What Is Money? Why Does It Have Value?
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Have you ever wondered why we have money? In this lesson you will learn about the purpose of money, its characteristics, and how it shapes our society.
At the end of the lesson you will make a list of all the ways in which money impacts your everyday life. As you go through the lesson, keep this in mind.
Our society, we use money constantly in many different aspects of life. But why do we have money? What did people do before the idea of money existed?
Please complete the worksheet entitled "What's It Worth?" on your own. In the distant past, people did not use money. Instead, they traded goods and services directly with other people. Today, people still trade, but instead of trading goods and services, most people use money. Why do you think people would prefer to trade with money, rather than goods and services? What is money? How would you define it?
Why do you think people would prefer to use money? Please complete the worksheet entitled "The Characteristics of Money," in groups of two or three. Money has three distinct functions. First, it is a medium of exchange. People can use it to trade, but only because everyone agrees that it is acceptable as payment for a good or service. Second, money is a unit of account. We use money to measure the value of goods and services. We express the value of food, clothing, houses, pets, plane tickets, doctor visits, and almost everything in terms of money. Third, money is a store of value. This means that you can keep a dollar bill in your safe for many years and it will still be worth the same amount; something like an apple would not work well as a form of money because it would rot after a couple of weeks, and would not have any exchange value after that. Also, it would be difficult to carry a big bag of apples around with you every time you wanted to go shopping. A dollar bill, in contrast, is durable and easy to carry. Are there items other then dollar bills and coins that could serve as money? What types of items would work well as money, and what types would not? Why? Could you print your own money and use it to pay for things? Why or why not?
You should now have an understanding of why we have money, what society would be like without money, and how money impacts every individual. Also, you should be able to explain why money has value, what its three main functions are, and how it encourages specialization.
Think through a typical day, and then make a list of all the ways in which you use money or are affected by the use of money. Then explain how each item on your list is related to money.
1. 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. Please choose one of the following two options: 1. write out a list of characteristics of the currency that you would develop; 2. draw a picture of the currency that you imagine as best fitting the definition of money. In either case, be able to explain why your currency would work well as money.
2. Try the interactive game on the IMF's website: www.imf.org/external/np/exr/center/students/money/index.htm . Why do you think that people would prefer to use money, rather than trading, to facilitate exchanges? Explain your answer.