In this article we will consider such economic categories as money, their essence and functions. Money is a financial asset needed to complete a transaction, that is, to purchase services and goods. Assets are all that have value. An asset can be financial and real. Financial assets are divided into monetary and non-monetary (securities - bonds and stocks), and real assets are tangible (tangible) values, such as buildings, furniture, equipment, household appliances and so on.
Money refers to financial assets, however, they differ in that they can serve transactions and are a means of circulation. For example, you can’t buy bread or milk and give back a bond or share in return.
The essence of this category is best manifested through functions. Considering money and their functions, it should be noted that money is:
- Means of circulation.
- A measure of deferred payments.
- Stock value.
- Unit of account.
As a means of circulation, they serve as an intermediary in transactions, in the exchange of goods. Everything can be purchased for money. An alternative to such an exchange is barter. But the latter requires significant costs. On the one hand, one has to bear direct transaction costs, and on the other, the loss of effort and time, that is, opportunity costs. In order for barter to take place, many conditions must be fulfilled, including the condition of “double coincidence of desires,” as William Stanley Jevons called it.
A person who wants to purchase a product or service must find a seller who agrees to the product produced by that individual. For example, a shoemaker who needs a loaf of bread must find a baker who needs new boots. The search for the second side may continue for a long time, but still not succeed. In this case, time and a lot of effort will be spent. Therefore, barter is considered an irrational and inefficient form of exchange.
Money and their functions are the basis of the economy and are considered one of the greatest inventions of mankind. The emergence of money as an intermediary in the exchange process removed the costs of exchange and eliminated the problem of matching desires. Now the goods can be sold, having received money for it, and buy the other goods for the proceeds. The property of money can be easily and without additional costs exchanged for another asset, financial or real, called absolute liquidity.
Considering money and their functions, it should be noted that the second function of money is that they are a unit of account, a measure of value. That is, value is measured by a certain amount of money. Before the advent of this unit of account, the value of goods was measured in a certain quantity of another product. A person who wanted to purchase a certain product needed to know the proportions of this exchange well, for example, what is the cost of bread in sausage, shells, boots and so on. Since money appeared, their functions allow you to set the cost only in comparison with one equivalent.
The third function of money is that it is a means of payment. This function is manifested in the fact that money is used to pay deferred payments. This function is possible because they retain their value over time. This is the fourth function - the stock of value. The value of money lies in its purchasing power and liquidity. At any time, they can purchase any product, service. However, under inflationary conditions, money will lose value over time, and purchasing power will decline.
Considering money and their functions, it should be noted that the first is the most important - a medium of circulation. But all functions are interdependent and interconnected.