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By the end of these notes, you should be able to:
Money is anything that is widely accepted as a means of paying for goods and services, or for settling debts. In modern economies, money is usually notes and coins issued by a government or central bank, but it can also include balances in bank accounts.
Before money existed, people used barter — directly exchanging one good for another (for example, trading five apples for a loaf of bread). The problem with barter is that it requires a "double coincidence of wants" — both people must want exactly what the other has. Money solved this problem.
Money performs four key functions:
1. Medium of Exchange Money is used to buy and sell things. Instead of swapping goods directly, you use money as the "middle step." For example, you earn money from a job and use it to buy food. This makes trade much easier and faster.
2. Unit of Account (Measure of Value) Money gives everything a price — it is a standard way to measure and compare the value of goods and services. For example, knowing that a pair of shoes costs 50 dollars and a book costs 10 dollars tells you the shoes are worth five times the book. Without a unit of account, comparing values would be very difficult.
3. Store of Value Money can be saved and used later. If you earn money today, you can spend it next week or next year. This means money holds its value over time — although inflation (a general rise in prices) can reduce this. Other stores of value include gold or property, but money is the most convenient.
4. Standard of Deferred Payment Money allows people to borrow now and pay back later. For example, if you take out a loan to buy a car, the loan agreement is written in money terms. This function makes credit (borrowing) possible.
Memory tip: The four functions can be remembered as MUSS — Medium of exchange, Unit of account, Store of value, Standard of deferred payment.
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