The Development of Trading Instruments - part 1
Yvonne Harvey, Contributor

There's a time for everything and these two Seaforth students chose to use some of their day to enjoy each other's company. - Photo by Oliver Wright

How are you all doing? Good? Okay. Let's get right into our lesson for today. We will start of by looking at trading in the early economies.

Early economies were of the subsistence type. This means that just enough was produced and people barely survived. There was virtually no surplus to exchange.

What little surplus there may have been was exchanged in the village through the process of barter. As we learnt last week, this is the direct exchange of goods and services. This process does not involve any medium of exchange or instrument of exchange. People exchanged for example animals for bread and corn for fish. Services were also exchanged.

As life developed, division of labour and specialisation resulted in increased output. Thus, surpluses became much larger and more exchange took place. Many problems arose in the barter system and it was eventually replaced in most economies by the money economy. Therefore, there was a movement from direct exchange to indirect exchange, using money as the medium of exchange. People sought something which everyone wanted. Therefore, the first form of money was precious metals e.g. gold and silver.

Money eliminated the problems of the barter system. What people produced was sold for money and then the money used to purchase other goods and services.

However, many of the early forms of money had faults, and therefore, they did not last long, for e.g. some forms deteriorated easily, e.g. ground provisions.

Difficulty to carry around

Some forms of money were difficult to carry around, e.g. pigs. Other forms such as sea shells were too abundant and quickly lost their value as money.

Money is defined as anything that can be used to purchase goods and services and settle debts. A good monetary system should have the following characteristics or features:

• Be generally acceptable
• Be scarce or limited in supply
• Be divisible
• Be recognisable
• Be durable or long lasting
• Be portable or easy to carry around
• Each unit should be homogeneous
• Should not be easy to forge

In addition to these characteristics or features, money has a number of functions as follows:

1. Money serves as a medium of exchange for purchasing goods and services and settling debts.

2. Money is a measure of value in that it allows goods and services to be assigned prices. The higher the price, therefore, the greater the money value.

3. Money is a store of value. This means that the value of a good or service can be stored in the form of money by selling it. For e.g. if you sell a book for $1,500, the value of the book is now in a different form - money.

4. Money is a unit of account. As such, it is a measuring or yard stick. Without money, accounts such as Balance of Payments and National Income Accounts would not be available.

5. Money is a standard of deferred payments. Money thus enables individuals to borrow and to defer payment or to pay back at a later date. The process of borrowing and lending money is facilitated.

6. Money is a tool of monetary policy. Governments monetary policies have to do with expanding or reducing the money supply. For example, in times of inflation, their monetary policies may be of the contractionist type, which means they will reduce the money supply.

If they seek to expand the economy, they may introduce expansionist monetary policies which will increase the money supply and stimulate the economy.

Our modern economies include other trading instruments apart from money.

Next week we will look at these trading instruments. In addition, we will look at reasons for establishing a business.

Now read over this lesson and do some research in order to do your homework assignment.

(a) Define the term, 'money' (2 marks)

(b) Discuss three (3) of the disadvantages of barter that led to the development of money (6 marks)

(c) (i) 'Money should possess certain characteristics'.

Explain the following characteristics that money should possess:

• Acceptability
• Portability and
• Durability (6 marks)

(ii) Outline any three (3) functions of money (6marks).

Total marks: 20

Keep cool my friends until next week.

Yvonne Harvey teaches at Glenmuir High School.