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With a partner, discuss: what is the function (use) of each of the items below?

Explore the concept of money and its three functions: medium of exchange, unit of account, and store of value. Learn about the difference between credit and money, the types of money, and the role of commodity money and fiat money. Discover why certain items like credit cards, debit cards, seashells, and sand are not considered money.

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With a partner, discuss: what is the function (use) of each of the items below?

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  1. With a partner, discuss: what is the function (use) of each of the items below?

  2. Money! 1. What is money? 2. What are money’s three functions? 3. How can you trade without money? 4. How are credit and money different? 5. What are the two major types of money?

  3. Money is anything people accept as payment for goods and services Can be used to pay debts Money has three functions: Medium of exchange Unit of account Store of value Exchange (trade) can happen without money. Barter—direct exchange of one good/service for another Problem: you waste time in transactions What is money?

  4. Removes problem of barter, because everyone is willing to accept it as payment Increases trade by providing a more convenient way to exchange A medium of exchange is anything widely accepted in exchange for goods and services This is called being fungible—interchangeable for a valued good/service Medium of Exchange

  5. Unit of account Unit of account—function of money that provides a common measurement of value for goods/services • Allows us to compare the value of two items • Monetary units are what we call our money (US/Australia—dollar; El Salvador—colon, Japan—yen, Afghanistan—dinar)

  6. Store of value Store of value—the function of money to hold value over time • This allows us to save our money and spend it in the future • Does not mean that the value will remain constant (inflation)

  7. Other properties of money • Money must be scarce, but not too scarce • Should be portable—easy to carry • Should be divisible—able to “make change” • Must be uniform—easy to tell how much it is worth, look the same as other money of its type

  8. What stands behind U.S. money? • Commodity money—anything that serves as money, has market value based on the material it’s made from (tangible value) • In other words, has value as money AND as a good • Should the penny be considered commodity money? • Used to be backed by gold/silver • Fiat money—money accepted by law, not because of its tangible value • In other words, what the government says is acceptable for exchange • Dollar bills • “THIS NOTE IS LEGAL TENDER…” means your paper money is fiat money

  9. Think about it… • Are credit cards money? • Are debit cards money? • Are seashells money? • Is sand money? THE ANSWER (in the U.S.) is NO.

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