
• Resistant to wearing out fast

4. Portability

• Convenient sizes to carry
• Small to insert into a purse or pocket

5. Recognisability

• Features are distinct and unique
• Size,  colour and portraits make money recognisable

6. Stability

• Consistent value year after year
• Credible and acceptable within society
• Value fluctuates due to inflation

7. Scarcity

• Balanced in supply
• Inflation might increase money supply

8. Uniformity

• Each denomination is unique
• Denomination has same size, structure, texture, colour, value and identity
• -Denominations are inscribed uniquely

Functions of money

1. 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.

2. 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.

3. 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.

4. 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

1. What is barter?
2. It is the buying of goods for cash.
3. It is the buying of goods on credit.
4. It is the exchange of goods for goods.
5. It is the selling of goods for cash.
6. What is the disadvantage of barter?
7. Goods are indivisible.
8. Exchange ratios cannot be determined.
9. Goods cannot be swapped.
10. Needs coincidence of wants.
11. The features of money are

(i)   acceptability. (ii) divisibility. (iii) durability.

1. (i) and (ii)  B.   (ii) and (iii)
2. (ii) and (iii)  D.   (i), (ii) and (iii)
3. Money is a

(i)   bill of exchange. (ii) store of value .

(iii) standard for future payments.

1. (i) and (ii)  B.   (i) and (iii)
2. (ii) and (iii)   D.   (i), (ii) and (iii)
3. Which has legal tender?
4. Cheques and coupons  B.   Coins and notes
5. Vouchers and orders  D.   Bearer cheques and notes

Essay questions

1. Explain the advantages and disadvantages of barter.
2. What are the forms of barter?
3. What is the importance of barter in Commerce?
4. Explain the functions of money.
5. Explain any five features of money.