Lec Notes 104-7 - Economics 104B - Lecture Notes -...

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Economics 104B - Lecture Notes - Professor Fazzari Topic VII: Monetary Economics (Updated April 13, 2007) A. The Meaning and Measurement of Money 1. Definition of money a) Meaning of “generalized purchasing power” Generalized Purchasing Power: Money is valuable not for its intrinsic value (aside from the case of coin collectors). Money is valuable because it has generalized purchasing power. This means that money is the substance used to buy “stuff.” People hold money because of what it can buy, not because of its intrinsic value. It’s most obvious to think of money as currency issued by the government, that is, the fancy printed green pieces of paper. Currency certainly functions as generalized purchasing power, but for most people it is used only for relatively small transactions. Other things like credit cards and checks also function as generalized purchasing power. They are accepted as means of payment for a very wide range of goods and services. b) How money serves this role Money is one side of the vast majority of exchanges in the modern economy. That is, when an item or service is sold, it is almost always exchanged for money. When something is bought, it is usually purchased with money. The alternative to monetary exchange is barter: goods are exchanged directly for other goods (my wheat is exchanged for your pot). This kind of exchange dominates non-monetary economies, but it is of trivial importance in developed, monetary systems. 2. Roles of money a) Unit of Account: money is the basic unit for measuring economic value. In the U.S., all prices and wages are expressed in dollars, the U.S. unit of account. Having a single, uniform measure is a useful function of money. b) Store of Value: money is a way of storing wealth over time. c) Medium of Exchange: (1) Money as one side of all purchases and sales Money is one side of every market transaction. The alternative would be a barter economy in which there is a direct exchange of goods/services for other
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goods/services. Money, as a medium of exchange, is used to make transactions easier and more efficient. (2) Barter and the “double coincidence of wants” problem Double Coincidence of Wants: Imagine a barter economy with no money to use for transactions. It would be very difficult to trade with other people. If you produce nachos and you want to trade for chocolate, you must find a producer of chocolate who wants nachos. This problem is called the double coincidence of wants . o If you grow wheat and want a pot, you have to find a pot maker who wants wheat to make a mutually beneficial exchange. (3) How money overcomes this problem In a monetary system, money, as the medium of exchange, is always one side of every exchange. In this system, everybody wants money. This system eliminates the problem of the double coincidence of wants. Money serves as generalized purchasing power: people are willing to sell their goods for money because they are confident
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This note was uploaded on 01/22/2010 for the course ECO 1101 taught by Professor Sparr during the Fall '05 term at St.Francis College.

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Lec Notes 104-7 - Economics 104B - Lecture Notes -...

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