Money makes the world go around. In this lesson, we will learn more about money. We will break it down into its separate functions and look closer at its many characteristics.
A Closer Look at Money
There you are, shopping at your favorite store. While there, you find a pair of shoes you absolutely cannot live without. After searching for your size, you grab the box and head to the checkout lane. After the associate rings up your shoes, she asks you to pay $45.09. You dig into your wallet, pull out three 20-dollar bills, and hand them to the associate. While you obviously realize you paid for your new shoes using money, what you probably did not think much about is the characteristics of that money or the functions that money possesses.
Functions of Money
We, as consumers, use money so often that we rarely stop to think much about it. We know that we must have it to pay for goods and services, but how many of us realize what the functions of money are? Well, let’s take an opportunity to look deeper at money and its functions. For this lesson, we will concentrate on the functions of medium of exchange, unit of account, and the store of value.
Medium of Exchange: What this means, is that we use money to purchase goods and services. Before the introduction of money, barter was the main process to obtain goods and services. For example, one may trade fur for a cow. However, now that we have money, we can use it as a medium of exchange to purchase those must-have shoes. We know that when we go into a store, that the store will accept our money as a form of payment because it is widely accepted as a medium of exchange.
Unit of Account: When we go to purchase items, there is a standard for measuring the worth of those items. This is what we call a unit of account. Basically, if an item costs $200, we understand how much that is. If the item costs 200 seashells, then there may be confusion.
Store of Value: What this means is we can put $25 in our piggy bank, and a month later, the value of the money will still be $25. Money is able to retain its value over time.
Now that we know what the functions of money are, it’s time to take a look at its characteristics. In general, there are four main characteristics that money should fulfill: durability, divisibility, transportability, and inability to counterfeit. Let’s take a closer look:
Durability: If money stays the same in terms of shape and substance over time, it is said to be durable. This means that it does not easily change form and can be used for a long period of time. Because money is said to be durable, individuals are willing to take it as a form of payment because they can use it later to purchase another good or service. An example of durability is coins vs. bananas. Coins will still look like coins over long periods of time. However, a banana continues to rot and may not look much like a banana after a few weeks. A coin would be considered durable, but a banana would not.
Divisibility: This means that money can be broken down into smaller units. For example, you may use a $100 bill when purchasing a car, but would likely opt for a smaller unit of money to purchase a candy bar.
Transportability: When we go to the store, like in the example above, we are able to actually take our money with us, perhaps in our wallet or purse. Therefore, money is considered transportable if we can bring money from one location to another. Objects such as heavy antiques are not easily carried from one place to another and not often used to pay for items in a store. Thus, they are not transportable as say a paper dollar or coin that can be carried in our purse.
Inability to Counterfeit: Basically, money should not be able to be duplicated easily. Unlike fruit that grows on a tree, money cannot be grown or ‘created’ like other items.
Let’s review. In the end, we have all used money in one way or another. We purchase goods and services usually on a regular basis and do so using a medium of exchange known as money. We know that when we put money in our bank, two weeks later, it will still have the same value. We also know that we can measure money and break it down into smaller units when purchasing items. Lastly, we know that in order for money to be a functional means to pay for goods or services, it needs to fulfill four characteristics: durability, divisibility, transportability, and the inability to counterfeit.