The Economic Uses of Money


The Economic Uses of Money

Money is any verifiable document or agreed act that is normally accepted as payment for products and services and payment of debts, including taxes, in a specific country or cultural context. It is used to make payments and settlements, transfer money from one account to another, buy, sell and hold assets and liabilities. However, money is also used for bad purposes, for example, it is used for gambling, for buying drugs and alcohol, for paying debts, for stealing and for promoting criminal enterprises. Thus, money as a medium of exchange has become very important in our present society. A banknote is a legal tender representing real property, issued by a government or a municipality. Banknotes are backed by the full faith and credit of the issuing government.


Like all other currencies, money is a standard unit of value that can be traded on the open market. Economists define money as the unit of account that produces the greatest possible degree of purchasing power relative to the supply of the money in the market. They assume that money is a creature of the law of demand and supply and have various effects on the variables of the domestic economy.


In a simple economic environment, money is generally accepted as repayable with goods and services in exchange for a basket of items of varying weights and value. Money is generally accepted to be a store of value because of the fact that goods usually have a fixed number of days for their maturity date. Deferred payment money usually matures after a fixed number of days. Money generally becomes a medium of exchange in societies where barter systems are practiced because money, unlike goods, is not fixed in time. Deferred payment money generally takes the form of promissory notes, which may be negotiable instruments.


Money, like goods, is a market-determined money commodity due to its physical nature. The price of money, the general market expectation of money, determines the amount of it that is involved in the production and sale of goods in any society. Money, as a commodity, is generally considered as a good that is not subject to bartering or to changes in supply and demand as it is not a product that can be produced or manufactured on a large scale. Unlike goods, money, unlike services, is a market-determined good because it has no inherent qualities that are subject to change. It has, on the basis of market expectations, a certain level of volatility that can be altered or adjusted by changes in market conditions.


A number of different kinds of money are traded on the global market. There are both fundamental money aggregates and derivative money products. Fundamental money aggregates are government currencies and national banks. Derivative money products include stocks, bonds, foreign currency exchange (forex) exchanges, and money market accounts.


In the United States, the most commonly traded legal tender laws are the federal funds rate and the standard interest rates. The most widely traded product is the US dollar. Historically, gold has always been the most valuable market-determined money. Gold, like other precious metals, is subject to market-driven prices that are influenced by the global political and economic situations. One kind of money that is not subject to market-driven prices and is not traded on the stock market are “fiat money”, which are normally guaranteed by the governments of specific countries in return for carrying the sovereign guarantees.


Money is a commodity that has a definite use-value. Money, unlike goods, is typically not produced in large quantities and is usually bought and sold on a direct basis. Money usually enters the economy through the use of bank loans, investment opportunities, trade deficits, and changes in the balance of payments between creditor and debtor. Money is created by the circulation of bank liabilities and is usually in the form of bank notes, bank deposits, and bank drafts. Money also circulates within the economy through the use of commercial banks, credit associations, deposit-based checking accounts, money orders, and specially designed certificates of currency.


Money has had a significant role in international trade ever since its first introduction more than four centuries ago. Since the early nineteenth century, money has been progressively used as the medium of exchange in international trade. Commercial banks play an important role in the functioning of the economy as they make loans and engage in financial activities. Governments frequently intervene in the economy by either printing or regulating the amount of money circulating to strengthen the national currency or to cut down on foreign trade deficit.


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