The rough guides

Money, functions of. money is generally regarded as fulfilling three functions:

(a) As a medium of exchange: since a barter system may be very cumbersome and inefficient, it is generally found useful to have some good or token which is widely accepted as payment in settlement of debts. Goods can be exchanged for money, which can then be exchanged for other goods, and hence money serves as the medium through which exchange is facilitated. Its ability to perform this function is, in fact, the defining characteristic of money.

(b) As a unit of account: the units in which money is measured (pounds and pence, dollars and cents) are generally used as the units in which prices, accounts, debts, financial assets, etc., are measured. This is a natural consequence of the use of money as a medium of exchange, although no exchange need be involved in the use of money as a unit of account.

(c) As a store of value: part of an individual’s income may be set aside from immediate consumption and held in some form in order to yield future consumption. Money is one form in which this may be held. Since receipts and payments are never perfectly synchronized, the medium of exchange function of money will in any case lead to money being held over time as a store of value or purchasing power.

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