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economy. Although it does not take into account several major factors, such as the role of government in the economy, the diagram shows the basic money transactions that make the economy work.
The functions of money as a medium of exchange and a measure of value greatly facilitate the exchange of goods and services and the specialization of production. Without the use of money, trade would be reduced to barter, or the direct exchange of one commodity for another; this was the means used in primitive societies, and barter is still practiced in some parts of the world. In a barter economy, a person having something to trade must find another who wants it and has something acceptable to offer in exchange...
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