Module 2

MODULE 2:
WHAT IS MONEY?
 WHAT IS MONEY?
 Money can be defined as anything that
people regularly use to buy goods and
services from other people. It can be
anything accepted as a means of
paying for goods or services or for
paying off debts.
 THE BASIC FUNCTION OF MONEY
 Money has one fundamental purpose in an
economic system: to facilitate the exchange of
goods and service, to lessen the time and effort
required carry on trade. We may say, then, that
the sole purpose of money in the economic
system is to enable trade to be to be carried on
as cheaply as possible in order to make feasible
the optimum degree of specialization, with its
attendant increase of productivity.
 THE BARTER SYSTEM
The system of exchanging goods for goods,
service for service, and the like was found
to be convenient, and in some communities
was considered almost the best system of
exchange at the time, barter presented
some difficulties which tended either to
slow down exchange or to make people
dissatisfied with the system.
 SOME OF THE DIFFICULTUES:
1. Bartertends to slow trade, it being cumbersome
or burdensome.
2. Barteris difficult because of the lack of double
coincidence of wants.
3. Barter
is also difficult due to lack of the a
proper way to equate the values of the things
exchange.
4. Barter is likewise difficult because of the
indivisibility of some goods.
 THE IMPORTANCE OF METAL
 Ofall the goods used in exchange, metals
proved the most useful. The did not wear out
quickly and were scarce enough to be in great
demand. Metals could also divided into a
single grain. When some bought an article,
the amount of metal needed to pay for it
would be weighed. The common equipment of
early merchants and traders was a sack of
gold or silver and a set of accurate scales.
 THE FIRST NOTE
 Theearliest country to use paper money
was China, as long ago as 7th century AD. At
one time the paper money system was so-
well established in China that it was even
an offense to trade in gold and silver. The
Chinese had stumbled on the truth of
money that is value really rests in the
wealth of the country and on what the
money will buy in goods.
 MONEY TODAY
 The big difference between money today and in the past is
that very little of it now is exchangeable into gold or silver
as it use to be. Money is only valued for what it will buy. It
will be much easier now to recognize the true function of
money as it has evolve through the ages. Money has three
main uses:
a) It serves as a way of exchanging goods and services

b) It acts as a precise measure of value
c) And represents a store of value in the person’s wealth that
can be save up and use at a later time.
 TRADITIONAL CHARACTERISTICS OF
MONEY
 UTILITY – this meant that the object or
commodity could be used not only as money but
in its own original form.
 GENERAL ACCEPTABILITY – in order to be an
effective medium of exchange, the object or
commodity must be of general acceptance.
 PORTABILITY – this means that the commodity
should be easily carried or transported from place
to place.
 TRADITIONAL CHARACTERISTICS OF
MONEY
 UNIFORMITY – in earlier days, coins of different
sizes, designs, shapes and metals were issued. So
today, uniformity is achieved through the use of
standard and uniform metal or paper, as the case
may be.
 MALLEABILITY – this means that the commodity
used as money could be melted down and shape into
different forms as well as imprinted with any
desired design.
 DURABILITY – the commodity chosen as money
would have to withstand normal wear and tear.
 FUNCTIONS OF MONEY
1. As a medium of exchange. It has indeed the need to

facilitate exchange that a means of payment became
necessary.
2. As a standard of value. It measures the values or utilities
of the objects exchange through the pricing system.
3. As a store of value. It must therefore be presumed that
the value of money is stable to be effective as such.
4. As a standard of deferred payment. It essentially
performs the second function except that such
measurement of value involves future payment of
contractual obligations.
 CLASSIFICATION OF MONEY
 Full-bodied Money – refers to any unit of money, whose intrinsic
value (value of metal) and face value are equal. Commodity Value
= Money Value. For example, during the colonial period, 1 rupee
coin was made of silver metal and its monetary value was equal to
its commodity value.
 Representative Full-bodied Money – it refers to money which is

usually made of paper. The value of representative full-bodied
money is much higher than its value as a commodity. It is
accepted as money as it can be conveniently used for carrying out
transactions.
a) Convertible Paper Money
b) Inconvertible Paper Money
 CLASSIFICATION OF MONEY
 Credit Money
– any money except representative full-bodied money that
circulates at a value greater than the commodity value of the
material from which it is made. Money Value > Commodity Value.
- Credit cards, bank deposits are some of the example of
Credit money.
 ESTABLISHING A MONETARY SYSTEM
 METALIC–BASED SYSTEMS - historically, gold and/or silver served
as money, with gold being more widely used than silver. These metals
received approval of the state to serve as money long after they were
assigned to the role by society.
Reasons:
1st: Gold was and continues to be in limited supply annual additions to
the world stock of gold are relatively small. Thus, its value was stable and
it serve as a good store of value.
2nd: Gold possessed the characteristics of an efficient unit of exchange-
portability, divisibility (by melting in down), durability, resistance to
counterfeiting.
3rd: Gold had alternative uses other than serving as money. Decorative,
artistic, religious, and industrial uses of gold are still common.
4th: Finally, gold and silver are both relatively soft metals, these metals
 Gold Coin Standard – a much better solution to the use of gold

as money is represented by the gold coin standard. As the name
implies, gold circulates as currency in the form of coins having a
given weight, fineness, and shape. Thus, the value of coin is easily
recognizable and the problem of non-standardized shape is
eliminated.
 Gold Bullion Standard – the monetary unit is again defined in

terms of a fixed quantity of gold, however, instead of the gold
being circulated as coins, paper money convertible into gold is
used as the hand-to-hand currency. Under the gold bullion
standard, paper currency can be converted into gold bullion.
 Gold Exchange Standard – monetary system where a

government guarantees a fixed exchange rate to a foreign
currency that uses a gold bullion standard. It is a way of countries
without a large gold reserves to fix the value of their currency in
terms of gold regardless of its own intrinsic value. While the US
operated on the international gold bullion standard, other nations
held dollars as international backing for their currency.
 PAPER CURRENCY SYSTEMS – inconvertible paper currency

frequently was over issued to finance the deficits of the government.
This inconvertible paper currency is called Fiat Money because it
exists only on the basis of the government decree that it is money.
 ‘MICKEY MOUYSE’ MONEY – as the Japanese settled down to

occupy the Philippines, they introduced and circulated huge amounts
of military peso notes that eventually came known as ‘mickey mouse’
money. Earlier, in December 1941, as Japanese forces succeeded in
invading and taking possession of any locality in the Philippines, they
issued and circulated these military notes which they brought with
them from Tokyo.

Module 2

Uploaded by

Copyright:

Available Formats

Module 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module 2

Uploaded by

Copyright:

Available Formats

MODULE 2:

a) It serves as a way of exchanging goods and services

1. As a medium of exchange. It has indeed the need to

 Representative Full-bodied Money – it refers to money which is

 Gold Coin Standard – a much better solution to the use of gold

 Gold Bullion Standard – the monetary unit is again defined in

 Gold Exchange Standard – monetary system where a

 PAPER CURRENCY SYSTEMS – inconvertible paper currency

 ‘MICKEY MOUYSE’ MONEY – as the Japanese settled down to

You might also like