Meaning of Money

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As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very specific meaning. To avoid confusion, we must clarify how economists' use of the word money differs from conventional usage.

Economists define money (also referred to as the money supply) as anything that is generally accepted in payment for goods or services or in the repayment of debts. Currency, consisting of dollar bills and coins, clearly fits this definition and is one type of money. When most people talk about money, they're talking about currency (paper money and coins). If, for example, someone comes up to you and says, "Your money or your life," you should quickly hand over all your currency rather than ask, "What exactly do you mean by 'money'?"

To define money merely as currency is much too narrow for economists. Because checks are also accepted as payment for purchases, checking account deposits are considered money as well. An even broader definition of money is often needed, because other items such as savings deposits can in effect function as money if they can be quickly and easily converted into currency or checking account deposits. As you can see, there is no single, precise definition of money or the money supply, even for economists.

To complicate matters further, the word money is frequently used synonymously with wealth. When people say, "Joe is rich—he has an awful lot of money," they probably mean that Joe has not only a lot of currency and a high balance in his checking account but has also stocks, bonds, four cars, three houses, and a yacht. Thus while "currency" is too narrow a definition of money, this other popular usage is much too broad. Economists make a distinction between money in the form of currency, demand deposits, and other items that are used to make purchases and wealth, the total collection of pieces of property that serve to store value. Wealth includes not only money but also other assets such as bonds, common stock, art, land, furniture, cars, and houses.

People also use the word money to describe what economists call income, as in the sentence "Sheila would be a wonderful catch; she has a good job and earns a lot of money." Income is a flow of earnings per unit of time. Money, by contrast, is a stock: It is a certain amount at a given point in time. If someone tells you that he has an income of $1,000, you cannot tell whether he earned a lot or a little without knowing whether this $1,000 is earned per year, per month, or even per day. But if someone tells you that she has $1,000 in her pocket, you know exactly how much this is.

Keep in mind that the money discussed in this book refers to anything that is generally accepted in payment for goods and services or in the repayment of debts and is distinct from income and wealth.

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