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MIFI 567Lecture 4: What Money Is AboutAUG 2017Economic Environment of Finance and InvestmentDaniel Sakyi[email protected] // 024 370 8390
•The Evolution of Money•What is Money?•Definitions of Money•Liquidity of Money•Functions of Money2Outline
What Money Is AboutThe Evolution of Money & The Collapse of Barter TradeWe study how moneylesseconomies operated and some of the challenges embedded in the systemWith this we will be able to appreciate the real economic value of money in the modern economyBarteris a system of trade in which commodities were directly exchanged for another ORBarter is the direct exchange of goods and services for other goods and services.2-3
What Money Is AboutBecause 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 goodsThis 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 grewThe 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 wantfor trade to take place. 2-4
What Money Is AboutThe 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 commoditiesHow 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 searchingfor someone to exchange with, an addition to cost and inefficiencies2-5
What Money Is AboutBarter 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 coincidingPeople need to recognise your commodity before deciding on whether to accept it or not2-6
What Money Is AboutAll these problems culminated in a multiple pricing for a single commodityTo overcome all these problems with barter, there was therefore the need for a single commodity that could be used as a common denominator; hence moneyHow does money eliminates the problems with barter?