Difference Between Fiat Money and Commodity Money

Edited by Diffzy | Updated on: April 30, 2023

       

Difference Between Fiat Money and Commodity Money

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Introduction

Money is the center of the universe. In economies, money is used to exchange products and services. Money, as well as its origins and value, are defined by economists. In a transactional economy, money is an economic unit that acts as a commonly acknowledged method of exchange. Money is used to reduce transaction costs, specifically the desire for two things to happen at the same time. Money begins as a physical commodity with a physical property that enables market participants to utilize it as a medium of exchange. Money can take many forms, including market-determined legal tender or fiat money, money substitutes, fiduciary media, and electronic cryptocurrencies People used to barter to get the commodities and services they needed before the invention of a medium of exchange, such as money. A trading agreement would be made between two individuals, each of whom possessed items that the other desired.

Money is a liquid asset that is used to settle transactions. Its value is widely accepted both within a governmental economy and across international borders via foreign exchange. The resources used in the manufacturing of monetary currency do not always determine its current value. Value is instead created by the desire to accept and rely on a demonstrated value in future interactions. Money's main purpose is to act as a universally recognized medium of exchange that people and economies around the world intend to keep and accept as payment for current and future transactions

For the sake of exchange, economic money systems began to be devised. The use of money as a medium of exchange in a market provides a centralized means for buying and selling. This was created to take the place of bartering. The use of monetary currency aids in the development of a system for overcoming the double coincidence of desires. In a barter system, where one side must have something that the other wants to trade, the double coincidence of wants is a common difficulty. This dilemma can be avoided if all parties utilize and readily accept an agreed-upon monetary currency a currency must be 1) fungible, 2) durable, 3) portable, 4) identifiable, and 5) stable to be used as money. These criteria ensure that the benefit of lowering or eliminating the transaction cost of a double coincidence of wants is not overshadowed by other transaction costs connected with that product

Fungible

The good's fungible units should be of a generally uniform quality so that they can be interchanged. If multiple units of an item have varying attributes, their value in future transactions may not be constant or dependable. Trying to use a non-fungible item as money incurs transaction costs since each unit of the good must be individually evaluated before an exchange can take place.

Durable

The physical characteristics of the good should be durable enough to be reused several times and retain their usefulness in future exchanges. A perishable item or one that degrades rapidly after being used in exchanges will be less usable in future transactions. Using a non-durable item as money is incompatible with money's fundamentally future-oriented nature.

Portable

It should be easily divided into small quantities so that its original use value can be identified-enough so that a useful quantity of the commodity can be carried or transported. When a good is indivisible, immobile, or has a low initial usage value, problems can occur. The transaction costs of physically transferring large amounts of a low-value item or defining realistic, transferable ownership of an indivisible or immovable asset may be incurred if a non-portable good is used as money.

Recognizable

To agree on the terms of exchange, users should be able to immediately determine the legality and amount of the goods. Using an unidentified good as money incurs transaction costs associated with confirming the good's legitimacy and amount.

Stable

People's perceived value of an item in terms of other goods for which they are ready to exchange should remain roughly constant or increase over time. A good whose value fluctuates dramatically over time or continually loses value is less acceptable. Attempting to utilize a non-stable good as money incurs transaction costs, such as revaluing the good in each subsequent transaction, as well as the risk that the exchange value of the commodity will fall below its other direct use-value or become useless, in which case it will cease to circulate as money.

Difference Between Fiat Money and Commodity Money in Tabular Form

Money is the source or means of exchange that can be utilized to meet one's daily needs. Money is an important component of everyone's life because we can't buy anything without it. As a result, money has been separated into three distinct sorts. But we'll make a distinction between fiat money and commodities money here. People frequently mix up the many forms of money, but it is important to be precise and detailed about the money because it represents its usage and distinctions.

Parameters of Comparison Fiat Money Commodity Money
Definition Fiat money is defined as money that is created with the full authority of the government and then utilized as a means of exchange. Commodity money is money that is not issued by the government but has its value and is used as a medium of exchange.
Nature Fiat money is readily available and accepted in a variety of ways. Commodity money is only accepted in certain locations and cannot be used everywhere.
Government Responsibility The government creates fiat money and determines its value. The government does not issue commodity currency or determine its value.
Example Indian rupees, US dollars, British pounds, and other currencies are instances of fiat money. Gold, silver, copper, tea, and other commodities are examples of commodity money.
Quality Determination In general, the quantity of fiat money is determined by the combination of the Governmental Monetary Policy and the Monetary Policy. The quantity of the commodity money is usually determined by the market.

What is Fiat Money?

Fiat money is a widely accepted and easy-to-carry form of currency. It's easy to move because it poses fewer dangers and occupies less space. The currency is referred to as fiat money in plain terms. The use and accessibility of each country's fiat money are governed by the government. The mechanism for producing fiat money is under the control of each country's government. The government is also in charge of determining the value of fiat money, which is affected by a variety of circumstances in each country.

Indian rupees, US dollars, British pounds, and other currencies are instances of fiat money. As a result, the value of each currency varies. In general, the quantity of fiat money is determined by the combination of the Governmental Monetary Policy and the Monetary Policy. Fiat money can also be referred to as fiat currency.

Fiat money has a fixed value in most cases, but it does change sometimes, if at all. The value of fiat money fluctuates due to factors such as government policy and the economy of the country. Fiat money offers several benefits and drawbacks. Fiat money has several advantages, including the fact that it is the only natural resource used in the production of the notes, that it is stable, that the government controls its supply, and so on. Whereas the downsides of fiat money include things like the abuse of bamboo trees for paper making, manufacturing instability at times, hyperinflation, excessive transaction costs, and so on.

