Which Of Following Is Not An Important Characteristic Of Money?
When was the last time y'all used a aureate coin to purchase something — if you lot have at all? Today, that may sound like something only a pirate would practise, but aureate and argent coins were the norm until simply a few centuries ago.
In fact, article money — the term for using gold, silver or any other commodity instead of paper bills — was the norm for much of civilisation. The large difference? Paper isn't so valuable, and it'south the numbers on the paper that ostensibly tell us what a newspaper pecker'due south value is. But commodity money is made of objects that are already considered valuable on their own, in addition to functioning equally currency. Acquire more nearly the basics of commodity money to improve empathize its uses and value.
What Is Commodity Money?
Commodity money is a course of money that has value as a specific commodity and is literally made of that detail; it's a valuable item that functions as a form currency. This type of item has intrinsic value, significant it'due south worth money on its ain. However, it becomes article coin when people agree to accept it as a form of currency. Gold and silvery have been 2 of the most common forms of commodity coin throughout history, just anything can be used as commodity coin as long as it has value to people.
Dried beans, grain and pieces of wood tin be article money if people hold that they have value and are willing to trade them for other goods and services. Commodity coin depends on what's well-nigh valuable to people in a society. For example, animal fur and cigarettes have served as commodity coin for societies in the past.
How Does Commodity Money Work?
Commodity money is tied to the value of a specific commodity, and the market determines that value. Commodity money works when multiple members of a lodge assign a value to a certain good. People obtain and shop that good, then they use it to buy things they demand.
Because the article has a recognized value, whether for its rarity or its usefulness, it's easy for members of society to agree upon its prices. For example, many farmers recognize the value of owning a cow, so a cow could exist traded as article coin for a service or adept.
Commodity Coin Examples
Commodity coin doesn't have to be expensive or like shooting fish in a barrel to carry. It simply needs to have value. Tobacco, tea, seashells and cacao beans have all been used as commodity money.
In biblical times, drachmas and denarii were forms of article money fabricated of precious metals. The coins had specific monetary values based on their weight. If you lived in that fourth dimension, you could bring a pocket full of drachmas to the market and pay people the number of drachmas they asked for to make a purchase.
Why Does Commodity Coin Exist?
Commodity coin exists because every good has an inherent value. Especially in the earliest civilizations, it would've been difficult to create many versions of tangible money that looked the same or weighed the same. Rather than using this type of uniform value organization, early on societies used bolt for trade and payment instead.
Although a good may be worth more to one person than another, value is universal. All people need food, clothing and shelter, so all people value food, clothing and shelter. Throughout history, commodity money has often been tied to obtaining those about bones and necessary goods.
Advantages and Disadvantages of Article Money
Commodities can be perishable and easier to steal than newspaper money. Prices aren't always exact, and commodity money is hard to divide into smaller increments. For example, while it'southward possible to split up an oil barrel into smaller containers, that could be a very messy and inconvenient process.
Commodity money is based on the value of an particular, so the value of the money is based on supply and demand. Oil has been extremely valuable as long equally cars accept existed, but regime initiatives exist in some places to encourage drivers to switch to electrical cars. If more countries follow suit, oil will become less valuable, thereby reducing its overall value equally a commodity.
One advantage of commodity money is that it's inflation resistant. Because commodities are tangible, there'due south a limit on the amount of a article that's available for trade. A concern cannot decide that its products are worth 1 1000000 gold bars if in that location are not 1 1000000 gilded bars circulating in the economy.
What Gives Commodity Money Its Value?
The value of commodity money is the same every bit the value of the commodity. The money is valuable because people can use it to consummate a specific task or meet a specific need. Sometimes, the article isn't directly valuable to the person who owns it, but it has recognized usefulness in society every bit a whole.
A cow produces milk, can help plow a field, tin mate with some other moo-cow to produce calves and can ultimately serve every bit a source of meat. An agrarian society could use cows as commodity money because having a reliable farm helper and nutrient source has value in that order.
Fiat Money vs. Commodity Coin
Today, fiat money is more common than commodity money. The U.S. dollar and the Euro are both forms of fiat money. Fiat money is based on the perceived value, not the intrinsic value, of the currency issued by a certain regime. The value is based on that country'southward economic activity and the perceived stability of the government backing it.
America is a groovy example of the dissimilarity between commodity coin and fiat money. In 1973, America switched from a representative commodity coin system to a fiat money system. Prior to 1973, the value of the American dollar was based on gold. If the value of gilt increased, the value of the dollar increased. To introduce more dollars into the economy, more gold of a corresponding value would first have to be purchased and stored. The combined value of all the U.South. dollars at that time corresponded directly with the value of the gold that the U.Southward. government owned. Nevertheless, American money had always been made of newspaper bills and (non-gilt) metal coins.
When the switch was made to fiat money, the Federal Reserve was given authorization to add dollars to the economic system based on need rather than based on buying more gold. Now, the value of the dollar is based on the health of the American economy. If the value of golden was to of a sudden take a nosedive, the value of the American dollar would only change in correspondence to the change in its buying power.
How to Use Commodity Money
The apply of commodity money can exist compared to trading of items. Suppose Jim is an early American settler looking to buy vegetables for his family unit. Jim is a fur trapper, and his neighbor Bill is a farmer. Jim gives Neb three beaver pelts in substitution for 10 bushels of collard greens. The pelts served as commodity money because both parties agreed that they were valuable and that three beaver pelts had an equal value to ten bushels of collard greens.
Source: https://www.askmoney.com/investing/commodity-money?utm_content=params%3Ao%3D1465803%26ad%3DdirN%26qo%3DserpIndex
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