Functions of money
-It is a medium of exchange> Money pays for everything that is the goods and services that our heart desires. Therefore the role that money plays in our economy is important.
-unity of account> Tools that allows us to compare the value of goods and services, for example: Gold is more valuable than chocolate because gold costs millions of rand.
-store of value> this simply means that, if you put your money in your wallet, under the mattress or bank for a year, you will still be able to use it at the end of the year. The best way to store wealth may be in the form of land and building, precious metals like gold, platinum or diamonds, in the form of financial assets, company shares or any type of asset that keeps its value.
Characteristics of money
-Scarcity> for a commodity to be money it must be valuable in itself. Only commodities that are scarce (that is, the demand for commodity must be greater than its supply) can have enough value for people to want to keep them. For this reason something like sand could never be money, but a precious metal like gold could.
-Durability> any commodity that is going to be money will be used often by many people. It must therefore be able to withstand wear and tear, rust and other forms of degeneration. If a commodity used as money is not durable, it will not last very long.
-Homogeneity> every unit of a commodity money must be the same as every other unit. If the same units (e.g. gold coins) had different values, people would stockpile the valuable units and only spend the less valuable units. This would lead to a situation described by Gresham’s law: “Bad money drives out the good money”.
-Constant value> the value of the units of the commodity used as money must be stable over time. If the value of the commodity money changes all the time, nobody will know what the commodity money is worth, and how much one can buy with the commodity money.
-Manageability> you must be able to carry money around with you. If a commodity is too big, too heavy or in a way to difficult to carry around, you will not be able to use it if you want to go out shopping.
-Divisibility> One should be able to divide the commodity into smaller parts with less value, so that one can buy cheap products as well. If it is impossible to divide a commodity into smaller parts with different values, it will not be possible to use it to buy products with different values.
-Generally accepted> the commodity used as money, must be accepted by everyone as payment. If everybody does not accept a commodity as money, it could be used as a medium of exchange.