Definition of Money
Money refers to any widely accepted medium of exchange, such as coins, banknotes, or digital currency, that is used to facilitate transactions and store value. It serves as a unit of account, a store of value, and a standard of deferred payment. In economics, money plays a crucial role in the functioning of modern economies by enabling the exchange of goods and services.
8 Key excerpts on "Definition of Money"
eBook - ePub- Lorenzo Garbo, Dorene Isenberg, Nicholas Reksten(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...7 Money changes everything Macroeconomic theory and policy: the money market 7.1 What is money? Working along with the real side of the economy is the monetary system, which enables people to carry out transactions with each other, whether buying or selling, saving or investing, borrowing or lending. At the heart of the monetary system is … money! While common language gives money several connotations, which range from coins and banknotes to wealth, economists have a precise Definition of Money: money is perfect liquidity. Operationally, it is the stock of assets that can be legally and readily used to make transactions and hold value. The assets which have acted as money have varied over time, and you’ll see different monies in different countries; so, it is important to remember that money changes as the economy changes. In other words, money is what can be used to make and receive payments and store value: in stable times, any commodity generally accepted as means of payment, as a way of settling a debt, can be money; during times of duress, there are fewer acceptable assets. Usually, money is defined by its three fundamental functions (and, as we’ll see later, these functions inform the demand for money). Medium of exchange : it is an asset that people are willing to accept as payment for what they sell because they in turn can use it to pay for something else they want. This function is dependent on liquidity. Store of value : money is a convenient way to store purchasing power and wealth through time. Money as cash maintains its value over time...
eBook - ePub- W. Charles Sawyer, Richard L. Sprinkle(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Coins and paper currency are money because they act as one of the primary mediums of exchange. Likewise, demand deposits held at commercial banks and other depository institutions are money because they provide the same function as currency. The sum of currency plus demand deposits is referred to as the money supply. In the U.S., the total quantity of currency plus demand deposits is called M1. 2 Internationally, this definition of the money supply is known as narrow money. Other definitions of money are possible. There are a number of financial assets that are referred to as near monies that can be used as money in many circumstances. Near monies are highly liquid financial assets such as savings accounts, time deposits, and short-term government securities. In many cases, these assets cannot be spent as easily as can currency or a demand deposit at a local bank. An example of a near money is an account with a money market mutual fund. In the U.S., this is a common form of near money. In other countries, where this form of near money is less common, a large amount of near money is held in the form of time deposits. For the most part, near monies do not function as a medium of exchange but they can be readily converted into currency or demand deposits. For the U.S., M1 plus money market mutual funds and time deposits constitutes M2. In an international context, the term for M2 is called broad money. Ultimately, the supply of money within a country is the result of a process that we need to describe. In order to do this we will need to look at an important part of the money supply known as the monetary base (B). The monetary base (B) is composed of cash in the hands of the BOX 15.1 WHAT IS THE SUPPLY OF MONEY? Even though the public can hold money for a variety of reasons, the supply of money that is relevant for the purposes of economic policy is a measure of money that will be used for economic transactions within a given period of time, such as a year...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...To pay for these items, you might hand the waiter some cash or a personal check. The restaurant is happy to accept either of these pieces of paper, which, in themselves are worthless. Nevertheless, they are considered money. We begin with a simple question: What is money? Money is the set of assets in the economy that people use regularly to purchase goods and services from others. Gold and silver were once the most common forms of money. But today, money consists primarily of paper bills, coins made of various metals, and checking account deposits. Each country has its own system of money. In the United States, for example, the basic unit of money is the U.S. dollar. Canada uses the Canadian dollar, Mexico uses the peso, Japan uses the yen, and so on. We call the money in use in a country its currency. Money has three functions in the economy: It is a medium of exchange, a unit of account, and a store of value. These functions distinguish money from other assets such as stocks, bonds, and real estate. Medium of Exchange First, money is a medium of exchange : It is something that people are willing to accept in payment for goods and services. In the United States, a penny, a dime, a quarter, and a $1 bill are media of exchange because people are willing to accept these items in payment, realizing that they can be used for other purchases. The transfer of money from the buyer to the seller allows the transaction to occur. Without a medium of exchange, people would have to trade their goods and services directly for other goods and services. For example, if you wanted a motorcycle, you would have to find a motorcycle owner willing to trade. Suppose that the motorcycle owner wanted a computer in exchange for the motorcycle, and you did not own a computer...
