Money is not a risk-free store of value, however. These payments will be made using money, because money acts as a store of value.
Moneymoney monet clarinet series#
When you borrow money, for example, you typically sign a contract pledging to make a series of future payments to settle the debt. Its role as a medium of exchange makes it a convenient store of value.īecause money acts as a store of value, it can be used as a standard for future payments. Money differs from these other stores of value by being readily exchangeable for other commodities. Houses, office buildings, land, works of art, and many other commodities serve as a means of storing wealth and value. Money, of course, is not the only thing that stores value. Value has, in effect, been “stored” in that little piece of paper. That is because you know the bill still has value. Consider a $20 bill that you accidentally left in a coat pocket a year ago. The third function of money is to serve as a store of value, that is, an item that holds value over time. When we report the value of a good or service in units of money, we are reporting what another person is likely to have to pay to obtain that good or service. We use money in this fashion because it is also a medium of exchange. Money serves as a unit of account, which is a consistent means of measuring the value of things. Instead, we report the value of things in terms of money. Other people may not think of values in pizza terms, so they might not know what we meant. The other is that the information would not be very useful. One is that people do not arrive at places like Radio Shack with five pizzas and expect to purchase a radio. Indeed, the complexity-and cost-of a visit to a grocery store in a barter economy would be so great that there probably would not be any grocery stores! A moment’s contemplation of the difficulty of life in a barter economy will demonstrate why human societies invariably select something-sometimes more than one thing-to serve as a medium of exchange, just as prisoners in federal penitentiaries accepted mackerel.Īsk someone in the United States what he or she paid for something, and that person will respond by quoting a price stated in dollars: “I paid $75 for this radio,” or “I paid $15 for this pizza.” People do not say, “I paid five pizzas for this radio.” That statement might, of course, be literally true in the sense of the opportunity cost of the transaction, but we do not report prices that way for two reasons. That would be an uncertain affair you could not know when you headed for the store which items the grocer might agree to trade. You would need to load up a truckful of items the grocer might accept in exchange for groceries. Suppose you were visiting a grocery store in a barter economy. Another seller might be willing to provide a haircut in exchange for a garden hose.
A buyer might find a seller who will trade a pair of shoes for two chickens. Because no one item serves as a medium of exchange in a barter economy, potential buyers must find things that individual sellers will accept.
Barter occurs when goods are exchanged directly for other goods. We can understand the significance of a medium of exchange by considering its absence. To facilitate these exchanges, people settle on something that will serve as a medium of exchange-they select something to be money. The exchange of goods and services in markets is among the most universal activities of human life.
We will learn in this chapter that changes in the way people use money have created new types of money and changed the way money is measured in recent decades. If people were to begin accepting basketballs as payment for most goods and services, basketballs would be money. When people use something as a medium of exchange, it becomes money. Money, ultimately, is defined by people and what they do. In Romania under Communist Party rule in the 1980s, for example, Kent cigarettes served as a medium of exchange the fact that they could be exchanged for other goods and services made them money. A medium of exchange is anything that is widely accepted as a means of payment. If cigarettes and mackerel can be used as money, then just what is money? Money is anything that serves as a medium of exchange.
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