Explain the meaning of the following terms as well as the advantages/disadvantages of each in facilitating payments
Commodity money
This is money made up of precious metals or other valuable commodities and was used in ancient times. It was used when the exchange was still primitive. Gold and silver were used as commodity money before and the problem which was and which is accompanied by commodity money is that it is very heavy and difficult to transport.
Fiat money
This is the paper currency decreed by governments as legal tender. Paper money has the advantage over commodity money because it’s lighter than coins and precious metal, but its basis of use is based on confidence and trust in the authorities issuing it. The problems with paper money are that it can be counterfeited. The major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because it is bulk. To avoid this cheques were developed.
Cheques
A cheque is an instruction from you to the bank to transfer money from your account to someone else’s account when she deposits the cheques. Cheques allow transactions of large amounts of money to take place without the need to carry large amounts of money. The advantage of cheques is that it reduces the transportation costs involved in carrying a lot of cash and thus improves economic efficiency. The use of cheques reduces the risk of theft that is associated with the use of cash and provides convenient receipts of purchases. Problems associated with the use of cheques include the time it takes for cheques to clear.
Electronic payment
Electronic payments have substituted the use of cheques and cash. Electronic transfer payments due to the adoption of cheap computers and the internet and do provide large cost savings overuse of checks.
