Money and currency are used interchangeably. But from an economic point of view, the two have a different meanings. Money is a medium of exchange that is generally accepted for transactional purposes. On the other hand, currency is tangible money in form of paper bills and coins that is accepted at face value. It is issued and regulated by the government.
What is Money and How Does it Work?
Money is a commodity that is generally accepted as a medium of exchange. It is used to facilitate trade and is a measure of wealth. Money is used to express the prices and value of commodities. It can take different forms like liquid cash, account balance, or certificate of deposit.
What are the Characteristics of Money?
The following are the main characteristics of money:
- Durability. Money should withstand wear and tear while it is moving from one person to the other.
- Acceptability. Money should be generally accepted as a medium of exchange.
- Portability. It should be easy to carry and walk with money around.
- Divisibility. Money should have the ability to be divided into smaller units.
- Stability of value. The value of money should not keep on fluctuating.
- Cognizability. The value of money should be easily identified.
- Limited supply. Money should not be easy to come by and it should be scarce.
Also read: Why is money important in our life?
Different Types of Money in Economics
There are 4 different types of money in economics. They include:
1. Commodity money. This is a kind of money that is used in the barter trade. Resources or commodities are used to play the function of money as a medium of exchange. The commodity used as a medium of exchange is called commodity money. Such commodities include precious metals like gold and silver. This kind of money has intrinsic value.
2. Fiat money. Fiat money is a type of money that does not have intrinsic value and is based on an authoritative decision by the governing body. The government declares fiat money as a legal tender and it can be accepted anywhere as a medium of exchange.
3. Fiduciary money. Fiduciary money is a type of money that works based on promise and trust. For instance, people trust banks can pay them in commodity money like gold or silver or fiat money such as paper money. Examples of fiduciary money include cheques since they carry the same value.
4. Commercial bank money. It is a type of money that is made of book money or debt generated by commercial banks. It is a claim against a bank for the purchase of goods and services.
Also read: How to survive without money.
What are the Functions of Money?
The following are the functions of money in economics.
1. A measure of value. This is a primary function of money. The value of goods and services can be expressed in terms of money. You can use the money to transfer the value of a commodity and that is why it is used in buying and selling of goods.
2. A medium of exchange. Money can be used in the exchange of goods and services. Money is widely accepted as a form of payment and allows people to access goods and services they are in need of.
3. Store of value. Money retains its worth over time and as such, it can be used to store value. However, sometimes the purchasing power of money fluctuates due to inflation. You can use money to save, store and retrieve your wealth with time.
4. Unit of account. Money can be used to measure the value of goods and services. Money helps you to determine the worth of a product, service, or an individual. This is possible because money is consistent and used as a common measure of value.
5. Standard of deferred payment. The other function of money is that it is a standard of deferred payment. It means that money can be used to value debt and repay debt. For instance, you can buy goods and services on credit and promise to repay later.
Summary of Different Types of Money
Money is a commodity that is generally accepted as a medium of economic exchange. Money is used to express the prices and values of commodities and is used to facilitate trade. With money, you can obtain what you need. There are four types of money; fiat money, fiduciary money, commodity money, and commercial bank money.