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MONEY

Money and its Functions

Although the crucial feature of money is its acceptance as the means of payment or medium of exchange, money has other functions. It serves as a standard of value, a unit of account, a store of value and as a standard of deferred payment. We discuss each of the functions of money in turn.

The Medium of Exchange

Money, the medium of exchange, is used in one-half of almost all exchange. Workers exchange labour services for money. People buy and sell goods in exchange for money. We accept money not to consume it directly but because it can subsequently be used to buy things we do wish to consume. Money is the medium through, which people exchange goods and services. To see that society benefits from a medium of exchange, imagine a barter economy. A barter economy has no medium of exchange. Goods are traded directly or swapped for other goods. In a barter economy, the seller and the buyer each must want something the other has to offer. Each person is simultaneously a seller and a buyer. In order to see a film, you must hand over in exchange a good or service that the cinema manager wants. There has to be a double coincidence of wants. You have to find a cinema where the manager wants what you have to offer in exchange. Trading is very expensive in a barter economy. People must spend a lot of time and effort finding others with whom they can make mutually satisfactory swaps. Since time and effort are scarce resources, a barter economy is wasteful. The use of money-any commodity generally accepted in payment for goods, services, and debts-makes the trading process simpler and more efficient.

Other Functions of Money

Money can also serve as a standard of value. Society considers it convenient to use a monetary unit to determine relative costs of different goods and services. In this function money appears as the unit of account, is the unit in which prices are quoted and accounts are kept. In Russia prices are quoted in roubles; in Britain, in pounds sterling; in the USA, in US dollars; in France, in French francs. It is usually convenient to use the units in which the medium of exchange is measured as the unit of account as well. However there are exceptions. During the rapid German inflation of 1922-1923 when prices in marks were changing very quickly, German shopkeepers found it more convenient to use dollars as the unit of account. Prices were quoted in dollars even though payment was made in marks, the German medium of exchange. The situation in Russia nowadays reminds of that of in Germany. Money is a store of value because it can be used to make purchases in the future. To be accepted in exchange, money has to be a store of value. Nobody would accept money as payment for goods supplied today if the money was going to be worthless when they tried to buy goods with it tomorrow. But money is neither the only nor necessarily the best store of value. Houses, stamp collections, and interest-bearing bank accounts all serve as stores of value. Since money pays no interest and its real purchasing power is eroded by inflation, there are almost certainly better ways to store value. Finally, money serves as a standard of deferred payment or a unit of account over time. When you borrow, the amount to be repaid next year is measured in pounds sterling or in some other hard currency. Although convenient, this is not an essential function of money. UK citizens can get bank loans specifying in dollars the amount that must be repaid next year. Thus the key feature of money is its use as a medium of exchange. For this, it must act as a store of value as well. And it is usually, though not invariably, convenient to make money the unit of account and standard of deferred payment as well.

unctions of money.

3. Dwell on different kinds of money.

4. What’s a barter economy? Why is trading expensive in a barter economy?

5. What currency can be used as the unit of account? Speak on the current

situation in Russia.

6. What does IOU stand for?

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Ответ:
юли10
юли10
18.01.2024 11:49
MONEY

Money is a crucial component of our economic system that serves several important functions. The primary function of money is its acceptance as a means of payment or medium of exchange. In other words, money is used to facilitate the buying and selling of goods and services. It is the medium through which individuals exchange labor services for money and purchase goods in exchange for money. However, money also has other functions that are equally important and contribute to its overall value in our society.

One of these functions is as a standard of value. Money serves as a unit of account in which the relative costs of different goods and services are determined. For example, prices in Russia are quoted in roubles, in Britain in pounds sterling, in the USA in US dollars, and so on. In most cases, the monetary unit used as the medium of exchange is also used as the unit of account. However, there can be exceptions, like during the rapid inflation in Germany in 1922-1923 when German shopkeepers found it more convenient to use dollars as the unit of account even though payment was made in marks.

Money is also a store of value because it retains its purchasing power over time. To be accepted in exchange, money must be a reliable store of value. Nobody would willingly accept money as payment for goods today if the money's value would become worthless tomorrow. However, it is important to note that money is not the only store of value. Other assets such as houses, stamp collections, and interest-bearing bank accounts can also retain value over time.

Additionally, money serves as a standard of deferred payment or a unit of account over time. This means that when individuals borrow money, the amount to be repaid in the future is measured in the currency of the country, such as pounds sterling in the UK. However, this function is not absolutely necessary as individuals can also get bank loans specifying repayment in a different currency, such as US dollars.

Now, let's move on to discussing different kinds of money. Money can exist in various forms, including physical currency (banknotes and coins) and electronic or digital money (debit cards, online banking, etc.). Physical currency is tangible and can be carried and exchanged physically, while electronic money exists in digital form and can be transferred electronically. Both forms of money play essential roles in our modern economy.

Next, let's consider what a barter economy is and why trading in such an economy can be expensive. In a barter economy, there is no commonly accepted medium of exchange like money. Instead, goods and services are exchanged directly or swapped for other goods. For example, if you want to watch a film in a barter economy, you would have to offer something of value to the cinema manager in exchange for a ticket. The challenge in a barter economy is that there must be a double coincidence of wants, where both the seller and the buyer must want something the other has to offer. This makes trading in a barter economy time-consuming and inefficient, as individuals have to spend significant time and effort finding mutually satisfactory swaps. In contrast, using money as a medium of exchange simplifies and streamlines the trading process, leading to more efficient transactions.

Moving on, let's discuss what currencies can be used as the unit of account. The unit of account in a country is typically the currency accepted and recognized by the government and financial institutions. For example, in Russia, the unit of account is the Russian rouble, in Britain it is the pound sterling, and in the USA it is the US dollar. However, in certain cases, when a country experiences significant economic instability or high inflation, individuals may find it more convenient to use foreign currencies, like the US dollar, as a unit of account despite making payments in the local currency. This was observed during the inflationary period in Germany in the early 20th century and can be seen in the current situation in Russia, where some businesses may quote prices in a foreign currency like dollars due to concerns about the stability of the local currency.

Lastly, let's define what IOU stands for. IOU stands for "I Owe You." It is a written acknowledgment of a debt, where the debtor acknowledges their obligation to repay a certain amount of money to the creditor at a later date. IOUs are commonly used in informal agreements or between individuals as a temporary substitute for actual money, particularly when immediate cash payment is not possible.

In conclusion, money has multiple functions that go beyond its role as a medium of exchange. It acts as a standard of value, unit of account, store of value, and standard of deferred payment. Money simplifies trading in comparison to barter economies, where direct exchanges of goods and services are required. Different forms of money exist, including physical currency and electronic money. The unit of account in a country is typically the local currency, but in certain situations, foreign currencies can be used. IOU stands for "I Owe You" and represents a written acknowledgment of a debt.
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