MEANING, FUNCTIONS, CHARACTERISTICS AND TYPES OF MONEY

The definition of money is somewhat imprecise. 

But generally, we can define money as anything that is generally accepted as a medium of exchange and repayment of debts. 

Without money, we would have to rely on the barter system for exchange. A barter system is simply the exchange of goods for goods and services for services. the barter system comes with its problem of double coincidence of wants. 

Double coincidence is the unlikely situation that two people each have the goods and services that the other can produce.

If, for example, a teacher wants some book, he will have to look for someone willing to exchange his book for some hours of teaching hours.

It is for this reason that money is now used as a medium of exchange in almost all countries of the world.

Functions Of Money

Money has functions namely; medium of exchange, store of value, unit of account, and standard of deferred payment. 

1. Medium of exchange: This is the best-known function of money. Money is vital to the working of the modern economy.

It serves as an intermediary between buyers and sellers. 

For example, when you buy a book at a bookstore, you give the bookstore your money. This money (as a medium of exchange) allows the transaction to take place.

By serving as a medium of exchange, money helps to obviate the problem of double coincidence of wants common with trade by barter.

2. A unit of account: By this, we mean money serves as the yardstick for measuring the market value of goods and services and other transactions. 

Just as minutes are used to measure time, money is standard denominations the price of goods and services are measured with.

When you go to buy goods, you might observe that one cloth costs €50 and a book cost €10. Though it might be accurate to say the price of cloth is 5 books and the price of a book is 1\5 cloth, prices are, however, not quoted this way.

Rather, money is used to show the relative worth of these two goods. Moreover, accountants used the money measurement concept to emphasize the idea of money as a unit of account.

3. A store of value: Money can be used to transfer purchasing power from the present to the future.

This means that: with money, you can transfer purchasing power today to purchase items( say, books) tomorrow 

Money can be used to retain purchasing power into the future. For example, the bookshop owner can accept your money and hold it (retain purchasing power) as long as he wants before she spends it.

Undoubtedly, Money's usefulness as a store of value also depends on how well it maintains its value. 

Indeed, money will be useless if its values are not relatively stable. This happened in Zimbabwe where hyperinflation causes the country currency to lose its value. To emphasize how worthless a Zimbabwean dollar is at that time, at some point, 100 trillion Zimbabweans dollars were exchanged for just 70 US dollars. 😎

Zimbabwe, of course, had to abandon its currency and opts for other countries currency. You will know how inflation reduces the value of money in subsequent posts.

4. Standard of deferred payment: By this, we mean money can be used as a way of valuing debts, thereby allowing us to make purchases that will be paid for in the future.

Loan and other credit agreements are usually stated in monetary terms because money serves as a means of settling debt.

It is, however, important to note that this function of money is directly affected by the value of money. If money loses its value rapidly, its function as a standard of deferred payment degrades.

Characteristics Of Money

There are six characteristics of money namely; durability, portability, divisibility, general acceptability, scarcity and uniformity.

1. Durability: Earlier, I told you that money functions as a store of value. The durable nature of money allows it to be a store of value.

Money is durable in that it lasts longer or they do not easily suffer from wear and tear, Hence, money is spent and respent for a long time before they get worn out.

2. Portability: This is one characteristic that distinguishes money from other commodities used as a medium of money. Unlike other commodities, money can be conveniently transported from one place to another. This is because they are less lighter than most commodity

3. Divisibility: for money to successfully function as a unit of account, it must be divisible. By divisible, we mean people should be able to divide money into smaller units.

For example, a 50 naira bill can be exchanged for two 20 naira bills and a 10 naira bill.

The divisibility character of money allows individuals to buy cars with money( larger units) and buy books with money(smaller units).

Also, supermarkets and other retail shops quote different prices for different goods because they know that money is available in smaller denominations.

4. Generally acceptable: For anything to be called money, it must be generally accepted as a medium of exchange and settling of debt.

The general acceptance of money as a medium of exchange makes it easier to perform trade and transactions easily as people are confident no one will reject their money.

5. Scarce: For money to successfully function as a store of value, it must be relatively scarce

if you have read our post on equilibrium, you would have been aware by now that t high price is associated with a surplus.

Using this idea, when more people have money, the value of the money decreases because of inflation

The opposite is also true fewer people have money. The value of money increases because of deflation.

instability in the value of money is not desirable as it can impose a cost on firms in the form of revaluation of goods price. It is for this reason that most countries have a central bank that regulates the supply of money in the economy.

6. Uniformity: This is yet another characteristic of money. The bill of money in an economy must be uniform in identity and quality.

To illustrate, 10 naira bills are identical in shapes, quality, and values. No 10 bills have more value than the other 10 bills

Kinds Of Commodity

Money comes in two forms: Fiat money and commodity money.

Commodity money is money that takes the form commodity which has intrinsic value.

By intrinsic value, we mean this commodity has value even if they are not used as money.

In other words, we can define commodity money as money that is important for other reasons apart from its usefulness as money.

The best-known example of commodity money is gold.

In ancient times, gold was used as a medium of exchange.

However, in our world today, gold is no longer used as money. Rather, it is valued for its other attributes. Gold can be used in the electricity industry to conduct electricity.

Gold is also used in the construction industry for the creation of energy-efficient skyscraper reflective glass.

Gold is also useful for its beauty as it can be used to create gorgeous jewelry.

Other examples of commodity money are cowries shells and cigarettes.

Fiat money, on the other hand, does not have any intrinsic value but is money because of the government. Fiat money has no value if they are not used as money.

However, the government usually declares fiat money as legal tender, thus,  making it unlawful to accept them as a medium of exchange or a means of settling debt.

A good example of fiat money is paper money. If paper money is not used as money, it will be useless as paper. However, because we used paper money as money in our society, it is highly valued in every economy.

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Finals words
We just discussed money. For a recap, we defined money as anything that is generally accepted as a medium of exchange and means of settling debt. 

We also told you that money serves as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.
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