Question

Can you name some item that is a store of value, but does not serve the other functions of money?

Short answer

Collectible items, such as stamps or rare coins, serve as a store of value but do not fulfill the other functions of money. They can be saved and exchanged later but are not widely accepted as a medium of exchange and do not have a stable value to serve as a unit of account.

Step-by-step solution

Understand the functions of money

The three main functions of money are: 1. Medium of exchange: Money is used to facilitate transactions between people. It is accepted for buying and selling goods/services. 2. Store of value: Money is a way to store wealth. It can be saved and used later for future purchases. 3. Unit of account: Money is a measure of value. It allows us to compare the value of different goods/services. Our objective is to find an item that serves as a store of value but does not fulfill the other two functions of money.

Identify an item that is a store of value

An item that serves as a store of value is something that can be saved, retrieved, and exchanged at a later time, and it also has a relatively stable value over time. Some examples of items that are stores of value include: - Gold - Silver - Collectible items - Real estate - Fine art Let's analyze one of these items more in-depth to see if it fits the requirement of not serving the other functions of money.

Analysing the chosen item

We will analyze collectible items, such as stamps or rare coins, as a store of value that does not serve the other functions of money. Collectible items can be a store of value because they have a set market value and can be sold or exchanged later. Additionally, the value of collectible items often increases over time due to their rarity and demand. However, collectible items do not generally serve as a medium of exchange because they are not widely accepted for buying and selling goods/services, and their value is based on their rarity and the specific collector's market. They are usually traded only among collectors. Collectible items also do not function as a unit of account because their value is not stable, and the prices can be determined by unique factors such as rarity, condition, or demand in the collector's market, making it difficult to create a standard value for them.

Conclusion

In this exercise, we have identified collectible items, such as stamps or rare coins, as an item that serves as a store of value but does not fulfill the other functions of money. Collectible items can be saved and exchanged later but are not widely accepted as a medium of exchange and do not have a stable value to serve as a unit of account.

Key concepts

store of value

A store of value is a fundamental function of money, allowing people to preserve their wealth over time. To qualify as a store of value, an item must maintain its worth into the future, making it useful for saving and future spending.

For instance, if you buy an item today, you want it to retain or potentially increase in value over decades, so you can trade or sell it later for similar purchasing power. Items like gold, silver, real estate, and even collectibles, like rare coins, serve this purpose.

They can store value because they are either rare or have consistent demand.

• They need not change much in value over time, providing a sound investment for the future.
• People often seek them during times of economic uncertainty, as they tend to hold their value despite currency fluctuations.

However, such items predominantly serve the storage function and often lack the versatility of money in other areas.

medium of exchange

The medium of exchange function of money is pivotal in facilitating trade and transactions. Money, in its various forms, is a universally accepted instrument in buying and selling goods or services.

When you purchase a cup of coffee, the money exchanged is accepted by the seller and is fluid in its ability to transact.

• This function requires widespread acceptability, allowing seamless transactions between parties.
• Money used as a medium of exchange should be portable, making everyday transactions simple and convenient.

Collectible items, while valuable, usually lack this quality. For example, a rare coin is valuable but not practical for buying groceries as grocery stores don't accept rare coins at face value. Thus, while certain items hold significant worth as collectible pieces, they do not typically facilitate normal trade and transactions in everyday life.

unit of account

The unit of account function of money allows it to measure and compare the value of goods and services in a standardized way. Essentially, it is money's ability to serve as a common measure of value, providing a consistent means to assess worth.

When you compare two items, like an apple and a book, both priced in terms of money, it becomes easy to determine their relative value.

• This function demands stability, as money should reliably and consistently reflect the value of goods and services.
• It helps in making economic calculations and aids in financial planning.

Collectibles often fluctuate significantly in value because factors like rarity, condition, and market demand vary. Therefore, they cannot provide a consistent value metric like money does. This instability makes them unsuitable as a unit of account, as you cannot easily use them for accurate financial assessments or comparisons.