eBook - ePubMoney and Banking
An International Text
- Robert Eyler(Author)
- 2009(Publication Date)
- Routledge(Publisher)
...There is an additional cost of barter which does not exist with money. But money also has its costs, and those help shape the definition of what is accepted for all debts public and private. The Definition of Money Money is, at its foundation, a medium of exchange. This text uses a Definition of Money that also eliminates certain financial assets from being considered money. To be considered money, an entity must have the following four characteristics simultaneously: • Medium of Exchange: money eliminates the double coincidence of wants under barter; • Unit of Account/Standard of Value: all goods, services, and financial assets within an economy are priced in terms of the currency; • Store of Value: money is an asset because money has value or explicitly earns income; and • Standard of Deferred Payment: all debts, public and private, are priced in terms of the currency. The medium of exchange characteristic is specific to being the lubricant between buyers and sellers, eliminating barter. Monetary economies came from a natural evolution of society. We will see later that differences between currencies around the world, and sometimes within an economy unified politically otherwise, were at one time set to a certain value of gold such that the relative prices of goods were basically the same in any country. Economists still consider “barter terms of trade”, or the relative export to import volumes of goods exchanged between two countries. Karl Marx discussed an economy without money as a “natural economy”. Marx suggested that a barter economy is not necessarily distinct from a monetary economy, simply a part of it. A coincidence of wants is still needed, but money allows for the use of credit to facilitate transactions. Both goods and credit can be priced in the same terms when a monetary economy is present...
eBook - ePub- Kevin Deane, Elisa van Waeyenberge, Kevin Deane, Elisa van Waeyenberge(Authors)
- 2020(Publication Date)
- Bloomsbury Academic(Publisher)
...Anything able to perform these functions in an economy would be defined as money. Anything able to perform some of these functions but not all of them, or anything not able to consistently perform these functions would be considered ‘near’ money. Given Neoclassical economics’ disproportionate focus on market exchange (see also Chapters 5, 6, and 7), the most important function of money is its ability to make trading easier and more efficient, that is its medium of exchange function. The other functions of money are derived from this first function. Because money can be used as a medium of exchange in the future, it also becomes the best commodity to store value for future transactions. The store of value is a store of generalised purchasing power, where people can use money to buy commodities in the future. Similarly, because everybody wishes to use the same commodity in trading, it becomes the common way to price all goods and services (or a unit of account). These functions help to reduce the costs of transacting and address the frictions involved with trading. By having a common unit of account, the pricing and comparisons of trading options becomes more efficient. By having a store of value, consumption of goods and services can be smoothed and transactions spaced out over time. This ‘exchange’ view of economic processes is also reflected in the way Neoclassical economics sees the emergence of money. The argument goes as follows. Before the development of money, barter was the main form of trade. Barter involves the direct exchange of goods and services, without some intermediary (i.e. money). However, barter suffers from a number of frictions or ‘transaction costs’. These difficulties are summarised with the concept of ‘double co-incidence of wants’. Any exchange under barter requires each party to be willing to accept those exact goods on offer, at an agreed ratio (price), in exchange for those goods/services they are offering...
