MONEY, FUNCTIONS OF MONEY AND DIFFICULTIES IN BARTER SYSTEM

MONEY, FUNCTIONS OF MONEY AND DIFFICULTIES IN BARTER SYSTEM.
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context.

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SUBJECT :
MONEY AND BANKING
ASSIGNMENT ON:
MONEY, FUNCTIONS OF MONEY AND DIFFICULTIES IN
BARTER SYSTEM
SUBMITTED TO:
SIR NAJJAF CHANNA
SUBMITTED BY:
VARDA SHAIKH (1310-BBA027)

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CONTENTS
1. MONEY…………………………………………………………………….. 3

2. FUNCTIONS OF MONEY
2.1 medium of exchange……………………………………………4
2.2 measure of value (or unit of account)…………………………4
2.3 standard of value (or standard of deferred payment)………..4
2.4 store of value…………………………………………………….4

3. DIFFICULTIES IN BARTER SYSTEM
3.1 Lack of double coincidence of wants: ...
3.2 Lack of common measure of value: .....................................5
3.3 Lack of standard of deferred payment: ................................5
3.4 Difficulty in storing wealth…………………………………... ..5
3.5 Indivisibility of goods:…………………………………… …….5

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1. MONEY
Money is any item or verifiable record that is generally accepted as payment for goods
and services and repayment of debts in a particular country or socio-economic
context.The main functions of money are distinguished as: a medium of exchange; a
unit of account; a store of value; and, sometimes, a standard of deferred payment. Any
item or verifiable record that fulfills these functions can be considered as money.

Money is historically an emergent market phenomenon establishing a commodity
money, but nearly all contemporary money systems are based on fiat money. Fiat
money, like any check or note of debt, is without use value as a physical commodity. It
derives its value by being declared by a government to be legal tender; that is, it must
be accepted as a form of payment within the boundaries of the country, for "all debts,
public and private".

The money supply of a country consists of currency (banknotes and coins) and,
depending on the particular definition used, one or more types of bank money (the
balances held in checking accounts, savings accounts, and other types of bank
accounts). Bank money, which consists only of records (mostly computerized in modern
banking), forms by far the largest part of broad money in developed countries.

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2. FUNCTIONS OF MONEY
In Money and the Mechanism of Exchange (1875), William Stanley Jevons famously
analyzed money in terms of four functions:
1. medium of exchange
2. measure of value (or unit of account)
3. standard of value (or standard of deferred payment)
4. store of value.

2.1 Medium of exchange
When money is used to intermediate the exchange of goods and services, it is
performing a function as a medium of exchange. It thereby avoids the inefficiencies of a
barter system, such as the "coincidence of wants" problem. Money's most important
usage is as a method for comparing the values of dissimilar objects.
2.2 Measure of value
A unit of account (in economics
]
) is a standard numerical monetary unit of measurement
of the market value of goods, services, and other transactions. Also known as a
"measure" or "standard" of relative worth and deferred payment, a unit of account is a
necessary prerequisite for the formulation of commercial agreements that involve debt.
Money acts as a standard measure and common denomination of trade. It is thus a
basis for quoting and bargaining of prices. It is necessary for developing efficient
accounting systems.
2.3 Standard of deferred payment
While standard of deferred payment is distinguished by some texts particularly older
ones, other texts subsume this under other functions A "standard of deferred payment"
is an accepted way to settle a debt – a unit in which debts are denominated, and the
status of money as legal tender, in those jurisdictions which have this concept, states
that it may function for the discharge of debts. When debts are denominated in money,
the real value of debts may change due to inflation and deflation, and for sovereign and
international debts via debasement and devaluation.
2.4 Store of value
To act as a store of value, a money must be able to be reliably saved, stored, and
retrieved – and be predictably usable as a medium of exchange when it is retrieved.
The value of the money must also remain stable over time. Some have argued
that inflation, by reducing the value of money, diminishes the ability of the money to
function as a store of value

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3. DIFFICULTIES IN BARTER SYSTEM
Inconveniences (Problems) of Barter Exchange:
1. Lack of double coincidence of wants: ...
2. Lack of common measure of value: ...
3. Lack of standard of deferred payment: ...
4. Difficulty in storing wealth (or generalised purchasing power): ...
5. Indivisibility of goods:

3.1 Lack of double coincidence of wants:
Double coincidence of wants means what one person wants to sell and buy must
coincide with what some other person wants to buy and sell. ‘Simultaneous fulfillment of
mutual wants by buyers and sellers’ is known as double coincidence of wants.
3.2 Lack of common measure of value:
In barter, there is no common measure (unit) of value. Even if buyer and seller of each
other commodity happen to meet, the problem arises in what proportion the two goods
are to be exchanged. Each article must have as many different values as there are
other articles for which it is to be exchanged.
3.3 Lack of standard of deferred payment:
There is problem of borrowing and lending. It is difficult to engage in contracts which
involve future payments due to lack of any satisfactory unit. As a result, future payments
are to be stated in term of specific goods or services. But there could be disagreement
about the quality of the good, specific type of the good and change in the value of the
good.
3.4 Difficulty in storing wealth (or generalised purchasing power):
It is difficult for the people to store wealth or generalised purchasing power for future
use in the form of goods like cattle, wheat, potatoes, etc. Holding of stocks of such
goods involves costly storage and deterioration.
3.5 Indivisibility of goods:
How to exchange goods of unequal value? If a household wants to sell his cow and get
in exchange cloth equal to the value of half of his cow, he cannot do so without killing
his cow. Thus, lack of divisibility of goods makes barter exchange impossible.