Avel-COVID19-BFN-hnd1 Monetary Economics- Money
Monetary Economics
1.0 Understand money, monetary standards and theory.
2.0 Understand monetary and fiscal policies.
3.0 Understand money in the economic system.
4.0 Understand the Nigerian financial system.
5.0 Understand money supply.
6.0 Understand balance of payment.
7.0 Understand the role of Central Bank.
8.0 Understand the role of government in the economy
Money
(1)(a) In your own words, give a functional definition of money.
(b) Discuss the various types of money. Which of them is currently in use in
Nigeria.
(2) What are the functions of money?
Describe clearly
how money performs these functions.
(3) What are its main characteristics and major roles in the economy of a
Nation.
(4) The inadequacies of Trade by Barter as an Exchange Mechanism gave birth
to money. Name and explain these inadequacies.
Definition of Money?
Everybody who has reached the age of Kindergarten knows what money is. You possibly
have touched money today. However, the term ‘money’ means different things to the
ordinary man in the street. It is often used to describe wealth and financial resources,
credit and income. When we say “the man has money or the man is in money”, we are
referring to money as wealth or financial resources. It differs from the way an economist
uses the term ‘money’.
Economists see money as anything that serves as a medium of exchange in a given
society. Chandler and Goldfield (1997) defined money as “anything that is generally
acceptable as a medium of exchange”. Amacher and Ulbrich (1986) defined it as “an item
that people accept as payment for goods or services.” Cox (1983) defined it as “anything
which passes freely from hand to hand and is generally acceptable in settlement of debt
and other financial obligation is money.”Traditional view or view of the currency school
and keynes defined money as ” currency and demand deposits”(M = C + D where M –
Money supply, C – Currency and D – Demand deposits). Friedman’s empirical definition
of money means ‘ literally the number of cash people are carrying around in their pockets,
the number of cash they have to their credit at banks in the form of demand deposits and
commercial bank time deposits’ . Friedman’s theoretical definition of money defines
money as ”any asset capable of serving as a temporary abode of purchasing power”. His
broader definition of money includes bank deposits, non – bank deposits and any other
type of assets through which the monetary authority influences the future level of income,
prices, employment or any other important macro variable (Here, money is expressed as
M2 = C + D + S + T). The Radcliffe committee defined money as ” note plus bank
deposits”. Gurley – Shaw definition regard a substantial volume of liquid assets held by
financial intermediaries and the liabilities of non – bank intermediaries as close
substitutes for money. Intermediaries provide substitute for money as a store of value.
Money proper which is defined as equal to currency plus demand deposits is only one
liquid asset. They have thus formulated a wider definition of money based upon liquidity
which includes bonds, insurance reserves, pension funds, savings and loan shares. From
these definitions, we have two things to note. The first is that whatever serves as money
has to be generally acceptable in settling financial obligations. The second thing is that
anything whatsoever can serve as money provided it is acceptable as money within a
given community. The legal tender approach to defining money brings to fore the point
that the law can help a commodity to achieve general acceptability.
Barter System
Trade by barter is the direct system and practice of exchanging goods and services for
goods or services. The best way to understand the importance of money in any economy
is to look at an economy that does not use money. When there is no generally accepted
medium of exchange, individuals engage in barter. A barter economy is a moneyless
economy. It is also a simple economy where people produce goods either for self –
consumption or for exchange with other goods which they want.
The problem or difficulties of Trade by Barter includes:
The difficulty of double co-incidence of wants;
It wastes time and energy, i.e. labourious and time-consuming;
Lack of a common measure of value, i.e. ,difficulty in assessing the value of
commodities using this model, R = n (n – 1)/2 where R and n denote respectively
the total number of separate exchange ratios and the total number of commodities
exchanged in the economy.
The exchange always becomes uninteresting;
It does not encourage deferred payments;
It does not encourage the system of division of labour and specialization;
There is no lending and borrowing;
It discourages large-scale production.
Difficulty in storing value;
Indivisibility
of certain goods;
Types of Money
(i) Coins: They are metal money with definite amount.
(ii) Paper Money: It is in form of paper notes which originated from the receipts that
the Goldsmiths issued to people.
(iii) Bank Money: It is deposit in both Savings Account, Current Account and Fixed
Deposit Account.
(iv) Foreign Money: It is the money of other countries and it serves as money in the
foreign exchange market.
(v) Legal Tender: It is money backed by the force of law in a country which is
generally acceptable as a medium of exchange.
(vi) Gold Backed Money: It is money that can easily be converted or changed into gold
by the central authority that issues money.
(vii) Commodity Money: It is commodity used as money in the olden days, e.g.
cowries, shart teeth manilla etc.
(viii) Token Money: This is money whose intrinsic worth is less than its normal or face
value.
(ix) Representative Money: It is a document or lieu of legal tender but not fully and
freely acceptable e.g. cheques, postal and money order bills, etc.
(x) Fiduciary Note Issue: This is the type of money that are not backed by either gold
or any foreign currency.
(xi) Standard money: is money whose value as a commodity for non-monetary
purposes is as great as its value as money.
