Systems of Exchange
©2012, TESCCC
What do all of
these images
have in
common?
©2012, TESCCC
Economics Unit 7, Lesson 1
Barter – goods and services were
traded without the exchange of money.
However, before trade could occur, there had to
be a “double coincidence of wants”. Each trader
had to have something the other wanted.
I’ll trade you a
chicken for a pair of
shoes.
I would love to sell you these
shoes but I can’t eat chicken,
due to my bad teeth, caused by
smoking.
In a barter economy a chicken
farmer who wants to buy shoes
may have to first trade chickens
for apples and then apples for
shoes because the guy selling
shoes wants only apples.
Money eliminates this problem.
You are lucky you are a
pineapple farmer and not a
broccoli farmer. I hate broccoli.
Or, a heart surgeon might accept only
certain goods (like pineapples
)
but not others (
like broccoli)
because he doesn’t like broccoli.
It is less expensive to use money.
The “calculation of exchange” is fast and easy
because whatever the price is, you pay that amount.
Here’s $3.00 for
one gallon.
.
The “calculation of exchange” by bartering is
much slower than the “calculation of exchange”
in a monetary system.
• It is less expensive to use money.
• Using money saves time and time is money.
The monetary system enables the “calculation
of exchange” to go much faster.
• Money is also easier to tax.
• So a monetary system is better than a
barter system.
Three FUNCTIONS OF MONEY
1. Medium of Exchange
Any asset that sellers will accept as payment for g/s
[Acceptability]
Medium means “something in the middle”, so money is a “medium of trade
between buyers and sellers” because it can be exchanged for something else.
Avoids “double coincidence of wants” that bartering requires.
You would have to have a trading partner who “wants to sell
you goods you want to buy” and “wants to buy
goods you want to sell.”
Liquidity – how easily an asset can be converted into cash
without any additional expense. [Cash has 100% liquidity]
Three FUNCTIONS OF MONEY
$249.00
2. Unit of Account
[measuring the relative value of goods by
stating prices-a standard of value]
Example: Microsoft Stock is selling for $50 a share.
The new Jag is selling for $32,000.
A $2 item is twice as valuable as a $1 item.
Money is like a
yardstick.
People use it to
compare the worth of things that they buy and sell.
Three FUNCTIONS OF MONEY
Greek Coin
2,500 years old
3. Store of Value
[storing wealth from one point in time to another]
[doesn’t wear out easily (durability) and holds up to inflatio
Ability of money to hold value over time [Money that lacked durability
or did not hold up well to inflation would not make good money [would not
store value].
Ice cream cones would suffer monetary meltdown, become a
sticky puddle. If money suffers high inflation, it causes the
value of money to “melt.”
Other desirable qualities for money are:
A. Scarcity (limited supply) B. Portability C. Divisible D. Difficult to counterfeit
• Commodity Money:
something that performs the
function of money and has value as alternative, nonmonetary uses. Gold, silver, cigarettes, corn
Alternative uses
such as
• Fiat Money: Money that has value simply because
the government has decreed it to be an acceptable
means to pay debts (Federal Reserve Notes)
• Paper notes
– Coins
• Representative Money: items that have no
value in themselves but can be exchanged for
something of value (gold certificates, silver
certificates, checks…)
They are not “plastic money.” They do serve as a:
1. medium of exchange & the
2. credit card statement serves as a unit of account.
3. but, they do not have a store of value.
If the credit card company goes out of business or decides
not to honor your card, it is worthless. They are not money
because they don’t store value.
Debit cards are money. They serve as a:
1. medium of exchange; they also serve as a
2. store of value (not an extension of credit); and
3. debit card statements serve as a unit of account.
Debit Card
Value of Money
Prices
The value of money goes in the opposite direction
of the general price level.
Or, the amount a dollar will buy varies inversely
with the price level.
Money has grown increasingly more abstract
- from a physical commodity,
- to a piece of paper representing a
claim on a physical commodity,
- to a piece of paper of no intrinsic value,
[just a Federal Reserve note]
- to an electronic entry representing a claim
on a piece of paper of no intrinsic value.
Review: Functions of Money
• A medium of exchange: people are willing to
accept in exchange for goods and services
• A standard of value: a measure of value that
allows people to compare the values of goods
and services using prices
• Store of value: allows people to save for
future consumption
©2012, TESCCC
Properties of Money
• Durable: it lasts even after years of use
• Portability: you can take it anywhere
• Divisibility: must be easily divided into smaller
denominations
• Uniformity: money must be the same within a
country
• Limited Supply: if there is too much in circulation,
the value drops and may even become worthless
• Acceptability: people may use it to buy other
things
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Commodity
Money
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Representative
Money
Fiat Money
On an exit card, answer the following:
1. Why must money be durable?
2. Why must money be portable?
3. Why must money be divisible?
4. Why must money be uniform?
5. Why must there be a limited supply of
money?
6. Why must money be acceptable by others?
©2012, TESCCC
Your assignment:
In Chapter 11, read text pages 285 290 and do the assessment
questions on p. 290, numbers 1-6.
Turn in your work before you leave
class today.
©2012, TESCCC