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Understanding Money: Definitions and Core Concepts
Dive into the world of finance with our comprehensive guide on money definitions. Learn about currency functions, various forms of money, and gain confidence in navigating financial decisions.

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  1. The Definition of Money
    • Commodity or Token accepted as Payment
    • Medium of Exchange
    • Unit of Account
    • Store of Value
  2. Examples & Official Measures of Money
    • Currency
    • Deposits
    • M1 & M2
Money definitions
Jump to:NotesConceptFAQsPrerequisites
Notes

The Definition of Money

Money: is any well-known token or commodity that is commonly received for means of payment.

Examples: loonies, dimes, gold

Means of Payment: is a method used to settle a debt. Once the payment is made or completed, there are no more remaining transactions between the parties.

Money serves as 3 other functionalities:

  1. Medium of Exchange: any item that is commonly approved in exchanges for goods and services.

    With the absence of medium of exchange, then goods and services must be traded with other goods and services which we call as a barter. A barter happens when a double of coincidence of wants occurs, which is rare.

  2. Unit of Account: an approved measure for the value of goods and services. In most cases, we would use money that is expressed in dollars and cents as a unit of account.

    Money Definitions

  3. Store of Value: is the idea that something can be held and exchanged later for goods and services. Money can be held and exchanged later to purchase goods and services.

    Examples: houses, shoe collection, hat collection.

    No token or commodity is completely stable. However, the more stable the token or commodity is, the better it acts as a store of value.


Examples & Official Measures of Money

Two examples of money in the US are:
  1. Currency: are coins or notes held by households and business. Notes are paper money made by the bank. The reason they are money is because the government declares them with the words “This note is legal tender for all debts, public and private.”

    Any coins and notes inside banks are not considered currency since they are not held by households or businesses.

  2. Deposits: Deposits from households or businesses at banks, savings or loan associations are examples of money. Deposits are money since the owners of the deposits can take out the money to use them for payments.


There are exactly two official measures of money in the US:
  1. M1: has currency, traveler’s checks, and checking deposits owned by households and businesses. However, it does not include the checking deposits and currency owned by the government and currency held by the banks.

  2. M2: includes M1, time deposits, savings deposits, money market mutual funds, and other deposits.


What is Not Considered Money

There are two things that people easily mistaken as money:
  1. Checks: When a household writes a check to someone, it does not increase the deposit of the bank.

    Example: Suppose Kevin has $400 in the bank, and Charles has $300 in the same bank. The total of the bank’s deposit is then $700. If Kevin writes a $100 cheque to Charles, then Kevin has a total of $300 and Charles has a total of $400. In the end, the bank still has $700 in deposits.

  2. Credit Cards: Credit cards are not a means of payment. A credit card is an ID card that instantly lets a person take out a loan. You will have to pay that loan in a given time by using currency or a checking deposit.
Concept

Introduction to Money: Definitions and Concepts

Welcome to our comprehensive exploration of money, a fundamental concept that shapes our daily lives and global economies. To kickstart our journey, we've prepared an insightful introduction video that lays the groundwork for understanding the complex world of finance. This video is crucial in grasping the basic principles of money and its role in society. Throughout this course, we'll delve into three main areas: the definition of money, its essential functionalities, and what actually constitutes money in today's world. By examining these key topics, you'll gain a solid foundation in monetary concepts. We'll explore how money serves as a medium of exchange, a store of value, and a unit of account. Additionally, we'll discuss various forms of money, from traditional currencies to modern digital alternatives. This knowledge will empower you to navigate financial decisions with confidence and understand the broader economic landscape.

FAQs

Q1: What are the three main functions of money?
A1: The three main functions of money are:

  1. Medium of exchange: Money facilitates the exchange of goods and services.
  2. Unit of account: Money provides a standard measure for expressing the value of goods and services.
  3. Store of value: Money allows individuals to save purchasing power for future use.

Q2: What's the difference between M1 and M2 money supply?
A2: M1 is the narrowest measure of money supply, including currency in circulation, demand deposits, and other checkable deposits. M2 is a broader measure that includes all of M1 plus savings deposits, small-denomination time deposits, and retail money market mutual funds. M2 provides a more comprehensive view of the money supply.

Q3: Why aren't checks considered money?
A3: Checks are not considered money because they are merely instructions to transfer funds between bank accounts. They don't create new money or increase the money supply. When a check is written and deposited, it simply moves existing money from one account to another without changing the total amount of money in the banking system.

Q4: How does inflation affect money as a store of value?
A4: Inflation erodes the purchasing power of money over time, reducing its effectiveness as a store of value. When inflation is high, the same amount of money buys fewer goods and services in the future than it does today. This is why central banks aim to maintain price stability and control inflation to preserve money's function as a reliable store of value.

Q5: Are cryptocurrencies considered money?
A5: While cryptocurrencies like Bitcoin share some characteristics with traditional money, their classification as money is debated. They can function as a medium of exchange and a store of value to some extent, but their high volatility and limited acceptance make them less effective as a unit of account. Currently, most economists and financial regulators do not fully classify cryptocurrencies as money in the traditional sense, but they acknowledge their potential to function as a new form of digital asset.

Prerequisites

Understanding the fundamentals of money and its definitions is crucial for developing financial literacy and making informed economic decisions. While there are no specific prerequisite topics listed for "Money definitions," it's important to recognize that a solid grasp of basic mathematical concepts and general economic principles can greatly enhance your comprehension of this subject.

Money definitions form the foundation of financial knowledge, and having a clear understanding of these terms is essential for navigating the complex world of personal and global finance. Although there are no direct prerequisites, familiarity with basic arithmetic, percentages, and simple interest calculations can be beneficial when exploring money-related concepts.

When studying money definitions, you'll encounter various terms that describe different aspects of currency, financial instruments, and economic systems. These definitions are interconnected and build upon one another, creating a comprehensive framework for understanding how money functions in society.

For instance, grasping the concept of "currency" is fundamental to understanding more complex ideas like "exchange rates" or "monetary policy." Similarly, knowing the definition of "inflation" is crucial for comprehending its effects on purchasing power and the overall economy.

While there may not be specific prerequisite topics listed, developing a curious mindset and staying informed about current economic events can greatly enhance your understanding of money definitions. Reading financial news, following economic trends, and engaging in discussions about monetary issues can provide valuable context for the terms you'll encounter.

As you delve into money definitions, you'll find that many concepts are interrelated. For example, understanding the definition of "supply and demand" can help you better grasp the factors that influence currency values and market dynamics. Similarly, knowing the basics of "interest rates" can provide insight into how money is valued over time and how financial institutions operate.

It's worth noting that while there are no specific prerequisites, having a general understanding of basic economic principles can serve as a helpful foundation. Concepts such as scarcity, opportunity cost, and the circular flow of money in an economy can provide valuable context for the various money definitions you'll encounter.

As you progress in your study of money definitions, you'll likely find that your knowledge builds upon itself. Each new term you learn will contribute to a more comprehensive understanding of financial systems and economic principles. This cumulative learning process highlights the importance of starting with fundamental definitions and gradually expanding your financial vocabulary.

In conclusion, while there are no explicit prerequisite topics for studying money definitions, approaching the subject with an open mind, a willingness to learn, and a foundation in basic math and economic concepts can significantly enhance your understanding. By mastering these definitions, you'll be better equipped to make informed financial decisions and engage in meaningful discussions about economic issues in both personal and professional contexts.