Money does four jobs: it is a medium of exchange, a measure of value, a store of value and a standard of deferred payment. The clearest way to learn them is to follow one note through a day.
This lesson opens money, banking and income. The next lesson, comparing roles of financial institutions, shows who holds and moves money.
Why is money needed at all?
Without money, people must barter, swapping goods directly. A baker who wants shoes must find a shoemaker who wants bread, at the same moment. That rare match is the double coincidence of wants.
Money solves this. The baker sells bread for money, then spends the money on shoes, so the two trades no longer need to match.
Worked example: one RM100 note
An invented shopper called Mei has one RM100 note. Her day shows each function.
| Situation | Function |
|---|---|
| Mei hands over RM100 for a RM35 book and gets change | Medium of exchange |
| The book’s price tag says RM35 and the pen RM5, so she can compare them | Measure of value |
| She keeps RM50 in her drawer for next week | Store of value |
| She borrowed RM20 from her sister last week and repays it next month in ringgit | Standard of deferred payment |
The same kind of note does four different jobs, which is why the function depends on the situation, not on the object.
The mistake to avoid
The common slip is to pick a function by the thing being bought, not by the role of the money. A student sees “Mei buys a book with RM100” and writes “store of value”, because money is involved. The money is being handed over now for a good, so it is a medium of exchange.
| Situation | Wrong | Right | Reason |
|---|---|---|---|
| Paying for a book now | Store of value | Medium of exchange | Handed over in a trade |
| Keeping savings for next week | Medium of exchange | Store of value | Held for later |
| Price tags on goods | Store of value | Measure of value | Gives a common price unit |
| Repaying a loan next month | Medium of exchange | Standard of deferred payment | Payment later |
A quick test is to ask “now or later?” for exchange and storage, and “a price number or a payment later?” for the other two.
One sentence per function
- As a medium of exchange, money is accepted in payment for goods and services.
- As a measure of value, money gives every good a price, so values can be compared.
- As a store of value, money keeps purchasing power until it is spent.
- As a standard of deferred payment, money lets debts be settled at a later date.
Notice that each sentence starts with “as”, so the function is named before the description. Higher prices can weaken the third function, which links to interpreting inflation data.
Check yourself
Name the function shown in each case.
- A shop displays a shirt at RM60 and a cap at RM20.
- A farmer sells vegetables for RM300 and keeps it in the bank until he buys seeds next season.
- A customer pays RM12 for lunch.
- A tailor agrees to be paid RM500 at the end of the month.
Answer
-
Measure of value: prices give a common unit for comparison.
-
Store of value: money is kept for later use.
-
Medium of exchange: money is handed over in a trade now.
-
Standard of deferred payment: payment is settled in ringgit at a later date.
What to study next
Move on to comparing roles of financial institutions, then use the chapter practice.
If you want a teacher to give you new situations until the function is automatic, see online one-to-one Economics tuition.