Money is a universally accepted medium of exchange and it facilitates the trade of goods and services. It is a standard measure of value a unit of account and a store of value.
Functions of Money:
- Medium of Exchange:
Money is accepted as a medium of exchange for goods and services. By using money, we can eliminate the shortcomings of the barter system where coincidence wants are required for of a direct exchange of goods and services.
- Unit of Account:
Money is a standard unit of measurement for valuing goods and services. By using money as a unit of measurement, the process of pricing becomes simple and it becomes easier to compare the values of multiple commodities and the economic transactions become easier. Central banks use money supply and interest rates to implement monetary policy, aiming to achieve financial stability, control inflation, and influence employment and growth
- Store of Value:
Money can be saved and the value which is stored can be used in a future time. This allows individuals and businesses to transfer purchasing power from present to future. This enables the transactions to be postponed to a future date. As a store of value, money encourages saving and investment, which are crucial for economic growth and development
- Standard of Deferred Payment:
Money is used as a medium for settling the debts that have to be paid in the future. This is an important function for undertaking transactions on credit. Money is fundamental to the functioning of financial systems, including banking, lending, and insurance, which facilitate capital accumulation and risk management.
Characteristics of Good Money:
- Durability: Money should withstand physical wear and tear so that it can be used repeatedly over time.
- Portability: Money should be easily transportable, allowing individuals to carry and transfer it conveniently.
- Divisibility: Money should be divisible into smaller units to facilitate transactions of varying sizes.
- Uniformity: All units of money should be the same in terms of quality and value to ensure consistency in transactions.
- Acceptability: Money must be widely accepted by people and institutions as a medium of exchange.
- Stability: The value of money should be relatively stable over time to preserve its utility as a store of value and a medium of deferred payment.
The concept of money is central to modern economies, serving as the foundation for trade, finance, and economic policy. It functions as a medium of exchange, unit of account, store of value, and standard of deferred payment, making it indispensable in daily economic activities and long-term economic planning. Understanding the different types and characteristics of money is essential for grasping how economies operate and how monetary policy impacts economic stability and growth.