Money

1. Money Money: Functions, Properties, and Types

2. Objectives Explain the three functions of money Describe the physical properties of currency Describe the types of money

3. Functions of Money • Medium of exchange – something that can be traded for goods and services • Money – anything of value that is accepted in return for goods or services • Barter – exchange of one good or service for another good or service • Depends on coincidence of wants – if we each want what the other has to offer

4. Functions of Money • Unit of account – provides a common measure of what something is worth or what it costs • Store of value – meaning it can be saved, or stored, to use at a later date • Can lose it’s purchasing power • Other stores of value – gold, silver, and real estate • These items may appreciate…worth more than the original purchase price

5. Properties of Money • Durable – needs to be physically strong • Our paper bills are made out of a blend of cotton and linen • The average $1 bill lasts about 42 months before it becomes too worn…$100 bill lasts about 89 months • Coins are made of copper and nickel…in the past gold and silver

6. Properties of Money • Portable – bills are lighter than coins but the electronic form is even more portable • Recognize – good money needs to be recognized quickly…most widely used currency around the world • Counterfeit – make a copy of something and represent it as the real thing…well designed currency tries to defeat counterfeiting

7. Properties of Money Acceptable – in some countries the local currency isn’t accepted because it’s not stable like the US dollar Divisibility – can be divided into smaller units

8. Types of Money • Commodity money – something perceived as having value used as payment for something else • Commodity – anything that is useful or has value • Agricultural commodities – wheat, corn, or oats • Oil, gold, and silver • Beads, fur pelts, salt, cotton, and iron nails • Similar to barter but commodity money has recognized value • Example…one beaver pelt might have a recognized value of $10 • Weakness – not very portable and items could lose their value if they spoiled

9. Types of Money • Representative Money – a bill or coin that can be exchanged for an item of value…the bill or coin didn’t have value but it was backed by something of value…like gold • Gold standard – system that determines how much gold each paper note represents • 1933 to 1971 – Gold exchange standard – foreign governments could redeem US dollars for gold. In 1971, President Nixon terminated it because the government thought we were losing too much of our gold supply…oil rich nations held US dollars and were converting them into gold

10. Types of Money • Fiat money – have value because the government says it does…US dollars • Major type of currency in the world today • Generally in the form of coins and bills but also in the form of near money (funds in a savings account and other instruments that can be cashed), and demand deposits (checking accounts)