Personal Finance Functions of Money

Form vs Function Form is what something looks like. Function is how something is used or its purpose. This activity examines how we use money.

Medium of Exchange We exchange (trade) money for goods and services that we want to consume (use). Example: you trade your money for a new pair of shoes at the local mall. Before we had money, people had to barter (trade) goods that they owned to purchase new goods TRADE MY STUFF FOR YOUR STUFF?

Store of Value We store (save) money and it does not lose value. If you put $10 into a piggy bank to save it, then it will be worth $10 later on when you take it out to use it. In the agricultural age, when farmers used to bring their goods to market to trade (barter), it was more difficult to store your value. For example, a dairy farmer could not store his products to use later on – it would spoil. Our money does not spoil.

Standard of Value We use money as a standard to put value on goods and services We compare things based on value and that value is in dollars, yuen, euros, etc. Example: How much are your shoes worth? We answer using dollars, “60 dollars”. We generally do not value things in any other way (e.g., hours of labour). We don’t generally say, “My shoes are worth 6 hours of work at my part time job.” We measure the value of goods using money. If we didn’t have money, we would have to value goods using other goods. This leads to many discrepancies. The dollar (in Canada) is the standard unit of measurement for value of goods and services.

Standard of Future Payment We calculate how much it will cost to borrow money, using money For example: you can purchase a $20,000 car by borrowing $20,000 from the car dealership and paying them back $350 every month for five years. In the example above, how much would you end up paying for the $20,000 car? Are you pooping me? The difference is known as interest or the cost of borrowing. This is an example of how we use money as a standard for future payment. We loan money and say you owe me my money back plus ten more dollars. We do not ask for food, paper, or other goods to measure the value of future payment (borrowing), we use money.

Summary Medium of Exchange – we trade things using money Store of Value – we save money and it does not spoil Standard of Value – we put value on things using money Standard of Future Payment – we calculate the cost of borrowing (interest) using money