Functions and Characteristics of Money
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- Amanda Lim Pui Sze
Money is the essential monetary transaction that people use every day. Without Money, there will be no marketing and economy in human kind. Money acts as a fundamental medium of exchange which clears up both humanity’s past and present obligations. Economists define money as widely accepted by society and acts as payments for goods and services.
Functions of Money
As a general rule, economists have finalized and defined all the four types of functions of money which are medium of exchange, measurement of value, standard of deferred payments and lastly store of value.
- As for Medium of Exchange, ever since it being introduced into the economic society, money has been fulfilling its duty to act as an essential function which is medium of exchange in the society. Money facilitates well as our monetary transactions to purchase and own both tangible and intangible goods and services as a medium of exchange. As manufacturers sell their productions to the wholesalers or retailers in exchange of money as an earning. While wholesalers and retailers sell the same finalized goods to the final consumers in exchange of money as their own earning. Similarly, all service providers of the society sell their services in exchange of money as their earning. Then, all these sections of the economic society which are manufacturers, wholesalers, retailers and service sellers such as doctors, lawyers and more will then use the earnings which they have made to consume on other goods and services which they need or want. (Harcourt, 2013) Without the existence of money, every transaction of money for goods and services may have to be conducted by barter trading, which engages direct and absolute exchange of one good or service to own or use another. The only obstacle which barter system always faces is when in order to obtain a specific good or service from a seller, one has to be able to provide another good or service which consist of equal value with the good and service they want to possess, which the seller desires to obtain. (Harcourt, 2013)
- Furthermore, as a Measurement of Value, it measures provides the fixed value of all kinds of goods and services which are manufactured and produced in the economy. Money performs as unit of value and acts as the standard of value of all goods and services. In barter trading, it is very burdensome and challenging to measure and decide the quantity or volume of goods to be exchanged for another given quantity of goods. Having the knowledge of the average value of a good assists both the seller and purchaser to make decisions about the quantity and volume of goods to be exchanged. (Bullard, 2013)
- Moreover, as for Standard of Deferred Payments, (Tilak, 2011) money is able to act as a monetary transaction to be used to pay both before or over time for other goods. This means that goods and services can be paid for installments over a period of time such as hire purchase. Unlike barter trade, transactions do not need to be settled at a lump sum at a time. (Upadhyaya, 2012) Money, besides acting as a monetary support of current transactions, it also acts as the monetary support of deferred payments which is future payments, loan repayments acts as an example for deferred payments.
- Money must hold its value over time; it must act a Store of Value. As before, goods were beyond possible to store its surplus value under barter economy. After the creation of money, the following issue has been solved efficiently. Retailers and sellers can now store their surplus retailing earnings. Saving money is now secure in value without having to worry its loss of value (Education, 2012) Rather than spending today, you can store it for use in the future.
Which serves as Functions of Money
The characteristics of what serves as money depend somewhat on the degree of complexity in the society. A relatively simple economy, with relatively few goods and services, few producers and consumers, and few transactions, may be able to function with a form of money that would not work in a more complex society. There are some general characteristics that are usually important for whatever serves as money in a modern economy.
- First, to serve as an effective medium of exchange and store of value, money must be durable. Durability is when an item is able to withstand all the hardships and is still able to maintain to be undamaged and usable after a long term of usage. (SubraMoney, 2011) Durability is crucial for money to be able to perform the following functions of medium of exchange and store of value. Coins and paper bills are made to perform and to act as the currency. Nowadays, Money is manufactured with the materials such as paper, metal and plastics, which results to a long lasting medium. (SubraMoney, 2011)
- Portability, which also serves as a medium of exchange, (Money Characteristics, 2011) means that money can be movable from place to place to be used as monetary transaction to be exchanged for goods and services. Portability also means that consumers are now able to carry money along with them to be used as transactions for goods and services. In modern days, money is carried from one location to another without needing much effort as all types of money such as cash notes, coins and cards are carried easily in a wallet. (SubraMoney, 2011)
- Furthermore, divisibility is a characteristic which means the money can be divided into small units and that it can be used in exchange for goods and services. As to function as the medium of exchange, as it is divisible, it can be used to purchase all kinds of goods with different values. As money functions as the medium of exchange it must have denominations to be traded for all goods and services, and everything in between. (Money Characteristics, 2011)
- Moreover, uniformity means that all types of the same denomination of money must consist of purchasing power. It is a characteristic to perform the function of standard of deferred payments. (SubraMoney, 2011)
- Limited supply is a characteristic which helps in storing the value of money, meaning that constraints on the amount of money in the monetary circulation ensure that values remain constant for the currency. Currently most of the respective country's government has the responsibility to control an adequate money supply based on market with their monetary policies, such as expansionary monetary policy and contractionary monetary policy. (SubraMoney, 2011)
- Acceptability supports the function of medium of exchange. The essential quality of money is that it must act as an item being acceptable to all, without having any hesitation in the exchange for goods and services. Acceptability means that everyone must be able to accept the money for transactions. Money is universally accepted around the world as a universal mean for transaction. (SubraMoney, 2011)
- Lastly, the characteristic of non-counterfeitability which functions as the store of value means that money cannot be easily duplicated. As money cannot be easily duplicated, it prevents the unrestricted and illegal creating of duplication of money. Besides, preventing the duplication of money to happen is one of the main reasons of government existence. (Money Characteristics, 2011)
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Bullard, J. (2013, June 27). The Economic Lowdown Podcast Series. Retrieved February 13, 2014, from EconLowDown: http://www.stlouisfed.org/education_resources/economic-lowdown-podcast-series/functions-of-money/
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Harcourt, H. M. (2013). Functions Of Money. Retrieved 2013, from Cliffs Notes: http://www.cliffsnotes.com/more-subjects/economics/money-and-banking/functions-of-money
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