Chapter 1.

Origins and functions of Money

 Specialization and exchange
- Previously man was sufficient (food,
clothing, shelter through hunting, fishing)

- Need for specialization- to save time and

get convenience. (for e.g. specialized in hunting,
construction)
 Chapter 1.
Origins and functions of
Money
Barter System / Direct
Exchange
-Definition: Barter is a type of trade where
goods or services are exchanged for a certain
amount of
other goods or services; no money is involved in
the transaction. It can be bilateral or
Multilateral as trade
 Disadvantages of Barter
1. Mutual coincidence of wants: Before any
transaction can be undertaken, each party must be able to
supply something the other party demands. To overcome
this mutual coincidence problem, some communities have
developed a system of intermediaries who can store, trade,
and warehouse commodities. However, the intermediaries
often suffer from financial risk.
2. The rate of exchange: how to measure?
3. Large indivisible units: chair for cow
4. Consistent quality
5. Perishable commodities
6. Transport and storage of commodities
for exchange
 Indirect Exchange
- Diagrammatic explanation

-few most marketable commodities available (grain

bags, salt, cloth etc)
 Precious Metals
 Usage of bronze , silver, gold , copper
etc.

1. Less bulky
2. Durable
3. Consistent Quality
 Money and its functions
Money : Assets that people are generally willing to accept
in
exchange for goods and services or for payment of debts.
 Functions of Money
3. Standard of Deferred payment
1. Medium of Exchange: - Many contracts promise to pay
- Willing to accept fixed sums of money well into the
- Money is universally future
accepted - borrowing and lending possibilities

4. Store of Value
2. Unit of Account: - If you do not use all your dollars to
- Measure the relative values buy goods and services today, you
of goods and services. can hold the rest to use in the future.
- Money is a useful unit of - money does not lose much of its
value
account only if its value
relative to the average of all
other prices doesn’t change
too quickly.