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What is the Monetary Economy?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 November 2016
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A monetary economy refers to the segment of a trade system where money is given in exchange for goods and services. It may include areas that involve the trading of items that are given a monetary value or can be exchanged for money, such as stocks or credit. Many modern economies operate on a blended system that incorporates a monetary economy with elements of non-monetary trade, such as bartering and volunteerism.

For much of human history, a barter economy was an important means of trade. Goods and services were exchanged for other goods and services; the farmer could trade his wheat for necessary non-farm made items, such as cloth, sugar, or milled lumber. With the rise of currency, however, many societies began to see the value in translating goods or services into a flexible form that could be used to purchase anything. The development of a monetary economy also allowed the accumulation of wealth through saving and trading.

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There are several characteristics that tend to appear as a monetary economy rises. Most of these associated concepts deal with the regulation and flow of money throughout an economy. First, most modern monetary-based economies operate on fiat currency, which has no intrinsic value. Fiat money is given value by an authoritative agency, like a national government, which may determine the amount of money in circulation, the denominations, the rights of production of currency, and the rules of taxation. A rising monetary economy will also frequently lead to the development of credit institutions, which temporarily lend money in return for a set repayment and a profitable interest fee.

One creation of the growing reliance on monetary economies is the financial market. This enormous industry includes the trading of stocks, bonds, and other monetary-based shares in the hopes of making a profit. The presence of multiple currencies that require constant exchange and transfer between economies has even spawned its own segment of the financial market, called the foreign exchange (Forex) or currency exchange market. In this particular segment, investors attempt to make money on investments simply based on the fluctuating rate of exchange between given currencies.

Modern economies often blend a heavy monetary component with some elements of barter, gift, and volunteer economies. At a household level, for instance, both monetary and non-monetary exchanges often occur side by side. Two siblings may make a barter-based swap of chores, such as trading dish duty for trash duty. Their parents, however, may choose to employ a monetary policy by rewarding the completion of weekly chores with an allowance. Similarly, two nations may engage in multiple forms of trade with one another: while an oil producing nation may be willing to barter fuel for infrastructure improvements, two national leaders may employ a gift economics principle by giving important or lavish ceremonial gifts to one another as a means of creating obligation, respect, and a positive working relationship.

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