POB(money/barter)

• Barter


  The exchange of goods or services for other goods or services without the use of money
• Barter goes way back as one of the first forms of trade, prevalent in subsistence economies
• Problems with barter system

  • Coincidence of wants (both parties must be willing to trade)
  • Difficulty in determining rate of exchange
  • Some goods are not divisible
  • Goods can be easily stolen or spoil easily
• Money


  Solves the problems of the barter system by serving as a medium of exchange, measure of value, store of value, and standard for deferred payments
• Money evolved from using various materials like shells, seeds, metals (copper, silver, gold) as currency
• Fiat money


  Money that derives its value from government regulation or law, not from the intrinsic value of the material that the money is made of
• The gold standard, where money was backed by gold, was eventually abandoned in favour of fiat money
• Gold standard


  Each currency at face value was backed by that amount of gold in the bank
• Eventually there wasn't enough gold to match the amount of money the people wanted or the money circulating, so they had to move away from the gold standard
• Fiat money


  The legal tender money we have today that is not backed by gold
• Money as a medium of exchange


  Money is used to exchange for goods or services
• Medium of exchange


  • You buy a soda for $3, you give the cashier $3 and get the soda
• Money as a measure of value


  Money is used to assign a value to a product or service
• Money as a store of value


  Money can be saved and stored to build wealth over time
• Money as a standard of deferred payments


  Money can be used to buy something today and pay for it later
• Characteristics of money


  • Durable
  • Widely accepted as legal tender
  • Divisible
  • Portable
  • Fungible (one unit can be exchanged for another)
  • Scarce (difficult to replicate)
• Problems with barter system

  • Coincidence of wants
  • Need for exchange rate
  • Indivisibility of some goods
  • Difficulty of storage
• Money solves the problems of the barter system by acting as a medium of exchange, measure of value, store of value, and standard of deferred payments