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Sunday, 20 April 2008

Three distinct economic items

There are three distinct economic items in the economy:

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1. Variable real value non-monetary items
2. Monetary items
3. Constant real value non-monetary items

They are valued in distinctly different ways.

Monetary items are money held and monetary values pertaining only to money.

Non-monetary items are all items that are not monetary items.

Non-monetary items are sub-divided into variable real value non-monetary items and constant real value non-monetary items. Constant real value non-monetary items only came about with the introduction of the double entry accounting model.

The first economies

The first economies functioned without money. They were barter economies. People bartered economic items they produced or possessed for other economic items they wanted.

Those economic items had variable values. A baker baking bread bartered her extra rolls of bread for rabbits that a hunter would barter. When the hunter had many rabbits to barter he would accept a certain number of bread rolls for a rabbit. When he had few rabbits to barter and he was the only hunter in that area, then he would trade the rabbits for more rolls of bread per rabbit.

Both the rabbits and the bread rolls thus had variable values depending on demand and supply. This applied to all economic items in those barter economies.

Neither money nor the double entry accounting model was invented yet. There was no inflation. There was no medium of exchange. There was no monetary unit of account. There were no financial reports: no profit and loss account and no balance sheet.

There were no monetary items and no constant real value non-monetary items. Only variable real value non-monetary items.

The first economic item was thus a variable real value non-monetary item.

People in barter economies used a primitive system of demand and supply at a specific location where the barter transaction took place.

Money

Money was then invented over a long period of time. Eventually money came to fulfil three functions:

a. Medium of exchange
b. Unit of account
c. Store of value


At that stage there were two distinct economic items in the economy: variable real value non-monetary items and monetary items. The double entry accounting model was not perfected yet
The second distinct economic item was a monetary item. Inflation appeared soon after money was invented.

Double Entry Accounting

Finally the double entry accounting model was invented. This resulted in the creation of the third distinct economic item: a constant real value non-monetary item.

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