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Explain the different functions of money and highlight its advantages compared to other forms of assets. (200 words)
1. Introduction What is money? Currency is employed the world over as a medium of trade which makes it easy to buy goods and services. It also acts as a measure of worth allowing people to rent or borrow items or exchange an equivalent amount of value for various other items and lastly, it enables aRead more
1. Introduction
What is money?
Currency is employed the world over as a medium of trade which makes it easy to buy goods and services. It also acts as a measure of worth allowing people to rent or borrow items or exchange an equivalent amount of value for various other items and lastly, it enables an individual to keep or preserve his or her wealth so that it can also be used later without losing too much value.
2. Functions of Money
, Money has three important functions in an economy: it is the medium of exchange, the unit of account, and the Store of value.
(a) Medium Of Exchange – With the help of money, a person does not have to square the needs of two people which is the case in a bartering system, this saves time and promotes trade.
(b) Unit of Account – This avoids the need to express costs of goods or services in terms of a percentage for pure commodity exchanges.
(c) Store of Value – This means that a person can hold off on making purchases, or save, without being bothered by the depreciation of money because it can hold its value for a longer period.
3. Advantage of Money over Assets
Assets do exhibit some distinct characteristics, however, money is unlike any other asset in the sense it is very liquid and any holder is always able to utilize it with no conversion costs whatsoever, something which would be the case for other assets such as real estate or commodities as they would demand high maintenance or storage costs. In addition to this money’s qualities are also that it is easier to carry around and is divisible which means small transactions can be done with ease. More so even, money is easily recognized and is trusted everywhere because of the government’s backing which has many implications such as reducing the risk of a transaction or making it stable.
Currencies are perhaps the heaviest and most used tools in the economy as assets such as stocks or even property can provide good returns however they can’t be as easily accessed or used which is why we require money on a day-to-day basis along with short-term assets.
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