Understanding Money: Types and Functions
by Yuvi K - December 16, 2023
What is Money?
Money is anything of value that is accepted in exchange for goods or services. Money is a medium of exchange – when people agree it has value, they can use it to exchange things like goods or services. Money is also a store of value – it can easily be saved and exchanged for goods or services when you are ready. Money is also a unit of account – it allows people to measure the value of items and determine prices.
Types of Money
Money can come in many forms. Let’s look at the main types:
Commodity Money
Commodity money is when some object is used as a medium of exchange. It has intrinsic value, which means it has a value in and of itself. Historically, objects like shells, salt, and even cigarettes have been used as money.
Representative Money
Representative money is when a physical item is used to represent an agreement of value. For instance, coins are usually representative money – they have a value printed on them, but the material they are made of is actually less valuable than the amount written on the coin.
Fiat Money
Fiat money is when a currency is declared by an authority to be legal tender – legal currency – even without being backed by a physical object. For instance, the US dollar is a fiat currency – it is accepted as money only because the government says it is.
Cryptocurrency
Cryptocurrency is a form of digital money. It is a digital asset which is used as a medium of exchange and is secured using cryptography. Cryptocurrency is a decentralized system, which means it does not rely on banks or other institutions to issue or control it. Examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
Functions of Money
Money has several important functions. These are:
Unit of Account
Money serves as a unit of account, which means it is a standard way to measure the value of a good or service. Money allows people to compare prices and prices can easily be converted into other currencies.
Medium of Exchange
Money is also a medium of exchange, meaning it is a medium used to make payments for goods and services. Money makes it much easier to conduct business transactions.
Store of Value
Money also serves as a store of value, which allows people to save for future purchases. Money can be saved and exchanged for goods and services in the future. This provides stability and trust in the economy.
Means of Payment
Finally, money serves as a means of payment, which allows people to pay debts and receive repayment. Money also makes it easier to transfer wealth from one person to another.
Conclusion
Money is a key element of any economy. It provides a means to exchange goods and services, measure value, and store value. Money is also used to facilitate payments and transfer wealth. With so many different types and functions, it is no surprise that money is an integral part of everyday life.
