Macro-Economics Group Assignment

Submitted by
Adeel Ahmad
Ahmad Mubarak
Zabi Ullah
Waleed akram
Salman
Talha

Roll Number
BBHM-F19-033
BBHM-F19-030
BBHM-F19-032
BBHM-F19-018
BBHM-F19-042
BBHM-F19-043
Subject
Macroeconomics

Submitted to

Professor Saad Salman

Barter system:
In the early days of history when money was not known to people,
people did not use coins and notes for the purchase and sale of goods
and services. They exchanged goods with goods.
For example: a farmer used to get everything in exchange of
agricultural products, a cobbler in exchange of shoes and a weaver in
exchange of cloth. In this way every person exchanged his goods with
those of another person. The system of exchanging goods with goods is
called barter system.
It can be defined in the following words.
“Barter means direct exchange of one good with another
when money is not used as a medium of exchange.”
DIFFICULTIES OF BARTER SYSTEM:
In this system, man has to face many difficulties. These difficulties are
describe in the following lines.

Lack of Double Coincidence of Wants:

The big difficulty of this system is that it lacks double coincidence of
wants. means double coincidence of human wants used to take place
rarely.
For example: one person has ghee and he wants to get wheat. Now
he will have to look for a person who has wheat and he is ready to
exchange wheat with ghee. The first man will have to waste a lot of
time for this purpose. It may also be possible that he meets a man
who is in search of ghee but he has something other instead of wheat.
It seldom happens that two persons may meet who need the goods of
each other.
Lack of Common Measure of Value:
If two persons having double coincidence of wants happen to meet,
then the another difficulty is what quantity of good in the possession
of first person should be exchanged with what quantity of good in the
possession of the second person.
For example: the first person has cloth and the second has wheat.
Now the problem is how selection of commodity money. Commodity
money prevailed 2000 years ago. The value of all units of commodity
money was not equal. It was also difficult to store some of the
commodities. Because of these drawbacks, the use of commodity
money was given up in 19th century.
Metallic Money:
Because of the drawbacks of commodity money, man continued
efforts to discover a better money and finally gold and silver were
selected for this purpose. Coins of gold and silver were used as
medium of exchange. This system also had some drawbacks,
For example, silver got dirty and it darkened with the passage of
time. As for as gold is concerned, its quantity is scarce while its value
is very high that it is not possible to make its coins for buying minor
products Anyhow, people used costly metals as a medium of
exchange for some time
Paper Money:
After sometime, when it is felt that it is very difficult to carry metal
coins from one place to another, paper money took the place of
metallic money. Paper money is issued by government or its
representative institution. All currency notes are issued by the state
Bank of Pakistan by the permission of the govt. In the present age,
paper money is used in all the countries of the world and it is legally
accepted.
Credit Money:
With the expansion of economies in modern age, credit money is used
to run business affairs. Credit money is used in the form of cheques
issued in the name of banks. Bills of exchange and credit cards are
also forms of credit money. Payments and receipts of heavy amounts
in business sectors are made in credit money.
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. Economists differentiate among three different types of money:
commodity money, fiat money, and bank money. Commodity money is
a good whose value serves as the value of money.
According to professor marshall

“Money is the centre around which economics resolves”

According to Professor Kent
“Anything which is widely accepted as a medium of
exchange and a standard of value is money”
According to Professor Sayers
“Anything which is widely used for the transaction of loans
is money."

EVOLUTION OF MONEY:
Owing to above mentioned drawbacks of barter system, man started his
efforts to discover a medium of exchange (money), which can overcome
the difficulties of barter system. So, passing through various stages we
have a fine shape of money. These stages are as follows.
 Commodity money
 Metallic money
 Paper money
 Credit money
Commodity Money:
In the beginning stage of evolution of money, commodities were used as
money. Usually these were the goods which were consumed by the
people in daily life. Cultural, economic, regional, geographical and
climatic conditions of a region influenced the selection of commodity
money. Commodity money prevailed 2000 years ago. The value of all
units of commodity money was not equal. It was also difficult to store
some of the commodities. Because of these drawbacks, the use of
commodity money was given up in 19th century.
Metallic Money:
Because of the drawbacks of commodity money, man continued efforts
to discover a better money and finally gold and silver were selected for
this purpose. coins of gold and silver were used as medium of exchange.
This system also had some drawbacks, for example, silver got dirty and
it darkened with the passage of time. As for as gold is concerned, its
quantity is scarce-while its value is very high that it is not possible to
make its coins for buying minor products Anyhow, people used costly
metals as a medium of exchange for some time.

