Functions and characteristics Of Money: The definition of money in economics is anything that is accepted when paying for goods and services, or paying off debts. Without money there will be neither marketing nor economics in mankind. Money is what people routinely use in buying or selling goods and services. And that’s why money has to be widely accepted by both buyers and sellers. Money has taken many structures throughout human history. Cheques, paper money, electronic money, cash, and merchandise are just a few of the many forms or types of money that still exist today.
For money to be accepted, it must have distinct characteristics that proportionally determine its functions. In this article, we will be outlining the characteristics and functions of good money.
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Major Characteristics/Features of Money
Money had the following qualities which includes:
1. Acceptable: Money is acceptable to all economic agencies in the country, both individuals and businesses, in exchange for goods and services. and in the settlement of debts and obligations.
If the money is acceptable, then sellers can sell their goods or services and people can buy what they need. Thereby making it easier for businesses to process transactions. Societies accept money because it has value. Countries nowadays accept cheques to conduct business transactions.
2. Divisible: Money is divisible means that money can be divided into small units and exchanged for goods and services. Divisibility is a crucial feature of money as it enables people to store value in silver and gold. Since money is divisible, it can be used to purchase all sorts of goods of different values.
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3. Portable: Money needs to be easily transported and exchanged for other currencies Money needs to be convenient to carry to facilitate transfer to other people during transactions.
Portability also means consumers can effortlessly carry money with them to use for goods transactions without must labor to transport them from one place to another at great expense.
4. Scarce: The more money people possess, the less valuable it becomes. In other words, money only becomes valuable when there is limited supply. The money should be unique, not something easy to find anywhere. Money has to be scarce enough to be of some value, but not so scarce that it is not available. The scarcity of money can be regulated by curbing the amount of money in circulation.
5. Stable: Money is stable means that it must have the same value over a long period of time and must therefore remain stable. Stability is arguably the most significant characteristic of good money. If the value of money continues to change, it will lose its function as a measure of value and a standard for deferral payment. Stability makes it easier for people to exchange goods or services at reasonable prices.
6. Durable: The money has to be strong enough to keep its usefulness in future exchanges and to be reused several times. For this reason, high-quality papers are used for printing paper money while precious metals are used for making coins. Longevity is critical for money to function as a medium of exchange and as a store of value.
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Top 5 Functions of Money
1. Medium of Exchange: Money as a medium of trade acts as an intermediary between consumer and dealer. Money offers a universal system of commercial exchange. This money is then used to purchase clothes, cars, etc. It has to be widely accepted as currency in the markets for goods, labor and financial capital.
Today all service providers in society sell their services for money as profit. Without the existence of money, any monetary transaction for goods and services may have to be carried out through barter, which is a direct and absolute exchange of one good or service for the use of another.
Today, money has effectively eliminated the barter system of exchange by serving as a medium of exchange that is accepted by all parties in all transactions, whether or not they want the goods and services of others.
2. Store of Value: Money is a store of value because it operates as a medium of exchange and is readily received everywhere. Money can be used to store value for future reference. For example, money can be secured for future use including retirement, holiday, tuition, And so on.
Saving money is a much easier way of storing value. In addition, saving money is now of safe value without worrying about depreciation. While money is not only the store of value that exists, because it downgrades in value with inflation. but land, postage stamps, including works of painting, are used as a store of value. But money is a great asset because it is more liquid than other stores of value and also the easy-to-carry store of value that comes in many convenient denominations. Hence, it is widely accepted. so instead of spending money today, you can save it for future use.
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3. Unit of Account: Money also functions as a unit of account and provides a universal measure of the worth of goods and services being exchanged. A nation’s official currencies are used to record, measure, and report the value of assets, goods, services, wages, liabilities, income, profits, losses, expenses, taxes, capital gains, and interest rates, therefore money is the ruler by which other values are measured.
Knowing the value of the goods or services in monetary terms enables both the seller and the buyer of the goods to make decisions about how much of the goods to offer and buy. hence money estimates the values of the goods and services that are exchanged
4. Standard of Deferred Payments: Money services as the standard for deferred payments, meaning, It is the accepted method of evaluating and paying off debt. This means that goods and services can be paid for in installments over a certain period of time. It creates credits and allows you to process transactions in the future, hence it functions as a standard of deferred payment.
And this led to the popularity of transactions and contributed significantly to the formation of financial institutions. Today money is acceptable to make purchases that will be paid for in the future. Hence, money acts as a monetary transaction used to pay both early and overtime for other goods.
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5. Measurement of Value: Money functions as a unit of value and serves as a measure of value for all goods and services. Money is used as a universal unit of account to measure the value of all goods and services exchanged in an economy. Money simplifies exchange because it serves as a measure of value.
We state the price of a good or service in monetary units so that potential exchange partners will know exactly how much value we want in exchange. In contrast, in a barter economy, the prices of a good or service must be determined on the basis of all other goods or services produced and exchanged.
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Conclusion
Money has taken many forms over the centuries, but money has several functions: as a medium of exchange, as a unit of account, as the store of value, and a standard for deferred payment. The most fundamental function of money is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be carried out through the exchange ( barter) system.
Since the exchange (barter) system was an inconvenient method of exchange, people were forced to choose a product that was widely accepted as a medium of exchange in their area. Today every country has its own currency system and money has now taken the place of all these commodities.
Edeh Samuel Chukwuemeka, ACMC, is a lawyer and a certified mediator/conciliator in Nigeria. He is also a developer with knowledge in various programming languages. Samuel is determined to leverage his skills in technology, SEO, and legal practice to revolutionize the legal profession worldwide by creating web and mobile applications that simplify legal research. Sam is also passionate about educating and providing valuable information to people.