How To Make Money In Economy – Money is a value system that facilitates the exchange of goods in an economy. Using money allows buyers and sellers to pay lower transaction costs than barter.
The first forms of money were commodities. Their physical properties made them attractive as a medium of exchange. In modern markets, money can include government-issued legal tender, money substitutes, fiduciary media, or electronic cryptocurrencies.
How To Make Money In Economy
Money is a liquid asset and is used to facilitate valuable transactions. It is used as a medium of exchange between individuals and legal entities. It is also a store of value and a unit of account against which the value of other goods can be measured.
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Before the invention of money, most economies relied on barter, where individuals exchanged goods they owned directly for what they needed. This raised the problem of two-way matching of desires: if both participants had what the other needed, the deal could be done. Money solves this problem by acting as an intermediary commodity.
The first known forms of money were agricultural commodities, such as grain or cattle. These goods were in high demand and merchants knew that they could use or trade these goods again in the future. Cocoa beans, cowrie shells, and agricultural implements also served as early forms of money.
As economies became more complex, currencies became standardized. This reduced transaction costs by making it easier to measure and compare value. Also, the imagery of money has become increasingly abstract, from precious metals and stamped coins to paper bills and, in modern times, to electronic records.
During World War II, cigarettes became the de facto currency for soldiers in POW camps. The use of cigarettes as currency necessitated the use of tobacco, even among non-smoking soldiers.
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To be most useful, money must be movable, durable, portable, recognizable and stable. These features reduce the transaction costs of using money by making it easier to switch.
The word fungible refers to the quality that allows one thing to be replaced, exchanged, or returned for something else of equivalent value. So, the currencies should be interchangeable.
For example, metal coins must have a standard weight and purity. Commodities should be relatively uniform in quality. Attempting to use a non-convertible commodity as money incurs transaction costs, which involve valuing each unit of the commodity separately before exchange.
Money must be durable enough to retain its usefulness for many future exchanges. Merchandise that is perishable or deteriorates quickly due to various exchanges will be less useful for future transactions. Attempting to use a non-durable commodity goes against the future-oriented primary use and value of money.
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Money should be easy to carry and share, so that a valuable amount can be carried or transported in your hand. For example, attempting to use a commodity as money that is difficult or inconvenient to carry may require physical transportation, which may incur transaction costs.
The product’s authenticity and quantity should be readily apparent to users so that they can easily agree to the exchange terms. Using an unrecognizable commodity as money may incur transaction costs associated with authenticating the commodity and agreeing the amount required for exchange.
The supply of an item used as money must be relatively constant over time to avoid fluctuations in value. Using a non-stable commodity as money incurs transaction costs due to its rise or fall in value, shortage or overabundance before the next transaction.
Money is primarily used by good people to exchange valuable things. However, it also has secondary functions arising from its use as a medium of exchange.
What Gives Money Its Value?
Due to the fact that money is a medium of exchange and used as a measure of value for all kinds of goods and services, money can be used as a unit of account.
This means that money can track changes in the value of things over time and across multiple transactions. People can use it to compare different combinations or quantities of different goods and services.
As a unit of account, money makes it possible to calculate profit and loss, balance the budget and evaluate the total assets of the company.
The utility of money as a medium of exchange is inherently forward-looking. As such, it provides a means to preserve the value of money for future use without degrading that value.
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So when people exchange things for money, that money retains some value that can be used in other transactions. This ability to act as a store of value makes it easier to save for the future and engage in transactions over long distances.
As long as money is accepted as a medium of exchange and serves as a useful store of value, it can be used to transfer value in the form of credit and debt at different times.
A person can borrow money from another person for an agreed period of time and repay another agreed amount in the future.
Money can come from the spontaneous order of markets. When traders trade different goods, some goods are more favorable than others because they have the best combination of the five characteristics listed above.
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Over time, these goods may become desirable as objects of exchange rather than for practical use. At the end of the day, people may only want good things for future sales.
Historically, precious metals such as gold and silver were often used as market-based money. They are highly valued in various cultures and societies. People in today’s cashless economy often turn to cigarettes, instant noodles, or other non-perishable goods as substitutes for market-based money.
If a certain type of money becomes common throughout the economy, government authorities can begin to regulate it as a currency. They can issue standardized coins or notes to further reduce transaction costs.
The government may also recognize some money as legal tender, meaning that courts and public authorities must accept that form of money as final tender.
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Money issuance allows the government to use seigniorage, the difference between the nominal value of the currency and the cost of its production.
For example, if the cost of printing a $100 bill is only $10, the government will make a profit of $90 per note. However, governments that rely too much on seigniorage may inadvertently devalue their currencies.
Many countries issue fiat currency, which is currency that does not represent any type of commodity. Instead, fiat money is backed by the economic power of the issuing government. It derives its value from supply and demand and government stability.
Fiat money allows the issuing government to conduct economic policy by increasing or decreasing the money supply. In the US, the Federal Reserve System and the Treasury Department monitor several types of money supply in order to regulate and mitigate monetary problems.
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Since fiat money does not represent an actual commodity, it falls to the issuing government to ensure that it meets the five characteristics outlined above.
The International Monetary Fund (IMF) and the World Bank serve as global regulators of international currency exchange. Governments can impose capital controls or pegs to stabilize their currencies in the international market.
To reduce the burden of carrying large amounts of currency, traders and merchants sometimes exchange cash substitutes, such as written promissory notes that can be redeemed later. These statements can take on some of the characteristics of money, especially if merchants use them instead of real currency.
For example, ancient banks issued promissory notes to their depositors, which indicated the amount deposited and the terms of withdrawal. Instead of borrowing money from the bank to make payments, depositors exchange their bills, allowing the payee to redeem or sell them at will.
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Such use of money substitutes can increase the mobility and durability of money, as well as reduce storage costs. However, there are risks associated with cash substitutes. Banks can print more bills than they have money to redeem, a practice of fractional reserve banking. If too many people try to withdraw money at the same time, the bank may fail.
Fiduciary media are types of money substitutes put into circulation that are not fully backed by the underlying money held to back the money substitutes. For example, paper checks, token coins, and electronic credit represent modern examples of fiduciary media.
In recent years, digital currencies that do not exist in physical form, such as Bitcoin, have been introduced. Unlike electronic banking or payment systems, these virtual currencies are not issued by a government or other central authority. Cryptocurrencies share some of the characteristics of money and are sometimes used in online transactions.
Although cryptocurrencies are rarely used in day-to-day transactions, they have made some gains as speculative investments or securities. Some jurisdictions have recognized cryptocurrencies as a means of payment, including the government of El
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