What this lesson teaches
I can describe the forms, functions and characteristics of money.
Syllabus K343, 3.1.1. Money: forms, functions and characteristics of money
Make a guess
You have $500 in the bank and own a flat worth $600,000. How much money do you have?
- Nothing, because only notes and coins are money.
- $600,500, because both are things you own.
- $500. The flat is wealth, but not money.
Show the answer
$500. The flat is wealth, but not money.
Money is what is widely accepted as payment. You cannot pay for lunch with part of a flat, so it is wealth but not money.
Money is anything widely accepted in exchange; it works as a medium of exchange, store of value, unit of account and standard of deferred payment.
Money is anything that is widely accepted as payment for goods and services. Without money, people would have to barter: swap goods directly. Barter only works when each person wants what the other has, which rarely happens.
Forms of money include coins and notes (cash), bank deposits, and digital payments made by card, phone or online transfer. Today most money in Singapore exists as bank deposits, not cash.
Money has four functions. It is a medium of exchange, used to buy and sell. It is a unit of account, so prices can be compared. It is a store of value, so wealth can be kept for later. It is a standard of deferred payment, so debts can be repaid in future.
Good money is generally acceptable, durable, portable, divisible into small amounts, limited in supply, and hard to forge.
Sort these
Sort each use of money by the function it shows.
Groups: Medium of exchange, Unit of account, Store of value, Standard of deferred payment.
- A firm adds up its yearly costs in dollars.
- You keep $300 of birthday money in the bank for next year.
- A buyer pays for a sofa in six monthly payments.
- A family saves part of each pay cheque for a holiday.
- You tap your card to pay for a bus ride.
- A cafe pays its supplier for coffee beans.
- Two phones are priced at $899 and $1,099, so you compare them.
- You agree to repay a $2,000 loan in monthly instalments.
Show the answer
Medium of exchange
- You tap your card to pay for a bus ride. Money is being used to buy a service, so it works as a medium of exchange.
- A cafe pays its supplier for coffee beans. Money settles a trade between buyer and seller, which avoids barter.
Unit of account
- A firm adds up its yearly costs in dollars. Money gives one common measure for very different items.
- Two phones are priced at $899 and $1,099, so you compare them. Prices in dollars let you measure and compare value.
Store of value
- You keep $300 of birthday money in the bank for next year. Money holds its value over time, so it can be spent later.
- A family saves part of each pay cheque for a holiday. Saving money moves spending power into the future.
Standard of deferred payment
- A buyer pays for a sofa in six monthly payments. The future payments are fixed in money terms, so the debt can be settled over time.
- You agree to repay a $2,000 loan in monthly instalments. Money lets a debt be set now and paid back later.
- Functions of money
- Medium of exchange, unit of account, store of value, standard of deferred payment.
- Characteristics
- Acceptable, durable, portable, divisible, limited in supply, hard to forge.
- Barter
- Swapping goods directly; needs a double coincidence of wants.
Worked example: Why rice would make poor money
Suppose a village used bags of rice as money. Test it against the characteristics.
- Durable? No. Rice can rot or be eaten by pests, so it is a poor store of value.
- Portable? No. Carrying enough rice to buy a bicycle would be very hard.
- Divisible? Partly, but sharing out exact amounts is slow.
- Conclusion: notes, coins and bank deposits are far better because they have these characteristics.
Watch out for this
Money and wealth are the same thing.
Money is one form of wealth. A person can be wealthy through owning property or shares while holding little money.
Check your understanding
A worker keeps part of her pay in a bank account to spend next year. Which function of money is this?
- Unit of account
- Medium of exchange
- Store of value
Show the answer
Store of value
Right. Money lets her keep purchasing power for later.
Check your understanding
A shop shows the price of every item in dollars, so shoppers can compare them. Which function of money is this?
- Standard of deferred payment
- Unit of account
- Store of value
- Medium of exchange
Show the answer
Unit of account
Right. Money gives a common measure of value, so different goods can be compared.