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We use money to make a lot of transactions in our lives, and money can come in a lot forms for different purposes. This is what I am going to take you through in this article, you will learn about the functions and types of money. Money is anything that people agree to use as a way of paying for goods and services; medium of exchange. But money has other roles and forms as well. Let's find out what they are! |
The Functions of Money
Money has three main functions: it is a medium of exchange, a unit of account, and a store of value.
- Medium of exchange:
This is the primary function of money. It means that money can be used to buy and sell things. For example, you can use money to buy a pizza, a book, or a ticket to the movies. Money makes transactions simpler and faster than bartering, which is exchanging goods or services directly without using money. Imagine if you had to trade your shoes for a hamburger, or your bike for a dog, or your watch for a movie ticket. That would be very complicated and time-consuming, right? Money can solve this problem by being something that everyone accepts and wants.
- Unit of account:
This is another function of money. It means that money can be used to measure the value of goods and services. For example, you can use money to compare the prices of different things. You can say that a pizza costs $10, another type of pizza costs $15, and a movie ticket costs $8, or a dog costs 200$.
Money helps us to make decisions about what to buy and sell, and how much to save and spend.
Money also helps us to track of our income and expenses, and calculate our profits and losses when we trade.
- Store of value:
This is the third function of money. It means that money can be used to save and preserve wealth for the future. For example, you can use money to put some aside in a bank account, a piggy bank, or a wallet.
Money allows us to save some of our income today and use it later when we need it or want it. Money also allows us to transfer wealth from one person to another, such as when we give gifts or inheritances.
The Types of Money
Money can be classified into different types based on its characteristics and features. Some of the common types of money are:
- Commodity money:
This is a type of money that has value because it is made of something valuable or useful. For example, gold, silver, copper, salt, shells, tobacco, and cattle have been used as commodity money in different times and places in history. Commodity money has the advantage of being durable, portable, divisible, and scarce. However, commodity money also has some disadvantages, such as being bulky, heavy, difficult to standardize, and subject to changes in supply and demand.
- Fiat money:
This is a type of money that has value because it is declared by law or by an authority. For example, paper bills and coins are fiat money in most countries today. Fiat money has the advantage of being easy to produce, transport, store, and control. However, fiat money also has some disadvantages, such as being subject to counterfeiting, inflation, deflation, and loss of confidence.
- Digital money:
This is a type of money that exists only in electronic form. For example, bank deposits, credit cards, debit cards, mobile payments, online transfers, and cryptocurrencies are digital money in the modern world. Digital money has the advantage of being convenient, fast, secure, and innovative. However, digital money also has some disadvantages, such as being dependent on technology, vulnerable to hacking, fraud, theft, and regulation.
Each type of money has advantages and disadvantages, and it has changed over time. Money is a very important and interesting topic that affects our lives in many ways. By understanding the functions and types of money, we can better appreciate the role and value of money in our economy and society.
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