Functions of Money Flowchart Foxstone Education

"In the past, money was generally considered to have the following four main functions, which are summed up in a rhyme found in older economics textbooks:
"Money is a matter of functions four, a medium, a measure, a standard, a store."
That is, money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value. However, modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value." (e.p.1)

• "The first function of money is to be a unit of value. The monetary unit is the unit in terms of which the value of all goods and services is measured and expressed. The value of each good or service is expressed as a price, which is the number of monetary units for which the good or service can be exchanged.

• [The second] function of money is served by anything that is generally accepted by people in exchange for goods and services. 'Anything' has been quite a variety of things across places and times. Some of the things that have served as money are - clay, cowry shells, tortoise shells, trinkets and charms, cattle, pigs, horses, sheep, tea, tobacco, wool, salt, wine, boats, iron, copper, brass, silver, gold, bronze, nickel, paper, leather, playing cards, debts of individuals, debts of banks, debts of governments, etc.

• [The third function] it may also perform the function of being the unit in terms of which deferred or future payments are stated. Examples of situations where future payments are to be made are pensions, principal and interest on debt, salaries etc.

• [The fourth function of money states;] holders of money are holders of generalised purchasing power that can be spent through time. They know that it will be accepted at any time for any good or service and is thus a store of value." (e.p. 2)

The modern text books list but only three functions money, and they are;

• Medium of Exchange – This by far the most important function that money has, to facilitate trade. Without money being the medium of exchange, we would have to exchange one good or service for another, a system known as the barter system.

• Store of Value – In order for money to be an effective medium of exchange, money must be able to maintain its value over a period of time.

• Unit of Account – Money functions as a unit of account by placing a monetary (measure of value) amount to either a good or a service. Thereby letting the buyer and seller make informed decisions about a product or service regardless of their knowledge of a product or service.

Modern Monetary Triangle FOFAblogspot
References:1. http://en.wikipedia.org/wiki/Money (Last accessed April 7, 2011)2. http://hubpages.com/hub/Functions-of-Money (Last accessed April 7, 2011)