Lecture 4 What Money is About.pptx - MIFI 567 Economic...

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MIFI 567 Lecture 4: What Money Is About AUG 2017 Economic Environment of Finance and Investment Daniel Sakyi [email protected] // 024 370 8390
The Evolution of Money What is Money? Definitions of Money Liquidity of Money Functions of Money 2 Outline
What Money Is About The Evolution of Money & The Collapse of Barter Trade We study how moneyless economies operated and some of the challenges embedded in the system With this we will be able to appreciate the real economic value of money in the modern economy Barter is a system of trade in which commodities were directly exchanged for another OR Barter is the direct exchange of goods and services for other goods and services. 2- 3
What Money Is About Because talents are not equally distributed, there was the need for this kind of exchange that allowed people to concentrate on one profession and trade that for other goods This notwithstanding, barter had several problems that was not only complicated, it was also relatively inefficient and unsustainable as society grew larger and modern way of doing things also grew The severest was the problem of double coincidence of want (i.e. Under barter, exchange is possible only when both parties wishing to exchange, simultaneously and mutually have the need for what each other has to offer). A barter system requires a double coincidence of want for trade to take place. 2- 4
What Money Is About The system was costly due to the time wastage in searching for someone (i.e. search cost ) and waiting time ( wait cost ) Barter trade was coupled with pricing or valuation of the commodities involved in the transaction (i.e. Measurement problems) There wasn’t any structured pricing system that could be a basis for comparing the value of two commodities How many cups of salt should be exchange for a cow? Barter was coupled with the problem of durability (e.g. the exchange of perishable goods got rotten in the course of searching for someone to exchange with, an addition to cost and inefficiencies 2- 5
What Money Is About Barter was coupled with portability and divisibility (e.g. people had to carry a huge item around in search of someone to barter with which also made it impossible for items to be divided as there was no unit of measurement) Barter was coupled with acceptability and ‘recognisability’. If everybody would just accept anything at all, then there wouldn’t be any problem of wants coinciding People need to recognise your commodity before deciding on whether to accept it or not 2- 6
What Money Is About All these problems culminated in a multiple pricing for a single commodity To overcome all these problems with barter, there was therefore the need for a single commodity that could be used as a common denominator; hence money How does money eliminates the problems with barter?

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