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Sunday, 4 May 2014

What is money?

I) AS DEFINED IN ECONOMICS

In terms of economics, an item has to fulfil all the following requirements, at the same time, to be considered "money" and thus a monetary item:


1. a widely used medium of exchange which overcomes the double coincidence of wants problem,

2. a relatively stable store of real value, 

3. a relatively stable real value unit of account

and

4. legal tender.

This money is a monetary item. Monetary items constitute the money supply.

Money´s real value is eroded by inflation and increased by deflation. 

Prices are widely quoted in this money.

The Daily CPI reflects the general price level. Items in the consumer basket used to calculate the Daily CPI are priced in terms of this money.

This money is used to calculate a unit of constant purchasing power in terms of the Daily CPI in order to

(a) eliminate the effect of inflation and deflation from monetary items and 

(b) eliminate the effect of the stable measuring unit assumption from constant real value non-monetary items.

II) AS SEEN BY THE MAN IN THE STREET

Money is anything that is a widely used medium of exchange.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.