What Are The Four Functions Of Money

Chapter 27. Coin and Cyberbanking

27.ane Defining Money by Its Functions

Learning Objectives

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

• Explicate the various functions of money
• Contrast commodity money and fiat coin

Coin 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, coin is a "blessing that is of no reward to u.s. excepting when we part with it." Money is what people regularly use when purchasing or selling appurtenances and services, and thus money must be widely accepted past 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 empathize the usefulness of coin, nosotros must consider what the world would be like without coin. How would people commutation goods and services? Economies without coin typically appoint in the barter arrangement. 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 commutation betwixt ii 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 case, 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 probable to be difficult to suit. Call back about the complexity of such trades in a mod economic system, with its extensive partitioning of labor that involves thousands upon thousands of different jobs and appurtenances.

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 exist difficult to exchange them for other goods in the future. Imagine a farmer wanting to purchase a tractor in half-dozen months using a fresh crop of strawberries. Additionally, while the castling arrangement might piece of work fairly in pocket-size economies, information technology will proceed these economies from growing. The time that individuals would otherwise spend producing goods and services and enjoying leisure time is spent bartering.

Functions for Coin

Money solves the problems created by the castling arrangement. (We will become to its definition soon.) First, money serves as a medium of substitution, which means that money acts as an intermediary between the heir-apparent 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 fiscal capital.

2d, money must serve as a shop of value. In a barter arrangement, 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 adept store of value. Belongings coin is a much easier way of storing value. Y'all know that you lot practice not need to spend it immediately because it will still concord its value the next 24-hour interval, or the next twelvemonth. This office of coin does non require that coin is a perfect shop of value. In an economy with aggrandizement, money loses some ownership power each twelvemonth, but information technology remains money.

Tertiary, money serves as a unit of business relationship, which means that it is the ruler past which other values are measured. For example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $fifty a pair. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.

Finally, some other function of money is that money must serve as a standard of deferred payment. This means that if money is usable today to brand purchases, it must also be adequate to make purchases today that volition be paid in the future. Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to purchase goods and services today and pay in the future. So money serves all of these functions— it is a medium of exchange, shop of value, unit of account, and standard of deferred payment.

Commodity versus Fiat Money

Money has taken a wide multifariousness of forms in dissimilar cultures. Gilt, silver, cowrie shells, cigarettes, and even cocoa beans have been used equally coin. Although these items are used as article money, they likewise have a value from use as something other than money. Golden, for example, has been used throughout the ages as money although today it is not used every bit money but rather is valued for its other attributes. Gilt is a good conductor of electricity and is used in the electronics and aerospace industry. Gold is too used in the manufacturing of energy efficient reflective glass for skyscrapers and is used in the medical industry too. Of course, gold too has value considering of its beauty and malleability in the creation of jewelry.

As commodity money, aureate has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other article held at a bank. During much of its history, the coin supply in the Usa was backed past gold and silver. Interestingly, antique dollars dated as late every bit 1957, have "Silverish Document" printed over the portrait of George Washington, as shown in Figure 1. This meant that the holder could take the neb to the appropriate bank and exchange it for a dollar's worth of argent.

Figure 1. A Silver Certificate and a Modern U.S. Bill. Until 1958, silverish certificates were commodity-backed money—backed by silver, as indicated past the words "Silver Certificate" printed on the bill. Today, U.S. bills are backed past the Federal Reserve, only as fiat money. (Credit: "The.Comedian"/Flickr Creative Commons)

As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved towards the use of fiat money. Fiat coin has no intrinsic value, but is alleged by a government to exist the legal tender of a country. The United States' paper money, for example, carries the statement: "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND Private." In other words, by government prescript, if you owe a debt, then legally speaking, you tin pay that debt with the U.S. currency, even though it is not backed by a commodity. The only backing of our coin is universal faith and trust that the currency has value, and cypher more.

Watch this video on the "History of Money."

Key Concepts and Summary

Money is what people in a guild regularly employ when purchasing or selling goods and services. If money were not bachelor, people would need to barter with each other, significant that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific adept or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a shop of value, and a standard of deferred payment. There are ii types of money: article coin, which is an detail used as coin, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is alleged past a government to be the legal tender of a country.

Cocky-Check Questions

1. In many casinos, a person buys chips to use for gambling. Within the walls of the casino, these chips tin often exist used to purchase food and beverage or fifty-fifty a hotel room. Practise fries in a gambling casino serve all three functions of coin?
2. Can you name some item that is a store of value, but does not serve the other functions of money?

Review Questions

1. What are the four functions served by money?
2. How does the existence of money simplify the process of buying and selling?
3. What is the double-coincidence of wants?

Critical Thinking Questions

1. The Bring it Home Feature discusses the use of cowrie shells as money. Although cowrie shells are no longer used equally money, practice you lot think other forms of article monies are possible? What office might applied science play in our definition of coin?
2. Imagine that y'all are a barber in a world without money. Explain why information technology would be tricky to obtain groceries, clothing, and a place to alive.

References

Hogendorn, January and Marion Johnson. The Shell Coin of the Slave Trade. Cambridge University Press, 2003. 6.

Glossary

barter

literally, trading ane expert or service for some other, without using money

commodity coin

an item that is used equally money, simply which too has value from its use as something other than coin

article-backed currencies

are dollar bills or other currencies with values backed upwardly by gold or another commodity

double coincidence of wants

a situation in which ii people each want some good or service that the other person can provide

fiat coin

has no intrinsic value, but is declared by a authorities to exist the legal tender of a country

medium of exchange

whatever is widely accustomed as a method of payment

money

whatever serves society in four functions: as a medium of exchange, a store of value, a unit of business relationship, and a standard of deferred payment.

standard of deferred payment

money must also be acceptable to brand purchases today that will be paid in the future

store of value

something that serves as a way of preserving economic value that can be spent or consumed in the future

unit of account

the common way in which marketplace values are measured in an economy

Solutions

Answers to Cocky-Check Questions

1. As long as you lot remain within the walls of the casino, chips fit the definition of coin; that is, they serve as a medium of exchange, a unit of account, and a store of value. Chips do not piece of work very well as money once you get out the casino, only many kinds of money do not piece of work well in other areas. For example, it is hard to spend money from Turkey or Brazil at your local supermarket or at the picture palace.
2. Many physical items that a person buys at in one case but may sell at another time tin serve as an answer to this question. Examples include a house, state, art, rare coins or stamps, and then on.

Source: https://opentextbc.ca/principlesofeconomics/chapter/27-1-defining-money-by-its-functions/#:~:text=Money%20serves%20several%20functions%3A%20a,a%20standard%20of%20deferred%20payment.

Posted by: boardgreedur.blogspot.com

Share this post