[MUSIC] We now turn our attention to a favorite topic for all of us money. Let's get started. In the previous lectures, we've made the point that people have been trading with one another for all of human history. But the question arises, how did historical trade transactions occur? The answer is barter where two parties exchange goods with one another for mutual advantage. For example, on the ancient Silk Road, traders bartered silk for furs. Pre European Native Americans traded turquoise from the south for Flynn from the North. Lewis and Clark during their famous exploration of the Louisiana Territory in 1804, and 1805, parted with Native Americans they met exchanging iron implements for food and horses. Today, informal barter occurs all the time. For example, I'll help you with your head chemistry homework if you help me with history. Or I'll trade my old bicycle for your old guitar, okay? Or more formally, I'll trade advertising for your accounting business if you help me with my taxes. Bartering works well when each party has something the other wants and they can agree on the relative value of each. But if the two parties do not have mutually desirable items didn't know trade can occur. For example, if I need two tyres for my car, I might go to a tyre store and offer to trade a lecture on inventory theory for new tyres. I doubt my offer would be well received. The economists call this the double coincidence of wants. Barter can only occur if two or more parties have complimentary needs. The bartering parties must have similar perceptions of value, and they must need each other's products at the same time in place and comparable quantities. So barter certainly has problems in the modern world. How to solve these problems? The answer to the problems of barter is money. However, before we proceed, pause the video and jot down answers to these two questions. What is money and what are its purposes? economists identify three main attributes of money. First, money is a medium of exchange. It sounds to double coincidence of wants problem of barter. Is something of value for both parties that serves as an intermediary good that facilitates trade. Historically, gold and silver has served as that intermediary good, but some other valuable products could also work so long as both parties play similar value on it. Examples in history include seashells, cattle, salt and cigarettes. Money solves the double coincidence of wants problem of barter, and it solves the problem of unequal party quantities. The second purpose of money is that it serves as a unit of account. Money is countable and divisible, which solves the unequal quantities problem of barter. Money is tangible, meaning it can be used in exchange for a wide variety of goods and services. And finally, money serves as an intertemporal store of value, meaning it can be stored over time and preserved until it's needed, it's not perishable. For example, money you earn in the summer can be started to pay for a Hawaiian vacation in the winter. Can be saved to fund your retirement 30 years from now. In summary money it can be thought of as streamlined barter. I barter money with you for your old bicycle. Later you barter that money for used guitar, in the modern world, money runs the world that barter. Okay, we've covered barter and money. The next question to answer is what is currency? Economists tend to think of money in ephemeral terms as some notional value floating in space. Currency is the physical or concrete manifestation of money. Historically, currency referred to the physical paper notes and coins that represent and define units of money. For example, in the European Union, the basic unit of money is the Euro. In the UK, the unit of money is the Pound. In the US is the Dollar. In China is the yuan. And in Russia the ruble and so on, you get the idea. In fact, there are 180 currencies currently used in the world today. That's a lot of currencies. Today in terms money and currency are often used as synonyms. So let's ask what is a fiat currency? In history coins were made of gold and silver so were valuable in and of themselves. And in history, paper banknotes were backed by gold and silver meaning paper currency could be exchanged for physical gold and silver. Paper is much easier to carry than loads of gold and silver so it was used. A fiat currency is a currency not backed by gold or silver but only backed by the full faith and credit of the issuing government. Almost all the world currencies circulated today are fiat currencies and backed by any physical asset. As this graphic illustrates, definitions and uses of money have changed over time and continue to evolve from barter, to lumps of gold and silver, to metal coins, to paper currency, and on to digital money. The use of digital money in the form of credit cards and Electronic Funds is relatively recent. Will digital money eventually replace paper money? Well, it's already happening in Sweden which is aggressively moving toward a cashless economy, where bank notes and coins are not used or accepted. Whether other nations follow remains to be seen. And finally what is the future of cryptocurrencies such as Bitcoins? Perhaps someday national currencies will disappear and we will all use a single Cryptocurrencies. But in the meantime, international businesses must work with many national currencies. So why we can ask Are there 180 different national currencies Why doesn't the world just decide on a single currency? Global business would be so much easier with a single currency. Well, history is part of the answer. in history, towns, cities, kingdoms and countries are isolated and distinct from one another, at least in terms of travel and communication time. The governments of these communities and needed money so they invented their own currencies that survived to this day. A recent exception to this is the European Union's Eurozone credit in 1999, 19 European countries abandon their historical currencies in favor of the EU euro. Government policy is the other reason for sovereign nations hang on to their historical currencies. Governments use their currencies to collect taxes and pay debts, encourage growth, incentivize production, induce or reduce inflation, and to redistribute wealth among many other reasons. Using a global currency would hinder or prevent execution of these national policies, as some members of the eurozone have recently discovered. In summary, barter is the oldest form of economic exchange but has problems with the coincidence of wants Equal quantities, separate locations, and disjoint timing. Money solves these problems by serving as a medium of exchange for barter and exchange of goods. It eliminates the double coincidence of wants problem of barter, and it sells barters quantity, place and time problems. Money also serves as a unit of account whose value we all agree upon. And money it hasn't intertemporal value, meaning it retains its value over time. Currency is the physical manifestation of money, and national currencies aid in the implementation of government policies. In the next video, we'll discuss the important topics of foreign exchange. That is how one nation's currency can be exchanged for that of another nation. See you there. [MUSIC]
