Wednesday, November 5, 2008

Money and its Functions

Money is anything that is generally accepted to serve as a medium of exchange, store of value, and unit of account.

Functions of Money

· Money is a medium of exchange when it is used to facilitate trade. In the absence of money, trade is done by barter. Barter is the exchange of a good or service for another good or service. Barter is often difficult because it requires a double coincidence of wants, which is the need for a trader to find a partner who has a product he wants and who wants what he is offering to trade. Buying food from the grocery store with a twenty-dollar bill is an example of using money as a medium of exchange.

· Money is a store of value when it is used to hold purchasing power for use at a later time. Putting coins in a piggy bank is an example of using money as a store of value.

· Money is a unit of account when it is used to measure the prices of things. In the United States, items are priced in dollars and cents.

Many things have been used as money throughout history. In Colonial Virginia, bundles of tobacco were used as money. In World War II, soldiers used cigarettes as money. On the Pacific island of Yap, giant circular stones with holes in the center are used as money.

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