A monetary economy involves the exchange of goods and services for money, allowing for wealth accumulation and the development of financial markets. Modern economies blend monetary and non-monetary exchanges, such as bartering and volunteering. Fiat currency, lenders, and the foreign exchange market are features of a growing monetary economy.
A monetary economy refers to the segment of a trading 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 that can be exchanged for money, such as stock or credit. Many modern economies operate on a mixed system incorporating a monetary economy with elements of non-monetary trade, such as bartering and volunteering.
For much of human history, a barter economy was an important medium of exchange. Goods and services have been exchanged for other goods and services; the farmer could exchange his grain for needed nonagricultural items, such as cloth, sugar, or ground lumber. With the rise of currency, however, many companies began to see the value in translating goods or services into a flexible form that could be used to buy anything. The development of a monetary economy also allowed for the accumulation of wealth through savings and trade.
There are several features that tend to appear as the monetary economy increases. Most of these associated concepts are concerned with regulation and the flow of money throughout the economy. First, most modern money-based economies operate on fiat currency, which has no intrinsic value. Fiat money is valued by an authoritative agency, such as a national government, which can determine the amount of money in circulation, denominations, currency production rights and taxation rules. A rising money economy will often lead to the development of lenders, which temporarily lend money in exchange for a prearranged repayment and a lucrative interest fee.
One creation of the growing dependence on monetary economies is the financial market. This huge industry includes trading in stocks, bonds, and other money-based stocks in 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 foreign exchange market. In this particular segment, investors attempt to make money on investments simply based on the fluctuating exchange rate between certain currencies.
Modern economies often blend a heavy monetary component with some element of barter, gift, and volunteer economies. At the household level, for example, both monetary and non-monetary exchanges often occur. Two brothers can do a barter-based chore exchange, such as exchanging dishware for trash service. Their parents, however, may choose to implement a monetary policy by rewarding the completion of the weekly chores with an allowance. Similarly, two nations may engage in multiple forms of trade with each other: while an oil-producing nation may be willing to trade fuel for infrastructure improvements, two national leaders may apply a gift economy principle giving important or lavish ceremonial gifts to one another as a means of building obligation, respect, and a positive working relationship.
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