Economics / Unit 7: Money, Banking and Financial Markets
7.1 Functions and Characteristics of Money
Notes
Money is anything people generally accept as payment for goods and services. Without money, people must barter, trading goods directly, which requires a double coincidence of wants: each trader must want what the other has.
- Three functions of money:
| Function | Meaning | Example |
|---|---|---|
| Medium of exchange | used to buy and sell | paying $5 for lunch |
| Unit of account | a common measure of value | comparing a $20 shirt with a $40 shirt |
| Store of value | holds value over time | saving $100 to spend next year |
- Six characteristics of good money: durable (lasts), portable (easy to carry), divisible (can be split into smaller units), uniform (each unit is the same), limited in supply (scarce, so it keeps value) and acceptable (people will take it).
- High inflation weakens money as a store of value, because money buys less over time.
Practice
A shop lists all its prices in dollars so customers can compare items. Which function of money is this?
Money gives a common measure for comparing the value of goods.
A farmer with eggs wants shoes, but the shoemaker wants milk, not eggs. This shows the main problem of:
Barter requires a double coincidence of wants.
Fresh fish would make poor money mainly because it is not:
Fish spoils quickly, so it cannot hold its value over time.
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