Understanding Money

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Prior to the creation of money, individuals and firms had to accept other goods or services as payment, or be self-sufficient by producing everything required
Often lacking self-sufficiency or driven by the desire for a wider range of goods/services, bartering became the norm but it too had problems
As individuals and firms trade with each other in order to acquire goods or raw materials, they require a means of exchange that is acceptable and easy to use
Modern currency fulfils this purpose and money functions as a medium of exchange, a measure of value, a store of value, and a method of deferred payment

The Four Functions of Money

A Medium of Exchange	A Measure of Value	A Store of Value	A Method of Deferred Payment
Without money, it becomes necessary for buyers and sellers to barter (exchange goods) Bartering is problematic as it requires two people to want each other's goods (double co-incidence of wants) Money easily facilitates the exchange of goods as no double co-incidence of wants is necessary	Money provides a means of ascribing value to different goods and services Knowing the price of a good in terms of money allows both consumers and producers to make decisions in their best interests Without this measure it is difficult for buyers and sellers to arrange an agreeable exchange	Money holds its value over time (of course inflation means that is not always true!) This means that money can be saved It remains valuable in exchange over long periods of time	Money is an acceptable way to arrange terms of credit (loans) and to settle any future debts This allows producers and consumers to acquire goods in the present and pay for them in the future

A Medium of Exchange

A Measure of Value

A Store of Value

A Method of Deferred Payment

Without money, it becomes necessary for buyers and sellers to barter (exchange goods)
Bartering is problematic as it requires two people to want each other's goods (double co-incidence of wants)
Money easily facilitates the exchange of goods as no double co-incidence of wants is necessary

Money provides a means of ascribing value to different goods and services
Knowing the price of a good in terms of money allows both consumers and producers to make decisions in their best interests
Without this measure it is difficult for buyers and sellers to arrange an agreeable exchange

Money holds its value over time (of course inflation means that is not always true!)
This means that money can be saved
It remains valuable in exchange over long periods of time

Money is an acceptable way to arrange terms of credit (loans) and to settle any future debts
This allows producers and consumers to acquire goods in the present and pay for them in the future

Many items were used for centuries as a form of money such as gold, silver, shells, beer, tobacco
However, each one of these items had some characteristics that made the less than ideal for exchange in certain circumstances
Good money has a number of essential characteristics - and modern currency fulfils them all

Divisibility: to be a valued medium of exchange, currency must be divisible. €50 notes can be exchanged for €10 euro notes or €1 coins
Acceptability: the currency must be valued and widely accepted by society as a valid way to pay for goods/services
Durability: the currency must be robust, not easily defaced/destroyed and last for a long period of time
Scarcity: the supply of the currency should be such that remains desirable and retains its value in the market. Oversupply would decrease its worth
Uniformity: in order to be a valid measure of value each denomination must be exactly the same e.g. every $50 note must be exactly the same
Portability: good currency is easy to carry/conceal

The Meaning of Money