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From ZuluNotes - Free Leaving Cert Notes

Barter

The exchange of goods and services for other goods and services.

Disadvantages

• Depends on a double coincidence of wants

• No set rate of exchange

• Prevents the specialisation of labour

Money

Anything accepted as payment by the majority for goods and services.

Functions

• Medium of exchange: Allows for the trade of goods and services independently of each other.

• Unit of account: Money allows for the measuring of the value of items and for the comparing of the value of items.

• Store of wealth: Money allows for the accumulation of wealth for the future. This function is undermined by inflation.

• Standard for deferred payment: Money allows for goods to be bought now and be paid for later.

• Contribution to the smooth running of the economy

• Division of labour: Money allows for people to specialise and aquire their desired goods and services with money.

• Increased wealth: Money allows for specialisation, thus increasing societies wealth. This allows for the provision of more services and improvements to infrastructure.

• Confidence in the economy: The use of money gives citizens confidence that the economy will run smoothly. Hence consumers and firms contribute to society and are rewarded.

Characteristics

• Generally acceptable: People must be confident that money will perform its functions for it to be acceptable.

• Recognisable as genuine: Counterfeit money should be easily identifiable.

• Should be portable: Money should be long-lasting and not deteriorate easily.

• Should be divisible: Should come in different denominations to allow for the purchase of large and small items.

• Relatively scarce: If money was too plentiful, it would quickly lose its value.

Forms of money

• Legal tender: Currency which must be accepted if offered as payment for a purchase or the settlement of a debt.

• Near money: Those assets which fulfill some, but not all, of the functions of money.