Money and Money Supply

Money is defined in economics as anything that is used or accepted as payment for goods and services. Throughout the years, several commodities have been used as money.  Before the use of money, however, barter was used. Bartering is a system in which individuals directly exchange one good for another. This system was not the most efficient, as a double coincidence of wants had to be satisfied in order to make a trade.

Double coincidence of wants refers to a situation where the person who has the good you wish to acquire, also wants the good that you have to offer in return. Because of how time consuming this system was, commodity money was adapted. Commodity money is the use of objects (which has value in other uses) as a medium for the exchange of goods and services. Some examples of commodity money are the use of cattle, shells, stones, leather currency, cigarettes, silver and gold. Today, in most countries, paper money issued by respective governments, are used as a medium of exchange.

Money has four main functions:

- Medium of exchange: To pay for goods and services.

- Unit of account: The unit, in which values are stated, recorded and settled.

- Standard of deferred payment: The unit in which debt contracts for future payments are stated.

- Store of value: Used to maintain the value of wealth.

The main qualities of money are:

- Liquidity: This is the ease in which it is transferred into the medium of exchange.

- Transportable/Storable: It is light weight, malleable and easily transportable/storable without depreciation.                                                   

- Uniformed: It is of standardized size and quality.

- Easily Recognized: It is easily recognized by the eye and touch.

Money supply is the total supply of money in circulation in a given country’s economy at any moment.

Previous | Next