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The only thing considered universal, standard, and integral principles of running the world are money. Considered as a pull factor, the world revolves around the concept of money. Money is defined as a platform for payments of goods, services, or facilities within a given socio-economic context. It is defined as a valuable item used to pay debts, taxes, and other forms of amenities. Predominantly, money is distinguished as a given medium of exchange through which transactions and exchange of acceptable goods and services occur.
Moreover, it is a unit of account, commodity, an asset to retain purchasing power, and a standard of deferred payment. Finally, economists define money as is a platform allowing individuals to perform transactions regularly. Previously, money was compatible with the barter system, where ancient people traded and exchanged goods, services, and merchandise with other goods and items.
What is Money in Economics?
Money represents a medium of exchange or transactional purposes in an economy. Money is generally accepted as payment for services and goods and repayment of debts in a given country or socio-economic context. Money and currency are related because the currency is a form of money.
The importance of monetary value cannot be overlooked. Besides economist terms, money is an integral aspect of social, human, trade, religious, and cultural categories. Individuals earn it regularly, and therefore it is probably the most consumed concept in the world. Money is currently available in three different forms: commodity money, fiat money, and fiduciary money. The novel and modernized approach to financial transactions is presently based on fiat money. Fiat money is known to derive its value through government orders, whereas commodity money takes its word from commodities through which it is made.
Money is known to serve four essential functions as stipulated by William Stanley Jevons in ‘Money and the Mechanism of Exchange.’ The concept was analyzed, and consequently, aspects of money became predominant within the macroeconomic theory. Modern economics currently highlights three functions of money: medium of exchange, a unit of account, and store of value.
Which of the following are functions of money?
What are the six characteristics of money?
The six characteristics of money are acceptability, portability, durability, divisibility, uniformity, and limited supply. The three most important characteristics of money are that it serves as a medium of exchange, a store of value, and a unit of account.
Money as a medium of exchange
The concept of money is predominantly used to move from one entity to another. Therefore, this movement is observed within a particular domain, making money a medium of exchange between two or multiple parties. The transference and exchange of items and services in the financial market within different entities widely provided the activity of human life. To facilitate and accommodate these transactions and exchange regularly, people tend to use an item, allowing them to serve as a credible medium of exchange. This concept is contrary to the barter system, where individuals settle on an item inclined to fluctuate at every transaction. However, this concept was uncertain and unreliable as there was no established or customary system as a medium of exchange. As a result, a lack of an efficient and transferability system led to a chaotic and confusing system.
Sellers or buyers would have to agree on different things on every instance of purchase or trade, therefore, preventing the concept of a single source of medium.
Money is considered a standard and fixed source of the medium of exchange; money would certainly be accepted everywhere as a universal payment source. The currency note or value would be acceptable to all buyers, sellers, merchandisers, and retailers regardless of the place, time, and concepts.
Money as a measure of value
The concept of a unit of accounts in economics is referred to as a standard numerical monetary aspect of measurement of items and services within the market value. A unit of account is deemed necessary and integral for producing and formulating commercial agreements, including debt. The value of things is reported through money. Money is equivalent to a unit of account known to be a consistent way of analyzing and evaluating the worth and importance of any facility, service, or goods. When the item’s value is reported in units of money, we anticipate what the other person would like to pay to achieve that item or service. Money is the basis for mentioning and highlighting their price expectations and is also essential for establishing practical accounting measures and systems.
Money is known to be a standard threshold used to measure worth in economic transactions agrees regularly. So, for example, if you are purchasing a new computer, the price would automatically be mentioned in money rather than pizzas, clothes, or other miscellaneous items. So if a retailer tells you about a particular price of a selected item, then it is because money is a common measure of value in the economic concept.
Money as a store of value
The third and last important function of money is a store of value. It signifies the importance of potential accumulation and growth of value over a considerable amount of time. If, for example, you have lost a five-dollar bill somewhere and found it years after, then you would still consider yourself lucky as that five-dollar bill would have the same or some value currently. This is because that value has efficiently and fortunately been stored within the dollar bill.
The piece of paper tends to depreciate or increase in terms of value and rate over time. However, it will not lose its importance, functionality, and essence even after years. Other items such as houses, properties, and other commodities may devalue monetary importance, but money will not lose its significance. Money is also different from other valuable commodities as it can be readily exchangeable to substitute other commodities.
However, for money to add a store of value, money should be saved, accumulated, and retrieved. Fast forward, it should also be used as a medium of exchange upon retrieving. Since it is available in sorts of stores of value, money can also be used to secure future payments. During loans and debt settlement, future payments are also guaranteed through money because of its value function. Some, however, believe that money tends to reduce its significance and value over time due to inflation. As a result of inflation, money does not remain stable, and the essence of money diminishes over time. Inflation reduces the current value of money; therefore, people doubt money as a store of money during rapid inflation and economic recession. Why is there a surge of property accumulation and other commodities storing such as gold or land?
General acceptability of money means that most businesses and individuals will accept money in exchange for goods and services.
Portability of money means that individuals can carry money with them and transfer it easily with other individuals.
What are the features of good money?
Attributes of good money are to serve as a medium of exchange, to store of value, and follow all six main functions such as acceptability, portability, durability, disability, recognizability, and stability.