(xii) Subsidiary Money: This type of money is to assist token money (coins) and are
limited legal tender.
(xiii) Credit money: Credit money or bank money is money transferred by a
commercial bank in the form of a cheque or draft.
(xiv) Optional money or Non – Legal Tender: This type of money does not possess
any legal authority of the state or central bank. Such optional monies are time
deposits, bonds, securities, debentures, bills of exchange, treasury bills, postal
certificates, insurance policies, cheques and drafts.
Qualities of Money
This is also known as the characteristics of money.
(a) Homogeneity: Each unit of money must be homogenous, that is, each unit held by
different individuals must be identical;
(b) General Acceptability: Each unit of money must be generally acceptable in
exchange for goods and services purchased;
(c) Portability: Each money unit must be easily carried about. In other words, it must
be easily transmissible;
(d) Divisibility: Money must be capable of being divided into small units;
(e) Recognisibility: Money must be easily recognizable by all and sundry in order to
detect any counterfeit;
(f) Relative Scarcity: Money must be relatively scarce in order to maintain its value;
(g) Stability in Value: There should be absence of inflation and deflation to make
money stable in value as well as enable it serve some useful functions such as the
store of value and means of deferred payment;
(h) Durability: Money must possess durability quality. It should be storable and last
long without losing its value over a period of time. i.e., money must be capable of
staying long without spoiling or going bad.
Functions of Money
Money performs a number of primary, secondary, contingent and other functions which
eliminate the difficulties of barter.
Primary functions:
(a) Money serves as a medium of exchange. With the introduction of money, goods
and services are exchanged with money and thus exchange is facilitated. With
money as a mean of exchange, the problems of barter are bye-passed.
(b) Money serves as a unit of account. All business transactions are accounted in money
units. Whether it is payments, debts or costs, it is made in money units. This facilitates
exchange or transactions.
(c) Money serves as a measure of value. With money, one can measure the quality or
value of goods, services or different occupations.
Thus money is used to measure and compare the value of goods and services.
Secondary functions:
(a) Money serves as a standard for deferred payments – With the use of money, one
can postpone or
defer the payment for goods and services purchased. This function
is important these days when
credit
basis.
business
transactions are carried out mostly on
(b) Money serves as a store of value. In-so-far as there is no inflation and deflation in
the economy, money serves as a store of value since money would not lose its
value any period it is kept.
(c) Money serve as a transfer of value: since money is a generally acceptable means
of payment and acts as a store of value.
Contingent functions:
Money also performs certain contingent or incidental functions such as
(a) Money as the most liquid of all liquid assets – Money as the most liquid of all
liquid assets in which wealth is held. Individuals and firms may hold wealth in
infinitely varied forms.
(b) Basis for the credit system – Money is the basis of credit system. Business
transactions are either in cash or on credit.
(c) Equaliser of marginal Utilities and productivities: Money acts as an equaliser of
marginal utilities for the consumer. The main aim of a consumer is to maximise
his satisfaction by spending a given sum of money on various goods. This
happens when the ratios of the marginal utilities and prices of the various goods
are equal.
(d) Measurement of National Income: It was not possible to measure the national
income under the barter system.
Money helps in measuring national income. This is done when the various goods
and services produced in a country are assessed in money terms.
(e) Distribution of National Income: Money also helps in the distribution of national
income. Rewards of factors of production in the form of wages, rent, interest and
profit are determined and paid in terms of money.
Other functions:
(a) Helpful in making Decisions: Money is a means of store of value and the consumer
meets his daily requirements on the basis of money held by him. If the consumer has a
scooter and in the near future he needs a car, he can buy a car by selling his scooter and
money accumulated by him. In this way, money helps in taking decisions.
(b) Money as a basis of adjustment: to carry on trade in a proper manner, the adjustment
between money market and capital market is done through money. Similarly, adjustments
in foreign exchange are also made through money. Further, international payments of
various types are also adjusted and made through money.
Money has a very crucial role to play in every economy. Explain?
One good way to understand the importance of money to any society is to imagine a situation where there is no money in an economy. All the problems associated with the barter system will become very
prominent in such economy.
In every economy, money performs four major functions. The first two can be classified
as primary or basic function while the last two are secondary functions. They are said to
be secondary because they are derived from the first two. Any commodity that can
perform the primary function can automatically perform the secondary functions, but not
all commodities that perform the secondary functions can perform the primary functions.
The primary functions of money are:
(a) Money as a medium of exchange.
(b) Money as a unit of value.
The secondary functions are:
(a) Money as a standard for deferred payment.
(b) Money as a store of value.
It is clear that money plays a vital role in the economic system of any country. Discuss?
Modern economic activity is based on specialisation and exchange. Money is a
device for promoting specialisation and exchange. Specialisation and exchange would
revert to the barter system of money that have ceased to exist. We are living in an
economy based on money. Government development programmes as well as individual
enterprise activities are calculated in terms of money as a unit of account. The existence
of a unit of account permits the growth of a price system and this in turn promotes growth
of markets. By serving as a medium of exchange, money facilitates the exchange of
goods and services among specialists.
