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Uses and Characteristics of Money

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Economic Definitions

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Uses and Characteristics of Money

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

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