Uses and Characteristics of Money
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Uses and Characteristics of Money

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Economic Definitions

Economic Definitions

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Uses and Characteristics of Money Uses and Characteristics of Money Presentation Transcript

  • Money Its Uses and Characteristics
  • Uses of Money Explained
    • Money, as defined by dictionary.com, is:
      • any circulating medium of exchange, including coins, paper money, and demand deposits.
    • However, for the purposes of economics, money actually has three distinct uses, some of which are not adequately covered in the above definition.
    • These uses are:
      • a Medium of Exchange
      • a Unit of Account
      • a Store of Value
  • …a Medium of Exchange
    • By definition, a Medium of Exchange is anything that is used to determine value during the exchange of goods and services.
    • Money allows us to use systems of trade beyond the Barter System.
      • Bartering is directly trading one good or service for another.
    • Your money acts as a common ground for determining value.
  • …a Unit of Account
    • Money can be used as a means to compare the values of goods and services.
    • You can use the monetary value assigned to a specific good or service to compare it to one offered by a different provider.
    • Money allows us to compare similar offers for goods and services to determine the best value.
  • …a Store of Value
    • Money is used to maintain the value of a transaction over time.
    • If you receive monetary compensation for a good or service, the actual amount that your received does not change if you do not use it immediately.
      • You can spend, or exchange, your money at a later time without penalty.
    • However, the functional value of the stored money may change over time due to other factors.
  • What then is Money?
    • An item must have six key characteristics to be considered as “Money”.
    • These Characteristics are:
      • Durability
      • Portability
      • Divisibility
      • Uniformity
      • Limited Supply
      • Acceptability
  • Durability
    • Durability means that the item must be able to withstand being used repeatedly.
    • Items that are considered Currency, coins and paper bills used as money meet this requirement.
  • Portability
    • Portability means that individuals are able to carry money with them and transfer it easily to other individuals.
    • This is why coins and paper money have historically proved popular.
  • Divisibility
    • Divisibility means that the money can easily be divided into smaller units of value.
    • Today, different coins and notes convey these fractional values.
  • Uniformity
    • Uniformity means that all versions of the same denomination of currency must have the purchasing power.
    • As an example, a 1928 $2 bill will still buy $2 worth of goods or services today.
  • Limited Supply
    • Limited Supply means that restrictions on the amount of money in circulation ensure that values remain relatively constant for the currency.
    • The responsibility for maintaining an adequate money supply falls on the Federal Reserve System.
  • Acceptability
    • Acceptability means that everyone must be able to use the money for transactions.
    • In the United States this is indicated on our paper bills by the notation: “This note is legal tender for all debts, public and private”.