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     * Home /
     * Economics /
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     * Analysis /
     * Money: The Economic Definition

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   (BUTTON) TABLE OF CONTENTS
     * Intro
     * Overview
     * Analysis
     * Money: The Economic Definition
     * Types of Money
     * American Money
     * US Money Supply
     * The Federal Reserve System
     * Monetary Policy
     * Just the Facts
     * Game
     * Best of the Web
     * Teaching

Money: The Economic Definition

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   We all know what money is. We may have different terms for it—smackers,
   c-notes, dead presidents, Benjamins, bucks, bones, clams, dough,
   moolah—but money usually finds a way to overcome these barriers of
   dialect and speak to us all.

   Economists, however, have a language all their own when it comes to
   money. They define it as something that serves as a medium of exchange,
   a unit of accounting, and a store of value.

   Money is a medium of exchange in the sense that we all agree to accept
   it in making transactions. Merchants agree to accept money in exchange
   for their goods; employees agree to accept money in exchange for their
   labor.

   As a unit of accounting, money provides a simple device for identifying
   and communicating value. How much is that bicycle? It’s $200. Without
   this convenient, readily understood unit of accounting, setting and
   communicating value would be difficult. How much is that bicycle? Well,
   less than a piano but more than wheelbarrow—I’d say that bicycle is
   worth about one third of a piano plus two backpacks and a small pizza.
    Two hundred bucks is a little easier, right?

   Money serves as a store of value in that it allows us to store the
   rewards of our labor or business in a convenient tool. In other words,
   money lets us store the value of a long, hard week of work in a tidy
   little stack of cash. Without money, how would we set aside the
   compensation we receive for later use? We could be paid in cows, but
   that would not be a very convenient way to set aside our unspent
   compensation. We could be paid in pizzas, but the value of our labor
   would not be stored in the rotting little pies for very long.

   In other words, economists largely define money by the functions that
   it serves. It need not be green and made of paper, and it need not be
   little metallic discs—money is anything that fills those three
   essential functions. Now, the best money is also highly convenient—it
   is light, easy to carry, and can be broken into smaller units for easy
   exchange. (If we used cows for money, how would we give change?) But
   most important, it must serve as a medium of exchange, a unit of
   accounting, and a store of value.

   Why It Matters Today

   "Money, money, money/ Must be funny/ In a rich man's world"

   That little ditty from ABBA (John McCain's favorite band! For real!
   Look it up...) is about money. It's about choice and risk and reward,
   and what you're willing to sacrifices to have choices.  That's the way
   money works.  The Gospel of Shmoop does not suggest that we all try to
   fit through the eye of the needle that money on its own really is the
   answer to any kind of wishes for happiness.

   (As the Beatles sang, money can't buy me love.)

   (Or if you prefer the way Biggie Smalls put it: mo' money, mo'
   problems.)

   But whether you think money is the solution or money is the problem, it
   will help you to understand what money is, how it works, where it comes
   from and where it goes.

Sometimes, a Song Says it Better: Money Money Money, by Abba

   Abba talks of a rich man’s world with “money, money, money.”
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