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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

factors that determine the country material standard ?
Serena Reply
what is the important of studying economics
Akurugu Reply
economics teaches you how to think not what think
umer
in order to know how our country operates and corporate with other countries based on the international marketing and to know how our economy is doing regarding incomes going in and out through exchange of goods and services,we have to study more about economics to gain more and better understanding
Betty
important studying economic is make a choice under the condition of scarcity
cafifo
is labour a intermediate good or final good
umer Reply
what is economics
Mahamed Reply
Economic is science, which Studies human behaviour and who they are earn and spend
Ammu
economics is the science which shows how can use scare resources among society
umer
how to derive the equation for the equilibrium level of national income in an open economy with no taxes
loise Reply
what is inflation?
Herry Reply
when price goes up with some shottime
umer
Give me 5 example for Macro economics
Neha Reply
1. Markets 2. Market Failure 3. Competition 4. Price Stability 5. Efficiency
Luyando
please can you explain markets and markets failure ?
Timothy
When we talk about Markets as an example of macroeconomics, we look at demand and supply in labor market.
Luyando
Then for market failures, we focus on market inefficiencies and failures such as the destruction of common goods due to economic systems that provide no incentive for their preservation
Luyando
Who is a discourage worker.?
Timothy
a discourage worker is simply a worker who stop looking for a job because he/she believe no job is available for them..
Joseph
sloping curve normal
Mirasol Reply
A normal sloping curve
Mirasol
State what happen to the aggregate supply curve for beef. The price of beef decrease
Mirasol
i think there is positive relationship between price n supply so as the price decreases the supply curve so decreases and vice versa
Dharani
quantity supply will decrease,less.profit for firms in a perfectly competitive market i guess
Joseph
yaa
Dharani
List two REASONS FOR LOW PRODUCTIVITY IN DEVELOPING COUNTRIES?
KHONAYE Reply
DESCRIBE WHY MARGINALISED GROUPS ARE NORMALLY AFFECTED FIRST DURING A RECESSION.I'M IN GRADE 11
KHONAYE
A normal sloping curve
Mirasol
what are varriable of macro economics
maryam Reply
what is Pareto efficiency?
Kgothatso Reply
when you want to something better off you must worse off other thing
umer
What is PPF2?
Joseph Reply
how are commodities important to the country
Oriho Reply
what is the difference between real cost and opportunity cost in economy
Oriho
real costs are total money expenditure for the production of goods and services and opportunity costs is the money which is not included for production, like work of entrepreneurs in their own company
Maheswar
hi everyone how are you?
Prathana Reply
fine wbu
Abinash
fine
ALIM
hi , prathana 🍁🍁
sachin
hello sachin
Prathana
hi any indians?
Karan
I am not indian I am from Nepal 🇳🇵
Prathana
hi I'm Indian
Shraddha
ohh hi indian how are you 😅
Karan
ohh nepal great
Karan
can you tell me prathana you like china more or india
Karan
I loved both
Prathana
oh nice
Karan
R u know ,u disturb some peoples?
Rashmi
@ Karan shoor I'm good n u
Shraddha
fine than you.
Haftay
hii
Maheswar
hello guys
Khadak
hi!! i am from nepal.
Khadak
Hi am fine thanks for you
cabdirixmaan
Abdirahman haaye seetahay
ALIM
ALIM ABDALLA walale fiican dhankaaga
cabdirixmaan
hello
Muhammad
are you studying macroeconomics.
Muhammad
yes
Muhammad
hi every one
Khan
What is foreign reserve? Why countries reserved? And have any limitations of this reserve?
Adil Reply

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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