What Is Money?
Money is a medium of exchange that facilitates trading goods and services.
It serves three main functions:
- Store of Value: Money retains its value over time, allowing individuals to save and use it for future purchases.
- Medium of Exchange: Money is a common exchange unit, making transactions more efficient.
- Unit of Account: Money is a measurement tool for valuing goods and services.
Types of Money
There are various types of money, each with its own characteristics:
- Cash Money: Cash is a currency issued by governments or central banks. It is used for transactions in the form of coins, paper bills, or demand deposits held in financial institutions.
- Commodity Money: Commodity money refers to items widely accepted as a means of exchange. Historically, gold, silver, and other goods have served as commodity money.
- Fiat Money: Fiat money is a currency issued by a government and considered legal tender. Unlike commodity money, it is not backed by a physical object but derives its value from government backing and public acceptance.
- Representative Money: Representative money represents an underlying asset of value. In the past, paper currency could be exchanged for gold or silver. Nowadays, representative money is often backed by assets held by a country’s central bank.