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Economics Lesson
Note for Grade 9
Unit - 6
Unit Objectives
At the end of this unit, students will be able to:
Describe the functions of money.
Describe the evolution of money in Ethiopia and globally.
Enumerate the factors affecting the demand and supply of money.
Explain the role of money and electronic banking in an economy.
Definition of Money
Money is any good that is widely used and
accepted in transactions involving the transfer of
goods and services from one person to another.
Money may be any commodity chosen by
common consent as a medium or instrument of
exchange. All other commodities are thus
expressed and valued in terms of that commodity
regarded as money.
For a commodity to be accepted as money, it
must meet the following criteria.
Standardization: it must be easily standardized,
making it simple to ascertain its value.
Acceptability: It must be widely accepted as a
medium of exchange.
Divisibility: It must be divisible so that it is easy
to make a change.
Portability: it must be easy to carry.
Durability – it should not degrade quickly.
Activity 6.1
1. What is the general definition of money.
2. Identify the criteria for a commodity to be
accepted as money.
Evolution of Money
Bartering
The process of exchange started in the form of
bartering, followed by commodity money as a
medium of exchange.
Initially, the exchange was direct. That is, it was an
exchange of goods for goods. Such an exchange is
known as “barter.”
Limitations of the barter system: A direct exchange
of one good for another without the mediation of
money has a number of difficulties associated with
it. These are:
1. Lack of double coincidence of wants:
a person having a surplus of one commodity be
able to find another person who not only wants
that commodity but also has something
acceptable to offer in exchange.
2. Lack of a common measure of value:
Different commodities have different values.
There is no common value under the barter
system.
3.Indivisibility of commodities: There are many
goods which are indivisible when we will have to
part with a portion of that good. for example
animals .the exchange is unthinkable.
4.Difficulty in storing and transferring wealth:
Most goods, such as rice, wheat, cattle, skin,
and so on, lose their value over time or involve
high storage costs. Further, the transfer of these
goods from one place to another involves a huge
transportation cost.
5.Difficulty in differed payments: In the barter
exchange system, payment is not always made right away,
but rather after some time has passed. This is because there
is an absence of stability in the prices of goods. Besides,
there is an absence of quality and general acceptability in
goods. In this way, it is very difficult to make different
payments in the form of goods.
Under the barter system, an individual produces goods in
greater quantities than they could be consumed, so as to
exchange the surplus with another person for something
the producer needs in return.
Historically, money has taken different forms in
different cultures-everything from salt, stones,
and beads to gold, silver, and copper coins, and,
more recently, virtual currency has been used.
Regardless of the form it takes, money needs to
be widely accepted by both buyers and sellers in
order to be useful.
Functions of Money
In every society, money performs four basic
functions.
1. The medium of exchange functions
The most basic function of money is to serve as a
medium of exchange. In almost all market
transactions in our economy, money in the form of
currency or checks is a medium of exchange.
Although money has no power to satisfy human
wants directly, it does have the power to purchase
those things that have utility and satisfy human
wants
The time spent trying to exchange goods or a
service is called a “transaction cost.”
Transaction cost is high in barter system.
2. Money as a unit of account
It is used to measure value in the economy.
We measure the value of goods and services in
terms of money. Just as we measure weight in
terms of pounds or distance in terms of miles.
Money enables an orderly pricing system, which is
essential for:
Rational economic calculation and choice
Transmitting economic information among
individuals
A store of value is used to save purchasing power
from the time income is received until it is spent.
This function of money is useful because most of us
do not want to immediately spend our income on
3. Money as a store of
receiving it. value
We’d rather prefer to wait until we have the time or
the desire to shop.
Money lets you buy now and pay later. Or it lets
you lend now and collect later. When people save
money, that money can be borrowed and channeled
into investments. 4. Money as a standard
It is the deferred payment
of deferred
functionpayments
of money that
permits this transfer of spending power from earners
—savers to borrowers—spenders.
It permits the easy transfer of resources out of their
less desired (less productive, less profitable) uses
and into their more desired (more productive, more
profitable) uses.
Activity 6.2
Why is money a poor means of holding
wealth?
5.Difficulty in differed payments: In the barter
exchange system, payment is not always made
right away, but rather after some time has passed.
Demand for Money
The old idea about the demand for money was
that money was demanded to complete business
transactions. In other words, the demand for
Demand and Supply of
money depends on the volume of trade or
Money
transactions.
As a result, demand for money increased during a
boom period or when trade was erratic, and
decreased during a depression or a null in trade.
The modern idea about the demand for money was
put forward by John Maynard Keynes, the famous
English economist, who gave birth to what has been
called the Keynesian Economics.
According to Keynes people want money for three
main reasons:
(i) Transaction purpose:
This motive can be looked at from the:
(a) perspective of consumers seeking income to
meet their household expenditures, also
known as the income motive.
Individuals hold cash in order “to bridge the
interval between the receipt of income and its
expenditure.” This is called the “income motive.”
(b) The business motive. businessmen and
entrepreneurs require money and want to hold it in
order to carry on their business and they need it all
the time in order to pay for raw materials and
transport, pay wages and salaries, and meet all
other current expenses incurred by any business.
People hold a certain amount of money to provide
for the risk of unemployment, sickness, accidents,
and other more uncertain losses. The amount of
money held under this motive will depend on the
(ii) and
nature of the individual Precautionary motive: in
on the conditions
which he lives.
The speculative motive relates to the desire to hold
one’s resources in liquid form in order to take
advantage of market movements regarding future
changes in the rate of interest (or bond-prices).
(iii) Speculative motive:
The supply of money means the sum total of all the
forms of money held by a community at any given
moment.
The money supply consists of:-
(a) metallic money or coins, Supply of money
(b) currency notes issued by the currency authority
of the country, whether it be the central bank or
the government, and chequable bank deposits.
Money supply means the total volume of monetary
medium of exchange available to the community for
use in connection with the economic activity of the
country.
Broadly speaking, the money supply in a country is
composed of two main elements, ,
(a) currency with the public; ( Cash in hand with
banks ) and
(b) deposit money with the public(the bank
balances held in current accounts of the banks. )
6.5 Money and Electronic Banking
For many people, electronic banking means
24-hour access to cash through an automated
teller machine (ATM) or direct deposit of pay
checks into checking or savings accounts. But
electronic banking involves many different
types of transactions, rights, responsibilities,
and sometimes fees.
Electronic Fund Transfer
Electronic banking, also known as electronic fund
transfer (EFT), uses computer and electronic
technology in place of checks and other paper
transactions. EFTs are initiated through devices like
cards or codes that let you, or those you authorize,
access your account. ATM is electronic terminal
that lets you bank at almost virtually any time. To
withdraw cash, or transfer funds between
accounts, you generally insert an ATM card and
enter your PIN.
Review Questions
1. Identify the criteria for a commodity to be accepted as money.
2. Discuss the various stages (development process) the world has been passing
through to come up with the current use of money.
3. Define the meaning of bartering.
4. Explain the motives for holding money.
5. Describe what constitutes the supply of money.
Review questions
1.Define the meaning of bartering.
2.Explain the basic functions of money.
3.Why is money a poor means of holding wealth?
4.Explain the motives for holding money.
5. Describe what constitutes the supply of money.
6. Explain the meaning of electronic banking.
7.Visit banks in your area and ask people why they
prefer to use ATMs.
