Money is anything widely accepted in exchange; it works as a medium of exchange, store of value, unit of account and standard of deferred payment.
Money is anything that is widely accepted as payment for goods and services. Without money, people would have to barter: swap goods directly. Barter only works when each person wants what the other has, which rarely happens.
Forms of money include coins and notes (cash), bank deposits, and digital payments made by card, phone or online transfer. Today most money in Singapore exists as bank deposits, not cash.
Money has four functions. It is a medium of exchange, used to buy and sell. It is a unit of account, so prices can be compared. It is a store of value, so wealth can be kept for later. It is a standard of deferred payment, so debts can be repaid in future.
Good money is generally acceptable, durable, portable, divisible into small amounts, limited in supply, and hard to forge.
- Functions of money
- Medium of exchange, unit of account, store of value, standard of deferred payment.
- Characteristics
- Acceptable, durable, portable, divisible, limited in supply, hard to forge.
- Barter
- Swapping goods directly; needs a double coincidence of wants.
Worked example: Why rice would make poor money
Suppose a village used bags of rice as money. Test it against the characteristics.
- Durable? No. Rice can rot or be eaten by pests, so it is a poor store of value.
- Portable? No. Carrying enough rice to buy a bicycle would be very hard.
- Divisible? Partly, but sharing out exact amounts is slow.
- Conclusion: notes, coins and bank deposits are far better because they have these characteristics.
Watch out for this
Money and wealth are the same thing.
Money is one form of wealth. A person can be wealthy through owning property or shares while holding little money.
Check your understanding
A shop labels every item with a price in dollars, so shoppers can compare value. Which function of money is this?
- Unit of account
- Store of value
- Standard of deferred payment