THE NATURE OF MONEY

The Nature of Money

Money is the universal corresponding value of all goods and services and is also amass of value. It is a critical component of any civilized functioning economic system, if that system is based on the entire objective of the total value of monetary categories. (Solow 2006, 65-94.)

The economic concept of "goods" mean any product, whose participation in fiscal life takes place through the sale. Under the conditions of subsistence, agriculture products are produced for personal consumption and not a commodity. (Bernstein 2008 35-56) The development of the division of labour, accompanied by the appearance of a regular exchange of products of labour, has led to the establishment of commodity's economy in which products are made specifically for sale, and thus becomes a commodity. (Sargent & Wallace 2005, 241-255)

In the past, when there was no concept of money, the goods were exchanged. Examples of such financial systems are of barter economy and the economy with cash handling, (Samuelson & Solow 2000, 177-194). Barter economy, in turn, has two main forms:

• System of pure barter and

• Wicksell Problem

The System of Pure Barter

Barter is a direct exchange of goods and services for other goods and services. Under a system of the pure barter economy subject who needs a specific product or service, needs to find another entity who is willing to provide such a product in exchange for the goods offered by the first. Thus there must be something called double coincidence of wants. Two people must have both the relevant products and services and want to exchange them. (Phillips 2008, 283-299)

This does not mean that barter is always ineffective. In some countries, the production of goods and services are limited and the numbers of sales transactions are small. In such countries, barter can be effective and survive for a long time. However, when the range of products and services will expand they become frequent trading with other countries; the costs of barter greatly exceed its profitability. Gradually barter will be replaced by a new payment mechanism. (Phelps 2008, 678-711)

Pure barter system has a number of shortcomings, including:

Lack of ways to maintain the complete purchasing power; money allows a private person or entity to maintain the complete purchasing power (oppose the specific purchasing power in the form of a product or service). Barter involves keeping only the definite purchasing power. It allows saving just particular products whose value may change as the result of physical changes or because of changes in people's tastes.

Lack of a scale of measurement value; under a barter system, we must express the price of any good or service in quantities of all other goods and services. Thus in a barter system there is no standardized way of expressing prices of commodities. (Parkin 2000, 85-89)

As an example consider the number of prices that would exist in an economy producing and selling 1000 products, but no money, and monetary unit of account. Individual can exchange each item on any of the remaining 999 ...