<< 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 a cell
Odelana Reply
how does Neisseria cause meningitis
Nyibol Reply
what is microbiologist
Muhammad Reply
what is errata
Muhammad
is the branch of biology that deals with the study of microorganisms.
Ntefuni Reply
What is microbiology
Mercy Reply
studies of microbes
Louisiaste
when we takee the specimen which lumbar,spin,
Ziyad Reply
How bacteria create energy to survive?
Muhamad Reply
Bacteria doesn't produce energy they are dependent upon their substrate in case of lack of nutrients they are able to make spores which helps them to sustain in harsh environments
_Adnan
But not all bacteria make spores, l mean Eukaryotic cells have Mitochondria which acts as powerhouse for them, since bacteria don't have it, what is the substitution for it?
Muhamad
they make spores
Louisiaste
what is sporadic nd endemic, epidemic
Aminu Reply
the significance of food webs for disease transmission
Abreham
food webs brings about an infection as an individual depends on number of diseased foods or carriers dully.
Mark
explain assimilatory nitrate reduction
Esinniobiwa Reply
Assimilatory nitrate reduction is a process that occurs in some microorganisms, such as bacteria and archaea, in which nitrate (NO3-) is reduced to nitrite (NO2-), and then further reduced to ammonia (NH3).
Elkana
This process is called assimilatory nitrate reduction because the nitrogen that is produced is incorporated in the cells of microorganisms where it can be used in the synthesis of amino acids and other nitrogen products
Elkana
Examples of thermophilic organisms
Shu Reply
Give Examples of thermophilic organisms
Shu
advantages of normal Flora to the host
Micheal Reply
Prevent foreign microbes to the host
Abubakar
they provide healthier benefits to their hosts
ayesha
They are friends to host only when Host immune system is strong and become enemies when the host immune system is weakened . very bad relationship!
Mark
what is cell
faisal Reply
cell is the smallest unit of life
Fauziya
cell is the smallest unit of life
Akanni
ok
Innocent
cell is the structural and functional unit of life
Hasan
is the fundamental units of Life
Musa
what are emergency diseases
Micheal Reply
There are nothing like emergency disease but there are some common medical emergency which can occur simultaneously like Bleeding,heart attack,Breathing difficulties,severe pain heart stock.Hope you will get my point .Have a nice day ❣️
_Adnan
define infection ,prevention and control
Innocent
I think infection prevention and control is the avoidance of all things we do that gives out break of infections and promotion of health practices that promote life
Lubega
Heyy Lubega hussein where are u from?
_Adnan
en français
Adama
which site have a normal flora
ESTHER Reply
Many sites of the body have it Skin Nasal cavity Oral cavity Gastro intestinal tract
Safaa
skin
Asiina
skin,Oral,Nasal,GIt
Sadik
How can Commensal can Bacteria change into pathogen?
Sadik
How can Commensal Bacteria change into pathogen?
Sadik
all
Tesfaye
by fussion
Asiina
what are the advantages of normal Flora to the host
Micheal
what are the ways of control and prevention of nosocomial infection in the hospital
Micheal
what is inflammation
Shelly Reply
part of a tissue or an organ being wounded or bruised.
Wilfred
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