Economic functions of money, Macroeconomics

Money is generally considered to have three economic functions:

  • A medium of exchange. This is its most significant role. Without money we would live in a barter economy where we would have to trade services and goods for other services and goods. If I had fish but wanted bread, I would need to find someone who was in precise opposite situation. In a monetary economy I can trade fish for money with one individual and money for bread with another. Money solves what is known as the double coincidence of wants.
  • A unit of account. In a monetary economy, all prices can be expressed in monetary units that everyone may relate to. Without money, prices should be expressed in units of other goods and comparing prices are more difficult. You can find that a grilled chicken costs 2 kilos of cod in one place and 4 kilos of strawberries in another. Finding the cheapest grilled chicken isn't easy.
  • Store of value. If you are a fisherman and have a temporary surplus of fish that you want to store for future, storing the fish may not be a great idea. Money, conversely, stores well. Other commodities, like gold, have this feature as well.
Posted Date: 8/13/2013 2:55:50 AM | Location : United States

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