What is money?
Money is anything that is generally accepted as payment for goods and services and repayment of debts.
Functions of Money
A medium of exchange
Money overcomes the problem of needing a double coincidence of wants. It can be used to exchange and is therefore a comparative object, a tertium comparationis ("a third comparative unit").
A unit of account
Money acts as a measuring unit for value. Thus different commodities can be expressed in terms of money uniformly. This simplifies the comparison of the value of two products or services.
A store of value
Money can be used to store value. Unlike barter system where the commodities could not be saved over time, money can be stored as it does not lose value overtime.
A standard of deferred payment
Money can be used to pay over time for commodities. Goods and services can be paid for in instalments over a period of time e.g hire purchase. This was much more difficult and complicated in the barter system.
Watch a Video - Problems of Barter System
Qualities of Good Money
Following are the qualities of good money:
General acceptance
The essential quality of good money is that it should be acceptable to all, without any hesitation in the exchange for goods and services.
Portability
It is also an important quality of good money that is should be easily transferable from one place to another for doing business and making payment. The paper money is easier to carry because it has minimum possible wait than metallic money.
Storability
Money should be storable and it should not be depreciate with time. If the money used is perishable it will lose its value in few days. Paper money has this quality of storability.
Divisibility
Good money is that which could be divided into small units without losing any value.
Durability
Money should be durable. It should not lose its value with the passage of time. The gold and silver coins do not wear out quickly and quality of money remains the same.
Economy
It is important quality of good money that it should be made economically. If there is heavy cost on issuing more money that is not good money. Good money is that has low cost and more supply. Paper money has this quality of economy.
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