The Functions of Money; The Kinds of Money - Video Tutorials & Practice Problems

Definition of Money; Barter Economy; Double Coincidence of Wants

Alright, So let's get into everyone's favorite topic. Money. So we're going to discuss the functions of money and the kinds of money and why money is important. So let's start off with the definition of money, money is a set of assets that people are generally willing to accept in exchange for goods and services. So when you work at your job, you're willing to accept money when you go and put in your labor and when you go to the store to buy something, the store is willing to accept the money for whatever you want to buy. Right? So money acts as that medium. So why is money useful? Well, it eliminates the need for a double coincidence coincidence of wants. This is an important term that they love to use in this class. Double coincidence of wants because this double coincidence of wants is where both the buyer and the seller need to have something that the other one has. Alright, so let's go ahead and see what this means in a barter economy. The double coincidence of wants is important in a barter economy because they only trade goods for other goods. In a barter economy, there's no money, there's no money in a barter economy. So let's go through this example. We've got three people in this economy. We've got brick master who's a builder and who would like to trade his extra clay for lumber. And then we've got Sir lumber who's a carpenter who would like to trade his extra lumber for wheat, Right? So if these two tried to trade if brick master tried to trade his clay for lumber, But Sir lumber only has lumber that he wants to trade for wheat? Well, they're not going to make a trade, right? Because neither one has what the other one has. There's no double coincidence of wants. Sir lumber would have to have a need for clay. Right? But he only has a need for week. He doesn't have a need for clay. Finally, we have Admiral wheat, who's a farmer who would like to trade his extra wheat for lumber. So, in this situation, who would trade? Well, we would be able to trade right here, right? There would be a trade between Sir lumber, Sir lumber and Admiral wheat would be able to make a trade because they have what each other wants. But what about Brick master? He's kind of screwed here because all he has is clay and nobody wants his clay and he needs lumber? Right, But what if he was able to sell his clay for money? And then uh Sir lumber would accept the money for lumber as well. You'd be able to get rid of this double coincidence of wants. So, it's difficult to get what you want without the use of money, right? You need to have that double coincidence of wants in this situation. So, let's go ahead and pause and let's talk about the functions of money in the

Functions of Money

Alright so let's discuss the three main functions of money. These are the three main functions of money right here. A medium of exchange, a unit of account and a store of value. Okay so let's start here with medium of exchange. A medium of exchange means that the money can be used for trading goods rather than just for its own consumption. Okay so we don't actually consume us dollars. Right? The U. S. Dollars are not consumed by anyone. They never get used up. They get traded away and they get they get traded just for other goods and service right there just used to trade. So that's what the money does. It acts as this middleman between the goods that you want and the goods that you have. Next we have a unit of account. So this the money is a measure used to set prices and to help make calculations right? It helps us make have a set price for things rather than many different prices for for each item. So let's go through an example. Money allows us for one set price. For example in U. S. Dollars. So if we have lumber right? If we're selling one One amount of lumber it's worth $5. But without money we would have to be able to value it with different number different types of goods. So one lumber could be worth for example to wheat or three bricks or one sheep. Right so all of these different calculations. Now if we had to wheat. Well we know that's worth one lumber, how many bricks can we get with two wheat? It adds a whole bunch of layers of math that nobody wants to do. Money gets us to eliminate that complex calculation and we just say one number is $5. If you have $5 you can get that lumber. So we would have a set price for the bricks, a set price for the wheat and we would just get the money in the middle ground. Okay, finally we have the store of value. So we want to be able to have the ability to retain our purchasing power over time, right? Because you may give up your services now to get paid in money, but you don't really need anything right now. But maybe in the future you might need something. So you can trade your goods and services now, save the money and use it later, right? Because it's gonna retain that value. You don't have to immediately need something to make the trade. You can just get the money, hold the value and then later on get what you want. So this goes in with the idea of a standard for deferred payment. And this allows for trading of goods in advance where we can kinda have alone, right? We can we can get a loan for something, We can receive something now, like buy a car now and make payments in the future because the seller knows that the money that we pay them in the future is still gonna hold the value that it has today. That's what a good um money would do is be able to have these three characteristics here. Now I want to make a note here when we talk about money is that there are other things that hold wealth right there that can store value, but they're not exactly money. So things like stocks, bonds and real estate right there, they hold a value in it. You buy a house, it's not like that house is just gonna become worthless. Uh so to speak, right? It's still gonna hold value but it's not like you can go to the store and buy your groceries and say, hey I own a house. Do you wanna take you know uh 1% of the house for for this, this batch of groceries doesn't work like that. It doesn't function as money in the same way as it holds, right? So we talked about this idea of liquidity which is how easily an asset can be converted into cash, right? So liquid asset means that you can sell the asset quickly and have the cash on hand. So maybe something like stocks, stocks are pretty liquid because there's always, let's say you own some apple stock, well you can go onto the market, you can check on google what it's worth and you can sell the stock almost immediately using an exchange, right? So stock would be said to be pretty liquid. Real estate is very very much less liquid, Right? You need to find a buyer. It takes a long process to actually sell a house compared to selling a piece of stock. Alright, so those are the functions of money. Remember those three? We've got our medium of exchange, our unit of account and our store of value. Cool. Let's pause here, and let's talk about the different kind.

Kinds of Money

Alright, so now let's discuss the two different kinds of money. We've got fiat money and commodity money. Okay, so, fiat money. Well, fiat money just has value just because we say it has value. Okay, the only value is because we say it has that value. So it's usually mandated by a government to say that this is the currency of our nation. So this currency has value. But think about it if the US dollar outside of its uses money has no value, right? Um There's you can't eat it. You can't eat dollars for consumption or anything. There's nothing really you can do with the dollars other than buy something. Okay, So they have no other use. That's the big deal with fiat versus commodity. Fiat money has no other use. Okay. But commodity money has other uses. So commodity money has value and other uses. But it's also used as money. The very common commodity money is gold. Gold is a great example of commodity money. It's been used as a medium of exchange for millennia, right? It's been a long time that it's been used for um for money, but it has many other uses as well. Right? We use it in jewelry, It has uses in electronics. And of course when you have gold teeth, you need to have some gold for that as well. Right? So commodity money has other uses than just uh being traded as money uh just like gold does here. Okay, so fiat money, no other uses commodity money has other uses. Cool. Let's go ahead and move on to