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August 14, 2018 

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AMORTIZATION: The process of paying off a debt liability and accrued interest through a series of equal, periodic payments. Car loans and mortgages are two debts commonly paid off through amortization. Your monthly car payment, for example, partially pays for interest accrued on the outstanding balance and partly reduces that balance. Because one payment reduces the outstanding balance, each subsequent payment has a smaller portion for interest. If the proper amortization schedule has been calculated, your loan will be paid off with the last payment.

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VALUE IN EXCHANGE:

The ability to trade an item or asset, especially money, for other goods and services that can then be used to satisfy wants and needs. Value in exchange means that value (that is, satisfaction) is obtained indirectly through the acquisition of something else. For an item to have value in exchange it need NOT have value in use, value obtained directly from the consumption of a good or service.
The notion of value in exchange is most important for money. In particular, almost all modern money is fiat money, which has value in exchange, but little or no value in use. In contrast, commodity money has value in exchange and value in use. Value in exchange goes hand-in-hand with the medium of exchange function of money. When an item is generally accepted in payment for goods and services and thus serves the medium of exchange function, then it HAS value in exchange. People are willing to accept money in exchange for the goods they HAVE because they know that this money can then be exchanged for other goods that they WANT.

The value in exchange of commodity money is largely based on the commodity's value in use. In fact, the earliest forms of money were commodities that provided value in use to virtually everyone in an economy, such as grains for food and animal skins for clothing. For example, in the early eons of civiliaation, people were willing to accept bushels of grain in trade for another good because they were hungry, because the grain had value in use, NOT necessarily because they planned to use the grain to buy another good, NOT because the grain had value in exchange.

However, knowing that EVERYONE was willing to trade for grain gave it value in exchange. Because people couldd trade the grain to others, they were willing to accept grain in payment even when they were NOT hungry, even when the grain. did not provide them with value in use.

The value in exchange of fiat money is based exclusively on an item's widespread acceptance AS MONEY. In the modern world, people accept fiat money in payment because EVERYONE accepts fiat money in payment. Continued acceptance of fiat money rests largely with the authority responsible for issuing the money, usually government. If the issuing government remains healthy, trustworthy, and responsible, then the money that it issues continues to be accepted as payment. A primary way that government maintains the "official" status of money is to accept it in payment for taxes. Usually, not always, but usually, whatever item the government is willing to accept as payment is good enough for the rest of the economy. Such acceptance gives the item value in exchange.

Some folks overlook the point that money ONLY requires value in exchange to function effectively as the medium of exchange. Money does NOT require value in use. Value in use definitely played a key role in the historical progression from barter to fiat money. Commodities with economy-wide value in use that evolved into commodity money revealed the benefits of money over barter. But those who study money now know that the benefits associated with value in exchange are distinct from value in use. Money is only valuable NOT for what it IS, but for what it can BUY.

<= VALUE ADDEDVALUE IN USE =>


Recommended Citation:

VALUE IN EXCHANGE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: August 14, 2018].


Check Out These Related Terms...

     | value in use | commodity money | fiat money | barter | barter economy | double coincidence of wants | M1 |


Or For A Little Background...

     | money | money functions | medium of exchange | money characteristics | value | price | market | government functions | satisfaction | exchange |


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 | 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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