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 –
Money should meet some key characteristics:
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
