Alright. So let's discuss the 3 main functions of money. These are the 3 main functions of money right here. A medium of exchange, a unit of account, and a store of value. Okay? So let's start here with the medium of exchange. A medium of exchange means that the money can be used for trading goods rather than just for its own consumption, okay? So we don't actually consume US dollars, right? The US dollars are not consumed by anyone. They never get used up. They get traded away and they get traded just for other goods and services, right? They're just used to trade. So that's what the money does. It acts as this middleman between the goods that you want and the goods that you have.
Next, we have a unit of account. So this the money is a measure used to set prices and to help make calculations, right? It helps us to have a set price for things rather than many different prices for each item. So let's go through an example. Money allows us for one set price. For example, in US dollars. So if we have lumber, right? If we're selling one amount of lumber, it's worth $5. But without money, we would have to be able to value it with different types of goods. So one lumber could be worth, for example, 2 wheat or 3 bricks or 1 sheep, right? So all of these different calculations. Now, if we had 2 wheat, well, we know that's worth 1 lumber. How many bricks can we get with 2 wheat? It adds a whole bunch of layers of math that nobody wants to do. Money gets us to eliminate that complex calculation and we just say one lumber is $5. If you have $5, you can get that lumber. So, we would have set prices for the bricks, a set price for the wheat, and we would just get the money in the middle ground, okay?
Finally, we have the store of value. So we want to be able to have the ability to retain our purchasing power over time, right? Because you may give up your services now to get paid in money, but you don't really need anything right now. But maybe in the future, you might need something. So, you can trade your goods and services now, save the money, and use it later, right? Because it's going to retain that value. You don't have to immediately need something to make the trade. You can just get the money, hold the value, and then later on, get what you want. So this goes in with the idea of a standard for deferred payment. And this allows for trading of goods in advance where we can kind of have a loan, right? We can get a loan for something. We can receive something now like buy a car now and make payments in the future because the seller knows that the money that we pay them in the future is still going to hold the value that it has today. That's what good money would do is be able to have these three characteristics here.
Now, I want to make a note here when we talk about money is that there are other things that hold wealth, right? That can store value, but they're not exactly money. So things like stocks, bonds, and real estate, right? They hold a value in it. You buy a house, it's not like that house is just going to become worthless, so to speak, right? It's still going to hold value. But it's not like you can go to the store and buy your groceries and say, hey, I own a house. Do you want to take, you know, 1% of the house for this batch of groceries? It doesn't work like that. It doesn't function as money in the same way as it holds wealth, right? So we talk about this idea of liquidity which is how easily an asset can be converted into cash, right? So a liquid asset means that you could sell the asset quickly and have the cash on hand. So maybe something like stocks. Stocks are pretty liquid because there's always, let's say you own some Apple stock. Well, you could go on to the market. You could check on Google what it's worth and you could sell the stock almost immediately using an exchange, right? So stock would be said to be pretty liquid. Real estate is very much less liquid, right? You need to find a buyer. It takes a long process to actually sell a house compared to selling a piece of stock.
Alright? So those are the functions of money. Remember those 3. We've got our medium of exchange, our unit of account, and our store of value. Cool? Let's pause here and let's talk about the different kind