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THREE-SECTOR AGGREGATE EXPENDITURES LINE: A graphical depiction of the relation between aggregate expenditures by the three domestic macroeconomic sectors (household, business, and government) and the level of aggregate income or production. The three-sector aggregate expenditures line combines consumption expenditures, investment expenditures, and government purchases. The slope of this aggregate expenditures line is based on the marginal propensity to consume, adjusted for marginal propensities of the other expenditures that are assumed to be induced when constructing the line. This is one of three aggregate expenditures lines based on the number of sectors included. The others are the two-sector aggregate expenditures line and the four-sector aggregate expenditures line.

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MEDIUM OF EXCHANGE:

The money function in which money is widely accept in exchange for goods and services. For an asset to function as a medium of exchange it needs value in exchange, but not necessarily value in use. This is one of four basic functions of money. The other three are unit of account, store of value, and standard of deferred payment.
THE primary function of money is to act as THE medium of exchange for an economy. People use money to buy and sell goods. Buyers give up money and receive goods. Sellers give up goods and receive money. Money makes transactions easier because everyone is willing to trade money for goods and goods for money.

Making Payment

Consider the examples offered by three representative citizens of the hypothetical community of Shady Valley.
  • Johnathan McJohnson is a typical suburban consumer. Each month he and his family buy a wide range of goods and services used to provide satisfaction and to enhance their living standards. One such purchase is electricity used to operate his 52-inch plasma screen television, his central air conditioning system, and his electric weed whacker and grass trimmer. He buys this electricity through a direct Internet transfer from his online banking website to his local electric company.

  • Manny Mustard operates a popular restaurant near the Shady Valley Sprawling Hills Shopping Mall, which serves the popular Deluxe Club Sandwich to lunch hungry patrons. To prepare this product, Manny purchases an assortment of inputs--including bread, lettuce, tomatoes, bacon, ham, turkey, and barbecue sauce--from Freshable Produce, a local grocery wholesale distributer. He makes payment for these inputs with a company check to Freshable Produce.

  • Winston Smythe Kennsington III is a wealthy industrialist and financier who suspects that his sister, Geraldine Constance Kennsington, is secretly seeking to undermine his leadership of OmniConglomerate, Inc. To ward off such an effort, he has hired the services of Seth Mullholland, a former covert military operative, to acquire unflattering and possibly incriminating information on his sister, which he hopes will convince Geraldine to discontinue her efforts. Winston pays for Seth's services with a satchel full hundred dollar bills.
In each example, the medium used to conduct the transaction is money--paper currency for Winston, a paper check for Manny, or direct checking account access for Johnathan.

A Bit About Barter

To see why money makes transactions easier, consider a barter economy that has no money, where one good is traded directly for another. The key to successful barter trades is double coincidence of wants, each trader has want the other wants and wants what the other has. Without double coincidence of wants, a barter economy can become exceedingly inefficient. Traders spend more time seeking trades and less time producing goods.

Suppose, for example, that Manny is seeking to acquire his sandwich making ingredients without the benefit of money. He would need to work out a barter trade with Freshable Produce, such as trading a dozen Deluxe Club Sandwiches for a crate of tomatoes. If the owners and employees of Freshable Produce need a dozen sandwiches, then this is a workable barter exchange. But if they do not, then there is no double coincidence of wants and Manny must do without his tomatoes.

At least Manny can not get his tomatoes without spending some time, perhaps a great deal of time, seeking to trade his club sandwiches to someone else for a good that the Freshable Produce does want or need. Manny might need to seek out dozens of other people, conducting dozens of intermediate trades, before he finally has a good that can be traded for tomatoes. The time I spend on barter trades is time that Manny CANNOT spend preparing other club sandwiches, to the loss of hungry consumers throughout the town.

Money eliminates the need for double coincidence of wants because EVERYONE is willing to accept money in payment for goods. Manny can trade his sandwiches for money (that is, sell), trade this money for the produce (that is, buy), then continue his club sandwich production. With a generally accepted medium of exchange, trades are easier, more efficient, and resources can spend more time doing production.

The Other Three Functions

The medium of exchange function is by far the most important money function. Three other functions are also worth noting.
  • Unit of Account: This function means that money is used to designate the prices of goods and services. Any item that is generally accepted as payment for goods and services is also the obvious choice for denominating the prices of those goods and services.

  • Store of Value: This function means that money can be used to purchase the same quantity of goods and services, that provide the same consumption value, in the future as it can purchase today. Inflation is the primary nemesis for the ability of money to store value.

  • Standard of Deferred Payment: This function means that money is used to designate future payments, such as those for loan repayments. The standard of deferred payment is a natural result of the standard unit of account and store of value functions of money.

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Recommended Citation:

MEDIUM OF EXCHANGE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: June 20, 2018].


Check Out These Related Terms...

     | money functions | unit of account | store of value | standard of deferred payment | value in use | value in exchange | commodity money | fiat money | money characteristics | M1 |


Or For A Little Background...

     | money | barter | market | government functions | value | satisfaction |


And For Further Study...

     | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | monetary economics | Keynesian economics | aggregate market analysis | inflation | business cycles |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury |


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