Despite its historical use, grain has significant drawbacks as a form of commodity money. It is perishable, meaning its quality degrades over time, and it is vulnerable to being consumed by pests. Furthermore, its bulk makes it highly impractical to transport for everyday transactions, particularly in a modern economy.

Disadvantages of Grain as Commodity Money

In an extended economic model with multiple goods, grain serves as an example of commodity money. It has intrinsic value because it can be consumed, and it also fulfills the three functions of money: it acts as a medium of exchange for other goods, a store of value, and a unit of account in which prices are expressed.

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To properly investigate the function and necessity of money, economic analysis often progresses from simplified models to more realistic scenarios that include many different goods and services. This methodological step is crucial for demonstrating the limitations of barter and the advantages of a monetary system.

Extending Economic Models to Multi-Good Economies

Money is an asset that serves three primary roles in an economy: it is a widely accepted medium of exchange, a store of value, and typically a unit of account for valuing goods, services, assets, and liabilities. While certain commodities can function as money, in contemporary economies, the money supply primarily consists of currency (notes and coins issued by the central bank) and commercial bank deposits.

Money

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Macroeconomics

The function of a medium of exchange becomes critically important as an economy evolves to include more than one type of good. While barter or a single commodity standard might suffice in a very simple economy, a universally accepted medium of exchange is necessary to facilitate the vast number of transactions involved in buying and selling a diverse range of products.

Essential Role of Medium of Exchange in Multi-Good Economies

Grain as an Example of Commodity Money

The Marco-Julia model can be adapted to analyze a more complex scenario by envisioning a wealthier economy where many different goods are available for purchase, similar to a modern supermarket. This extension moves the analysis beyond a simple, single-good framework, setting the stage to explore the functions of money in a more realistic setting.

Extending the Marco-Julia Model to a Multi-Good Economy

There are three key functions of currency: 
- Unit of account 
- Medium of exchange 
- Store of value 

Functions of Currency 

There are seven key properties of currency: 

- Durability 
- Portability
- Divisibility 
- Uniformity
- Limited supply
- Acceptability 
- Stability 

Properties of Currency 

Commodity money is a good used as a medium of exchange that also possesses intrinsic value from its own use or consumption. Often found in economies without well-developed banking systems, a commodity like gold or grain can serve as money if it is widely valued and can effectively function as a medium of exchange, a store of value, and a unit of account.

Commodity Money

In an economy that relies on commodity money, a critical question arises regarding which specific commodity should be chosen to serve as the monetary standard. This selection is a significant challenge, as not all commodities are equally suitable for fulfilling the functions of money.

The Challenge of Selecting a Commodity for Money

In modern economies, the measured money supply is composed of two primary elements: currency, which includes physical banknotes and coins in circulation, and bank money, which consists of the total deposits held in commercial banks.

Components of the Modern Money Supply

A fundamental question in modern economics is understanding the origin of money, particularly the funds held in a bank account. Unlike commodity money, which has intrinsic value, the money in today's economy is not a naturally occurring resource but is instead created through specific institutional processes.

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