It is usually bilateral, though it can be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a very limited extent. The barter system has a number of limitations which make transactions very inefficient, including:. Barter : In a barter system, individuals possessing something of value could exchange it for something else of similar or greater value. Despite the long list of limitations, the barter system has some advantages.
It can replace money as the method of exchange in times of monetary crisis, such as when a the currency is either unstable e. It can also be useful when there is little information about the credit worthiness of trade partners or when there is a lack of trust. The money system is a significant improvement over the barter system.
It provides a way to quantify the value of goods and communicate it to others. Money has several defining characteristics. It is:. The use of money as a medium of exchange has removed the major difficulty of double coincidence of wants in the barter system. It separates the act of sale and purchase of goods and services and helps both parties in obtaining maximum satisfaction and profits independently.
M1 captures the most liquid components of the money supply, including currency held by the public and checkable deposits in banks. M1 is the narrowest measure of the money supply, including only money that can be spent directly. More specifically, M1 includes currency and all checkable deposits. Currency refers to the coins and paper money in the hands of the public. Checkable deposits refer to all spendable deposits in commercial banks and thrifts.
M1 : The M1 measure includes currency in the hands of the public and checkable deposits in commercial banks. Near monies cannot be spent as readily as currency or checking account money, but they can be turned into spendable balances with very little effort or cost. Near monies include what is in savings accounts and money-market mutual funds.
The broader category of money that embraces all of these assets is called M2. M3 encompassed M2 plus relatively less liquid near monies. In practice, the measure of M3 is no longer used by the Federal Reserve. Mandy deposits the money in a checking account at another bank.
M2 is a broader measure of the money supply than M1, including all M1 monies and those that could be quickly converted to liquid forms. Instead there are several measures, classified along a continuum between narrow and broad monetary aggregates. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation.
However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations. Unit of account. Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. 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 money has no intrinsic value, but is declared by a government to be the legal tender of a country. The only backing of our money is universal faith and trust that the currency has value, and nothing more. Money is what people in a society regularly use when purchasing or selling goods and services. If money were not available, people would need to barter with each other, meaning that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific good or service that the other desires.
Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. There are two types of money: commodity money, which is an item used as money, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is declared by a government to be the legal tender of a country.
Hogendorn, Jan and Marion Johnson. The Shell Money of the Slave Trade. Cambridge University Press, Skip to content Chapter Money and Banking. Learning Objectives By the end of this section, you will be able to: Explain the various functions of money Contrast commodity money and fiat money. Self-Check Questions In many casinos, a person buys chips to use for gambling. Within the walls of the casino, these chips can often be used to buy food and drink or even a hotel room.
Do chips in a gambling casino serve all three functions of money? Can you name some item that is a store of value, but does not serve the other functions of money? Review Questions What are the four functions served by money? How does the existence of money simplify the process of buying and selling?
A Silver Certificate and a Modern U. Today, U. As commodity money, gold 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 some other commodity held at a bank.
During much of its history, the money supply in the United States was backed by gold and silver. 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 money has no intrinsic value, but is declared by a government to be the legal tender of a country.
The only backing of our money is universal faith and trust that the currency has value, and nothing more. Improve this page Learn More. Skip to main content. Module Money and Banking. Search for:. Try It.
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