Money Functions

Money Functions

XECO 212

July 7, 2012

Jan Cohen

Money Functions

The three functions of money are; unit of account, medium of exchange, and store of value. Unit of account is used as the foundation which constitutes the price of goods and exchange rate through the economy. Unit of account is also a measure of value for money, a way to measure the cost for any given item. For example if a 16 ounce soda costs $1.25 from a vending machine and a two liter bottle is $1.50 at a grocery store a person is able to compare both price and value for the soda, with price defining how much money is necessary to complete the exchange for a good.

The second function is that of medium of exchange. From the above example a vending machine accepts the $1.25 and dispenses the soda desired, money is given and goods are received, whenever a purchase is made the buyer and seller exchange money, a commonly accepted medium, to complete the transaction. This system of exchange replaces the barter system and makes the transaction easier to complete.

The final function of money is that of a store of value. That simply means money can be used to purchase the same goods in the future as could be purchased today. As a person receives money some is spent immediately while some can be saved for future purchases. A young couple may set a goal of saving a sum of money large enough for the down payment on a home while still meeting their normal expenses of rent, food, and transportation.

References:

Canadian Foundation for Economic Education. (1994). Money: Its Functions and Characteristics. Toronto, Ontario, Canada.

Mankiw, N. G. (2006). Principles of Economics, 4e. Mason, Oh: South-Western College Pub.

Money Functions

XECO 212

July 7, 2012

Jan Cohen

Money Functions

The three functions of money are; unit of account, medium of exchange, and store of value. Unit of account is used as the foundation which constitutes the price of goods and exchange...