Why money is needed
Before money, people used barter, swapping goods directly. This needed a double coincidence of wants, meaning each person had to want exactly what the other offered. Money removes this problem and makes exchange far easier.
Key idea
Money has four functions: a medium of exchange, a store of value, a unit of account, and a standard for deferred payment.
The functions of money
- Medium of exchange: money is accepted in payment for goods and services.
- Store of value: money can be saved and used later, keeping its worth over time.
- Unit of account: money measures and compares the value of different goods.
- Standard for deferred payment: money allows borrowing and lending, so debts can be repaid later.
To do these jobs well, money should be durable, portable, divisible, hard to copy and generally accepted.
Example
A shopper uses RM50 to buy groceries (medium of exchange), keeps RM20 in a jar for next week (store of value) and compares two phones priced in RM (unit of account).
Banks
A commercial bank accepts deposits, lends to households and firms, and provides services such as payments. It acts as a financial intermediary between savers and borrowers. A central bank issues the country's currency, acts as banker to the government, and controls monetary policy, including setting interest rates.
Remember
- Barter needs a double coincidence of wants.
- Commercial banks lend; the central bank controls interest rates.
- Money is only useful if it is generally accepted.