Money
Definition of money
Money is defined as anything which is widely acceptable as means of payment.
Barter system
Before money came into use, man had to use the barter system. Barter is the exchange of goods at the
expense for another. However there were several problems associated with barter. For example:
Under the system of trade a person need to find someone offering the good or service he wants and
at the same time that person will accept the good or service the other one is offering. This is known as
the double coincidence of wants.
There was also the problem of indivisibility and perishability
With the barter system, Exchange becomes difficult when more than two persons are involved.
Double coincidence of wants is a difficult condition to satisfy
Goods are not easily divisible
There is no measure of value
In order to solve the problem with barter system, people found out many things t facilitate trade. For
example: shells, precious stones, beats, salts and precious metals like gold and silver were used as
means of payment.
Nowadays money is in form of coins and bank notes which are used in trade. The commodity which
facilitates trade must be limited in supply and must be generally acceptable by people.
Characteristics of money
Acceptability- it must be acceptable by all to facilitate transaction
Durability- it must be long lasting and will depreciate not easily
Portability-it should not be too bulky to carry
Divisibility-it should be divided into smaller denominating
Scarcity-it must be scarce and cannot be abundant in supply
Easily recognized-it is easily recognized even from a distance
Uniformed –it should be the same
Functions of money
1. Medium of exchange
Money is used to buy goods and services and it thus enables transactions to take place. There is
no need to be self-sufficient anymore as we can use money to buy the things we need. With
, money, division of labor and specialization can be carried out. A person can specialize in the
production of a good or service and with the money obtained he can purchase other goods and
services that he needs.
2. Unit of account/ measure of value
The value of goods expressed in terms of price can be reflected with the use of money; that is
money will measure the value of the product. Money then becomes an important item that can
translate the value of goods and services. For example a book can be valued at $5
3. Store of value
People can keep money either in form of cash or deposits and then use the money to buy goods
or services as and when they are needed in the future.
4. Standard of differed payment
This is a loan system whereby the bank takes money borrowed from the depositors and gives it
to clients as loan. The bank charges interest on loans whereby repayment is done at a later date.
Also, money helps a person to purchase on credit that is hire purchase. They pay a small sum of
money when they purchase the product and pay the rest by installment over a certain period of
time. However, interest will be charged for the loan
Near money
Near money, also known as quasi-money, refers to highly liquid assets that can be rapidly converted into
cash such as short-term money market investments and bank deposits.
Examples of near money.
1. Foreign currencies – Especially the most widely traded ones such as the US dollar, Euro and
British pound.’
2. Money market funds – Open-ended mutual funds that invest in short-term debt securities.
3. Bank time deposits – Money deposits in a bank that cannot be withdrawn before a certain
period.
4. Bonds – specifically those near their redemption date
Liquidity
It means how quickly you can get your hand on your cash. Liquidity might be your emergency saving,
account or the cash lying with you that you can access in case of any unforeseen happening.
Cash and bank deposits.
Money is often regarded as cash, but in many economies there is a move towards a cashless society.
Cash deposits are the notes and coins in existence in an economy, this is the most liquid form of asset.
Bank deposits are money held in accounts with a financial institution, such as bank, a building society, a
credit union or a friendly society.
Definition of money
Money is defined as anything which is widely acceptable as means of payment.
Barter system
Before money came into use, man had to use the barter system. Barter is the exchange of goods at the
expense for another. However there were several problems associated with barter. For example:
Under the system of trade a person need to find someone offering the good or service he wants and
at the same time that person will accept the good or service the other one is offering. This is known as
the double coincidence of wants.
There was also the problem of indivisibility and perishability
With the barter system, Exchange becomes difficult when more than two persons are involved.
Double coincidence of wants is a difficult condition to satisfy
Goods are not easily divisible
There is no measure of value
In order to solve the problem with barter system, people found out many things t facilitate trade. For
example: shells, precious stones, beats, salts and precious metals like gold and silver were used as
means of payment.
Nowadays money is in form of coins and bank notes which are used in trade. The commodity which
facilitates trade must be limited in supply and must be generally acceptable by people.
Characteristics of money
Acceptability- it must be acceptable by all to facilitate transaction
Durability- it must be long lasting and will depreciate not easily
Portability-it should not be too bulky to carry
Divisibility-it should be divided into smaller denominating
Scarcity-it must be scarce and cannot be abundant in supply
Easily recognized-it is easily recognized even from a distance
Uniformed –it should be the same
Functions of money
1. Medium of exchange
Money is used to buy goods and services and it thus enables transactions to take place. There is
no need to be self-sufficient anymore as we can use money to buy the things we need. With
, money, division of labor and specialization can be carried out. A person can specialize in the
production of a good or service and with the money obtained he can purchase other goods and
services that he needs.
2. Unit of account/ measure of value
The value of goods expressed in terms of price can be reflected with the use of money; that is
money will measure the value of the product. Money then becomes an important item that can
translate the value of goods and services. For example a book can be valued at $5
3. Store of value
People can keep money either in form of cash or deposits and then use the money to buy goods
or services as and when they are needed in the future.
4. Standard of differed payment
This is a loan system whereby the bank takes money borrowed from the depositors and gives it
to clients as loan. The bank charges interest on loans whereby repayment is done at a later date.
Also, money helps a person to purchase on credit that is hire purchase. They pay a small sum of
money when they purchase the product and pay the rest by installment over a certain period of
time. However, interest will be charged for the loan
Near money
Near money, also known as quasi-money, refers to highly liquid assets that can be rapidly converted into
cash such as short-term money market investments and bank deposits.
Examples of near money.
1. Foreign currencies – Especially the most widely traded ones such as the US dollar, Euro and
British pound.’
2. Money market funds – Open-ended mutual funds that invest in short-term debt securities.
3. Bank time deposits – Money deposits in a bank that cannot be withdrawn before a certain
period.
4. Bonds – specifically those near their redemption date
Liquidity
It means how quickly you can get your hand on your cash. Liquidity might be your emergency saving,
account or the cash lying with you that you can access in case of any unforeseen happening.
Cash and bank deposits.
Money is often regarded as cash, but in many economies there is a move towards a cashless society.
Cash deposits are the notes and coins in existence in an economy, this is the most liquid form of asset.
Bank deposits are money held in accounts with a financial institution, such as bank, a building society, a
credit union or a friendly society.
