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THE ROLE AND USES OF MONEY (VISUAL AID)

WHAT IS MONEY?

Money can be defined as anything that people regularly use to buy goods and services from otherpeople. It can be anything accepted as a means of paying off debts.

THE BASIC FUNCTION OF MONEY

- To facilitate the exchange of goods and services- To lessen the time and effort required to carry on trade

or simply, the sole purpose of money in the economic system is - To enable trade to be carried on as cheaply as possible in order to make feasible the optimum

degree in order to make feasible the optimum degree of specialization, with its attendantincrease of productivity.

Money is productive, therefore, in the sense that it is an essential part of the modern exchangemechanism and thereby facilitates specialization and production.

THE BARTER SYSTEM

Barter is a system of exchange by which goods or services are directly exchanged for other goods orservices without using a medium of exchange, such as money.

Some difficulties experienced in Barter System:

1. Barter tends to slow down trade, it being cumbersome or burdensome.

2. Lack of double coincidence of wants.

3. Lack of a proper way to equate the values of the things exchanged.

4. Indivisibility of some goods.

LIVING WITHOUT MONEY

Communities were so small that everything was shared out between them.

THE IMPORTANCE OF METAL

- Metals did not wear out quickly and were scarce enough to be in great demand.- Metals could be divided into a single grain.

THE FIRST NOTESThe earliest country to use paper money was China, as long ago as the 7 th Century AD.MONEY TODAYMoney is only valued for what it will buy.Money has three main uses:

- Way of exchanging goods and services- Precise measure of value- Store of value

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Money functions at three levels:- It is held directly by the public, by companies, other organizations, and by the government itself- There are banks which borrow money from the public and in turn make loans to the public- States or central banks are responsible for creating new money or cutting the amount of money

THE WEALTH OF KINGS AND NATIONS- Gold is a symbol of wealth through the ages.- Croesus, the Lydian King, was the first ruler to have issued pure gold coins in the 6 th Century BC.

TRADITIONAL CHARACTERISTICS OF MONEY

1. Utility The object or commodity could be used not only as money but its own original form.2. General acceptability The object or commodity must be of general acceptance.3. Portability It should be easily carried or transported from place to place.4. Uniformity Uniformity is achieved through the use of standard and uniform metal or paper.5. Malleability Can be melted down and shaped into different forms as well as imprinted with anydesired sign.6. Durability The commodity chosen as money would have to withstand normal wear and tear.

FUNCTIONS OF MONEY

The uses of money in an economic setting:1. As a medium of exchange - Money is used for buying and selling of goods or services.2. As standard of value - Money is functioning as the measuring unit for prices.3. As a store of value Money retains its value for some period of time.4. As a standard of deferred payment - Money is used as a standard benchmark for specifying futurepayments for current purchases.5. As a reserve or guaranty for solvency- The use of money as a reserve or guaranty for solvency servesto bolster the confidence and trust of the public in the banking system.

CLASSIFICATION OF MONEY

Full-bodied money- is a money whose value as a commodity for non-monetary purposes is a great as itsvalue as money.The principal full-bodied money in modern monetary systems has been coins of the standard metalwhen a country is on a metallic standard: a gold standard, a silver standard or a bimetallic standardusing gold and silver.Full-bodied coins were typically issued by governments. Three steps were involved:

1. Define the gold value of the monetary unit.2. At the stipulated price, purchase all the metal that is offered and coin it without limit and

virtually without charge.

3. Permit the melting of coins to get gold for non-monetary uses and stand ready to sell the entirecommodity that is demanded.Two points on which there has been much misunderstanding need to be clarified:1. To say that full bodied coins have the same value as money as they have in non-monetary uses of themetal is not to say that they have a constant value or purchasing power in terms of other things.2. It is not true, as some inferred that the value of a full-bodied coin is simply the reflective value of themetal as determined by its stock and its demand for non- monetary uses.

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Representative full-bodied money is usually made of paper. It is in effect a circulating warehouse receiptfor full-bodied coins or either equivalent in bullion. It represents in circulating an amount of metalwit4h a commodity value equal to the value of the money."

METALLIC-BASED SYSTEMS- Golds value was stable and it served as a good store of value. - Portable, divisible (by melting it down), durable, and resistant to counterfeiting- It as alternative uses other than serving as money.

THE GOLD COIN STANDARD

Problems

- The supply of gold opr other precious metals does not necessarily expand in relation to theneeds of an expanding economy for a growing money supply.

- The circulation of gold as money results in losses owing to the normal wearing of the coins or totheir debasing by people removing part of the gold and then passing the coins at their regularface value.

- The demand for gold as money must compete with the demand for gold for non-monetary uses.

THE GOLD BULLION STANDARD

The monetary unit is defined in term s of a fixed quantity of glod, however, instead of the gold beingcirculated as coins, paper money convertible to gold.