Define what is bartering and identify the major problems with this type of system. Identify the three main functions of money. Distinguish between

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2 Define what is bartering and identify the major problems with this type of system. Identify the three main functions of money. Distinguish between the different types of money and their different purposes.

3 Barter Inflation Counterfeit Commodity Commodity Money Representative Money Fiat Money Legal Tender Buying Power Face Value

4 What is money? What does it do? Why do we need it? In today s world, very few people can produce for themselves all the things they need and want. In fact, most people must buy almost all the goods and services they use. Today, most goods and services are bought with money. Exchanges for goods and services has not always been made with money.

5 The primitive kind of exchange is barter. Barter Trading objects or services directly for objects or services. For Example: a farm family might give a doctor a chicken or a dozen eggs for treating their child. You could mow someone s lawn in exchange for a haircut. These are both examples of bartering.

6 In a barter system, you have something of value. You want to trade what you have for something of value either goods or services that another person has. What are the major problems with a barter system? You can t find anyone who wants what you have to trade and who also has what you want. What you have to trade and what you want are not in equal value. What you have to trade may lose value before you can find someone who wants it.

7 Bartering is not a convenient way to trade, it takes a lot of time. With bartering, you may find it hard to get exactly what you want. It is usually hard to find someone who has what you want and wants what you have. Double Coincidence of Wants So what is the answer?! MONEY!

8 Money has three main functions: Standard of Value Medium of Exchange Store of Value

9 Money is a measure of value (standard) No matter what you are measuring, a standard measure is important. A standard measure lets people compare things and helps people understand each other. Using money as a standard of measuring value gives people a way to compare the value of one product with another. Money makes it easier for people to keep records of what they buy and sell.

10 To make trading easier, groups of people may agree to use a certain type of object to represent the value of all goods and services to be traded. Trading is difficult in the barter system so groups of people choose something to be traded for all things they want to acquire, this symbol is known as money. In other words, money is a medium of exchange

11 A dollar bill is only a piece of paper. As a piece of paper it isn t worth much. As a standard, however, or symbol of value, a dollar bill can be exchanged for many things. Money makes trade easier. The trade that goes on between cities, states, and nations today would be impossible without the use of money.

12 Money is a way to store or keep wealth If you are farming tomatoes they are your wealth; but eventually, they will spoil and will not be worth anything You can store money as long as you want. You can use the money now or later Money is a way to store the value of something that is easily lost (like the tomatoes)

13 Most countries today use paper bills and metal coins for money. In the past, however, many different things have been used for money. What are the characteristics that money must have? Money must be all of the following: Durable Portable Divisible Stable Hard to counterfiet

14 Whatever is used for money must be sturdy enough to last a long time, that is, it must be durable Metal coins are durable Paper money is fairly durable and may be replaced easily and cheaply.

15 Whatever is used for money must be easy to carry. It must be convenient for people to use. Small, light weight coins are easy to carry. Paper money is easy to carry. It wouldn t be as easy, for example, to carry around a bushel of tomatoes.

16 Whatever is used for money must be easy to divide into smaller units. For example, the dollar is divide into 100 pennies. We call this quality of money, divisibility. Using money, the value of goods and services can be measured very exactly. It would be rather hard to pay for something that cost half a tomato or a quarter of a tomato.

17 Whatever is used for money must keep its value for a long time. It must be something that can be controlled. Metal coins and paper money are issued by the government. The supply of money is controlled by the government. It is a crime for people to make their own money. Such money, called counterfeit is worthless. In this way, money is kept scarce and it s value is protected.

18 Every piece of money has its value written on it, this is called its face value. The face value of money always stays the same. The buying power of money is not always the same. Because of inflation, the buying power of money in the U.S. has gone down over the last several decades. Inflation A rise in the average price level of all goods and services.

19 Whatever is used for money must be hard to counterfeit or duplicate. Both the material used for making money and the method used for printing paper money or manufacturing coins must be difficult to fake.

20 To be useful, money must have value. What makes money valuable? Different kinds of money get their value differently; Commodity Money The object used for money is valuable in itself Representative Money The object used for money stands for something else of value Fiat Money The government says that the object used is valuable.

21 The object used for money may be valuable in itself. For example, if diamonds are used as money, then the money is valuable because the diamonds are valuable themselves. An item that has value in itself and that is widely traded is sometimes referred to as a commodity so this is called commodity money. Examples: Cheese, tobacco, salt, furs, and tea

22 The object used for money may stand for something else that has value. Something that stands for something else represents it so this kind of money is called representative money. Checks are representative money. A check can be used in place of cash to buy goods or services. Also, a check can be exchanged for cash at a bank In the US today, more than 70% of the of the money supply is checks.

23 The object used as money may be valuable because the government says it has value. This is called fiat money. Fiat is a latin word that means let it be done. Today fiat means a government order or decree. Paper money and coins are fiat money A piece of U.S. paper money is called a Federal Reserve note. Legal Tender means that bills are recognized by law as legal money.

24 How many kinds of money are there today? Paper Money Coins Checks Travelers Checks Credit Cards Savings Accounts

25 Coins and paper money (called cash or currency) are the most familiar kinds of money. However, this kind of money makes up less than 1/3 of the total money supply. Paper money is printed in $1, $2, $5, $10, $20, $50 and $100 bills Coins are made in 1, 5, 10, 50, and $1 values. The actual value of these coins ranges from 2/10 of a cent up to 2 cents.

26 Remember! Paper money and coins are fiat money they have value because the government says they are valuable. Cash paper money and coins serves all the functions of money. Cash can be carried around easily and is a standard of value. Cash is also an easy way to store value.

27 Checks make up the largest portion of the money supply in the United States today. Checks are representative money Checking accounts are also called demand deposits. A person who owns a checking account is called a depositor The money in a checking account is available to the depositor at any time. That is, the money is available on demand.

28 Checks are very convenient to use. Checks can be written for the exact amount of a purchase and are accepted by most businesses. Checks are also safer to mail and also to carry around then cash.

29 Traveler s Checks are a special kind of check. They are called checks, but they do not represent money in a person s checking account. They instead represent money in a bank or a large company like American Express that specializes in these checks.

30 These are checks that are sold by banks for their face value, plus a small fee. They are guaranteed against loss or theft; if a check is lost or stolen, the bank or company will replace it. Traveler s checks are used in place of cash. They are accepted almost everywhere, even in places where the buyer is a stranger. In fact, their name shows that they were invented for use by travelers.

31 Credit Cards are a common way of buying things. They are often used instead of cash or checks in buying something, but the card itself is not exchanged when you make a purchase. Credit cards do not have a fixed value so they cannot store value For these reasons, credit cards are not really called money.

32 Using a credit card means that you are taking out a loan from the credit card company. When you buy something with a credit card, you make a promise to later pay that loan company back with cash. That loan company pays the producer for their goods and you pay them back at a later date.

33 A savings account is a way to store value. Also, placing money in a savings account is a way to increase your wealth if your money is earning interest. A savings account is not a medium of exchange. Money in a savings account cannot be withdrawn by writing a check. It must be withdrawn at the bank. Savings accounts are sometimes called near money.

34 Two kinds of savings accounts are: Passbook Accounts Time Deposits Money in passbook accounts may be withdrawn at any time. Money in time deposits is placed there for a fixed period of time. If you take your money out before your time period is up, you usually have to pay a penalty. These are sometimes called certificates of deposit, or CD s

35 1) What are 3 main problems with bartering? 2) What are the 3 main functions of money? 3) Why do you think that most countries today use metal coins and paper bills for money? 4) Are checks money? Explain. 5) What are savings accounts called near money?