Posted by / Friday 13 January 2017 / No comments

The functions of money

Money can be defined as “any commodity which is generally acceptable in exchange for goods and services”.

Money has three dimensional meanings. The first is that it is a medium of exchange. The second is that it is a unit of account and the third is that it is a store of value. For the ordinary man in the street, because he uses money only for the exchange of goods and services he sees money only as a medium of exchange.

As a medium of exchange
As noted in the introduction above, one of the functions of money is that it serves as a medium of exchange. In the offices, shops, markets, streets, and elsewhere, money is used to gain possession of goods and services. In other words, where a person has money but desires something, the money he has in his hands can be used to obtain that which he desires.

As a unit of account
Another function of money is that it serves as unit of account. Money is a commodity that can be used to assign values to goods and services. There are several items that are offered for sale in many communities of the world which one can obtain when offers a certain amount of money. Money is used to place a value on those items. So that, for example, one can say the price of a radio set to X amount of money.

As a store of value
Another function of money is that it can be put away for a while until it is needed. In other words, it can be stored as a form of wealth for a long time. When in the future, something needs to be acquired, that same money can be used to retrieve and used to acquire that which is needed. This is achievable because of certain features of money, such as, its durability and portability.

Money as a standard of deferred payment
Another function of money is that it allows for goods and services to be purchased today but payment made at a later date. In other words, money allows for the value of a commodity to be determined at the time of purchase so that in the future the same value which was determined in the past is paid. In a sense, the payment was deferred.

1. a. What is money?
    b. What four functions does money perform?

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