How to Explain What is Money to a Five-Year-Old

Money will make the world move around, because the love of money is the root of all evils and the world says it in the money market. The history of money would be another topic, and we’ll discuss about the confusion people have on “what is money laundering”. That being said, quite a few people on the planet for sure have handled money, on each day. But despite its popularity, probably few people could tell you exactly what money is, or how it works.

In short, money might be something that can serve as a

  • Store of value, this means people can help to conserve it and use it later smoothing their purchases after a while
  • Unit of account, that is, give a common base for prices or
  • Medium of exchange, something people will use to trade from one another.

Perhaps the simplest way to think about the role of Money is always to consider what would change when we can’t do without it.

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If there were no money, we’d be reduced to a barter economy. Every item someone planned to purchase will have to be exchanged for something which person could provide. For example, an individual who is more concerned with fixing cars and needed to trade for food must find a farmer with a broken car.

If the farmer was lacking anything that would have to be fixed? Or suppose a farmer could only provide mechanic more eggs compared to mechanic could reasonably use? The need to find specific people to do business with makes it very difficult to specialize. People might starve before they had the ability to find the right person who to barter with.

But with money, you don’t need to find a particular person. You only need a market where you can sell your services or goods. In this market, you don’t barter for individual goods. Instead you exchange your goods or services to get a common medium of exchange – that is money.

You can then use that money to get what exactly you need from other people who also accept exactly the same medium of exchange. As people become specialized, it’s better to produce more, which leads to more need for transactions and, hence, more interest in money.

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So you need to know that there are several different classifications of Money. Be aware that credit cards aren’t a form of money.

Know that Money is different from wealth. We can’t make ourselves richer by just printing more money in our society.

So, what do you think what is Money? Is it just more than pieces of paper?

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