Understanding Money (Cambridge (CIE) O Level Economics)

The Meaning of Money

• Prior to the creation of money, individuals and firms had to accept other goods or services as payment, or be self-sufficient by producing everything required

• Often lacking self-sufficiency or driven by the desire for a wider range of goods/services, bartering became the norm but it too had problems

• As individuals and firms trade with each other in order to acquire goods or raw materials, they require a means of exchange that is acceptable and easy to use 

• Modern currency fulfils this purpose and money functions as a medium of exchange, a measure of value, a store of value, and a method of deferred payment

The Functions of Money

The Four Functions of Money

The Characteristics of Money

• Many items were used for centuries as a form of money such as gold, silver, shells, beer, tobacco

• However, each one of these items had some characteristics that made the less than ideal for exchange in certain circumstances

• Good money has a number of essential characteristics - and modern currency fulfils them all 

1. Divisibility: to be a valued medium of exchange, currency must be divisible. €50 notes can be exchanged for €10 euro notes or €1 coins

2. Acceptability: the currency must be valued and widely accepted by society as a valid way to pay for goods/services

3. Durability: the currency must be robust, not easily defaced/destroyed and last for a long period of time

4. Scarcity: the supply of the currency should be such that remains desirable and retains its value in the market. Oversupply would decrease its worth

5. Uniformity: in order to be a valid measure of value each denomination must be exactly the same e.g. every $50 note must be exactly the same

6. Portability: good currency is easy to carry/conceal