Money has actually taken many forms v the ages: shells, wheels, beads and even cows. All forms, though, have always had three points in common. Uncover out what in this eight-minute illustration of our financial Lowdown Podcast Series. You will also learn how commodity money differs from representative money and also how both differ from today"s fiat money.
You are watching: Which of the following best explains the difference between fiat money and commodity money?
TranscriptToday I"m talking about money.Money is other that world use every day. Us earn it and spend it however don"t frequently think much about it. Economists specify money as any good that is widely accepted as last payment because that goods and also services. Money has actually taken various forms through the ages; examples include cowry shells in Africa, big stone wheels on the Pacific island the Yap, and also strings of beads called wampum offered by native Americans and also early American settlers. What carry out these creates of money have actually in common? castle share the three attributes of money: First: Money is a store of value. If I work today and earn 25 dollars, I deserve to hold on come the money before I invest it due to the fact that it will hold its value till tomorrow, following week, or even next year. In fact, stop money is a more effective method of storing worth than holding various other items of value such as corn, which can rot. Although the is an effective store that value, money is not a perfect store of value. Inflation gradually erodes the purchasing power of money end time. Second: Money is a unit the account. You can think that money as a yardstick-the device we usage to measure value in economic transactions. If you room shopping for a brand-new computer, the price might be quoted in terms of t-shirts, bicycles, or corn. So, because that instance, your brand-new computer might expense you 100 to 150 bushels that corn at today"s prices, however you would discover it most valuable if the price were collection in terms of money since it is a typical measure the value throughout the economy. Third: Money is a tool of exchange. This method that money is widely accepted as a technique of payment. When I go to the grocery store store, ns am confident the the cashier will certainly accept mine payment the money. In fact, U.S. File money tote this statement: "This keep in mind is legal tender for every debts, public and also private." This means that the U.S. Federal government protects my best to pay v U.S. Dollars.In stimulate to evaluate the conveniences the money bring to one economy, think about life without it. Imagine i am a musician-a bassoonist in an orchestra-who has actually a auto that demands to it is in repaired. In a civilization without money, ns would must barter for auto repair. In fact, i would require to discover a simultaneously of wants-the unlikely instance that two human being each have something that the other wants at the best time and also place to make an exchange. In other words, i would require to find a mechanic who would be willing to exchange auto repairs because that a private bassoon concert by 9 AM tomorrow so I can drive come my following orchestra rehearsal. In an economic situation where human being have very specialized skills, this type of exchange would take an tremendous amount the time and also effort; in fact, it might be almost impossible. Money to reduce the expense of this transaction because, when it might be very an overwhelming to discover a mechanic that would exchange auto repairs for bassoon concerts, it is not difficult to discover one who would exchange automobile repairs because that money. In fact, without money, every transaction would need me to discover producers that would exchange your goods and services for bassoon performances. In a money-based economy, I deserve to sell my solutions as a bassoon player in one orchestra to those who room willing come pay for orchestra concerts v money. Then, I deserve to take the money ns earn and also pay because that a variety of goods and also services.Economists say that the development of money belonging in the same classification as the good inventions of old times, such together the wheel and the inclined plane, however how walk money develop? early forms the money were often commodity money-money that had value due to the fact that it to be made that a substance that had actually value. Examples of commodity money room gold and silver coins. Gold coins were beneficial because they can be offered in exchange for other goods or services, but also because the yellow itself to be valued and had other uses. Commodity money gave way to the following stage-representative money.Representative money is a certificate or token that have the right to be exchanged for the basic commodity. Because that example, rather of carrying the gold commodity money through you, the gold might have been maintained in a financial institution vault and also you might lug a record certificate the represents-or was "backed"-by the yellow in the vault. The was understood that the certificate might be redeemed for gold at any time. Also, the certificate to be easier and also safer to lug than the actual gold. Over time human being grew to to trust the paper certificates as much as the gold. Representative money brought about the usage of fiat money-the type used in modern economies today.Fiat money is money the does not have intrinsic value and also does not represent an asset in a vault somewhere. Its value originates from being claimed "legal tender"-an acceptable type of payment-by the federal government of the issuing country. In this case, we expropriate the value of the money since the government says it has value and other people value it sufficient to expropriate it together payment. Because that example, I expropriate U.S. Dollars as income due to the fact that I"m confident ns will have the ability to exchange the dollars for goods and services at local stores. Because I recognize others will certainly accept it, ns am comfortable agree it. U.S. Money is fiat money. That is not a commodity v its own great value and it walk not represent gold-or any kind of other an important commodity-held in a vault somewhere. It is valued since it is legit tender and also people have confidence in its usage as money.There have been plenty of forms the money in history, yet some creates have worked far better than others due to the fact that they have characteristics that make them an ext useful. The characteristics of money room durability, portability, divisibility, uniformity, minimal supply, and also acceptability. Let"s compare two examples of possible forms that money: A cow. Livestock have been offered as money at various points in history. A ridge of U.S. 20-dollar bills equal to the worth of one cow.Let"s run down our perform of attributes to see how they ridge up. Durability. A cow is fairly durable, but a lengthy trip to sector runs the risk of sickness or death for the cow and can severely reduce its value. Twenty-dollar bills are relatively durable and also can be easily replaced if they end up being worn. Also better, a lengthy trip to industry does no threaten the wellness or worth of the bill. Portability. If the cow is an overwhelming to transport to the store, the currency can be conveniently put in mine pocket. Divisibility. A 20-dollar bill have the right to be exchanged for other denominations, say a 10, a 5, four 1s, and 4 quarters. A cow, ~ above the various other hand, is not an extremely divisible. Uniformity. Cows come in countless sizes and also shapes and also each has a different value; cows space not a an extremely uniform type of money. Twenty-dollar bills room all the very same size and shape and also value; lock are very uniform. Restricted supply. In bespeak to keep its value, money must have actually a minimal supply. If the it is provided of cows is relatively limited, if they were supplied as money, you deserve to bet ranchers would carry out their ideal to increase the it is provided of cows, which would decrease your value. The supply, and therefore the value, that 20-dollar bills—and money in general—are regulation by the commonwealth Reserve so the the money retains its value over time. Acceptability. Also though cows have intrinsic value, some world may not accept livestock as money. In contrast, human being are an ext than ready to expropriate 20-dollar bills. In fact, the U.S. Federal government protects your ideal to use U.S. Money to pay her bills.Well, it appears "udderly" clear at this suggest that—based ~ above the characteristics of money—U.S. 20-dollar bills space a much far better form of money than cattle.To summarize, money has actually taken countless forms through the ages, but money consistently has actually three functions: keep of value, unit the account, and also medium the exchange. Modern economies use fiat money-money the is no a commodity nor stood for or "backed" through a commodity.
See more: How The District Sleeps Alone Tonight Meaning, The Postal Service
Even forms the money that share these role may be more or much less useful based on the qualities of money.