Instruments of Exchange
The problems of the barter system created the need for a medium that could be used to facilitate trade. Money solved the problems of the barter system. Money is anything that is acceptable for the purchase of goods and services. Presently it is in the form of notes and coins. Early forms of money included shells, beads, precious metals and stones.
The Characteristics of Money
1. Acceptable – money is universally accepted
2. Durable – long lasting
3. Divisible – Can be easily broken down into smaller units. E.g. $100 can be broken down into $10 bills and so facilitating the purchase of small quantities
4. Homogeneous – similar e.g. all $100 bills are the same in appearance
5. Convertible – easily exchanged for goods and services
6. Scarce – this ensures its value
7. Portable – easy to carry
Functions of Money
1. It is a medium of exchange i.e. since money is acceptable by all, persons will not have difficulties to trade
2. A measure of value – the price of an item indicates its value
3. It is a store of wealth i.e. money can be easily stored/saved.
4. It is a standard for deferred payments. i.e. it can be used to repay debts over time.
Types of Money
1. Notes and Coins
2. Quasi Money/ substitute money – examples are postal orders, soda machine tokens, cheques and credit cards.
3. Near Money – assets that can easily be turned into cash, e.g. certificate of deposits, bills of exchange.
A cheque is an order to the bank to make payments to the payee stated on it.
Credit Cards/Debit Cards
This allows the card holder to make payments by simply presenting the card to the seller. A credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A debit card is issued against a customer’s account balance and is therefore not a loan.
They can be used to make payments locally or overseas, as they are made out in the currency in which they are to be paid. The payee will cash the money order at his bank.
A bank draft is a cheque which guarantees payment to the receiver from the issuing bank. Bank drafts can be made out to a payee in foreign currency and thus used for making overseas payments. Bank drafts are obtained for a fee from a commercial bank.
Bill of Exchange
This is used to pay for goods bought overseas on credit. It is an order in writing from an exporter to an importer requiring payments of a certain sum of money at a fixed future date. The time period allowed is normally three months.
This is a system used to transfer funds electronically rather than paper-based payment methods. Examples include credit and debit card transactions, remittances (through companies such as Western Union) and money transfers.
This system allows a bank’s customer to simply use the telephone to get his banking services done rather than visiting the bank. Services include; checking account balances and transaction history, opening a new account, transferring funds etc.
This differs form tele-banking in that the internet is used to access the same services. Customers can go on-line to view their balances and transaction history and transfer funds etc.
Electronic commerce more popularly called ecommerce is the buying and selling of goods and service using the internet. It allows for a full range of trading activities over the internet such as advertising, placing orders, delivery and making payments.