Unit 3.1: Money
Why do we need money?
To exchange for those goods and services we each need and want but are unable to
produce for ourselves, because:
• we are not self-sufficient (individually we cannot produce everything we
need and want)
• we specialize in those tasks and productive activities we are best able to do
and therefore need to trade with producers of other products
What did we do before money?
Barter involves exchanging goods and services, i.e. ‘payment’ for one product is
made with another.
Problems with barter are:
Finding someone to swap with (there must be a double coincidence of wants- what
does this mean???)
How to agree values (how many apples to one cow, and how much cheese for one
apple?)
The functions of money
To overcome the problems of barter money must be:




a medium of exchange: this means that when buyers and sellers get
together to exchange, money is an acceptable method of payment
a good store of value: this means that when a seller sells something for
money, the money will keeps its value until it can be spent at a later date.
a measure of value: money is used to put a value on good or services. How
much satisfaction do you get from drinking a hot chocolate- 10RMB? 15RMB?
20RMB? We tend to think of how much something is worth in money termsits price
a means of deferred payment: Many people and businesses buy on credit
(i.e. they buy now and pay later). The business selling the good on credit will
happily accept money at a later date.
Characteristics of good money
Good money must be:
•
•
acceptable to others in payment for goods and services. The paper notes
that we use are worthless pieces of paper but everyone will accept notes at
the value printed on them- this is called token money.
durable so that it is not worn down or damaged easily though frequent use
portable so that it is easy to carry around
divisible into smaller units and values- the lack of divisibility was a key
problem for old types of money- like cowrie shells & dog’s teeth
scarce, otherwise if it is freely available it will be of little or no value to
others.
•
•
•
TASK:
In the table below are the various characteristics of money - that is the qualities
money needs to fulfil its functions well. Across the top of the table are various
possible types of money. For each type of money, give a score between 1 and 10 to
say how well you think it meets each characteristic.
10 = meets the attribute perfectly
1 = hardly meets the characteristic at all


Characteristic of
money
Gold
coins
Playing
cards
Sea
shells
Tobacco Leaves
Bank
notes
Acceptability
Divisibility
Portability
Difficult to
counterfeit
Durability
Uniformity
Limited in supply
Total Score
Now add up the totals for each type of money and list them in order below, starting
with the best form of money (the one with the highest score):
a.
b.
c.
d.
e.
f.
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
3. Write a short paragraph justifying why the type of money at the top of your
'money chart' is likely to fulfil the functions of money best.
What is Near Money and what is not?
CASH in the form of notes and coins is widely _________________ in many countries as
money. However, cash can lose its __________________ over time due to rising prices
(_________________)
Financial assets (things that people own) that can store value over time and can be
turned quickly into cash are a good form of money. Money that his held in bank
accounts (deposit or current accounts), that can quickly be converted into cash (by
withdrawing it at an __________, for example) is the closest form of money to actual
cash and is often called NEAR MONEY.
On the other-hand, even though money held in savings accounts may store its value
over time (because you receive _____________ on your savings), it is often difficult to
convert it quickly into cash as the bank might require that you tell them a month in
advance that you need the money. Some of you might have savings account set up by
your parents- they will hold their value but you can’t turn the money in it quickly
into cash- why not??___________________)
In addition, assets like gold jewelry or watches could also be sold for cash but this
could take some time. As a result they are not considered NEAR MONEY.
NEAR MONEY is often called the MONEY SUPPLY and it consists of notes and coins
in circulation and money held in deposit accounts.