There are different forms of money which occur in our life. This blog will investigate the definition, characteristics, functions and different types of money.
Definition of Money
Money has an important role in our daily life. In old times when money was not invented, people purchsed goods through exchanging which is known as the barter system. This system had low efficiency as purchases only take place when there are double coincidence of needs. The invention of money not only solved this problem, but also prevented people from exchanging goods with different values.
Characteristic of Money
Acceptability
This means that money must be widely accepted by the public.
Durability
In order to be a form of money, it has to be durable and can be used for long time without breaking.
Portability
Money need to be easy to carry around as this increases the efficiency of trade.
Divisbility
Money should be divisible in order to help trade of products.
Scarcity
Scarcity helps to insure the value of money. When it is limited in supply, the value of money can be created.
Function of Money
Medium of Exchange
Money acts as the medium for people to exchange goods and is the mean of payments.
Unit of Account
Money can be used to measure and compare the values between different products. It places a value for goods adn services
Store of Value
Money can be saved for future uses as it keeps its normal values with stable exchange and interest rate. However, when inflation or deflation occurs, the value of money may fluctuates.
Standard of Deferred Payment
Money can be borrowed to individuals or other economic agents for use, and is later payed back along with interest.
Different Types of Money
Fiat Money
Fiat money is the most common form of money in economic systems. It has no intrisic value and isn’t backed by a commodity such as gold. It is always officially declared by the government as a legal tender and is the basis of monetary system. Most of the currencies known today is fiat money.
Commodity Money
Most significant difference between commodity money and other forms of money is that comodity money has intrisic values. For instance, gold and silver are commonly known commodity money.
Commodity money is common throughout human history, they are especially used when there are no other forms of money. For example, cigarettes are forms of commodity money that is used in transaction of goods in jail.
Represenative Money
Representative money is the form of money that has no intrisic money but is backed up by actual commodity for instance most commonly by gold. The money can directly transferred into actual commodity in this case.
References
This blog referred to the knowledge used in the following website:
https://topmobilebanks.com/blog/types-of-money/ (Volenik,2022)