In: Economics
For each of the scenarios listed below, determine if this is an example of money serving as a medium of exchange, unit of account, or store of value. (1=medium of exchange, 2=unit of account, 3=store of value)
____________Sarah uses her debit card to purchase lunch for her and her friends at Rooster’s Grill.
____________At Rooster’s Grill, Sarah and her friends compare which entrée to order based on the prices listed on the menu.
____________The manager at Rooster’s Grill writes a check to pay his workers each Friday.
____________Beth takes her tips from Rooster’s Grill and saves them in a hot-pink piggy bank on her dresser.
Hello!
Of all the functions that money has, medium of exchange, unit of
account and store of value are of prime importance.
Medium of
exchange: You can simply understand this function by
recalling one of the key drawbacks of barter system (exchange in
terms of goods) ie. double coincidence of wants. In this, you had
to find the person who has what you want and is also willing to
exchange that in return of what you have. This was a tedious task.
But money as a medium of exchange has a fixed value and thus can be
used to purchase any amount of commodity from any seller.
Unit of
account: By using money as a unit of account, we can
express the value of all the goods and services in terms of a
common denomination ie. rupee in India, euro in England, etc. This
helps in comparing different commodities through price ratios and
keeping business accounts. (Hence the name!)
Store of
Value: As a store of value, money can be used to make
future transactions and can be used to store wealth in the most
convinient and liquid form. In barter system, goods had to be
stored for future transactions but their perishable and bulky
nature caused a lot of problems. The value of money doesn't change
and is only affected through inflation and deflation which is
common for everyone and hence the real value remains the
same.
Now that we have understood all the functions, we are ready to
answer the above query.
a) Medium of exchange (1): Money can be in any
form like notes, coins, debit card, credit card, or bank checks. We
need to identify what role it is playing in the current situation.
Here, money is being used to purchase someting and hence it is
acting as a medium of exchange.
b) Unit of account (2): All the goods are now
expressed in common unit of measure ie. their prices in particular
currency and can be compared through price ratios. This is possible
as money acts as a common unit for all goods and services. This is
the reason that Sarah and her friends are able to compare the
prices listed on the menu.
c) Medium of exchange (1): Remember that getting
paid for providing services is also a form of exchange as the two
commodities being exchanged here are services and
payment in form of money. Therefore, money in form of
cheque is acting as a medium of exhange for services that the
workers are providing at Rooster's Grill.
d) Store of Value (3): Since Beth is saving her
tips which are in form of money, hence money is acting as a store
of value here. This money can be used to make future tansactions
and is therefore transferring the purchasing power from present to
future.
I hope you understand now. :)