Money: Meaning and Functions of Money – Discussed!

Discussion of people who makes money where, Community Discussion: Making Money

discussion of people who makes money where

By Investopedia Updated Jun 26, Money makes the world go around. Economies rely on the exchange of money for products and services.

How to have a conversation about money

Economists define money, where it comes from, and what it's worth. Here are the multifaceted characteristics of money.

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Key Takeaways Money is a medium of exchange; it allows people to obtain what they need to live. Bartering was one way that people exchanged goods for other goods before money was created.

Like gold and other precious discussion of people who makes money where, money has worth because for most people it represents something valuable.

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Fiat money is government-issued currency that is not backed by a physical commodity but by the stability of the issuing government.

Medium of Exchange Before the development of a medium of exchange —that is, money—people would barter to obtain the goods and services they needed. Two individuals, each possessing some goods the other wanted, would enter into an agreement to trade.

discussion of people who makes money where

Early forms of bartering, however, do not provide the transferability and divisibility that makes trading efficient. For instance, if someone has cows but needs bananas, they must find someone who not only has bananas but also the desire for meat. What if that individual finds someone who has the need for meat but no bananas and can only offer potatoes? To get meat, that person must find someone who has bananas and wants potatoes, and so on.

The lack of transferability of bartering for goods is tiring, confusing, and inefficient.

discussion of people who makes money where

But that is not where the problems end; even if the person finds someone with whom to trade meat for bananas, they may not consider a bunch of bananas to be worth a whole cow. Such a trade requires coming to an agreement and devising a way to determine how many bananas are worth certain parts of the cow.

Community Discussion: Making Money

Commodity money solved these problems. Commodity money is a type of good that functions as currency. In the 17th and early 18th centuries, for example, American colonists used beaver pelts and dried corn in transactions.

discussion of people who makes money where

The commodities used for trade had certain characteristics: they were widely desired and, therefore, valuable, but they were also durable, portable, and easily stored. Another, more advanced example of commodity money is a precious metal such as gold. For centuries, gold was used to back paper currency—up until the s.

What Is Money?

Federal Reserve. What's interesting is that, unlike the beaver pelts and dried corn which can be used for clothing and food, respectivelygold is precious purely because people want it. It is not necessarily useful—you can't eat gold, and it won't keep you warm at night, but the majority of people think it is beautiful, and they discussion of people who makes money where others think it is beautiful.

discussion of people who makes money where

So, gold is something that has worth. Gold, therefore, serves as a physical token of wealth based on people's perceptions.

This relationship between money and gold provides insight into how money gains its value—as a representation of something valuable.

Impressions Create Everything The second type of money is fiat moneywhich does not require backing by a physical commodity. Instead, the value of fiat currencies is set by supply and demand and people's faith in its worth.

Money: Meaning and Functions of Money – Discussed!

Fiat money developed because gold was a scarce resource, and rapidly growing economies growing couldn't always mine enough to back their currency supply requirements. Fiat money becomes the token of people's perception of worth, the basis for why money is created.

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An economy that is growing is apparently succeeding in producing other things that are valuable to itself and other economies. The stronger the economy, the stronger its money will be perceived and sought after and vice versa. However, people's perceptions must be supported by an economy that can produce the products and services that people want. For example, inthe U.

discussion of people who makes money where

If the economy stalls, the value of the U. The implosion of the U.