Page 90 - 6727

Economic Theory

2) standard of value:
money serves as a standard of value as a unit of account. In a barter
economy, comparing the relative values of different goods and services is
much more complicated than in a money-using economy. For example, the

price of a TV set might be stated as seven pares of shoes or one pig.
To get an idea of the cost of sugar in a barter economy would require

knowledge of the rate at which sugar exchanges for bread, tea, shoes,
apples, haircuts, etc. A shopping trip would entail numerous comparisons.
Money provides a common unit of account for expressing the market
values of widely different goods and services. The existence of this

common unit of account greatly reduces the time and effort needed to
make intelligent economic decisions. As a result, more time and effort are
available for use in other productive activities.

Money prices tell us the relative value of one food compared to
another and thus serve as a measuring rod by which the value of goods can
be placed on a common scale;
3) standard of deferred payment:

the function of money as a standard of deferred payment is closely
related to its use as a standard of value. It would be strange for someone
obligated to make a payment to another person at a future date to state the

obligation in terms of shoes or cows or hours of work. It would also be
difficult for the one to whom the payment is owed to predict the
combination of goods and services that would be desired in payment of the
debt at some future time. The dilemma is easily resolved by stating the

obligation in terms of a payment in monetary units at the future date.
Unfortunately for the lender, inflation may have reduced the value of the

monetary unit in terms of goods and services by the time the payment date
arrives;
4) store of wealth:
Wealth can be held in many forms: houses, yachts, stocks, bonds,

jewellery, but no form of wealth is as readily convertible into other goods
and services as money is. This ready convertibility, or liquidity, makes
money an attractive store of value, or sources of purchasing power.

3. Market of Money. Supply and Demand for Money
The money market is an economic model describing the supply and

demand for money in a nation. Consumers and businesses have a demand

90