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Definition of Money:
is anything that is widely accepted as a means of payment for a good or service. Money is used as a medium of exchange, and can be used as a store of value and to compare values of goods and services.
Money plays an important role in all our lives. We need money to purchase the goods and services required for our families. Saving and investing our money provides financial security and the means to donate to charities. Imagine what the world would be like without money. People would have to trade with each other to acquire their needs.
Money must be widely accepted, while retaining its value. It basic characteristics are median of exchange, store of value, and measure of value.
A median of exchange
is something that is widely accepted as payment. All businesses and people accept money as payment for a good or service.
A store of value
means that the asset holds its value. Money retains its value, so an individual saving for a future purpose can be confident the value of the money saved will be close to the value when it is needed. Inflation occurs when market prices rise. During periods of extreme inflation, such as Germany post WWI, the store of value may plummet, and other assets, such as gold, may become favored as a median of exchange
People use money to compare the value of different goods and services. For example, assume admission to a movie is $10 and a latte at Starbucks is $5. The theater would say the cost of admission is $10, not two Starbucks® lattes. However, the intrinsic value of the movie exceeds the value of the latte at Starbucks. Unfortunately, the measure of value can illustrate the distortions of our economic system. Some star athletes are paid more than 50 times what a teacher is paid, but few would argue that the athlete’s value to society would be 50 times that of a teacher.
Dig Deeper With These Free Lessons:
What is Money
Causes of Inflation
Fractional Reserve Banking and The Creation of Money
Monetary Policy - The Power of an Interest Rate