Money

Posted in Finance, Accounting and Economics Terms, Total Reads: 554
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Definition: Money

In pure classical economic term, money is defined as something that acts a medium of exchange, unit of accounting and store of value.


The three characteristics are elaborated below.

  1. Medium of Exchange: Money is used as a medium of exchange when transactions happen between two parties. For example, a merchant accepts money for the goods he/she sells; workers are paid wages in monetary terms for their work.
  2. Unit of AccountingMoney is used to measure the value of goods, services and assets. It also used as the unit for reporting revenue, profit and loss.
  3. Store of Value: Money captures and stores the value of any tradable entity in the simplest realizable form. For example, the value of an employee’s work is captured by the monetary compensation he receives.

Money acts as an effective alternative to the traditional barter system where people used to exchange goods while doing transactions. The barter system was inefficient in the sense that it required an individual in possession of a tradable good X and aiming to acquire good Y in exchange, to look for another individual in need of good X and with excess possession of good Y. Money has reduced this difficulty by mapping the value of all the tradable goods and services in common unit.


However, not anything will qualify as money. An entity must possess following aspects to act as money.

  1. It must be scarce
  2. It must be durable
  3. It must be fungible and divisible
  4. It must be portable
  5. It must be proven
  6. It must have use value


Traditionally, gold and silver have acted as money. However, nowadays, paper notes and metal coins in proportion to gold reserve are used as money.


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