2. Systems of Exchange ©2012, TESCCC

3. What do all of these images have in common? ©2012, TESCCC Economics Unit 7, Lesson 1

4. Barter – goods and services were traded without the exchange of money. However, before trade could occur, there had to “double coincidence of wants” be a “double coincidence of wants”. E ach trader had to have something the other wanted. I’ll trade you a chicken for a pair of shoes. I would love to sell you these shoes but I can’t eat chicken, due to my bad teeth, caused by smoking. barter economychicken In a barter economy a chicken shoes farmer who wants to buy shoes chickens may have to first trade chickens apples apples for apples and then apples for shoes shoes because the guy selling shoes apples shoes wants only apples. Money eliminates this problem.

5. pineapples broccoli Or, a heart surgeon might accept only certain goods ( like pineapples ) but not others ( like broccoli ) b ecause he doesn’t like broccoli. You are lucky you are a pineapple farmer and not a broccoli farmer. I hate broccoli.

6. . less expensiveIt is less expensive to use money. saves timetime is moneyUsing money saves time and time is money. “calculation of exchange”bartering The “calculation of exchange” by bartering is “calculation of exchange” much slower than the “calculation of exchange” monetary system in a monetary system. less expensive It is less expensive to use money. “calculation of exchange”fast and easy The “calculation of exchange” is fast and easy because whatever the price is, you pay that amount.$3.00 Here’s $3.00 for one gallon.

7. Money is also easier to tax. So a monetary system is better than a barter system. T he m onetary system enables the “calculation of exchange” to go much faster.

8. Three FUNCTIONS OF MONEY 1. Medium of Exchange Any asset that sellers will accept as payment for g/s [Acceptability] Avoids “double coincidence of wants” Avoids “double coincidence of wants” that bartering requires. “wants to sell You would have to have a trading partner who “wants to sell you goods you want to buy”“wants to buy you goods you want to buy” and “wants to buy goods you want to sell.” Liquidit y cash Liquidit y – how easily an asset can be converted into cash Cash has 100% liquidity without any additional expense. [Cash has 100% liquidity] Medium“something in the middle” “medium of trade Medium means “something in the middle”, so money is a “medium of trade between buyers and sellers” between buyers and sellers” because it can be exchanged for something else.

9. Three FUNCTIONS OF MONEY 2. Unit of Account relative value of goods [measuring the relative value of goods by stating prices-a standard of value stating prices-a standard of value] Money yardstick Money is like a yardstick. People use it to compare the worth of things that they buy and sell. $249.00 Microsoft $50 a share Example: Microsoft Stock is selling for $50 a share. Jag$32,000 The new Jag is selling for $32,000. $2 item is twice as valuable as a $ 1 item A $2 item is twice as valuable as a $ 1 item.

10. Three FUNCTIONS OF MONEY 3. Store of Value storing wealthone point in time to another 3. Store of Value [storing wealth from one point in time to another ] doesn’t wear out easily (durability) and holds up to inflation [doesn’t wear out easily (durability) and holds up to inflation] hold value over time durability Ability of money to hold value over time [Money that lacked durability not hold up well toinflationnot or did not hold up well to inflation would not make good money [would not store value store value]. desirable qualities Other desirable qualities for money are: A.ScarcityPortabilityDivisibleDifficult to counterfeit A.Scarcity (limited supply) B. Portability C. Divisible D. Difficult to counterfeit E. Uniformity Greek Coin 2,500 years old Ice creammonetary meltdown Ice cream cones would suffer monetary meltdown, b ecome a sticky puddlehigh inflation sticky puddle. If money suffers high inflation, it causes the “melt.” value of money to “melt.”

11. Commodity Money alternative, non- monetary uses Commodity Money : something that performs the function of money and has value as alternative, non- monetary uses. Gold, silver, cigarettes, corn Fiat Money Fiat Money : Money that has value simply because the government has decreed it to be an acceptable means to pay debts (Federal Reserve Notes) Paper notes – Coins Alternative uses such as

12. Representative Money: items that have no value in themselves but can be exchanged for something of value (gold certificates, silver certificates, checks…)

13. not “plastic money.” They are not “plastic money.” They do serve as a: medium of exchange 1. medium of exchange & the credit card statementservesunit of account 2. credit card statement serves as a unit of account. donot have a store of value 3. but, they do not have a store of value. credit card company goes out of business If the credit card company goes out of business or decides not to honor your cardworthlessnot money not to honor your card, it is worthless. They are not money because they don’t store value because they don’t store value.

14. are money Debit cards are money. They serve as a: medium of exchange 1. medium of exchange; they also serve as a store of value 2. store of value (not an extension of credit); and debit card statements unit of account 3. debit card statements serve as a unit of account. Debit Card

15. value of money goesopposite The value of money goes in the opposite direction general price level of the general price level. amount a dollar will buyinversely Or, the amount a dollar will buy varies inversely price level with the price level. Value of Money Value of Money Prices

16. more abstract Money has grown increasingly more abstract physical commodity - from a physical commodity, piece of paper - to a piece of paper representing a claimon a physical commodity claim on a physical commodity, piece of paper of no intrinsic value - to a piece of paper of no intrinsic value, electronic entry - to an electronic entry representing a claim p iece of paper of no intrinsic value on a p iece of paper of no intrinsic value. Federal Reserve note [just a Federal Reserve note]

17. Review: Functions of Money A medium of exchange: people are willing to accept in exchange for goods and services A standard of value: a measure of value that allows people to compare the values of goods and services using prices Store of value: allows people to save for future consumption ©2012, TESCCC

18. Properties of Money Durable: it lasts even after years of use Portability: you can take it anywhere Divisibility: must be easily divided into smaller denominations Uniformity: money must be the same within a country Limited Supply: if there is too much in circulation, the value drops and may even become worthless Acceptability: people may use it to buy other things ©2012, TESCCC

19. Commodity Money Representative Money Fiat Money ©2012, TESCCC

20. On an exit card, answer the following: 1. Why must money be durable? 2. Why must money be portable? 3. Why must money be divisible? 4. Why must money be uniform? 5. Why must there be a limited supply of money? 6. Why must money be acceptable by others? ©2012, TESCCC

21. Your assignment: In Chapter 11, read text pages 285 - 290 and do the assessment questions on p. 290, numbers 1-6. Turn in your work before you leave class today. ©2012, TESCCC