Difference between revisions of "The three functions of money"
Mehdi Prevot (talk | contribs) (New page: '''Two sorts of money exist:''' 1) ''Fiat money'' is a money that has no intrinsic value (i.e. it is not made of anything valuable) but that has a nominal value by decree of the governmen...) |
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'''Two sorts of money exist:''' | '''Two sorts of money exist:''' | ||
| − | 1) ''Fiat money'' is a money that has no intrinsic value (i.e. it is not made of anything valuable) but that has a nominal value by decree of the government. For example, all paper currencies are ''fiat money.'' Inflation results from the issuing of too much fiat money by a government. | + | 1) ''Fiat money'' is a money that has no intrinsic value (i.e. it is not made of anything valuable) but that has a nominal value by decree of the government. For example, all paper currencies are ''fiat money.'' Inflation results from the issuing of too much fiat money by a government.<ref>http://www.investorwords.com/1928/fiat_money.html</ref> |
2) ''Specie'', on the contrary, does have an intrinsic value. For instance, gold or silver coins are specie because those are two precious metals. | 2) ''Specie'', on the contrary, does have an intrinsic value. For instance, gold or silver coins are specie because those are two precious metals. | ||
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3) ''Unit of Account'' = it provides a standard relationship between various goods and services in the economy, thereby facilitating transactions. | 3) ''Unit of Account'' = it provides a standard relationship between various goods and services in the economy, thereby facilitating transactions. | ||
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| + | ==REFERENCES== | ||
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| + | <references/> | ||
Revision as of 22:01, 15 October 2010
Two sorts of money exist:
1) Fiat money is a money that has no intrinsic value (i.e. it is not made of anything valuable) but that has a nominal value by decree of the government. For example, all paper currencies are fiat money. Inflation results from the issuing of too much fiat money by a government.[1]
2) Specie, on the contrary, does have an intrinsic value. For instance, gold or silver coins are specie because those are two precious metals.
Money serves three functions:
1) Medium of Exchange = it resolves the "double coincidence of wants problem", that is the unlikelihood of finding someone who has what I want and wants what I have. By accepting a common medium of exchange, people make transactions more likely to happen.
2) Store of value = it allows individuals to convert perishables (such as food) into more durable goods that can be stored and saved in between two transactions.
3) Unit of Account = it provides a standard relationship between various goods and services in the economy, thereby facilitating transactions.
