This archive report was first published on 16 September 2019.
Understanding Money in Economics ¶
Published on September 16, 2019, money is a fundamental concept in economics, serving as a medium of exchange, unit of account, and store of value. However, not all forms of money possess these characteristics, and understanding what makes money valuable is crucial for economic growth and stability.
Money has taken various forms throughout history, including cheques, fiat, paper currency, e-money, and commodity. However, for money to perform its functions well, it must possess several key characteristics.
The 6 Characteristics of Money ¶
1. Acceptable ¶
For money to be effective, individuals and businesses must accept it as a medium of exchange. This means that money should be widely accepted and recognized as a form of payment. In ancient economies, people used commodities like gold and silver to buy and sell goods and services because they had value.
2. Divisible ¶
Money must be divisible to serve as a unit of account and store of value. This means that it should be possible to divide money into smaller units, allowing for the exchange of goods and services of varying values. For example, a paper currency cannot be a medium of exchange if it is not divisible.
3. Durable ¶
Money must be durable to retain its original form, substance, and shape over a prolonged period. This means that money should be able to withstand wear and tear, and its value should not depreciate over time. Cheques, for instance, work well as mediums of exchange because they store value from transaction to transaction.
4. Portable ¶
Money must be portable to facilitate exchange. This means that it should be easy to carry and transport, making it convenient for individuals and businesses to conduct transactions. Paper currencies, for example, are lighter and easier to carry than commodities like gold and silver.
5. Scarce ¶
Money must be scarce to maintain its value. This means that the supply of money should be limited to prevent inflation and maintain economic stability. When a country increases the money supply at a faster rate than its output, it can lead to inflation, causing prices to rise.
6. Stable ¶
Money must be stable to retain its value over time. This means that its value should not fluctuate significantly, allowing individuals and businesses to make informed decisions about investments and transactions. Stability ensures that money can serve as a store of value and a standard for measuring the value of commodities.
