Money serves four key functions in an economy: as a medium of exchange, a measure of value, a store of value, and a standard for deferred payments. Without money, economies would have to rely on bartering systems, which are inefficient due to the double coincidence of wants problem, issues with divisibility of goods, and lack of portability. Bartering led countries to develop commodity forms of money like shells, grain, cloth, gold, and silver to facilitate exchange.
Money serves four key functions in an economy: as a medium of exchange, a measure of value, a store of value, and a standard for deferred payments. Without money, economies would have to rely on bartering systems, which are inefficient due to the double coincidence of wants problem, issues with divisibility of goods, and lack of portability. Bartering led countries to develop commodity forms of money like shells, grain, cloth, gold, and silver to facilitate exchange.
Money serves four key functions in an economy: as a medium of exchange, a measure of value, a store of value, and a standard for deferred payments. Without money, economies would have to rely on bartering systems, which are inefficient due to the double coincidence of wants problem, issues with divisibility of goods, and lack of portability. Bartering led countries to develop commodity forms of money like shells, grain, cloth, gold, and silver to facilitate exchange.
Money serves four key functions in an economy: as a medium of exchange, a measure of value, a store of value, and a standard for deferred payments. Without money, economies would have to rely on bartering systems, which are inefficient due to the double coincidence of wants problem, issues with divisibility of goods, and lack of portability. Bartering led countries to develop commodity forms of money like shells, grain, cloth, gold, and silver to facilitate exchange.
Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
You are on page 1/ 9
Money
Part II • Our economy needs money to be able to function. • In fact, money is so important for our economy just like blood for our body. • If the blood stops circulating in our body, we die. Similarly, if money stops circulating in our economy, we have hard times ahead.
• Hence, many economist argue
that money is one of the greatest inventions of all time. The functions of money
Economists suggest that there are four key functions of money:
• Money acts as a medium of exchange - For something to be considered as money it must function as a way to conduct trade. Money is widely recognised and accepted as a means of payment for goods and services. • Money is a measure of value - Money is a unit of account, as it measures the market value of different goods and services. It is far more efficient for trading purposes to express the price of goods and services in dollars (or another monetary value) rather than using products such as cloth, shells, salt or livestock - all of which have been unsuccessful forms of money in history. • Money is a store of value as it can be stored and used at a later date in the future. This means that money must be able to hold its purchasing power over time. Money therefore gives firms and households flexibility in the timing of their sales and their purchases, thus removing the urgency to trade straightaway. • Money is a standard of deferred payment - This means that money is used as the standard for future (deferred) payments of debt. For example, loans taken out today are repaid in money at some time in the foreseeable future. Both the US dollar and the euro have been widely accepted standards for settling international debts. So, what would happen if money ceased to exist? Bartering and the need for exchange
• In the absence of money, people
have to use a barter system in order to trade goods and services. • Bartering is the act of swapping items in exchange for other items through a process of bargaining and negotiation. • For example, someone might trade five sacks of rice for one cow, or four chickens for a sheep. The problems with bartering • The key problem with a barter system is the need for a double coincidence of wants - the person with chickens must find a trader who wants chickens in exchange for their sheep. As two people engaged in a trade must both want what the other person is offering, bartering is highly inefficient. • A second problem with bartering is that of divisibility - half a sheep or two-thirds of a chicken is not very useful for traders.
• A third problem is that of portability - compare
the portability of a sheep or fish with that of paper money (banknotes). The problems associated with bartering meant that countries around the world eventually developed the use of commodity money, such as cowry shells, grain and cloth. For much of history, precious metals such as gold and silver have served a monetary role.
