Money has actually taken many kind of forms via the ages: shells, wheels, beads and even cows. All forms, though, have always had 3 things in prevalent. Find out what in this eight-minute episode of our Economic Lowdvery own Podactors Series. You will also learn how commodity money differs from representative money and also how both differ from today"s fiat money.
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TranscriptToday I"m talking about money.Money is somepoint that human being usage eextremely day. We earn it and also spfinish it but don"t regularly think a lot around it. Economists specify money as any great that is extensively welcomed as final payment for goods and solutions. Money has taken different forms with the ages; examples encompass cowry shells in Africa, big rock wheels on the Pacific island also of Yap, and also strings of beads called wampum used by Native Americans and also beforehand Amerihave the right to inhabitants. What do these develops of money have in common? They share the 3 functions of money: First: Money is a store of worth. If I work-related this day and also earn 25 dollars, I have the right to host on to the money prior to I spend it bereason it will hold its worth till tomorrow, next week, or even following year. In truth, holding money is a much more effective method of storing worth than holding various other items of value such as corn, which might rot. Although it is an reliable save of worth, money is not a perfect save of worth. Inflation gradually erodes the purchasing power of money over time. Second: Money is a unit of account. You deserve to think of money as a yardstick-the tool we use to meacertain worth in economic transactions. If you are shopping for a brand-new computer, the price can be quoted in regards to t-shirts, bicycles, or corn. So, for instance, your new computer system might expense you 100 to 150 bushels of corn at today"s prices, but you would find it a lot of helpful if the price were collection in regards to money because it is a common meacertain of value across the economic climate. Third: Money is a medium of exchange. This means that money is extensively embraced as an approach of payment. When I go to the grocery store, I am confident that the cashier will accept my payment of money. In truth, UNITED STATE paper money carries this statement: "This note is legal tender for all debts, public and also exclusive." This implies that the U.S. federal government protects my appropriate to pay with UNITED STATE dollars.In order to appreciate the conveniences that money brings to an economy, think about life without it. Imagine I am a musician-a bassoonist in an orchestra-who has actually a car that demands to be repaired. In a people without money, I would should barter for auto repair. In reality, I would certainly must uncover a coincidence of wants-the unmost likely case that 2 people each have something that the other desires at the appropriate time and also location to make an exchange. In other words, I would should find a mechanic that would certainly be willing to exadjust car repairs for a private basshortly concert by 9 AM tomorrow so I can drive to my following orchestra rehearsal. In an economy where people have actually very specialized abilities, this kind of exchange would certainly take an significant amount of time and also effort; in truth, it might be virtually difficult. Money reduces the expense of this transactivity bereason, while it could be extremely difficult to find a mechanic who would exchange vehicle repairs for basquickly concerts, it is not tough to discover one that would exadjust auto repairs for money. In fact, without money, eextremely transaction would need me to discover producers that would exreadjust their products and also solutions for basshortly performances. In a money-based economic situation, I deserve to sell my solutions as a bassoon player in an orchestra to those who are willing to pay for orchestra concerts via money. Then, I can take the money I earn and also pay for a variety of items and solutions.Economists say that the development of money belongs in the same category as the excellent inventions of ancient times, such as the wheel and also the inclined plane, but just how did money develop? Early forms of money were often commodity money-money that had worth because it was made of a substance that had worth. Instances of commodity money are gold and silver coins. Gold coins were helpful bereason they might be provided in exchange for various other products or services, however additionally bereason the gold itself was valued and had actually other provides. Commodity money provided way to the following stage-representative money.Representative money is a certificate or token that have the right to be exadjusted for the underlying commodity. For instance, instead of delivering the gold commodity money through you, the gold can have actually been maintained in a financial institution vault and you might lug a paper certificate that represents-or was "backed"-by the gold in the vault. It was understood that the certificate can be reunderstood for gold at any type of time. Also, the certificate was simpler and also safer to bring than the actual gold. With time people flourished to trust the paper certificates as much as the gold. Representative money led to the usage of fiat money-the form provided in modern-day economic situations this day.Fiat money is money that does not have intrinsic value and does not reexisting an asset in a vault somewbelow. Its value comes from being asserted "legal tender"-an acceptable create of payment-by the federal government of the issuing country. In this case, we accept the value of the money because the government states it has actually worth and other civilization value it sufficient to accept it as payment. For example, I accept UNITED STATE dollars as earnings because I"m confident I will certainly have the ability to exadjust the dollars for items and solutions at local stores. Due to the fact that I recognize others will accept it, I am comfortable accepting it. U.S. money is fiat money. It is not a commodity with its own great value and it does not represent gold-or any kind of other useful commodity-hosted in a vault somewhere. It is valued bereason it is legal tender and human being have belief in its use as money.There have actually been many creates of money in history, yet some forms have worked better than others bereason they have actually features that make them more beneficial. The qualities of money are durcapacity, portcapacity, divisibility, uniformity, restricted supply, and also acceptcapacity. Let"s compare two examples of feasible creates of money: A cow. Cattle have been used as money at different points in history. A stack of U.S. 20-dollar bills equal to the value of one cow.Let"s run down our list of characteristics to watch exactly how they stack up. Durcapacity. A cow is reasonably long lasting, yet a lengthy trip to sector runs the risk of sickness or fatality for the cow and can sevedepend reduce its worth. Twenty-dollar bills are sensibly durable and also deserve to be quickly reput if they come to be worn. Even much better, a long expedition to industry does not thrconsumed the wellness or worth of the bill. Portcapability. While the cow is tough to transfer to the store, the currency have the right to be conveniently put in my pocket. Divisibility. A 20-dollar bill have the right to be exreadjusted for other denomicountries, say a 10, a 5, 4 1s, and 4 quarters. A cow, on the various other hand also, is not incredibly divisible. Uniformity. Cows come in many kind of sizes and forms and also each has actually a different value; cows are not an extremely unidevelop create of money. Twenty-dollar bills are all the same dimension and also form and also value; they are extremely unidevelop. Limited supply. In order to preserve its value, money have to have actually a limited supply. While the supply of cows is sensibly limited, if they were offered as money, you have the right to bet ranchers would do their ideal to rise the supply of cows, which would certainly decrease their value. The supply, and also therefore the worth, of 20-dollar bills—and also money in general—are regulated by the Federal Reserve so that the money retains its value over time. Acceptability. Even though cows have intrinsic worth, some people might not accept livestock as money. In contrast, civilization are even more than willing to accept 20-dollar bills. In truth, the U.S. federal government protects your ideal to use U.S. currency to pay your bills.Well, it seems "udderly" clear at this point that—based upon the features of money—UNITED STATE 20-dollar bills are a much better form of money than cattle.To summarize, money has taken many forms through the periods, yet money repetitively has 3 functions: store of value, unit of account, and tool of exreadjust. Modern economic climates use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.
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Even forms of money that share these attribute may be even more or much less advantageous based on the characteristics of money.