Page 541 - Encyclopedia of Business and Finance

eobf_M 7/5/06 3:15 PM Page 518

Money

International currency. PHOTODISC/GETTY IMAGES

your peaches for money and purchase the desired shoes ten money prices. In an economy with twenty goods there
with the proceeds of the sale. You no longer need to trade would be one hundred and ninety good-for-good prices
peaches—a lot of them—for a computer and then the but only twenty money prices. Imagine all of the good-
computer for beef and then the beef for the shoes. As a for-good prices in a more realistic economy with thou-
medium of exchange, money tends to encourage special- sands of goods and services available.
ization and division of labor, promoting economic effi- Using money as a measure of value reduces the num-
ciency.
ber of prices determined in markets and vastly reduces the
cost of collecting price information for market partici-
Money is a measure of value. As a measure of value,
pants. Instead of focusing on such information, market
money makes transactions significantly simpler. Instead of participants can focus their effort on producing the good
markets determining the price of peaches relative to com-
or service in which they specialize.
puters and to beef and to shoes, as well as the price of
computers relative to beef and to shoes, as well as the price
Money as a store of value. Money can also serve as a store
of beef relative to shoes (i.e., a total of six prices for only
four goods), the markets only need to determine the price of value, since it can quickly be exchanged for desired
of each of the four goods in terms of money. If we were to goods and services. Many assets can be used as a store of
add a fifth good to our simple economy, then we would value, including stocks, bonds, and real estate. However,
add four more prices to the number of good-for-good there are transaction costs associated with converting these
prices that the markets must determine. As the number of assets into money in order to purchase a desired good or
goods in our economy grew, the number of good-for-good service. These transaction costs could include monetary
prices would grow rapidly. In an economy with ten goods, fees as well as time delays involved in the liquidation
there would be forty-five good-for-good prices but only process.

518 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION