The Function of Money

Topics: Money, Inflation, Money supply Pages: 9 (3123 words) Published: August 30, 2013
The function of money

The main functions of money are distinguished among the terms of: a medium of exchange, a unit of store value and standard of deferred payments. Money as a Measure of value
In money, economy values of all commodities are expressed in the terms of money. Money is the means by which we a measure the disparate things which make up the economy. This functions of money makes transactions. Money as a store of value

In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.

Money as a medium of exchange
Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.

A Unit of Account/ Deferred Payment

Money also functions as a unit of account (deferred payments), providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good to make decisions about how much of the good to supply and how much of the good to purchase. In a money economy the contracts are made for future payments terms of money instead of goods and promise to repay the loan in money. In this way money is the standard of deferred payments. This function stimulates all kinds of economic activities which depend on borrowed money. During periods of inflation, people may accept paper money for immediate payment, but insist on some other medium, such as real goods and services or gold, for deferred payment because the medium of exchange would lose much of its value in the meanwhile. In a money economy the contracts are made for future payments terms of money instead of goods and promise to


* Commodity Money
Many items have been used as commodity money such as naturally scarce precious metals, conch shells, barley, beads etc., as well as many other things that are thought of as having value. Commodity money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. These items were sometimes used in a metric of perceived value in conjunction to one another, in various commodity valuation or Price System economies. Use of commodity money is similar to barter, but commodity money provides a simple and automatic unit of account for...
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