3/8/12

What are the properties of money?


The major desirable properties that money should have include:

(1) a numeraire:  This means that goods and services can be valued easily in one term of measurement, such as dollars.  This is instead of valuing 1 t shirt as 3 fish, or 4 shoes, we can value it as $10.

(2) a means of exchange: This means that we can use money to exchange for goods and services instead of barter.


(3) a store of value:  This means that we can delay our purchases or save for future spending.  If money were denominated in fish, we would have to get a new supply every few days and the store of value would not be very good.  If we put $1 under the couch, a year from now it is still worth $1, not spoiled and stinky.

(4) a source of liquidity:  Liquidity means that it can be exchanged for goods and services very easily (similar to 2).  If we use money to purchase a stock/bond/CD or house, it is no longer liquid, but holding money is an easy way to save money but still be able to use it readily.

Other properties money should have:
(A) Money should be easy to transport and identify

(B) Money should be durable, easily divisible, hard to counterfeit and easy to store.



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