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Chapter 1.

Origins and functions of Money

 Specialization and exchange
- Previously man was sufficient (food,
clothing, shelter through hunting, fishing)

- Need for specialization- to save time and

get convenience. (for e.g. specialized in hunting,
Chapter 1.
Origins and functions of
Barter System / Direct
-Definition: Barter is a type of trade where
goods or services are exchanged for a certain
amount of
other goods or services; no money is involved in
the transaction. It can be bilateral or
Multilateral as trade
Disadvantages of Barter
1. Mutual coincidence of wants: Before any
transaction can be undertaken, each party must be able to
supply something the other party demands. To overcome
this mutual coincidence problem, some communities have
developed a system of intermediaries who can store, trade,
and warehouse commodities. However, the intermediaries
often suffer from financial risk.
2. The rate of exchange: how to measure?
3. Large indivisible units: chair for cow
4. Consistent quality
5. Perishable commodities
6. Transport and storage of commodities
for exchange
Indirect Exchange
- Diagrammatic explanation

-few most marketable commodities available (grain

bags, salt, cloth etc)
Precious Metals
 Usage of bronze , silver, gold , copper

1. Less bulky
2. Durable
3. Consistent Quality
Money and its functions
Money : Assets that people are generally willing to accept
exchange for goods and services or for payment of debts.
Functions of Money
3. Standard of Deferred payment
1. Medium of Exchange: - Many contracts promise to pay
- Willing to accept fixed sums of money well into the
- Money is universally future
accepted - borrowing and lending possibilities

4. Store of Value
2. Unit of Account: - If you do not use all your dollars to
- Measure the relative values buy goods and services today, you
of goods and services. can hold the rest to use in the future.
- Money is a useful unit of - money does not lose much of its
account only if its value
relative to the average of all
other prices doesn’t change
too quickly.