eBook - ePubEconomics After the Crisis
An Introduction to Economics from a Pluralist and Global Perspective
- Irene van Staveren(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...The second function of money is as a unit of exchange. Obviously, this makes economic life much easier. Rather than dragging your home-made lentil soup or naan bread to the next village to exchange it for a new sari, and where you would need to find a seller of saris with an appetite for your soup or naan, you simply sell the food in your own village to whoever wants to buy it. And with the money earned, you go to your favourite sari seller in the next village and choose your size and colour, even when this sari seller does not like lentil soup. The third function of money is that it also serves as a store of value. Unlike soup or naan, it does not rot or evaporate as days go by. So, you can keep money for a long time – in your wallet, under the mattress, or in your bank account. The fourth function of money is that it enables accumulation in a capitalist economy. This was expressed by Marx as the sequence of money (M) and commodities (C), which begins and ends with money: M – C – M′. The beginning of the exchange chain is money through debt, which an entrepreneur invests. Then there is a process of exchange in commodities. Also the end of the chain is money, but now through profit for the entrepreneur. When money depends on trust, it may also lose trust. Monetary institutions are organisations, regulations, and social norms which together guarantee the functioning of a monetary system. When economic agents lose trust in a particular bank, they are afraid that the money that they have in their checking account and savings account will no longer be accessible to them, because the bank has lent it all out or even lost it. This fear creates a bank run, to make the money liquid. Liquid money means that money is shifted from deposits to immediately accessible forms of money...
eBook - ePubFinancial crises and the nature of capitalist money
Mutual developments from the work of Geoffrey Ingham
- Jocelyn Pixley, G. Harcourt, G. Harcourt(Authors)
- 2013(Publication Date)
- Palgrave Macmillan(Publisher)
...Further, the three functions are incommensurable, which raises the questions as to whether ‘ all the functions need to be performed by a single instrument for it to be money? If not, which are the definitive ones that might uniquely specify money?’ (Ingham, 2001: 308). Further, ‘leaving aside for the moment economic analysis’s misleading implication that the functions [of money] explain the existence and nature of money, the presence of multiple attributes in the list raises two questions. Do all the functions have to be performed before “moneyness” is established? If not, which are the definitive functions?’ (Ingham, 2004: 5). One of the functions is sometimes described as medium of exchange and at other times as means of payment. The term medium of exchange clearly suggests that the role of money is to facilitate exchange and the existence of money is seen to overcome the problem of the double coincidence of wants. The term means of payment indicates that money is used to settle payments and debts rather than just facilitating exchange. A second function is sometimes described as a store of value and sometimes as a store of wealth. A store of value is taken to mean that whatever serves as money must retain most of its value over the period of time for which it is held between its receipt and its disbursement, although it is envisaged that the time between receipt and disbursement is relatively short. The notion of store of wealth is rather different. The notion of store of wealth is taken to mean that individuals hold money as part of their asset portfolio for the holding of wealth, and intend to hold money in this sense for some significant period of time...
eBook - ePubUnderstanding Money
Philosophical Frameworks of Monetary Value
- Aditya Nain, P. G. Jung(Authors)
- 2021(Publication Date)
- Routledge India(Publisher)
...Hence, paper came to acquire monetary value – and now digits on a computer screen have come to acquire monetary value – that gold and silver once possessed precisely because we have chosen to ascribe this very function to it. Why, we could very well ascribe this function to stones, shells, or any other object, and as the history of money shows us, this has in fact been done. As Simmel sees it, the invocation of the substantive characteristics of the object that stands proxy for money in terms of its specific use-value is a misconstrual within the substantive frameworks of monetary value. 2 Thus, for an object to function as money it does not need to house any intrinsic value, but rather must be rooted in an assurance that it will be accepted in exchange for any commodity, irrespective of the particular nature of the commodity or entity. 3 That is, though the object would surely have specific qualities or intrinsic properties which may be associated with its so-called original use-value, in its abstract or its pure spiritualized form as a symbol of exchangeability, the object must, so to speak, give up its internal characteristics or its original use-value in order to properly function as money. 4 And given the variety of demands of exchanges within the world of money, the object that stands for money must necessarily be fluid enough to accommodate this diversity of demands. And its fluidity is ensured precisely by shedding off its other qualities which would otherwise constrain it and render it dysfunctional as money. Consequently, the very existence of money in a world of individualized, diverse objects, indicates that money cannot be merely one of those objects, but rather must be both, an object and a pure value. This is so because money must be a representative of all exchangeable objects that constitute the universe of commodities, irrespective of individualized differences among these objects...
