Money is a generally accepted means of exchange. In daily life, money is used to pay for goods and services, raw materials used in the production process, salaries to managers or wages to the production workers.
Money is essential for the smooth exchange of goods and services between sellers and buyers in markets, and helps specialization. It is necessary for needs and wants of individuals to be perfectly matched.
Without money goods would have to be exchanged using a barter system which means swapping goods directly which is inefficient. Because searching for the perfect match in a barter deal is very time-consuming, and may even not be successful in the end. It is also very difficult to value different goods at different times without money. Therefore, the creation and usage of money in daily life increased efficiency of trading, and efficiency means speed.
Additionally, giving change can be a problem when the values of the goods being exchanged do not match exactly.
Basic functions of money
Money also has a number of other functions including:
1. Delayed consumption. Money allows individuals to save some of their income and purchase goods and services at a later date, therefore increases the flexibility of consumption.
2. Common valuation. Money enables all goods and services to be valued in common units, for example, a house which costs USD$500,000 is worth exactly ten times more than a car which is valued at USD$50,000.
3. Deferred payments. Money allows payments to be deferred, for example goods can be bought and payment made at a later date, for example when raw materials are bought using trade credit.
How to measure money supply?
The availability of money in the economy is usually measured using the ‘Ms’ classification and the supply of money is managed by the governments, especially central banks.
M0 and M1 is a ‘narrow’ measure. It normally includes coins and notes in circulation and other money equivalents that can be easily convertible into cash. M2 includes M1 plus short-term deposits in banks and 24-hour money market funds. M3 includes M2 plus long-term deposits and money market funds with more than 24-hour maturity. M4 is a ‘broad’ measure. It includes M0 plus a wider range of financial assets such as money held in bank accounts.
Debit cards and credit cards are not money as they are only used for transferring money from one account to another.
