Question

List and explain the logic behind the “four functions of money.” Then, consider the following: In many prisons, cigarettes are used as money. Do cigarettes in prison have the ability to satisfy these four functions? Explain.

Answer 1

Four functions of money :

Medium of exchange : trading and exchanging based on monetary units . A common medium for buying and selling goods and services .

Unit of account : the comparison between value of different goods based on a single parameter .

Standard of deferred payment : aggrement or debts given based on credit or acceptable currency .

Store of wealth : Money can be stored for future use to buy goods and services .

Yes, cigarettes has potential to satisfy these four functions in a prison . It is used as a medium of exchange in prison . It is used as unit of account , like if a prisoner needs a haircut then has to pay say 10 cigarettes but if he needs some wine then has to pay say 30 cigarettes . So value of different services cost different and compared on the basis of number of cigarettes . Agreements are made or any service provided on basis of promised cigarettes . Cigarettes can be stored for future use .