SECTION 5-Money Flashcards
What is money
A medium of exchange and can be defined as a means people use to make payments. Payments can arise from a variety of transactions such as the purchase of a g/s by consumers and the purchase of FOP’s by products. The modern economy uses money as a means of facilitating trade and exchange.
what is commodity money?
consists of items that are used as money that are in themselves valuable eg. gold, silver
What is fiat money?
items that serve as money but which have no value in themselves. Fiat money has no intrinsic value but because it is a legal tender (accepted by law) it is acceptable as money
Development of money
1) commodities eg. cowrie shells are used as money
2) scarce metal eg. gold and silver
3) money takes the form of coins
4) development of paper money
5) modern forms of money, cheques, card payments, electronic transfer
What is barter?
The barter system was a means of exchanging g/s for other g/s
What are 2 difficulties of bartering?
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Unequal value of exchange:
Traders in the barter system have difficulty in determining the relative value of goods -
Double coincidence of wants:
A trader has to find someone who wants his good and has exactly what he wants to trade it for
What are problems with bartering? (2)
Problem of double coincidence of wants- in order for barter to take place, the double coincidence of wants must occur. Tis refers to a situation where a person is willing to trade good X for good Y finds someone who is willing to trade good Y for good X.
Problem of exchange terms- the exchange rate of one good for another good is hard to quantify. It is difficult to establish the exact exchange in terms between both parties.
What are problems with bartering? (4)
Problems of perishability- certain goods such as vegetables and dairy products are considered highly perishable and cannot be stored for a long period of time. Such items must be exchanged as soon as possible before they spoil. This might mean that exchanging them with other goods at a loss.
Problem of Portability- certain goods are bulky, which means that one has to look for the right person to exchange goods with
