Question

Define money and discuss its various functions. Is debit card money? Credit Card? Why? Why not? Explain.

Answer 1

Money is defined in terms of the three functions or services 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 as a medium of exchange to facilitate transactions. Without money, all transactions will have to be carried out through a barter, which includes the direct exchange of one good or service for another. The problem with the barter scheme is that, in order to receive a specific good or service from a supplier, one has to possess a good or service of similar value, which the supplier also needs. In other words, in a barter system, exchange can only take place if there is a double coincidence of desires between the two parties to the transaction. The likelihood of a double coincidence of desires, however, is small and makes the exchange of goods and services rather difficult.Money essentially removes the double correlation of desire problems by acting as a means of exchange agreed by all parties in all transactions, regardless of whether they wish each other goods and services.

Store of Value- To be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for a certain period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and would therefore not be used as a means of exchange. As a store of value, money is not unique; there are many other stores of value, such as property, works of art, and even baseball cards and stamps. Money might not even be the best store of value because it depreciates inflation. However, money is more liquid than most other value markets, since it is readily embraced everywhere as a medium of trade.

Unit of Account- Money also functions as a unit of account, providing a common measure of the value of goods and services to be exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions as to how much of the good to supply and how much of the good to purchase.

A debit card, like a check, is an order to the bank of the customer to move money directly and instantly from the bank account to the seller. So, a debit card is just as much money as a check. It is important to remember that, in our definition of money, it is checkable deposits that are money, not paper checks or debit cards. While you can make a purchase with a credit card, it is not considered money, but rather a short-term loan from a credit card company to you. When you make a payment using a credit card, the credit card company must automatically move money from its bank account to the retailer at the end of the month.

In short, credit cards, debit cards, and smart cards are different ways to transfer money when you make a purchase. Yet having more credit cards or debit cards does not boost the amount of money in the economy, no more than having more checks written raises the amount of money in your bank account.