• To economists, money is anything that serves as a medium of exchange, a unit of account, and a store of value.

Money as a Medium of Exchange

  • Medium of Exchange: Anything that is used to determine the value during an exchange of goods and/or services.

  • Without money, people barter (exchange of goods and services for another).

  • Bartering is used in many parts of the world, especially in traditional economies.

  • Economies that become more specialized, tend to become too difficult and inefficient for bartering.

Money as a Unit of Account

  • Unit of Account: A means of comparing the value of goods and services.

  • Money has the ability to compare the value of goods and services.

Money as a Store of Value

  • Store of Value: Something that keeps its value if it is stored rather than used.

  • Money keeps its value if you decide to hold on to instead of spending it.

  • When economies experience inflation, money does not function as well as a store of value.

Six Characteristics of Money

  • The coins and paper bills that are used as money are called currency.

  • Durability

    • Objects that are used as money must withstand physical wear and tear.

    • If money is easily destroyed, it can not be trusted to serve as a gesture of value.

  • Portability

    • Must be able to easily transfer cash to their daily business.

    • Paper money and coins are light and small.

  • Divisibility

    • Money must be easily divided into smaller units of value.

    • When money’s divisible, people only have to use as much as necessary.

    • Most currencies consist of various denomination

  • Uniformity

    • Any two units of money must be the same.

    • People must be able to court and measure money accurately.

  • Limited Supply

    • Supply of money is kept under control.

  • Acceptability

    • Everyone must be able to exchange objects. Both parties need to accept that it can be used elsewhere.

Source of Money’s Value

  • Commodity Money

    • Commodity money: Consists of objects that value in themselves as much as money.

    • Commodity = Money

    • Example: Salt, cattle, etc.

    • Commodity money often lack characteristics of an object that is a good source of money.

    • Commodity money works in only simple economics.

  • Representative Money

    • Representative Money: Objects that have value because the holder can exchange them for something else of value

    • Example: An IOU from a friend.

  • Fiat Money

    • Fiat Money: Money that has value because the government has ordered that it is an acceptable means to pay debts.