Money and banks (part 4)

Economic functions of money

Money is generally considered to have three economic functions:

• A medium of exchange. This is its most important role. Without money we would live in a barter economy where we would have to trade goods and services for other goods and services. If I had fish but wanted bread, I would need to find someone who was in the precise opposite situation. In a monetary economy I can trade fish for money with one individual and money for bread with another. Money solves what is called the double coincidence of wants.

• A unit of account. In a monetary economy, all prices may be expressed 111 monetary units which eveiyone may relate to. Without money, prices must be expressed in units of other goods and comparing prices are more difficult. You may find that a grilled chicken costs 2 kilos of cod 111 one place and 4 kilos of strawberries in another. Finding the cheapest grilled chicken is not easy.

• Store of value. If you are a fisherman and have a temporary surplus of fish that you want to store for the future, storing the fish might not be a sreat idea. Money, 011 the other hand, stores well. Other commodities, such as gold, have this feature as well.