Consider the following dialogue between two economics students, Janet and Larry, after a recent economics lecture. JANET: Hi Larry. Today the professor said that money is helpful because systems of exchange work better when everyone agrees to use a single common item to buy and sell things. But I don’t see how money is useful. As long as I specialize in something I have a comparative advantage in, like making cookies, I should be able to trade my cookies for whatever I need! I wouldn't need money! LARRY: Okay, I see where you are confused. Let’s run through it one more time. Suppose there is no money and you continue your job making cookies. With no money, you will actually have to be paid in cookies. Now, you still need water to survive, right? Well, in order to get water, you'll need to pay the water company your ___ (options: cookies, water, cash) in exchange for the water company's _ (options: cash, cookies, water). JANET: Yes. So what’s wrong with that? LARRY: Suppose there are no water companies that want your cookies, and instead water companies all want something else, like milk for example, as payment. You _ (options: would, would not) be able to pay for water! JANET: Oh no! I think I see what you are saying. If we all agree to use money to buy and sell things, then I can get paid in money. Then it ____ (options: will, will not) be easier to find a water company that wants money for water rather than a water company that wants cookies. LARRY: Yes! The money you give the water company will allow the water company to buy a variety of things and not just your cookies. This means the water company will be more likely to trade with you. If we all agree to use a common item, like money, to buy and sell things, then you don’t have to worry as much about finding people to trade with who also want your cookies.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter28: International Trade

Section: Chapter Questions

Problem 2P

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Consider the following dialogue between two economics students, Janet and Larry, after a recent economics lecture.

JANET: Hi Larry. Today the professor said that money is helpful because systems of exchange work better when everyone agrees to use a single common item to buy and sell things. But I don’t see how money is useful. As long as I specialize in something I have a comparative advantage in, like making cookies, I should be able to trade my cookies for whatever I need! I wouldn't need money!

LARRY: Okay, I see where you are confused. Let’s run through it one more time.

Suppose there is no money and you continue your job making cookies. With no money, you will actually have to be paid in cookies. Now, you still need water to survive, right?

Well, in order to get water, you'll need to pay the water company your _______ (options: cookies, water, cash) in exchange for the water company's _________ (options: cash, cookies, water).

JANET: Yes. So what’s wrong with that?

LARRY: Suppose there are no water companies that want your cookies, and instead water companies all want something else, like milk for example, as payment. You _______ (options: would, would not) be able to pay for water!

JANET: Oh no! I think I see what you are saying. If we all agree to use money to buy and sell things, then I can get paid in money. Then it ______ (options: will, will not) be easier to find a water company that wants money for water rather than a water company that wants cookies.

LARRY: Yes! The money you give the water company will allow the water company to buy a variety of things and not just your cookies. This means the water company will be more likely to trade with you. If we all agree to use a common item, like money, to buy and sell things, then you don’t have to worry as much about finding people to trade with who also want your cookies.

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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Money is anything which is generally accepted by the economy for the purpose of buying and selling goods and services.

Money has many function, such as the medium of exchange, it can be traded for any good or commodity or services one wishes to buy as they can further exchange the money to buy or sell anything they desire.

It acts as a measure of values representing the exchange value of the goods and services being traded in the economy during a specific period of time.

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