Learn what is money and what are its four main functions. Money serves all these functions: it is a medium for exchange, store of value, unit of account, and standard for deferred payments.
Use this video lesson on the topic to discuss the basic economic concepts of
Hand out the worksheet below (see the GET LESSON button near the bottom of the page).
Show students the video and have and have them complete the worksheet. Then have a discussion about the functions of money. Discuss money’s functions, including it as a store of value and the impact of inflation on it. Review the questions on the worksheet.
Main Functions of Money
Money is something people use every day. We earn it, and spend it, and hopefully, save it. Money is defined by economists as a medium of economic exchange, any item that is accepted widely as the final payment for goods or services, or the repayment of debt. Money has had many forms over time. Though, the ultimate purpose of money is to purchase and sell goods and services.
What would happen if people didn’t have money to use? Barter is a common way for economies without money to trade goods and services. However, Barter, which is the act of trading one good or service in exchange for another, is inefficient in modern economies. A cook might want to exchange food they prepare for repair services provided by a mechanic. While making a trade using food might not be difficult, it might not be always easy to arrange such a trade. Consider the difficulty of such trades in modern economies, which have a large division of labor and thousands upon thousands of jobs. A much easier way is to instead use money, which allows you to purchase a wide range of goods and services.
The problems caused by barter systems are solved by money and it has several functions.
Store of Value
First, money is a store of value. It is possible to save 50 dollars if I earn it working today. The money will still be valuable tomorrow, or next week. Actually, keeping money is more efficient than keeping food or other similar items, as they can more quickly go bad, or lose value. It is an efficient way to store worth, but it’s not necessarily the best. Over time, inflation slowly reduces the purchasing power of money.
Unit of Account
Second, money can be thought of as a unit of account. This means it is the standard by which all other values are measured. Money can be thought of as a measuring device. The price of a new shirt, for example, could be priced in terms of apples. Then maybe a shirt would be worth 50 apples. However, it would be more useful if the price was set in dollars, as it is an common economic measure of value.
Medium of Exchange
Third, money can be used as a medium of exchange. This means that money can be used to pay for goods and services. I feel confident that the cashier at the grocery store will accept money for payment. Money must be widely accepted in order to serve as a means of exchange in the economy.
Standard for Deferred Payments
Another function of money is its ability to serve as a standard for deferred payments. This means that money must be able today to purchase goods and services in the future. Future agreements and loans are described in monetary terms. The standard of deferred payments is what allows us buy goods and services now and then pay later.
Money serves all these functions: it is a medium for exchange, store of value, unit of account and standard for deferred payments. Money makes it easy, to buy goods and services, in a modern economy.