<< Chapter < Page Chapter >> Page >

By the end of this section, you will be able to:

  • Explain the various functions of money
  • Contrast commodity money and fiat money

Money for the sake of money is not an end in itself. You cannot eat dollar bills or wear your bank account. Ultimately, the usefulness of money rests in exchanging it for goods or services. As the American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a “blessing that is of no advantage to us excepting when we part with it.” Money is what people regularly use when purchasing or selling goods and services, and thus money must be widely accepted by both buyers and sellers. This concept of money is intentionally flexible, because money has taken a wide variety of forms in different cultures.

Barter and the double coincidence of wants

To understand the usefulness of money, we must consider what the world would be like without money. How would people exchange goods and services? Economies without money typically engage in the barter system. Barter —literally trading one good or service for another—is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economy without money, an exchange between two people would involve a double coincidence of wants    , a situation in which two people each want some good or service that the other person can provide. For example, if an accountant wants a pair of shoes, this accountant must find someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services. Such a trade is likely to be difficult to arrange. Think about the complexity of such trades in a modern economy, with its extensive division of labor that involves thousands upon thousands of different jobs and goods.

Another problem with the barter system is that it does not allow us to easily enter into future contracts for the purchase of many goods and services. For example, if the goods are perishable it may be difficult to exchange them for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of strawberries. Additionally, while the barter system might work adequately in small economies, it will keep these economies from growing. The time that individuals would otherwise spend producing goods and services and enjoying leisure time is spent bartering.

Functions for money

Money solves the problems created by the barter system. (We will get to its definition soon.) First, money serves as a medium of exchange    , which means that money acts as an intermediary between the buyer and the seller. Instead of exchanging accounting services for shoes, the accountant now exchanges accounting services for money. This money is then used to buy shoes. To serve as a medium of exchange, money must be very widely accepted as a method of payment in the markets for goods, labor, and financial capital.

Second, money must serve as a store of value    . In a barter system, we saw the example of the shoemaker trading shoes for accounting services. But she risks having her shoes go out of style, especially if she keeps them in a warehouse for future use—their value will decrease with each season. Shoes are not a good store of value. Holding money is a much easier way of storing value. You know that you do not need to spend it immediately because it will still hold its value the next day, or the next year. This function of money does not require that money is a perfect store of value. In an economy with inflation, money loses some buying power each year, but it remains money.

Questions & Answers

what is mutation
Janga Reply
what is a cell
Sifune Reply
how is urine form
Sifune
what is antagonism?
mahase Reply
classification of plants, gymnosperm features.
Linsy Reply
what is the features of gymnosperm
Linsy
how many types of solid did we have
Samuel Reply
what is an ionic bond
Samuel
What is Atoms
Daprince Reply
what is fallopian tube
Merolyn
what is bladder
Merolyn
what's bulbourethral gland
Eduek Reply
urine is formed in the nephron of the renal medulla in the kidney. It starts from filtration, then selective reabsorption and finally secretion
onuoha Reply
State the evolution relation and relevance between endoplasmic reticulum and cytoskeleton as it relates to cell.
Jeremiah
what is heart
Konadu Reply
how is urine formed in human
Konadu
how is urine formed in human
Rahma
what is the diference between a cavity and a canal
Pelagie Reply
what is the causative agent of malaria
Diamond
malaria is caused by an insect called mosquito.
Naomi
Malaria is cause by female anopheles mosquito
Isaac
Malaria is caused by plasmodium Female anopheles mosquitoe is d carrier
Olalekan
a canal is more needed in a root but a cavity is a bad effect
Commander
what are pathogens
Don Reply
In biology, a pathogen (Greek: πάθος pathos "suffering", "passion" and -γενής -genēs "producer of") in the oldest and broadest sense, is anything that can produce disease. A pathogen may also be referred to as an infectious agent, or simply a germ. The term pathogen came into use in the 1880s.[1][2
Zainab
A virus
Commander
Definition of respiration
Muhsin Reply
respiration is the process in which we breath in oxygen and breath out carbon dioxide
Achor
how are lungs work
Commander
where does digestion begins
Achiri Reply
in the mouth
EZEKIEL
what are the functions of follicle stimulating harmones?
Rashima Reply
stimulates the follicle to release the mature ovum into the oviduct
Davonte
what are the functions of Endocrine and pituitary gland
Chinaza
endocrine secrete hormone and regulate body process
Achor
while pituitary gland is an example of endocrine system and it's found in the Brain
Achor
what's biology?
Egbodo Reply
Biology is the study of living organisms, divided into many specialized field that cover their morphology, physiology,anatomy, behaviour,origin and distribution.
Lisah
biology is the study of life.
Alfreda
Biology is the study of how living organisms live and survive in a specific environment
Sifune
Got questions? Join the online conversation and get instant answers!
Jobilize.com Reply

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play Download on the App Store Now




Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Macroeconomics' conversation and receive update notifications?

Ask