Functions and kinds of money

 
 
 
 

MONEY . 
Functions and kinds of money

 
 
 
 

Money  and its Functions  

• Although the  crucial feature of money is its acceptance as the means of payment or medium of
• exchange, money has other functions. It serves as a standard of-value, a unit of account, a store of
• value and ft a standard of deferred payment. We discuss each of the functions of money in turn.

 
 
 
 

The  Medium of Exchange.  

• Money, the medium  of exchange, is used in one-half of  almost aU, exchange. Workers exchange
• labour services for money. People buy and sell goods in exchange for money. We accept money not to
• consume it directly but because it can subsequently be used to pay things we do wish to consume.
• Money is the medium through, which people exchange. goods and services.
• To see that society benefits from a medium of exchange, imagine a barter economy.

 
 
 
 

Functions  of Money  

• Money can also  serve as a standard of value.
• Society considers it convenient to use a monetary unit to determine relative costs of different goods and services.
• In this function money appears as the unit of account, is the unit in which prices are quoted and accounts are kept.
• In Russia prices are quoted in roubles; in Britain, in pounds sterling; in the USA, in US dollars; in
• France, in French francs. It is usually convenient to use the units in which the medium of exchange is
• measured as the unit of account as well.
• However there are exceptions. During the rapid German inflation of 1922 - 1923 when prices in marks were changing very quickly, German shopkeepers found it more convenient to use dollars as the unit of account. Prices were quoted in dollars even though
• payment was made in marks, the German medium of exchange.
• The situation in Russia nowadays reminds of that of in Germany.

 
 
 
 

• Money is a store of value because it can be used to make purchases in the future.
• To be accepted in exchange, money has to be a store of value.
• Nobody would accept money as payment for goods supplied today if the money was going to be worthless when they tried to buy goods with it tomorrow.
• But money is neither the only nor necessarily the best store of value.
• Houses, stamp collections, and interest-bearing bank accounts all serve as stores of value.
• Since money pays no interest and its real purchasing power is eroded by inflation, there are almost certainly better ways to store value. *
• Finally, money serves as a standard of deferred payment or a unit of account over time.
• When you borrow, the amount to be repaid next year is measured in pounds sterling or in some other hard currency.
• Although convenient, this is not an essential function of money.
• UK citizens can get bank loans specifying in dollars the amount that must be repaid next year.
• Thus the key feature of money is its use as a medium of exchange.
• For this, it must act as a store of value as well.
• And it is usually, though not invariably, convenient to make money the unit of account and standard of deferred payment as well.

 
 
 
 

Different  Kinds of Money  

• In  prisoner-of-war camps,  cigarettes served as money.
• In the 19th century money was mainly gold and silver coins.
• These are examples of commodity money, ordinary goods with industrial uses (gold) and
• consumption uses (cigarettes), which also serve as a medium of exchange.
• To use a commodity money, society must either cut back on other uses of that commodity or devote scarce resources toproducing additional quantities of the commodity.
• But there are less expensive ways for society to produce money.
• A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money.
• A $10 note, is worth far more as money than as a 3 x 6 inch piece of high-quality paper.
• Similarly, the monetary value of most coins exceeds the amount you would get by melting them down and selling off the metals they contain.
• By collectively agreeing to use token money, society economizes on the
• scarce resources required to produce money as a medium of exchange.
• Since the manufacturing costs are tiny, why doesn't everyone make $10 notes?
• The essential condition for the survival of token money is the restriction of the right to supply it.
• Private production is illegal: Society enforces the use of token money by making it legal tender. The law says it must be accepted as a means of payment.
• In modern economies, token money is supplemented by IOU money.

 
 
 
 

• An  IOU money is a medium of exchange based on the debt of a private firm or individual.
• A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank
• owes you money. You can write a cheque to yourself or a third party and the bank is obliged to pay
• whenever the cheque is presented. Bank deposits are a medium of exchange because they are generally
• accepted as payment.

 
 
 
 

words 

• VOCABULARY  NOTES
• the means of payment – средства платежа medium of exchange – средство обмена
• a standard of value - стандарт стоимости
• a store of value – сбережения
• a standard of deferred payment - стандарт отсрочкой платежа
• subsequently - впоследствии
• to hand over in exchange - передать в обмен
• a double coincidence of wants - двойное совпадение желаний
• a monetary unit – Денежная единица -
• to remind of – напомнить о
• to be worthless – быть бесполезным
• an interest-bearing bank account – процентных банковских счета
• to pay interest – платить проценты
• to erode – разрушать