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MONEY AND ITS FUNCTIONS

Money is a very important factor in the economy and economics. Goods are produced to be sold. They are sold to meet the needs of consumers or customers. Services are rendered to make life easier. People earn money to be able to pay for both goods and services. Banks cannot operate without money. That is why people say that: "Money makes the world go round".

Money makes the world go round and so profit is the driving force underlying most business activities. Producers, wholesalers, forwarders, retailers and advertisers do not usually work for some idealistic reason.

They work to earn a profit. When we talk about money we do not only mean cash (notes and coins), we also mean cheques, credit cards and debit cards, cash cards, certificates of deposit, treasury bond and shares.

There are things like health, true love or friendship that have no price. They can neither be bought nor sold. Money has nothing to do with them and neither has business. We are interested in business and that cannot exist without money.

Money is completely liquid which means that it can be converted into goods and services without any inconvenience or cost.

So, we can say that money is anything that is generally accepted as payment in exchange for goods and services.

The earliest form of trade was by barter. Barter is the exchange of one good or service for another without money. Barter works satisfactorily in very simple economies where there is little specialization and few different goods to trade, but for economies with greater specialization, money plays an important role in the exchange. It makes it easier for people to exchange. Today, money has three important functions: a medium of exchange, a store of value, and a measure of value.

A Medium of Exchange.Money economies differ from barter economies. In a barter economy you must find someone who has what you want. In a money economy people can sell what they have to anyone, then use the money to buy what they want. With money as a medium (means) of exchange, exchanging labour for goods and services is much easier.

A Store of Value.Money enables us to use the value of something that we sell today to make a purchase sometime in the future. We save its buying power for future use. Money is completely liquid which means that it can be converted into goods and services without any inconvenience or cost.

A Measure of Value.Money indicates the relative value of e products and resources. In a barter system a product would have as many different prices as there are other products that could be exchanged for it. When money is used in exchange, each product or resource has a single money price. Money enables people to state the price of something in terms that everyone can understand. It is a unit of account. People can compare money prices to find the best value for what they are selling or buying. Again, money makes exchange easier.

So, we can say that money is anything that is generally accepted as payment in exchange for goods and services. It also serves as a standard of value, and a store of value.



 

In the primitive or less organized societies, various kinds of commodities were used as money.

Commodity Money.Our current monetary system has developed over hundreds of years. Money as a medium of exchange first came into human history in the form of commodities.

In the primitive or less organized societies, various kinds of commodities were used as money. People used such things for their money as tobacco, salt, shells, stones, etc. Precious metals - such as gold, silver, or copper - were the most popular forms of money. All the items that serve the functions of money are called commodity money. The commodity that served as money had intrinsic value, i.e. value in itself (e. g. if not used as money, tobacco could be smoked).

By the nineteenth century, commodity money was almost exclusively limited to metals like silver and gold. These forms of money had intrinsic value, so there was no need for the government to guarantee its value. The quantity of money was regulated by the market through the supply and demand for gold or silver.

 

Fiat Money.The age of commodity money gave way to the age of paper money. In the course of history commodity money was first replaced by full-bodied paper money - paper certificates that were backed by gold or silver of equal value. Then the full-bodied paper money was replaced by certificates that were only partially backed by gold and silver. Finally, we arrived at our present system, in which paper money has no "backing" We use the so-called fiat money.

Fiat money is money that is accepted as a medium of exchange because of government decree. It has no intrinsic value as a commodity.

Coins and paper currency are always fiat money. It is of little value as a commodity, but it has its value as a medium of exchange. The government states that coins and paper currency are legal tender, which must be accepted for all debts, public and private.

Bank Money.Today is the age of bank money - cheques written on funds deposited in a bank or other financial institutions. Cheques are accepted in place of cash payment for many goods and services. Nowadays there are various innovations in the different forms of money. Credit cards and traveller’s cheques can be used for money transactions.


Date: 2015-12-11; view: 754


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