Money in Economics refers to any commodity or item or material that can be used as a means of exchange for goods and services. The Functions and forms of Money as discussed in economics will be explained. For money to be used as a means of exchange, it must fulfill some criteria such as being acceptable by people for exchange of goods or services and also for settlement of debts.
What is Money in Economics
Money is any commodity which is generally acceptable in a community or society for payments of goods and services and also for the settlement of debts.
Forms of Money
There are different types of Money that were used in the olden days and also the types used in todays world. Each formor typewould be explained.
Old Forms of Money
These are the types of money used in the olden days. These forms of money are still available today but are not used again as means of exchange.
List of Old forms of Money
- Cowrie shells
- Manilla this was a form of money that looks like a bracelet.
- Elephant tusks
- Bars of metals
These old forms of money were used in West Africa. The disadvantages of these old forms of money are: there is no scarcity and no form of control over the availability this means that anyone can go in search of cowries or bars of metals and use them as money making it very common and the commoner a form of money is, the worthless it becomes. Another problem with these old forms of money is that some animals were going into extinction because of the use of their parts as money this include use of elephant tusks leading to the killing of elephants because of the tusks.
New Forms of Money
These are the types of money used in this new era. The new forms of money are better in many ways than the old forms of money; the new forms of money were created as a result of the limitation of the old forms of money.
List of New forms of Money
- Bank notes
- Bank deposits
- Quasi-money (near money)
A coin is a type of money that is made from metals such as Gold , Silver, Copper, Zinc, etc. Because some of these metals are costly and more desired than others, their values are not the same; for this reason there are two types of coins: the standard coins and token coins.
A Standard coin: a standard coin contains the full face value of the amount printed on the coin. This means that if the amount of 1 gram of gold costs 10,000, then 1 gram of gold would be used for making a coin and $10,000 would be printed or stamped on it. If 1 gram of silver cost $100, then 1 gram of silver will be made into a coin and 100 would be printed on it. This is what is referred to as a standard coin holding the face value of the amount printed on it.
A Token coin: a token coin does not contain the face value of the amount printed on it and the face value of the amount printed on it is always higher. This means Zinc could be used for making a $10 coin but the weight of the zinc used for making the coin is not worth $10.
Most of the coins used these days are token coins but the first coins were initially made of gold and silver they were stopped because people started adding inferior metals to the precious metals used initially, making the face value of coins to be less than the amount printed on them; hence the creation of token coins in todays world.
Bank notes are forms of money made of paper and designed in a unique way to make it difficult to make counterfeit. Bank notes are usually printed by the central bank of a country and the amount of the money is printed on the designed paper. When bank notes were first printed, they were printed according to the amount of gold a country has in store. Which means that if America has 2 billion dollar worth of gold, they will make different amount of bank notes only up to 2 billion dollars combined. But with time, the governments increase demands for money and the scarcity of gold made countries to start printing bank notes to exceed the amount of gold they hold in store; therefore, the amount of paper money that is not backed up by gold or precious metal is called Fiduciary issue. If all the paper money in a country were backed up by gold, such a country is said to be on a Gold standard. In reality, there is no country on a gold standard in this era but there was some years back when paper money were first used.
Bank deposits (or Bank money)
This type of money refers to deposits kept in current accounts of commercial banks that can be withdrawn with cheques.
Quasi-money (near money)
Quasi-money is not a real type of money. It is not backed by the law of the country. They are created to increase flexibility and are used on a particular platform to make transactions easier. When you want to make use of quasi-money to buy or sell in real life, you have to convert it to the bank note that is backed by the country before withdrawing and using it.
Examples of quasi-money includes: bills of exchange, money orders, postal orders, cheques and promissory notes. Some new forms of quasi-money used online today include Amazon gift cards, skrill and cryptocurrency (bitcoin, ethereum etc). These forms of quasi-money are not backed by the law and transactions with these forms of money are only used on the platforms you can only convert them to real money before using it to buy in real world markets.
Any form of money that is backed by the law and which people are compelled by law to use as a means of exchange is called a legal tender. These include coins and bank notes issued by the central bank of a country. Coins can be used as legal tender but the more the amount, the heavier and cumbersome they become and so may not be used as legal tender up to a certain amount but bank notes or paper money can be used as legal tender up to any amount because it is easier to carry and has higher notes than the coins.
Functions of Money
- Money is used as a means of exchange: the use of money has increased flexibility in buying and selling of goods and services and has helped to overcome the problem of double coincidence of wants found in the barter system. It gives freedom to spend it when you like and as you want thereby giving the power to command different goods and services because it is generally accepted. This saves time, effort and prevents frustrations.
- Money is used as a measure of value: since the value of goods and services are expressed as prices, money can be used to measure the value of these goods and services according to their prices. This means that the higher the price, the more valuable it is.
- It is used as a unit of account: because the value of goods and services are measured by their prices, the records of the number of goods in store can be kept in the form of prices and can be used for keeping records of transactions too. You can estimate the number of transactions according to the amount of money in account and the price of each good and service.
- It is a store of value: money is the most convenient commodity used for storing wealth as it can be used anytime and can be stored over a long period without getting spoiled. Unlike the barter system where goods exchanged can get spoiled.
- Money is a standard for deferred payments: the use of money has made it possible to do business transactions on credit and payments made later, therefore deferred payment is possible. The trade by barter system could make this possible because the quality of good exchanged today may not be the same quality even when the same good is to be exchanged later when the borrower wants to pay back; money has overcome this problem because 10,000 borrowed today will still be the same returned after 10 months and can be used to buy any product with it.
- Money increases productivity: money makes it possible for division of labour to occur and therefore shortens the time frame it takes to achieve the same project that would have taken much time if it were to be done by one person. Take for example, when building a house, you need an architect, builders, carpenters, electricians and interior designers money has made it possible to settle all those involved with just one means of exchange (which is money) unlike in the barter system where you would have had serious difficulty in getting all those involved and exchanging goods with their services. By being able to get services in time and all working on the same project, productivity is increased and time is saved.
- Money is used for one-way payments: not all transactions involving buying and selling. Things such as payment of tax involves giving money to the government getting anything instant in return; the same applies with giving gifts no reciprocal payment in return. This one way payment is made possible with money and the person receiving it can instantly use it to get what he or she desired immediately without having to look for someone who needs what has been donated to exchange for what is desired.