Unit 2: Money-Exchange Systems
1. Money as a Medium of Exchange
Definition: Money is anything commonly accepted by a group of people for the exchange of
goods, services, or resources.
Purpose: It acts as a medium of exchange between buyers and sellers for goods and services.
Example: When you buy books or pencils, you exchange money with the shopkeeper.
Historical Context: Money wasn't always used as a medium of exchange; early civilizations
used the barter system.
2. Bartering and Commodity Money
Early Societies: People in early civilizations were focused on survival (food, clothing, shelter)
before the concept of money developed.
Specialization: Over time, societies evolved through specialization, where individuals
focused on producing one or a few specific things (e.g., house building, food production).
o Benefit of Specialization: Improves skills, leading to more and higher-quality
production.
Need for Trade: Specialization creates a surplus (more than what a person needs), which
then needs to be traded to acquire other necessary goods and services.
o Example: A farmer's surplus food can be traded for clothing or tools.
Barter System:
o Definition: The direct exchange of a good or service for another good or service
without the use of money (e.g., a bag of rice for a bag of wheat).
o Effectiveness: Functions successfully when there are few goods and services.
o Ineffectiveness: Becomes complicated and cumbersome as a society advances and
the volume and diversity of output increase. Problems include not agreeing on value
or not wanting what the other person offers.
Commodity Money:
o Solution to Barter Problems: Humans developed commodity money to overcome
the limitations of bartering.
o Definition: A basic item used by almost everyone that serves as money.
o Examples: Salt, tea, tobacco, cattle, seeds.
o Problems with Commodity Money: Often hard to carry/store, or perishable.
3. Evolution to Coins and Paper Money
Metal Objects/Coins:
o Introduction: Introduced as money around 5000 B.C.; metal coins by 700 B.C.
o Advantages: Readily available, easy to work with, recyclable, and provided specific
values for easier comparison of costs.
Paper Money:
o Earliest Known Use: China, around AD 806 onwards (until 1455, reappearing much
later).
o Definition: Notes with standardized characteristics issued as money.
o Advantages: More convenient to carry and store than commodity money.
4. Modern Currencies
Common Forms Today: Coins and paper money are the most commonly used forms of
money.
Terminology: Money is also called currency or a unit of exchange.
Indian Currency: Called the Indian Rupee (with Paise as fractional rupees).
Global Currencies: Different countries have different currencies used for purchasing goods
and services.
o Examples:
Argentina: Argentine Peso
Australia: Australian Dollar
Brazil: Brazilian Real
Canada: Canadian Dollar
China: Chinese Yuan
France/Germany: Euro
United Kingdom: British Pound
United States: United States Dollar
5. The Wheel of Economic Progress
Key Drivers: Innovation, Invention, Creativity, and Hard Work.
Impact of Specialization and Trade: Leads to increased production, better goods and
services, and a rising standard of living.
Division of Labor: A concept associated with specialization, where labor becomes
concentrated on specific activities. This has evolved over time, leading to a vast array of jobs
and occupations today compared to early history.