Paper Money:
After sometime, when it is felt that it is very difficult to carry metal
coins from one place to-another, paper money took the place of metallic
money. Paper money is issued by government or its representative
institution. All currency notes are issued by the state Bank of Pakistan
by the permission of the govt. in the present age, paper money is used in
all the countries of the world and it is legally accepted.
Credit Money:

With the expansion of economies in modern age, credit money is used to

run business affairs. Credit money is used in the form of cheques issued
in the name of banks. Bills of exchange and credit cards are also forms
of credit money,
Payments and receipts of heavy amounts in business sectors are made in
credit money.

FUNCTIONS OF MONEY:

Money performs the following functions.

Medium of Exchange:
The first and foremost function of money is that it should selling
function goods of and money services is that As it a medium should
serve of exchange, as a medium of has made process of production of
wealth, distribution of wealth and exchange money easy and convenient.
Individuals as factors of production offer their services to firms and
firms produce goods and services with the combination of these factors
of production Firms sell these goods and services in the market in
exchange of money and distribute monetary revenues among factors of
production as the rewards of their service. In this way, the people
offering services get income and the can purchase goods and from the
help of their monetary incomes.
Store of Value:
Money serves for storing value. It means we can preserve our goods for
a long time in the form of money. We can purchase desired goods and
services in the time of need with this money. The reason is that money is
not perishable thing rather its components are paper-note and coins. That
is why, people store-them and their value does not change like that of
other goods. In this way, money serves as a bridge between past and
present.

Standard of Future Payments:

Money serves as the standard of future payments. It means that people
easily accept it for borrowing and lending. for example, if a customer
borrows some goods of Rs.2000 from a shopkeeper and promises to pay
him after 2 months. After 2 month customer settles his account by
paying Rs.2000, and no person will have any complaint against each
other.

In fact, this function of money is very important and it has brought a

rapid expansion and development in trade and industry.

Transfer of Value:
Money serves as a means of transfer of value.
It is easy for the people to transfer their property from one place to
another with the help of money, they can sell their movable or
immovable property at some place for money and use the same to buy
property at some other place.
A Base for Govt. Payments and Revenues
Government payments and revenues have become easy by money. Govt.
receives taxes, rent, fine etc., in the form of money and it also pays
salaries, pensions, scholarships etc., in the form of money.
Unit of Account:
Money is used as a unit of account. It means that value of goods and
services is calculated in term of money. For example, we say apples are
Rs.60 per Lg. and income of a person is Rs.20000 per month.

KINDS OF MONEY:

Kinds of money are as follow:

Metallic Money:

Money that is made of some metal e.g., gold, silver, copper or brass etc.
is called metallic money. This money consists of metallic coins which
circulate throughout the country as money. Government issues coins
through mint.

There are two kinds of metallic money.

  Standard metallic money
 Token metallic money

Standard Metallic Money:

It is the metallic coin whose face value is equal to its intrinsic value. In
other words, the value of the metal used in coin in the market is exactly
the same as the value of the coin written on it. Such coin is also called
"Full Bodied Coin." One rupee silver coin used in subcontinent from
1835 to 1893 was full bodied coin.

Token Metallic Money:

It is the metallic coin whose face value is greater than its intrinsic value.
In other words, face value (written value) of the coin is greater than the
value of the metal used in it. For example, the face value of one rupee
metallic coin circulating in Pakistan is equal to 100 paisas while the
value of metal used in it is hardly 5 paisas. Thus Pakistani rupee is token
money. Other coins being used in Pakistan are also token money.
In the present age, token money is being used in all countries of the
world.
Paper Money:

Paper money means notes made of paper, which are issued by the
government or the central bank of the country. These notes are legal
tender money. The notes are accepted in general business dealings as
medium of exchange. In Pakistan, all the notes i.e., 10, 20, 50, 100, 500
and 1000 rupee notes arc issued by the State Bank of Pakistan There are
two kinds of paper money.

