What is money?
Money is any acceptable commodity that serves as a medium of exchange and a store of value. Today we use notes and coins as money. However, in the past barter was the medium of exchange. Barter involves exchanging or swapping goods and services for other goods and services. For example a farmer who grows potatoes needs cloth to make clothes. So he exchanges a sack of potatoes for a roll of cloth in the village market with a cloth maker.
Functions of money
Money has four main functions:
- It provides a standard of value
- It is a medium of exchange
- It is a means of buying on credit
- It is a store of value
Characteristics of money
Money should be:
- Durable – needs to withstand everyday wear and tear
- Portable – needs to be easily carried around
- Widely accepted as a means of payment – everyone in the country must agree to accept it as a medium of exchange
- Stable in value – must be worth the same over time
- Easily divisible – 100 cents = $1.00
- Difficult to counterfeit – maintains confidence in the currency