Money is a medium of exchange that is centralized, generally accepted, recognized, and facilitates transactions of goods and services. Following are the 7 main characteristics of money. There are main 7 characteristics of money. These characteristics enable money to perform its three major functions by overcoming the problems of the barter system. In this article, we will discuss about the main three functions of money. Main three functions of money:
1. Medium of exchange
2. Measure the value of goods and act as a unit of account
3. Store of value or wealth
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Main three functions of money
Three functions of money – Medium of exchange
Money is widely accepted as a form of payment since it serves as a medium of exchange. People accept money as a medium of exchange when buying and selling products and services. Sellers are willing to let go with their goods in exchange for money, and buyers have confidence that the cashier will accept their payment of cash. Therefore, as it is recognized by all buyers and sellers, money is regarded as the most liquid kind of wealth.
Money’s most important function is to act as a medium of exchange. If there is no money, people have to exchange goods and services under the barter system (direct exchange of one good or service for another). The weakness of the barter system is that to buy a certain good or service from the seller, the buyer should have a good or service that has equal value to the supplier’s good or service. In other words, there should be a double coincidence of wants between two transacting parties to exchange goods and services within the barter system.
By acting as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each other’s goods and services, money effectively solves the double coincidence of desires problem.
Three functions of money – Measure the value of goods and act as a unit of account
Money can be considered a yardstick to measure the value of all goods and services. If buyers and sellers know the value of a good or service in terms of money, both buyers and suppliers can decide what quantity to be purchased and what quantity to be sold.
By using money as a unit of measurement, all commodities and services may now be valued in terms of money instead of being quoted in terms of other goods. In the USA, the value of goods and services is measured in USD. For example, the price of a mobile phone is quoted as $1000, not 500 burgers.
So, when we measure the value of goods and services in money, we can compare the value of different goods and services.
As a unit of account, money allows people to keep accurate financial records and calculate profit and loss.
Three functions of money – Store of value or wealth
Money is a very effective way to store of value or wealth. Because money can be easily stored, retrieved, and used at a later time.
When we consider money as a medium of exchange, money must hold its value over time. For that, money should be a way of store of value. If money is not a way to store of values, we can not use them as a medium of exchange. Because if we will not able to use today’s money to buy goods and services tomorrow, it will not correctly function as a medium of exchange. So, money can be considered as the most effective way to store of value rather than holding easily perishable items of value, such as corn. Due to the reason that money is widely accepted as a form of exchange, it is more liquid than the majority of other stores of value. In addition, money is a transportable store of value that comes in a variety of useful denominations.
However, money is not a perfect store of value because inflation will slowly erode the purchasing power of money over time.