Functions of Money
B.A. (General) – Economics
1. What Is Money?
Money is a tool that people use to buy and sell things.
Think of it like a “currency card” that everyone agrees is worth something.
2. The Four Main Jobs (Functions) of Money
| # | Function | Everyday Analogy | Tiny Example |
|---|---|---|---|
| 1 | Medium of Exchange | A shopping card that lets you trade goods and services without bartering. | You give a dollar to a friend for a cup of coffee. |
| 2 | Unit of Account | A price tag that tells you how much each thing costs. | The price of a book is $12, the price of a pizza is $8. |
| 3 | Store of Value | A savings jar that keeps your money safe for later. | You save 5 $ in a piggy bank to buy a bike next month. |
| 4 | Standard of Deferred Payment | A promised‑payment note that lets you pay later. | You buy a phone now, promise to pay $200 next month. |
3. Why These Functions Matter
- Smooth Trade – Without money as a medium of exchange, buying a loaf of bread would need you to trade a chicken for it.
- Clear Pricing – A unit of account lets everyone read the same “price tag” on everything.
- Future Planning – Storing value lets people save for big things (cars, houses).
- Credit & Loans – Deferred payment lets banks lend money, helping businesses grow.
4. Everyday Life Check‑In
| Situation | Which Function Helps? | Example |
|---|---|---|
| You go to the grocery store | Medium of Exchange | Pay cash or card for produce. |
| You compare a laptop vs. a tablet | Unit of Account | Prices are in dollars, so you can see which is cheaper. |
| You keep a cash stash for emergencies | Store of Value | You can use it if your phone loses battery. |
| You buy a house with a mortgage | Standard of Deferred Payment | You sign a contract to pay the bank over 30 years. |
5. Quick Summary
- Medium of Exchange – Money lets you buy and sell easily.
- Unit of Account – Money gives a common “price scale.”
- Store of Value – Money can be kept safe for later use.
- Standard of Deferred Payment – Money allows you to promise to pay later.
Tip for Remembering
Think of money as a four‑wheel car:
• Wheel 1 (exchange) – gets you anywhere.
• Wheel 2 (account) – shows the route.
• Wheel 3 (store) – keeps you safe.
• Wheel 4 (deferred) – lets you drive now, pay later.
Practice Question
If you want to buy a sandwich, explain which function of money you are using and why.
(Answer: Medium of Exchange – you give money to get the sandwich.)