SOCIAL SCIENCE 5: ECONOMICS

FUNCTIONS OF MONEY | LG 1.1

At the end of this lesson, the students should be able to:

1. Discuss the concept and functions of money; and

2. Illustrate the functions of money in the Philippine context.

Suggested Time: 1 min | Actual Time Spent: ____min(s)

Look at the pictures below and find what is common among them. Write your answer in the boxes
below.

Images from Transferwise (2017), Development Bank of the Philippines (n.d.),

Alibasa (2019) & ABS-CBN News (2020)

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 If your answer is money, then you are correct! All of the pictures above represent a type of
money that is used here in the Philippines. All of them are used as a means of payment in all of the
transactions that we make every day - from the time we go to the wet market or supermarket to buy
different products, to paying our contributions in various group projects or when placing an order in our
favorite online stores like Lazada or Shopee. From being metal to paper, then to plastic and to being
digital, money has evolved to cater to the needs and wants of the society by being a tool that enabled
basic up to the most complex activities of the economy.

In the past quarter, you have learned about various concepts in macroeconomics which include
aggregate output, inflation, unemployment, and trade. We explored how consumers, firms, and the
government interact in the goods market. In this section, we shall examine the role of money in the
economy. We will discuss what money is and what are its uses.

Suggested Time: 4 mins | Actual Time Spent: ____min(s)

First things first: What is money?

Forbes (2020) reported the Sy Siblings as the richest persons in the Philippines. The six Sy
siblings inherited their fortune from their late father Henry Sy Sr., known as the owner of the SM Group.
Their total net worth in 2020 was estimated to be at a whooping 13.9 billion dollars. Sure, by saying
that they are the richest persons in the country, that probably means that they have a lot of money. They
are so rich that they could buy almost anything they want! In this sense, the term money is used to mean
wealth.

But economists have a more specific use for this term: Money is the set of assets in the economy
that people regularly use to buy goods and services from each other (Mankiw, 2021). The cash in your
wallet is considered as money because you can use it to buy virtually anything like when ordering your
favorite meal in a restaurant or paying for the delivery of the album or other merchandise of your
favorite pop group. By contrast, the large share of stakes held in the group's publicly-traded SM
Investments and SM Prime, which makes up most of their wealth (Forbes, 2020) is not considered as
money. According to the definition mentioned above, money includes only those certain types of wealth
that are regularly accepted by sellers to buy products and services (Mankiw, 2021).

The thought that we can use money to buy things is so natural that it seems absurd to mention
it. When the whole monetary system is running well, the basic workings of the system are virtually
invisible (Case et al., 2012). But try asking yourself: “Why will a store owner be willing to let me
exchange some intrinsically worthless pieces of paper with his/her kilo of rice or loaf of bread?” On the
other hand, why are there times when it would take a full bag of money to purchase a pack of salt or
piece of egg, just like in Venezuela or during the times of the Japanese occupation here in the
Philippines? The answer to these questions depends on what money is—a means of payment, a store of
value, a unit of account, and a standard of deferred payment.

What are the functions of Money?

Money has four main functions: It is a medium of exchange, a store of value, a unit of account,
and a standard of deferred payment. Let’s examine each of these functions of money.

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1. Money as a Medium of Exchange

Money is vital in the functioning of the modern market economy. Imagine what could possibly
happen if we are not using money. An alternative to a monetary economy is a barter economy, where
people trade goods and services directly with one another without the aid of any form of money. This
trade system was used by our Filipino ancestors before the Spanish colonization.

In order for barter to successfully happen, two parties should each hold an item
the other wants, so they can exchange these items directly. This is called the
double coincidence of wants.

One of the requirements of barter is the double coincidence of wants. To illustrate what this
means, let us have an example. Suppose that you are a farmer, and you have grains of rice in your
possession. You are in need of fish, but since there is no money in a barter economy, you will have to
find someone who is willing to exchange his or her fish with your grains of rice. This might seem easy
in a simple economy but in a complex economy where there are a lot of goods and commodities such
as what we have today, it will be laborious for one to successfully barter with another person. Imagine
going outside and trying to find people with those goods that you commonly buy in a supermarket trip
who are also willing to accept goods that you own in exchange for their goods.

Money eliminates this problem by acting as a generally accepted asset in all kinds of stores. A
medium of exchange is an item that buyers give to sellers when they purchase goods and services
(Mankiw, 2021). The transfer of money from one person to another person allows transactions to take
place. It serves as a lubricant for trade. When you walk into a store, you are confident that your money
will be accepted by the cashier for the items that you are buying because money is the commonly
accepted medium of exchange (Mankiw, 2021).

2. Money as a store of value

Suppose that you are a butcher in a moneyless economy. This means that you have to quickly
sell your meat, or it rots and loses its value. With money, you can sell the meat and keep your money
until you find something that you want to purchase. This illustrates another function of money, being a
store of value.

A store of value is an item that people can use to transfer purchasing power from the present
to the future (Mankiw, 2021). When a person accepts money today in exchange for a product or service,
he or she can use that and become a buyer of another good or service at another time.

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 Money is not the only store of value in the economy. You could hold your earnings by
purchasing things like antique paintings or posh jewelry, which you could sell in the future. You might
have also heard about stocks and bonds - these nonmonetary assets can also be used to transfer
purchasing power from the present to the future. The term wealth refers to the sum of a person’s stores
of value, including both money and nonmonetary assets (Mankiw, 2021).

There are several advantages of money as a store of value. First, it comes in convenient
denominations and is lightweight and portable. Because it is also a medium of exchange, it can be easily
used to buy goods at all times. These two factors compose the liquidity property of money. Economists
use the term liquidity to describe the ability of an asset (or a store of value) to be easily converted into
the economy’s medium of exchange (Mankiw, 2021).