 Convertible paper money

 Inconvertible paper money

Convertible Paper Money:

It is the paper money which can be converted in standard metallic

money e.g gold, silver or foreign exchange on demand. This kind of
money is called convertible paper money. In Pakistan, all currency notes
are convertible paper money. These notes are issued by the central bank
of a country.)ln Pakistan, these notes are issued by the State Bank of
Pakistan. The following stattment is written on these notes by the State
Bank of Pakistan.

'The bearer of this will be paid on demand"

It means if a man wants to convert these notes in gold or silver or

foreign exchange according to-value of these currency notes, he can get
them converted by the central bank of the country.
Inconvertible Paper Money:

These are the notes that cannot be converted in gold or silver or foreign
exchange. In other words govt. of the country does not take the
responisibility for converting them in gold or silver or foreign exchange.
But .these notes are legal tender mopey. So, all the people are bound to
accept them as medium of exchange. In Pakistan one rupee note was
inconvertible paper money.

Credit Money:

It is a kind of money which has no legal cover but circulates in the

country just because of trust or belief. cheques, drafts, credit cards and
bills of exchange etc., issued by commercial banks are credit money. In
case of credit money, net cash is not paid at once but it is promise to pay
it in future.

Legal Tender Money:

Legal tender means the money which is legally accepted. The people of
a country are bound to accept it in general business dealings and
payments of loans. The person who refuses to accept it is a criminal in
the eye of law. He is entitled to punishment. All the coins and currency
notes issued in Pakistan are legal tender money. Legal tender money is
also called fiat money.
There are two kinds of legal tender money:

 Limited legal tender money

 Unlimited legal tender money

Limited Legal Tender Money:

The kind of legal tender money in which payment can be made only to a
certain extent is called limited legal tender money. In Pakistan, 25 paisa
and other lower value coins are limited legal tender money. We can pay
upto 20 rupees by these coins. Nobody can be bound to accept more than
20 rupees in these coins.

Unlimited Legal. Tender Money:

The kind of legal tender money which has no specific extent to be

accepted by the people. whatever amount of this kind of money may be,
it is accepted by everyone and no one can refuse it. In Pakistan 50 paisa
coin and all the coins and notes having more value than this are
unlimited legal tender money.

Near Money:
The money which is not in the form of net cash and which is not used at
once for business dealings but it can be converted in net cash after a
little effort, is called near money. Saving deposits, Time deposits,
deposited in banks, government securities and shares of firms are called
near money. They are not called money because they cannot be used for
daily sale and purchase. However, they can be converted in money in the
time of need. Although time deposits cannot be with-drawn from the
bank before the fixed time yet they can be cashed at the notice given by
the depositor. In the same way, the shares of firms and government
securities can be converted in net cash by selling them.

Money of Account:

It means the unit of money by which the value of goods and services is
expressed Money of account of Pakistan is rupee because all people
count their money in rupees. I the same way, price of-all goods and
services is also expressed in rupees.
Every country has its own money of account. For example, England has
Pound Germany has Mark, America has Dollar and Saudi Arabia has
Riyal etc.
It is not necessary for money of account that it should circulate in the
country currency. It is possible that a note or coin of value equal to
accounting unit may circulate in the country. But if people use it for
accounting and pricing of goods etc. will be called money of account.

Foreign Exchange:
The currencies of some countries possess high and stable value. The)
accepted at international level. They are used as medium of exchange in
international trade. These currencies are called foreign exchange.
American dollar, British Pound Japanis Yen etc. are foreign exchange.
QUANTITY THEORY OF MONEY:

Classical Economist, J.S. Mill stated quantity theory of money in the

following words.

"As a result of change in quantity of money (BY the change in

prices) value of money changes in inverse proportion. Therefore
every increase in quantity of money results in proportional decrease
in value of money. While every decrease in quantity of money causes
a proportional increase in value of money, provided that other
things remain constant".

Prof. Taussig stated the quantity theory of money in the following

words:

"Double the quantity of money and other things being equal, prices
will be twice as high as before and the value of money one half.
Halve the quantity of money and other things being equal, prices
will be one half of what they were before and the value of money
double".

American economist„ Prof. Irving Fisher has presented the

relationship of quantity of money and value of money in the form of
an equation which is called equation of exchange.