personal finance LIBF unit 1 topic 1

Topic 1

Key ideas in this topic

• Definition of money.

something generally accepted as a medium of exchange, a measure of value, or a means of payment

• The purposes of money.

main purpose of money is to make payments, money is used to set the price of goods, People can store their money and so save it for making payments in the future. Money also makes it possible for people to buy items now, even if they do not have enough money themselves to make the purchase. They can borrow the money they need from someone else and repay the lender in the future.

• Bartering and its limitations.

The barter system is a way of exchanging goods or services, It relies on a ‘double coincidence of wants, It relies on the two parties agreeing a rate of exchange, This is a time-consuming process, And it relies on the person having a surplus of one thing when they need to acquire extra or other things.

• The development of money over time.

The limitations of barter led people to create systems where the local community used an item they all valued as a means of payment. Using items with intrinsic value as payment, Using items that represent value as money, Using paper notes as money and are now purchases are now made using coins and banknotes or by transferring electronic balances between bank accounts

• The features money needs to fulfil its purposes.

Acceptable; recognisable; stable; divisible; durable; portable; scarce but sufficient; homogenous

• The functions of money.

A unit of account,A means of exchange, A store of value, A means of borrowing and then repaying the debt

• Legal tender.

coins or banknotes that must be accepted if offered in payment of a debt.

• The purchasing power of money.

purchasing power of money is the quantity of goods and services it can buy.

• How people’s need to spend, save and borrow changes over the course of their life.

people use money to make payments, save, borrow and record value. At any one time an individual might be using money for one or more of these purposes. Certain combinations are more likely at certain times in a person’s life.

Using barter to trade goods and services

Before money barter was used.

Example: farmer wants wheat blacksmith wants nails= the farmer and blacksmith must decide the amount of flour equal to the value of one nail.

Development of money

Limitations of barter include:

• it relies on a ‘double coincidence of wants’

• Two parties must agree on a rate of exchange

• Which is time consuming

• Farmer must have a surplus of flour.

Using items of intrinsic value as payment

Barter limitations led people to create a system where the local community used an item they all valued as a means of payment

Example: in japan rice was used as payment,buyers and sellers would agree how much rice and item was worth; the buyer would then pay the agreed quantity of rice and receive the goods in exchange

…