What Is Money? Why Does It Have Value?
This lesson printed from:
Posted November 26, 2008
Author: Andrew Pass
Posted: November 26, 2008
Updated: March 3, 2008
In this lesson, students consider the fact that the value of money differs depending on where the money is being spent. In order to understand this idea, students will first develop a deeper understanding of what it means for money to have a value. They will then consider that different goods and services cost different amounts of money in different regions of the world. Finally, students develop an understanding that the value of a dollar is determined by where the dollar is spent.
- Explain why money has value.
- Explain the three main functions of money.
- Explain how money facilitates exchange and specialization.
In this lesson the students will think about why we have money, why it has value, and why it makes exchange easier. They will learn about the three main functions of money (as a medium of exchange, as a unit of account, and as a store of value) and why these functions are important. Finally, they will consider how a money system encourages specialization.
To begin this lesson, ask the students why they think we have money, and what they think we would do if we did not have money. Invite several students to share their thoughts with the class and write down their ideas. Then ask the students, working individually, to complete the worksheet entitled "What's It Worth?" After the students have completed this worksheet, reconvene the class. Invite students to share their answers with the class. Ask the students to explain why they were willing to accept some items in an exchange, but not other items. Also ask them if they discarded some possibilities, and why. The students should be able to explain that the amount of money they wrote down and the items they listed have approximately the same value to them as their favorite possession. Remind them that people trade because they believe that they will be made better off by the trade. If not, they would not make it. If transaction costs exist, then the 'better off' (the benefit or gain) has to at least equal the transaction costs.
Next, ask the students how they would define money. After writing down some of their ideas, clarify the meaning of the term: money is anything that can be used as a medium of exchange. Ask the students to answer the questions on the PDF document entitled "The Characteristics of Money." After they have completed this worksheet, reconvene the class and invite the students to share their answers with the class. The students should recognize that, as a medium of exchange, money is recognized by all parties as a means of payment. As a unit of account, money provides a commonly accepted unit for measuring the value of every good and service. And as a store of value, money retains purchasing power over time (except during periods of inflation). Help the students to understand that other goods and services, like food or healthcare, do not retain purchasing power over time. Remind the students that money is used for the purpose of exchange, and is worth something only because everyone agrees that it can be accepted as payment. Theoretically, anything that fulfills these three functions and is widely accepted could serve as money. Ask the students if they could print their own money and use it to pay for things, and ask them to explain their answers - why or why not?
Your students should now have a basic understanding of the money exchange system, of money's functions, why money has value, and how money encourages specialization. They should be able to explain these concepts in writing.
Ask the students to think through a typical day, and to make a list of all the ways in which they use money or are affected by the use of money. They should then explain why each item on their list is related to money.
1. Ask the students to imagine that the Treasury Department of the United States decided to hold a contest to see who could design a currency that best fit the characteristics of money. Ask the students to either develop a list of characteristics of the currency that they would develop, or to draw a picture of their idealized currency.
2. Have the students try the interactive game on the IMF's website: www.imf.org/external/np/exr/center/students/money/index.htm . (You could also go through the game as a class.) Then ask why they think that people would prefer to use money, rather than trading, to facilitate exchanges. Encourage them to explain their answers.