Is commodity a form of money?
The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
Today, U.S. bills are backed by the Federal Reserve, but as fiat money. As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved toward the use of fiat money. Fiat money is legal tender whose value is backed by the government that issued it.
The 4 different types of money as classified by the economists are commercial money, fiduciary money, fiat money, commodity money. Money whose value comes from a commodity of which it is made is known as commodity money.
Precious Metals is not a modern form of money.
Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.
Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods.
Commodity money has intrinsic value but risks large price fluctuations based on changing commodity prices. If silver coins are used, for instance, a large discovery of silver may cause the value of the silver currency to plunge, resulting in inflation.
On the criteria above, gold meets all the requirements needed that we can say yes, gold is a commodity. Like silver and other precious metals, it is a basic metal element. As such it is described as being fungible – identical, and totally interchangeable.
A commodity currency is a currency that co-moves with the world prices of primary commodity products, due to these countries' heavy dependency on the export of certain raw materials for income. Commodity currencies are most prevalent in developing countries (eg. Burundi, Tanzania, Papua New Guinea).
Why is fiat money better than commodity money?
Advantages and Disadvantages of Fiat Currency
The most important feature of fiat money is the stability of its value, unlike commodity-based money like gold, copper, and silver.
The Great Seal of the United States, featuring an eagle and shield, is printed in purple to the right of the portrait of President Lincoln. An arc of purple stars surrounds the portrait and The Great Seal. A large purple numeral 5 on the back of the note helps those with visual impairments distinguish the denomination.
The Mesopotamian civilization developed a large-scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded c. 3000 BC, which was nominally equivalent to a specific weight of barley that was the preexisting and parallel form of currency.
Historians generally agree that a system of bartering was likely used before this time. Bartering involves the direct trade of goods and services. For instance, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker.
Different types of modern forms of money are paper currency, coins, and cheques.
The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.
The Federal Reserve, as America's central bank, is responsible for controlling the supply of U.S. dollars. The Fed creates money by purchasing securities on the open market and adding the corresponding funds to the bank reserves of commercial banks.
Solution: Precious metal is not a modern form of money. Money is a modern paper currency, along with coins and demand deposits.
The most common form of commodity money was dried indian corn, which was used to purchase the item depicted above and described below.
Commodities trade involves goods like cocoa, coffee, and products that can be mined like oil and gold. On the other hand, forex —or foreign exchange — is a global market that trades in currencies like rupees, euros, dollars, and yen.
What is not an example of commodity money?
The answer is d). Commodity money is a type of money that is divisible, durable, can be exchanged, and has intrinsic value. Paper money (bank notes) does not have intrinsic value. Silver and gold are the two examples of commodity monies, though other commodities were used as money in history.
Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money.
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Is Bitcoin a commodity? Yes, virtual currencies, such as Bitcoin, have been determined to be commodities under the Commodity Exchange Act (CEA).
Answer: True
Commodity money such as gold or silver has value instead of just being money. The US dollar for example has no value except being money. The US dollar used to be backed by gold in order to derive real value.
Over time, people stopped using valuable metals for coins due to the high cost of the metals. Instead, we shifted to using the paper and non-precious metal money system that we use today. In this money system, each coin and bill represents a value that everyone agrees upon.
