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Characteristics and Functions of Money

Specialisation means that trade is vital to economies and their agents – there needs to be some way of obtaining the goods/services they are no longer producing.
 
Agents can swap goods/services to get what they need.  This is a bartering system, an inefficient system which requires a double coincidence of wants – a rare occurrence.
 
There is an effective means of exchanging goods/services – money.  Money has certain functions and traits.
 
Money is –
 
  • A medium of exchange – a currency which both buyers and sellers value, which can be used to purchase goods/services without needing a double coincidence of wants.

  • A measure of value / unit of account – applies an understandable, easily recognisable numeral market price to a good/service, allowing participants in a transaction to know the value of the good/service being exchanged.

  • A store of value – money retains a similar value as time passes (ceteris paribus), so an agent can wait before making a purchase in safe knowledge that it can be afforded in the future.

  • A method/standard of deferred payment – money is able to be paid at a later time for something which is acquired now.
 
Money should meet some key characteristics:
 
  • Portable
  • Acceptable
  • Durable
  • Divisible
  • Scarce
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