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What is Money? The Functions of Bills and Change

Money. Can’t live without it. Can’t buy everything with it, but if you’re living in any developed economy chances are you have it. You want more of it, wish it could buy happiness, and sometimes despise it, (or at least those who want yours).

But underneath the surface of it all what is money? From a macroeconomic standpoint what does money represent? This article will provide a brief summary on the 3 functions or purposes of money.

Three Functions or Purposes of Money

    1. 1) Unit of Account
      2) Medium of Exchange
      3) Store of Value

1) Provides a Unit of Account or ‘common yardstick’. Every good or service in the economy has an absolute price in the local currency. Simultaneously, every good or service in the economy has a relative price measured in the local currency.

2) Medium of exchange lays the foundation for the advanced economy. The barter system (that requires information from participants) results in the need for ‘double coincidence of wants’. Here buying and selling are inter-related.

3) Store of Value. Assets can store value, however, money is liquid (easy and also cheap method for payments). Currency and coins are generally perfectly liquid and are usually accepted as the medium of exchange.

There you have it, three simple but essential functions of your money.

*originally posted May 14, 2007*

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