Question

Why is simply counting currency an inadequate measure of money?

Discuss the three functions of money

Answer 1

Currency is a medium of exchange used to pay for goods & services. Counting currency generally refers to paper money & coins present in an economy. Apart from currency there are other assets having liquidity properties which can be used as money to buy goods & services. This includes checks, e cash, deposits & other electronic forms of payments (E-wallets) that represent a significant portion of money. Thus counting currency is an inadequate measure as it only represents a small portion of money.

Money has three functions or services that it provides. Money acts as a medium of exchange, as a store of value, and as a unit of account. We will discuss them in detail below.

1)

Medium of exchange: The primary function of money is as a medium of exchange to facilitate transactions. If there was no money goods & services would have to be exchanged through the process of barter which creates the problem of double coincidence of wants. Money removes the problem of “double coincidence of wants” which is present in barter system by serving 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.

2)

Store of value: Money as medium of exchange holds its value over time. It is a store of value. Though there are other assets which store value such as land, works of art & other goods, but money is more liquid than other stores of value because as a medium of exchange, it is readily accepted everywhere.

3)

Unit of account: Money also functions as unit of account. It means money can be used as a common standard to measure relative worth of goods and service. It gives meaning to profits, losses, liability, or assets.