People may easily form plans and build specialized economic activities because of their ability to store purchasing power. A mobile phone maker, for example, can spend money on new equipment, hire and pay more people, and expand into new markets. The value of fiat money is influenced by the success of a country's economy, governance, and the impact of these variables on interest rates. Political turmoil is likely to result in a weak currency and higher commodity prices, making it difficult for individuals to purchase the goods they require. It works when the public has enough faith in a fiat currency's ability to function as a purchasing power storage medium.

What is Commodity Money?

Commodity money is the end product of a natural resource that is classified as a type of money and has intrinsic worth. Gold, silver, copper, tea, and other commodities are examples of commodity money. And we all know that goods like gold, silver, copper and other precious metals are mined from the earth and polished before being sold on the market. However, there is a big drawback to commodity money, which is that it is not widely accepted or accessible. There are a few venues where we can buy and sell commodities with commodity money. Although the government does not issue commodity money, it is an important component of the country's economy.

Commodity money's value is likewise not determined by the government, and it fluctuates for a variety of causes. Commodity money's value is exclusively determined by the market, which also sets the money's amount. Product money has several advantages, including the ability to redesign the raw form of the commodity into commodity money, the fact that the government never controls commodity money, and so on. Commodity money has several drawbacks, including the fact that its value fluctuates, it lacks stability, and it carries a high level of risk because its value might drop and alter dramatically, among others. Nature is exploited to a considerable degree in commodity money.

Commodity money is money that can be used to purchase anything right now. Fiat money, on the other hand, is a future obligation because all it is a promise to pay in the future. Payment is never made in the case of fiat money; instead, it is only discharged. On the other hand, commodity money brings the transaction to a close. In a commodity monetary system, the final payment is always made in the commodity that was used as money in the transaction. The commodity is utilized as a final payment because there is no obligation and receiving the commodity as payment terminates all previous agreements.

The quantity of gold coined in a commodity monetary system, such as the gold standard, is determined by market forces. The amount of gold sent to the mint for coinage and the number of gold coins melted for other purposes determine the number of gold coins required by the general population. As a result, the intelligence and understanding of all those who regulate the supply of money can be said to determine the value of commodity money.

Difference between Fiat Money and Commodity Money (In Points)

Fiat money refers to money that is issued by governments, and the value of each currency is determined by the governments themselves. Each country's central bank determines the value of its currency. The money is legal tender and can only be issued by the government. Furthermore, the value of each currency is determined by the country. The Indian rupee, US dollars, British pound, and other fiat currencies are examples of fiat money. As a result, fiat money is produced in the form of paper. Commodity money, on the other hand, is exchangeable money that is linked to the value of the commodity it is made of. Commodity money is made by extracting raw materials and then transforming them into a finished product that can be used. Its worth is also prone to fluctuation. Gold, silver, copper, tea, salt, alcohol, and other commodities are examples of commodity money. It is feasible to redesign gold and silver jewelry.

  • Fiat money is defined as money that is created with the full authority of the government and then utilized as a means of exchange. Commodity money, on the other hand, refers to money that is not issued by the government but has its value and is utilized as a medium of exchange.
  • Fiat money is readily available and accepted in a variety of ways. Commodity money, on the other hand, is only accepted in a few places and cannot be used elsewhere.
  • The government creates fiat money and determines its value. The government, on the other hand, does not issue commodity money or determine its value.
  • Indian rupees, US dollar, British pound, and other currencies are examples of fiat money. Commodity money, on the other hand, includes items such as gold, silver, copper, tea, and so on.
  • In general, the quantity of fiat money is determined by the combination of the Governmental Monetary Policy and the Monetary Policy. The quantity of the commodity money, on the other hand, is usually determined by the market.

Conclusion

Money is the source or means of exchange that can be utilized to meet one's daily needs. Money is an important component of everyone's life because we can't buy anything without it. As a result, money has been separated into three distinct sorts. But we'll make a distinction between fiat money and commodities money here.

Money is a crucial need for everyone in their everyday life because they rely on it for a variety of things. As a result, money is divided into three categories, two of which we have explored with examples. Everything, including the values, relevance, and applications, differs from one another. Simply put, both sorts of money are necessary depending on one's needs and employment. Fiat money is widely accepted and accepted everywhere.

References

  1.  "The Four Different Types of Money - Quickonomics". Quickonomics. September 17, 2016. Archived from the original on February 13, 2018. Retrieved February 12, 2018.
  2. ^ Schueffel, Patrick (2017). The Concise Fintech Compendium. Fribourg: School of Management Fribourg/Switzerland. Archived from the original on October 24, 2017. Retrieved January 8, 2018.
  3. "Mackerel Economics in Prison Leads to Appreciation for Oily Fillets: Packs of Fish Catch On as Currency, Former Inmates Say; Officials Carp". The Wall Street Journal. October 2, 2008.
  4. ^ Oconnor, Ashling (June 16, 2007). "Coins run out as smugglers turn rupees into razors". The Times. London. Retrieved April 30, 2010.

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"Difference Between Fiat Money and Commodity Money." Diffzy.com, 2024. Mon. 26 Feb. 2024. <https://www.diffzy.com/article/difference-between-fiat-money-and-commodity-money-490>.



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