What Is Money?

Money is a medium of exchange that facilitates trading goods and services.

It serves three main functions:

  1. Store of Value: Money retains its value over time, allowing individuals to save and use it for future purchases.
  2. Medium of Exchange: Money is a common exchange unit, making transactions more efficient.
  3. 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.