What is money? Definition, Measurement and Functions of Money
Money is a concept that we use frequently in our daily lives and is an indispensable element of economic activities. So what is money? What are the definition, measurement and functions of money? In this article, we will try to answer these questions.
Definition of Money
Money is a medium of exchange that is used in the purchase and sale of goods and services, accepted by everyone and has the feature of storing value. Money is also a unit of account that expresses the value of goods and services. The money is printed by the government and is legally valid.
Measuring Money
Money is classified according to various criteria to measure the liquidity (cash) situation in the economy. According to this classification, the money supply is called M0, M1, M2, and M3.
M0: It represents the total amount of coins and banknotes in circulation.
M1: Includes money in demand deposit accounts in addition to M0.
M2: In addition to M1, it also includes money in time deposit accounts.
M3: In addition to M2, it also includes illiquid assets such as repos, mutual funds, securities.
Functions of Money
Money is defined by the three basic functions it performs in an economy. These functions are:
- Being a Medium of Exchange: Money is used in the purchase and sale of goods and services. In this way, it eliminates the difficulties of barter (exchange of goods for goods). Money encourages division of labor and specialization.
- Being a Measure of Value: Money is a common measure that determines the value of goods and services. Money creates prices. Money is used to pay off debts and in accounting.
- Being an Accumulator of Value: Money is used to save. Money stores value for future spending. The money is used to invest.
Conclusion
Money is one of the basic elements of economic life. Money performs three basic functions as a medium of exchange, a measure of value, and a means of accumulating value. The money supply is classified according to various criteria to measure the liquidity situation in the economy.