Yurkoits Valeriya

3rd year, group 6

Money
Money is any object that is generally accepted as payment for goods and services
and repayment of debts in a given country or socio-economic context. Money is
commonly referred to as currency. Economically, each government has its own
money system. Cryptocurrencies are also being developed for financing and
international exchange across the world.
The money system is a significant improvement over the barter system. It provides
a way to quantify the value of goods and communicate it to others. Money has
several defining characteristics. It is:
 Durable.
 Divisible.
 Portable.
 Liquid.
 A unit of account.
 Legal tender.
 Resistant to counterfeiting.
Money is a liquid asset used in the settlement of transactions. It functions based on
the general acceptance of its value within a governmental economy and
internationally through foreign exchange. Often times, people say that they can live
without money. They define money as just one of the tools that enhances peoples
living environment. However, in real life money is a very important matter in
people’s lives. Although the people in history might have lived through the
exchange of goods and not relying to the value of money itself, modern society
today could not function without money. Money plays a huge role in the society in
variety of ways such as in business, at people’s job, and even in education. Money
helps people achieve a better quality of education, larger chance of business
success, and higher work output.
On its own, money is essentially worthless – except for commodity money. It is the
trust that people place in it that gives it value. For certain types of money, such as
commodities (gold/silver), there is an element of stored value. By contrast, other
types such as fiat money are only backed by the government and people’s faith in
it. Many items have been historically used as commodity money, including
naturally scarce precious metals, conch shells, barley beads, and other things that
were considered to have value. The value of commodity money comes from the
commodity out of which it is made. The commodity itself constitutes the money,
and the money is the commodity.
Fiat money only has value by people’s trust in it. This trust is built by governments
declaring it as a legal tender – allowing all people and businesses to accept it as a
means of payment. Trust is then further secured as governments outlaw all other
forms of money. Unlike Commodity money, fiat money has no intrinsic value. It is
backed by the government and created by central banks. And it is because there is
no limitation on supply that inflation is more likely under fiat money.
Governments and central banks can simply create more of it when needed.
Although, with that said, this was also a common occurrence under commodity
money, as rulers would simply reduce the level of gold content in the coins it
issues.
People accept money in exchange for goods and services. But the role of money
depends on the state of development of an economy. Money has become an
essential element of economies based on the division of labour, in which
individuals have specialized in certain activities and enterprises have focused on
manufacturing specific goods and rendering specific services. In order to make
transactions as simple and efficient as possible, the introduction of a generally
accepted medium of exchange suggested itself.
In order to be most useful as money, a currency should be: 1) fungible, 2) durable,
3) portable, 4) recognizable, and 5) stable. These properties ensure that the benefit
of reducing or eliminating the transaction cost of the double coincidence of wants
is not outweighed by other types of transaction costs associated with that specific
good.
Purchasing power loss/gain is an increase or decrease in how much consumers can
buy with a given amount of money. Consumers lose purchasing power when prices
increase, and gain purchasing power when prices decrease. Causes of purchasing
power loss include government regulations, inflation and natural and manmade
disasters. Causes of purchasing power gain include deflation and technological
innovation.
Money has three primary functions. It is a medium of exchange, a unit of account,
and a store of value.
Money's most important function is as a medium of exchange to facilitate
transactions. Without money, all transactions would have to be conducted by
barter, which involves direct exchange of one good or service for another. The
difficulty with a barter system is that in order to obtain a particular good or service
from a supplier, one has to possess a good or service of equal value, which the
supplier also desires. Money effectively eliminates the double coincidence of
wants problem by serving as a medium of exchange that is accepted in all
transactions, by all parties, regardless of whether they desire each others' goods
and services.
In order to be a medium of exchange, money must hold its value over time. If
money could not be stored for some period of time and still remain valuable in
exchange, it would not solve the double coincidence of wants problem and
therefore would not be adopted as a medium of exchange. As a store of value,
money is not unique; many other stores of value exist, such as land, works of art,
and even baseball cards and stamps. Money may not even be the best store of value
because it depreciates with inflation. However, money is more liquid than most
other stores of value because as a medium of exchange, it is readily accepted
everywhere. Furthermore, money is an easily transported store of value that is
available in a number of convenient denominations.
Money also functions as a unit of account, providing a common measure of the
value of goods and services being exchanged. Knowing the value or price of a
good, in terms of money, enables both the supplier and the purchaser of the good
to make decisions about how much of the good to supply and how much of the
good to purchase.
Money supply is defined as the total quantity of money circulating in the economy
at a particular time. Many countries use it as an indicator of economic
performance. There are three measures of money supply M1, M2, and M3. But
there is also such measure as M0. It includes the amount of money in circulation.
M1 includes all currency in circulation, traveler’s checks, demand deposits at
commercial banks held by the public, and other checkable deposits. M2 includes
everything in M1 as well as savings deposits, time deposits below USD 100,000,
and balances in retail money market funds. And last but not least, M3 includes
everything in M2 and time deposits larger than USD 100,000, balances in
institutional money market funds, and term repurchase agreements.
In the economy today money performs several functions. Money serves as a
standard of value in which other values are measured. Money is a store of value,
that is, the means in which wealth can be held. It acts as a standard for deferred
payments.
However, the most important function of money which distinguishes it from other
goods is that it serves as a medium of exchange. That is, money is a means of
payment for goods and services. It is this use of money that distinguishes a
monetary economy from a barter economy. A monetary economy is one in which
goods are sold for money and money is used to buy goods.
Money Promotes Productivity and Economic Growth. Barter system was full of
difficulties of exchanging goods and services between individuals. In the absence
of easy exchange of goods and services the barter system worked as an obstacle to
the division of labour and specialisation among individuals which is an important
factor for increasing productivity and economic growth. Further, the process of
economic growth leads to the expansion of production of goods and services and
consequential rise in incomes of the people. As a result, volume of transactions in
the developing economy increases. This raises the demand for money to finance
the increased transactions brought about by the expanded level of economic
activity.
From the viewpoint of development another important role of money lies in
making the magnitude of investment independent of the current level of savings. In
a barter system, the goods not consumed constitute the savings as well as
investment. That is, investment is not different from current savings. The greater
the current savings, the greater the investment. However, in a modern economy,
this is not so. Whereas it is households which save in the form of money, it is the
firms which invest money in capital goods.
In developing countries, the created money can play a useful role in promoting
economic development. Rapid economic development can be achieved by stepping
up the rate of investment or capital formation. But additional resources are required
to increase the rate of investment. The newly created money can be spent on
investment projects both in the industrial and agricultural fields which would lead
to the increase in output, income and employment.
To sum up, money is important to buy basic life requirements, and money is also
important to preserve human dignity and to provide a decent life for him and his
family. It plays significant role in every sphere of people’s life, and has a plethora
of functions and forms. Money is one of the most important requirements of life
because without money, people lack essential things in life, such as education,
health care and others.