Money ,Banking and Finance

1. Chapter No 1
The Nature And Functions Of Money
Power Point Slides
Hina Hameed
The Islamia University Of Bahawalpur

2. Chapter overview
• Definition of money
• Money and its functions
• Stages in the development of money
• Qualities of a good money
• Barter system and barriers of barter
system
• Role of Money

3. Money
• A generally accepted medium for the
exchange of goods and services, for measuring
value, or for making payments.
• Many economists consider the amount of
money and growth in the amount of money in
an economy very significant in determining
interest rates, inflation, and the level of
economic activity.

4. Functions of money
• Medium of exchange
• Measure of value
• Future payments
• Budgeting
• Economic activities
• Transfer of wealth
• Store of wealth
• Determination of national income
• Liquidity of wealth
• Promote to foreign exchange
• Market mechanism
• Basis of credit creation

5. 1. Medium of exchange:
Money acts as a medium of exchange between
the buyer and seller. Money is used to make
payments for goods and services. Goods can
sold for money and that money can be used to
purchase goods.
2. Measure of value:
Value of different goods and services can be
measured in Monterey terms, in the same as we
can measure weight in kg and distance in KM.

6. 3. Future payments:
Future payments can be easily determined with the
help of money. One can borrow loans from banks
and other financial institutions in form of money
and repayment can be made as well in form of
money.
4. Budgeting:
Money helps government and companies in
preparation of budgeting. Incomes and expenses
are estimated and recorded in terms of money.
5. Economic activities:
All type of economic activities such as investments,
savings, credit are made in terms of money. Money
has played a vital role in economic growth of a
society.

7. 6. Transfer of wealth:
With the help of money wealth can be
transferred easily form one place to another
place. One can sold his property at one place
against money and he can buy similar at some
other place
7. Store of wealth:
Wealth can be stored easily in form of money.
One can save his wealth by converting it in
money.

8. 8. Determination of national income:
With the help of money, it becomes easy to
determine the income generated by a nation. It
also helps in determination of Gross Domestic
Product of a country.
9. Liquidity of wealth:
Liquidity means conversion of property in form
of cash. Wealth or property can be converted
in liquid from with the help of money.

9. 10. Promote to foreign trade:
Money has played a vital role in the growth of
foreign trade. Foreign investments are made in
terms of money. Payments and receipts of other
countries are made in terms of money.
11. Market mechanism:
Market mechanism is based on the demand,
supply and price of the goods. Demand and
supply are the two major factors of market
which work only because of money. Money is
the only factor which determines the price,
demand and supply of goods.

10. 12. Basis of credit creation:
Banks create credit on the basis of cash deposits
in banks. So it is not possible for banks to create
credit without the help of money.

11. Stages In The
Evolution Of Money
On the basis of evolution the money is classified
in five main types
1. Commodity money
2. Metallic money
3. Paper money
4. Credit money
5. Electronic money

12. 1. Commodity money
• In commodity money, different commodities
have been used as money .
• Commodity money was used in barter system
in which goods were exchanged with other
goods and services.

13. 2. Metallic money
Metallic money consists of gold coins, silver
coins, metal coins. Metallic money cannot be
eliminated from economy. It is playing vital role
in the economy. Metallic money is of three
kinds.
i. Full bodied money
ii. Token money
iii. Tender money

14. i. Full bodied money
In full bodied money, the metallic value of coin is equal to
their face value. Full bodied money is also called standard
money or natural money. The gold silver and nickel are
considered as full bodied money. Now such money is not
used anywhere in the world.
ii. Token money
In token money the face value of coin is higher than the
metallic value. They are usually made of silver, copper or
nickel. In Pakistan full bodied money does not exist only
token is used.
iii. Tender money
Any currency which is generally acceptable in discharge of
debts is called tender money it can be made of paper or
metal. If someone offers tender money against debts,
nobody can refuse to take it.

15. 3. Paper money
Paper money consists of notes issued by the
state bank of Pakistan. The paper money is of
different values, colors and sizes. Paper money is
more convenient than any other form of
currency.

16. 4. Bank money
Bank money includes cheques, bills of exchange,
and drafts. Bank money is playing a vital role in
the economic development. Because varies
transactions are settled without the use of
paper money. Bank money is safer than any
other form of money.

17. 5. Electronic money
With the development of computers and its
application, the business and business
transactions are changing very fast. Now a day’s
most of the transactions take place through
electronic money. People prefer to use debit
cards and credit cards instead of paper money
or bank money. With the passage of time
electronic money may diminish the use of paper
money.

18. Qualities Of Good Money
1. Acceptability
2. Transferability
3. Stability
4. Storability
5. Recognizable
6. Malleability
7. Divisibility
8. Durability
9. Economy
10. Elasticity
11. Homogeneity

19. 1. Acceptability
Good money should have the quality of general
acceptability. General acceptability means every
person must accept it for the settlement of
payments. It should be accepted for purchase and
sale of goods.
2. Transferability
Good money is easily transferable from one place to
another for doing business and making payments.
3. Stability
Value of money should remain stable. If value of
money is changing or fluctuating day by day than it
would not be considered reliable.

20. 4. Storability
The money should be storable. Value of money
should not depreciate with time. Paper money has
quality of storability.
5. Recognizable
The money should be easily recognizable so that
the holder of money may not confuse about the
value of money. Paper money is easily recognizable
because notes of different value have different
color.
6. Malleability
The material which is used for making money
should be malleable. The material which cannot be
melted is not fit for making coins.

21. 7. Divisibility
Divisibly means ability to divide into small units
without losing its value. Good money should be
divisible. In barter system, commodity money
was not divisible into small units. That’s why it
was replaced by the paper money.
8. Durability
The material used in making money should be
durable and long lasting. Coins do not wear
quickly, so the quality of money remains stable.

22. 9. Economical
Good money should be economical. Economical
means low cost of printing and more value.
10. Elasticity
Supply of money should be elastic. Elastic means
whenever it is needed, supply of money can be
increased or decreased. Paper money has the
quality of elasticity
11. Homogeneity
Homogeneity means the money should be
identical. So that there is no ambiguity to the
holder of money

23. Barter system:
• Barter is a system in which goods or services
are directly exchanged with the goods or
services without the use of money.
• Barter system is suitable only when people
have few needs and money system does not
exist in the economy.

24. Barriers of barter system:
• Lack of chance of wants
• Lack of common measure of value
• Lack of subdivision
• Lack of store of value
• Difficulty in future payments (credit)
• Difficulty in transfer of wealth
• Difficulty in tax collection
• Lack of specialization
• Difficulty in budgeting

25. Role of Money
Money plays an important part in the daily life
of a person whether he is a consumer, a
producer, a businessman, an academician, a
politician or an administrator. Besides, it
influences the economy in a number of ways.