The functions of money
A medium of exchange: Without money, transactions were conducted through bartering. Goods and services were traded with other goods and services, but people did not always get exactly what they wanted or needed.The goods and services exchanged were not always of the same value, which also posed a problem. Exchange could only take place if there was a double coincidence of wants, i.e. both parties have to want the good the other party offer. Using money eliminates this problem.
A measure of value (unit of account): Money provides a means to measure the relative values of different goods and services. For example, a bar of gold might be considered more valuable than an acre of land because of the relative price, measured by money. Money also puts a value on labour.
A store of value: Money has to hold its value to be used for payment. It can be kept for a long time without expiring. However, the quantity of goods and services that can be bought with money fluctuates slightly with the forces of supply and demand.
A method of deferred payment: Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.
Characteristics of money
Portability of money: In our context, portability means that money should be carried and transported easily. In the 21st century, this quality takes on special significance because of the mass distribution of electronic payment systems. So all modern entrepreneurs must be able to work with such systems and learn to search for the most profitable propositions for saving and transferring their money.
General acceptability of money: This means that the form of currency that you are receiving from trading your goods (services), must be generally distributed. You can’t accept a currency that cannot be put into circulation later.
Durability of money: Durability is one of the most important qualities of money. It means money must be a thing of continued use. For the paper money, it also means that it must be resistance to wear and tear for a long time.
Divisibility of money: This characteristic means that money must be easily separated to allow the owner buy different products.
Uniformity of money: Uniformity means that all versions of the same denomination of currency must have the same purchasing power. For example, an old $20 bill will still buy $20 worth of goods or services nowadays.
Limited supply of money: This characteristic means that restrictions on the amount of money in circulation ensure that values remain relatively constant for the currency.
- Barter: This involves exchanging goods or services for other goods and services, without the use of money.
- Cash deposits: A cash deposit is money that is injected into a money market or savings account, sometimes through a money transfer. The money can be withdrawn when the transaction is complete.
- Bank Deposit: A bank deposit is money kept in a bank to keep it safe. The deposit is a liability owed by the bank to the person making the deposit.
- Cheques: This is an order to pay a bank a stated amount from the drawer’s account.
- Near money: An asset which can be converted into cash easily.
- Liquidity: This means how quickly you can get your hands on your cash. It can also be said to be an amount of money that is readily available for investment and spending.