Question

How do economists define money? Explain. What are the three functions of money? Explain each. Explain the evolution of money from the 19^th century to modern times. How can a rapid inflation degrade the ability of money to carry out its three functions? Explain.

Answer 1

Money is defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account.

Medium of exchange- The most significant feature of Money is to promote transactions as a means of exchange. All transactions will have to be carried out by barter without money, which implies direct exchange of one good or service for another. The problem with a barter scheme is that in order to receive a specific good or service from a supplier, a good or service of equivalent value must be owned, which the supplier always requires. In other words, trade can only take place in a barter system if there is a double chance of will between two parties involved in transaction.

Store of Value- Money must maintain its value over time in order to become a medium of exchange; that is, it must be a store of value. If money could not be held for a certain period of time and still remain valuable in exchange, the double coincidence of want question will not be solved and thus not accepted as a medium of exchange. Money isn't unique as a value store; there are several other value stores, such as property, art works, and even baseball cards and stamps. Money can not even be the best value shop, since inflation depreciates it. Money is therefore more liquid than most other value stores as it is readily embraced everywhere as a medium of trade.

Unit of account- Money also acts as an account unit, which provides a specific measure of the value of the traded goods and services. In terms of money, knowing the value or price of a good helps both the manufacturer and the consumer of the good to make decisions about how much of the good to supply and how much of the good to buy.

There are three essential needs that are considered (food, clothing and shelter). Those needs were met in the early antiquity, but in vain through the barter method. When it was needed money came into being. It quickly satisfied a man's needs but how it turned into a credit card we must learn about. There are five evolutionary stages – Commodity Money(Goods), Metallic Money(Coins), Paper Money(Bank Notes), Credit Money(Cheques & DDs) and Credit & Debit Cards.

The first is to make the exchange of goods and services simpler, since the system was a barter before the money. This role would be influenced by inflation via the loose value of currency, and thus more capital would be required to make the same transactions, which could be beneficial for the economy in the way producers would gain more monetary benefits, raise productivity, and eventually higher wages for workers. Yet if manufacturers will not turn price increases into wage growth, a significant proportion of the population will be poorer than after inflation because of the decrease in their purchasing power.

The second is to be a financial instrument, that means that money could be a source of added value by itself, but that fact only happens in deflation situations, the opposite of what we are studying. In our case (inflation) the money 's financial role will be influenced by how there is a decrease in the value of cash deposits (like current accounts) but an rise in the value of non-cash assets (like real states or industrial investment). And it will boost the debtors 'position, and ultimately deteriorate the creditors' condition.