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Fin101: The Four Functions of Money and How Money Functions




When did money start to grow on trees? Answer: April 20, 1933 Give reason for date in comments. Once countries started to use paper currency/ when dollar was unlinked from gold. (paper is made from trees)




The function of money


Money – medium of exchange; storehouse of value; no intrinsic value; fungibility;

¨ Money is

  • a medium of exchange

trade my good or service for money, then money for good or service

  • a store of value

See inflation- causes value of money to decrease over time

Bread vs money

  • a unit of account

Able to compare the value of goods and services.

· Coke = $1

· Milk $5

· Milk is 5 x more value than coke

  • a standard of deferred payment

Invoice for good/service

Receive a good/ service today and pay for it tomorrow


Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type.


¨ Like goods and assets that are not interchangeable, such as owned cars and houses, are non-fungible.

¨ Money is a prime example of something fungible, where a $1 bill is easily convertible into four quarters or ten dimes, etc.



Quick history:

Ø Babylon: The economy of Babylonia was based, like that of Sumer, on agriculture. In Sumer, agricultural products such as grain and wool were often traded for goods the Sumerians could not produce themselves. Exchanging goods (or services) for other goods or services without using money is known as bartering.

Ø

Ø Coinage began in Lydia, in the interior of West Anatolia, in the form of electrum in the second half of the 7th century B.C., around 630.


Barter Economies

¨ A barter economy is a cashless economic system in which services and goods are traded at negotiated rates. Barter-based economies are one of the earliest, predating monetary systems and even recorded history. People can successfully use barter in many almost any field

Ø Requires double coincidence of wants


The Nature of Inflation

¨ Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product


The Concept of Utility

¨ Utility is a term in economics that refers to the total satisfaction received from consuming a good or service.

¨ The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify.


Advice:

(Notice I am not a financial adviser and I definitely don’t have life figured out, however this is my advice, take it how you’d like)

1) Spend less than you make

2) Consistently pay put money into a savings account (not a bank account, just some kind of asset that grows with inflation. We use real estate and American Century)

3) The earlier you start to invest the more you’ll have

4) Always have a rainy-day fund separate from your savings account. Consider it a bill. (a sinking fund)

5) Leverage debt responsibly. High interest credit cards are bad if you cant make the payoff amounts.


Recommended reading:


The richest man in Babylon: https://amzn.to/3vGbGhQ

The five financial foundations: https://amzn.to/3II98DJ

Rich dad poor dad: https://amzn.to/3KempnP

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