3.1 - Money and Banking
3.1.1 - Money
Money is an item that is generally acceptable as a form of payments for goods
and services.
Bartering and the need for exchange
● Barter system: In the absence of money, people have to use a barter system
in order to trade goods and services. Bartering is the act of swapping items in
exchange for other items through a process of bargaining and negotiation
Problems with the barter system
1) Need for a double coincidence of wants - you need to find a person who
wants to exchange said goods at said price → highly inefficient
2) Divisibility - e.g: ⅔ of a sheep is no use
3) Portability - livestock cannot be easily transported
The problems associated with bartering meant that countries around the world
eventually developed the use of commodity money, such as cowry shells, grain and
cloth. For much of history, precious metals such as gold and silver have served a
monetary role.
Need for money
1) Money overcomes the problems of barter and allows individuals, producers
and government to exchange with each other
2) Money enables individuals to specialise in different jobs to earn money to
exchange/buy different goods and services
Importance of money
1) To buy goods and services
2) Provides a fix rate of exchange between goods and services
Legal tender
Legal tender is a medium of payment recognised by a legal system to be valid
for use within a country.
E.g the notes and coins issued by the government to be used as money in a country
Forms of money
1) Notes
2) Coins
3) Credit card (taking money from the bank)
, 4) Debit card (in HK: EPS)
5) Value stored in electronic form
Functions of money
1) Medium of exchange
Something the buyer will exchange with a seller whom they want to
purchase goods and services from.
● Money overcomes the problem of barter
● Exchange is simple if everyone accepts money as a form of payment
for things they can exchange (sell)
● A person can be paid in money in exchange for their labour and then
use this money to exchange/buy goods and services
○ Receive income → buy goods and services
2) Store of value
Money that can be stored and spent in the future. It does not depreciate
but may change its value in the future.
● Money lose value over time due to inflation
○ Inflation: the rate of increase in prices over a given period of
time
● Inflation reduces the store of value of money
● E.g Some people may store valuable antiques, as they can be
exchanged for money in the future. This is because as the prices of
goods rise over time, the purchasing power of money or what it will
buy, is reduced
○ Purchasing power: the amount of goods and services that can
be purchased with a unit of currency
3) Measure of value (unit of account)
Money can measure the market value of goods and services in monetary
terms ($) rather than using goods.
● Helps producers and consumers engaged in trade to avoid problems
of fixing prices of goods and services in terms of all other goods and
services
● Expresses the worth of each good and service in monetary terms
4) Standard of deferred payment
This allows people to acquire goods and services now and to pay for them
in the future
● Money can be borrowed or lent. An agreement can then be made
about the amount that is to be repaid in the future.
● Someone can borrow money from someone who does not want to use
it now
3.1.1 - Money
Money is an item that is generally acceptable as a form of payments for goods
and services.
Bartering and the need for exchange
● Barter system: In the absence of money, people have to use a barter system
in order to trade goods and services. Bartering is the act of swapping items in
exchange for other items through a process of bargaining and negotiation
Problems with the barter system
1) Need for a double coincidence of wants - you need to find a person who
wants to exchange said goods at said price → highly inefficient
2) Divisibility - e.g: ⅔ of a sheep is no use
3) Portability - livestock cannot be easily transported
The problems associated with bartering meant that countries around the world
eventually developed the use of commodity money, such as cowry shells, grain and
cloth. For much of history, precious metals such as gold and silver have served a
monetary role.
Need for money
1) Money overcomes the problems of barter and allows individuals, producers
and government to exchange with each other
2) Money enables individuals to specialise in different jobs to earn money to
exchange/buy different goods and services
Importance of money
1) To buy goods and services
2) Provides a fix rate of exchange between goods and services
Legal tender
Legal tender is a medium of payment recognised by a legal system to be valid
for use within a country.
E.g the notes and coins issued by the government to be used as money in a country
Forms of money
1) Notes
2) Coins
3) Credit card (taking money from the bank)
, 4) Debit card (in HK: EPS)
5) Value stored in electronic form
Functions of money
1) Medium of exchange
Something the buyer will exchange with a seller whom they want to
purchase goods and services from.
● Money overcomes the problem of barter
● Exchange is simple if everyone accepts money as a form of payment
for things they can exchange (sell)
● A person can be paid in money in exchange for their labour and then
use this money to exchange/buy goods and services
○ Receive income → buy goods and services
2) Store of value
Money that can be stored and spent in the future. It does not depreciate
but may change its value in the future.
● Money lose value over time due to inflation
○ Inflation: the rate of increase in prices over a given period of
time
● Inflation reduces the store of value of money
● E.g Some people may store valuable antiques, as they can be
exchanged for money in the future. This is because as the prices of
goods rise over time, the purchasing power of money or what it will
buy, is reduced
○ Purchasing power: the amount of goods and services that can
be purchased with a unit of currency
3) Measure of value (unit of account)
Money can measure the market value of goods and services in monetary
terms ($) rather than using goods.
● Helps producers and consumers engaged in trade to avoid problems
of fixing prices of goods and services in terms of all other goods and
services
● Expresses the worth of each good and service in monetary terms
4) Standard of deferred payment
This allows people to acquire goods and services now and to pay for them
in the future
● Money can be borrowed or lent. An agreement can then be made
about the amount that is to be repaid in the future.
● Someone can borrow money from someone who does not want to use
it now
