Functions of money
Money is a set of assets economic entities use to buy goods. It facilitates business transactions, communicates prices and serves as a store of value. The primary economic function of money is to serve as a means of payment. It is a set of goods that serves as a generally accepted means of payment for goods or services or debt payment.
Money possesses three primary functions:
Medium of exchange – everything generally accepted as payment for goods and services can play the role of money as a medium of exchange.
Unit of account – money is a unit allowing to measure, express and record price. As a unit of account, money is used to express the exchange value of goods and quantify mutual receivables. To communicate prices, it must be divisible into smaller interchangeable, difficult-to-imitate and easy-to-verify units.
The store of value – money is the store of value, as it retains its purchasing power, and the holder can delay the time between receiving and consumption. Securities, real estate or works of art are also used for this purpose. For this function of money to be fulfilled, its value must remain the same over time. In reality, however, the value of money varies depending on price movements in the economy. When the price level rises, the value of money falls and vice versa.
Money is far from an ideal and perfect store of value. When its ability to retain value increases, liquidity decreases. If there is a rapid change in the value of money, the function of money as a medium of exchange is impaired accordingly. As a result, people either try to spend money quickly in fear of the money losing its value or, on the contrary, try to accumulate it, anticipating growth in its value.
Because money is not a perfect store of value, other assets can be used for this purpose, such as works of art, real estate, securities, gold or cryptocurrencies.