There are several things all economies must have: trust, property rights and a stable monetary system are among the most important. While it seems almost trivial, money is an extremely important factor in any prosperous economy. 'Legal tender for all debts public and private'; this phrase can be found on all of the money offered by the government. This idea that if I give you a piece of paper with this phrase, and you will be able to give it to someone else and its value will remain the same is one of the key factors in the development of the modern economy. This is why trust is so important. If no one trusts the government's currency, then people will not accept it, it will lose its value. The $100.00 bill is only worth 100.00, because everyone agrees to this fact.
What is the purpose of money? I know it seems as if this is an easy task; after all we use money every day. Yet many people are not actually aware of its main purpose. In answer to my question you might have said, 'well, of course, it's to buy things'. You are right, however that is not unique to money. After all when you go to the dealer and trade you car in, is your car money? Yet you 'buy' another car with it. In addition to being able to exchange things, money serves two other purposes: to act as a store of value, and to measure value.
The store of value should be easy enough. Pull out your wallet. Besides those looming credit cards what do you have? Most likely you are looking at some coins and maybe some dollar bills. That is a store of value. Of course you have other ways of storing value. Your house, car, stuff around your house (thanks to eBay) gold, jewelry; I am sure you get the picture. However how easy is it to go down to the store and purchase some beer with that antique roll top desk your great aunt left you? We know you could not do that; you would need to take it to an antique dealer, and hope they gave you a fair price. However, for the sake of discussion let's pretend that you could trade it for some beer. There is own question that you would need to know the answer to. How many beers is my roll top desk worth? This brings us to the other role of money when it is a measure of value.
Pretend you have 10 items in an economy. You would need to know the exchange value for each individual item when compared with another. How many beers for a roll top desk? How much cheese? How many eggs? You would have to know 45 different prices. If you had 100 goods in your economy that number grows to 4950! I get tired just thinking about it. However, with money, you can know the price for each item without having to put in all of that extra work.
The bottom line is that money is absolutely necessary for the economy to function. It is also necessary to have Trust that the money is worth what it says it is. This requires a stable monetary system. For those of you who like to trade in FOREX, it is very important that you are aware of money, its uses, what affects interest rates, why these things affect interest rates and what all of that has to do with the value of currency as compared to other countries. You will see many automated FOREX systems that promise a certain rate of return. These systems use, for the most part, a limited version of technical analysis. However, anyone who is speculating in high risk areas such as securities, currency exchange etc. Needs to have a solid understanding of Fundamental Analysis.
Author Resource:-
David Purcell studies Economics and explains difficult concepts in easy to understand language. If you are interested in receiving a newsletter with weekly updates, please go to the web site and sign up.
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