The main disadvantage of money as a store of value is that the value of money decreases when
there is inflation, that is, when the prices of goods and services rise. This means that the purchasing
power represented by the Peso is not always constant and is subject to the effect of various
macroeconomic factors. If the price of a piece of candy rises from P1 to P2, this means that the value
of peso in terms of candies has depleted to being half a piece. When this happens, holding on actual
goods or assets like real estate as a store of value is a better alternative than holding money itself. Indeed,
there have been inflationary times when people hoard goods rather than storing money to support their
future needs (Case et al, 2012).

3. Money as a Unit of Account

The value of all products and services are quoted in terms of money, hence the term monetary value.

When you go shopping, you might observe that the value of a kilo of rice or a shirt is stated in
terms of Philippine Pesos. Goods like fruits and bread, or services like a haircut, cannot be measured
without assigning them a single unit of valuation. With money, we do not have to appraise the value of
a shirt in terms of bananas, or in terms of how many haircuts can we get from a barber or parlor. Quoting
the prices of goods and services in terms of money provides an easy and consistent way of comparing
their relative value with one another. This illustrates another function of money, being a unit of account.

PSHS Social Science 5: Economics | Page 4 of 7

 A unit of account is the yardstick people use to post prices and record debts (Mankiw, 2021).
With money, we can add the values of different goods and services, hence the term monetary value
(Dumlao, 2013).

4. Money as a Standard of Deferred Payment

Lastly, money serves as a standard for deferred payments. Deferred payments refer to those
payments to be made in the future (Chron, 2020). If a loan is taken today, it would be paid back after a
certain period of time.

The amount of a loan is measured in terms of money. When we take a loan from the bank, the
size of loan repayments is quoted in terms of Philippine Pesos, and not in terms of a quantity of goods
and services. It also serves as a standard way of paying debts.

Using money as a standard of deferred payments is a direct consequence of being the unit of
account and a store of value (AmosWEB, 2021). If money serves as a standard way to quote prices in
the present time, then it is also the standard for future payments based on these prices.

Based on the four functions of money stated above, we could come up with a more
comprehensive definition of what money is. Thus, money is anything that can be used as a medium of
exchange, such that its value can be stored and accounted for, so that it can be used as a medium of
exchange for further transactions to come (Dumlao, 2013).

Suggested Time: 18 mins. | Actual Time Spent: ____min(s)

[NON-GRADED ASSESSMENT]
Directions: Using what you learned in this lesson, identify how money is being used in each of the
following situations. Scan/take a photo of your answers and send them to __________.

1. Anna uses her debit card to pay for her dinner at a restaurant.
2. Mikko opens a time deposit account to save the proceeds of his inheritance.
3. All of the prices of the arcade games in Toyland are stated in terms of Toyland tokens.
4. Sheena uses a check to pay for the conference fees in an international convention.
5. Marco uses cash to pay for the new refrigerator he availed through an appliance loan.

Suggested Time: 5 mins | Actual Time Spent: ____min(s)

PSHS Social Science 5: Economics | Page 5 of 7

 In summary, money is the set of assets in the economy that people regularly use to buy
goods and services from each other (Mankiw, 2021). There are four main functions of money –
it serves as a medium of exchange, a store of value, a unit of account and lastly, a standard
of deferred payment. We can define money more comprehensively as anything that can be used
as a medium of exchange, such that its value can be stored and accounted for, so that it can be
used as a medium of exchange for further transactions to come (Dumlao, 2013).

Suggested Time: 2 mins | Actual Time Spent: ____min(s)

References:
AmosWEB Encyclonomic WEB*pedia. (2021). Standard of Deferred Payment. https://www.amos
web.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=standard%20of%20deferred%20payment
Case, K et al. (2012). Principles of Economics Volume I: Microeconomics. Pearson Education South
Asia.
Chron. (2020). How Does a Deferred Payment Work?. https://smallbusiness.chron.com/ deferred-
payment-work-13950.html
Forbes. (2020). Philippines' 50 Richest List - 2020 RANKING. https://www.forbes.com/philippines-
billionaires/list/#tab:overall
Dumlao, L. F. (2013). Money and Banking in Economics & Society (2nd ed.). Bluebooks Ateneo de
Manila University Press.
Mankiw, N. G. (2021). Principles of Economics, Ninth Edition. Cengage Learning.
Samuelson, P. & W. Nordhaus. (2009). Economics (19th ed.). McGraw-Hill Irwin.

Image Credits:
ABS-CBN News. (2020). GCash, PayMaya to charge fees for fund transfers starting Oct. 1.
https://news.abs-cbn.com/business/09/25/20/gcash-to-start-charging-fees-for-bank-transfers-
starting-oct-1
Alibasa, B. (2019). Philippines Central Bank Warns on Risks of Growing Cryptocurrency Use.
https://www.coindesk.com/philippines-central-bank-warns-on-risks-of-growing-
cryptocurrency-use
Development Bank of the Philippines. (n.d.). DBP ATM ID Card. https://www.dbp.ph/personal-
banking/atm-services/dbp-atm-id-card/
Transferwise. (2017). Money in the Philippines: Banks, ATMs, cards & currency exchange.
https://transferwise.com/us/blog/money-and-banks-in-the-philippines
Pixtoon (2021).

PSHS Social Science 5: Economics | Page 6 of 7

*Lay-out and Design of Learning Guide Credit: Nneka B. Evangelista, SS 5 Teacher, PSHS-
CALABARZON Campus

Prepared by: Eman C. Patata Reviewed by: Pauline Kirstie H. Atumpag

Position: Special Science Teacher II Position: Special Science Teacher III
Campus: Eastern Visayas Campus Campus: Central Luzon Campus

PSHS Social Science 5: Economics | Page 7 of 7

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