• Manoj Jha in CBSE 2 years ago

MONEY NOTES CLASS 12 CBSE

MONEY NOTES CLASS 12

DISCLAIMER – Under this post, we are going to deal with MONEY . This is one of the important chapters under class-12th CBSE- MACRO ECNOMICS. This post would specifically deal with MONEY NOTES CLASS 12 CBSE. However, EXPLANATIONS are also incorporated, but for NOTES ONLY, one may ignore the EXPLAINATIONS. Also, it is highly recommended to read the explanations in order to have better understanding of the topics.

BARTER SYSTEM

  • Barter system/ Barter exchange/ Barter exchange system refers to the economic system in which commodities are exchange for commodities.
  • Before the money was invented, the trade used to be carried on as per Barter system.
  • An economy, where there is a direct barter of goods and services is called “Barter economy” OR “C-C Economy”.

EXPLAINATION – Suppose Ram is a person who is having sufficient amount of CORN and he is ready to sell CORN. But Ram wants BANANA, as he is not having BANANA. On the other hand, Shyam has BANANA and he is ready to sell BANANA. But Shyam wants CORN, as he is not having CORN. In the above example, it can be easily understood that both Ram and Shyam can easily trade with each other.

 

Ram can sell CORN and in return Shyam will provide BANANA. Once, the deal is done, both Ram and Shyam would be satisfied. This type or kind of trade, where goods are exchange against goods, is known as Barter system/ Barter exchange/ Barter exchange system. However, it must be kept in mind that under Barter exchange, there is no use of MONEY. Basically, Barter exchange system is an economic system which was practiced when MONEY was not invented.

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LIMITATION OF BARTER EXCHANGE

Following are the limitations of Barter exchange-

1. Lack of Double co-incidence of wants– Barter system is feasible only when both buyer and seller are ready to exchange each other’s goods. However, double co-incidence of wants is rarely found.

 EXPLANATION – In the above/previous explanation, we saw that Ram is having CORN and he needs BANANA. On the other hand, Shyam is having BANANA and he needs CORN. So, Ram needs banana and Shyam has banana , this is 1st co-incidence.Also , Shyam needs corn and Ram has corn , this is 2nd co-incidence. If both co-incidences exist simultaneously, then it is called as Double co-incidence of wants. However, it was rarely found. That is why lack of double co-incidence of wants has been enumerated as one of the limitation of Barter exchange.

2. Lack of common measure of value – In Barter system, all commodities are not of equal value and there is no common measure (unit) of value of goods and services, in which exchange ratios can be expressed.

EXPLANATION – Suppose , Ram is ready to exchange 5 Kg of CORN with Shyam and in return Shyam will give BANANA to Ram. But the problem is, 5Kg CORN would be exchange for what Quantity of Bananas. Is 5Kg Corn= 2 dozen Banana? OR, 5Kg Corn = 3 dozen Banana? OR, 5 Kg Corn =?? dozen Banana. This is the problem. However, when money was invented, this problem was solved. But, under Barter system, due to lack of common measure of value, this problem existed.

3. Lack of standard of deferred Payment – Under Barter system, contracts involving future Payments or credit transactions cannot take place, because: –

  1. Borrower may not repay in terms of exactly same quality of goods.
  2. The commodity, to be repaid, may lose or gain its value at the time of repayment.

Hence, in Barter system, it becomes very difficult to make Deferred Payments.

EXPLANATION – Suppose as on 1st January , Ram gave Corn to Shyam.  Shyam promised that after 15 days , he will pay back to Ram in terms of Banana. Now , it may happen that after 15 days ,  Shyam is unable to arrange Bananas  OR if Shyam has arranged Banana, then quality of Bananas may not be good. So, in both the situations Ram would go dissatisfied. Hence, speculating all this in advance, Ram may not agree for such transactions/ trade where payment would be paid in future (deferred payment).

4. Lack of Store of value – In barter system, it is very difficult to store wealth for future use because-

  1. Generally, goods do not possess durability.
  2. Storage of goods requires time and effort.

5. Lack of divisibility – In Barter exchange, it becomes difficult to trade between divisible and indivisible goods.

EXPLANATION –  Indivisible goods are those goods which cannot be divided into small units. For e.g.- Livestock like cow, horse etc. are indivisible goods i.e. a cow or a horse cannot be divided into several pieces / units. On the other hand, Divisible goods are those goods which can be divided into small units. For e.g. – 10kg Rice can be divided into 10 small units of 1Kg each. Now suppose in Barter economy 50kg Rice = 1 Cow. If Ram is having 25kg Rice only, then it cannot happen that 1/2 cow would be cut and then sold to Ram. Hence, it is very difficult to trade between divisible and indivisible goods.

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MONEY

As we have seen that is barter system there were lots of limitations. All those limitations would be solved by money. Hence best practice is to define money in terms of its function

FUNCTIONS OF MONEY

PRIMARY FUNCTIONS

1. Medium of Exchange

  • Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services.
  • Medium of exchange is the most essential function of money.
  • This function has removed the limitation of double co-incidence of wants, associated with Barter System.
  • Money in itself has no power to satisfy human wants, but it imparts power to purchase things and those things can ultimately satisfy human wants.

Ques– How does money separate the acts of sale and purchase?

Ans- Under the barter System, a transaction can be completed only when both buyer and seller are ready to exchange each other’s goods at same point of time. In other words, a transaction can be completed only when there exists, “Double co-incidence of wants”. However, with money as a medium of exchange , it can be used to settle the payments for all the purchases and money can be received for all the sales of goods and services,So, a person, with the help of a medium of exchange like money, can buy or sell at different points of time. Hence, money has separated the act of sale and purchase.

 
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