Money has three roles.
The first role
of money is to be a medium of exchange. People have needs and wants that they
cannot produce themselves. They also have skills so that they can provide
services and create goods in excess of what they need. This surplus is what
they create to trade on the open market. Without money, a chicken farmer who
wants a massage has to carry around his chickens to the massage place to trade
for a massage. The problem is that the farmer also had to find a masseuse that
wanted a chicken in exchange for his services. Money as a medium of exchange
got rid of this so that there is something standing in as chickens and massages
that are more universally accepted in trade. Ideally, this chit is portable,
durable, and not easily copied. It mediates trade and makes markets more
efficient (Krugman & Wells p. 413).
The second role
of money is as a store of value. In the previous example, the chickens have
value for a time, but they will eventually die or be consumed for dinner. Money
as a store of value is something unlike the chickens in that it will not perish
and instead will maintain purchasing power in the future. It is just as
tradable now as it is the future.
Krugman (2013) notes that this is not a unique feature of money, as many
things can hold their value over time and not perish (p. 414). Land, is a good
example of such a good
The final role
of money is as a unit of account. The unit of account role of money allows for
easier comparisons and allows people in the marketplace to quantify the value
of goods and services in trade. As in the masseuse and the farmer example,
instead of one chicken in exchange for one massage, it allows for more
specifics (Krugman & Wells p. 414). How big is the bird? How old is it? How
long is the massage expected to be. All of these are points of negotiation that
do not need to happen when there is quantification. Units give clarity in
conversation and negotiation so that all parties are speaking of similar
things.
Krugman, P.
& Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers
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