VOCABULARY.

It is common knowledge that money rules the world. Why does it and why do people need money – these are questions everyone would like to answer.

What is money? Money is anything that is generally accepted by people for the things they sell or the work they do. Money is the medium through which people exchange goods and services. Money makes the trading process simpler and more efficient.

Almost every society now has a money economy based on coins and paper notes of one kind or another. However, this has not always been true. In primitive societies a system of barterwas used. In barter economy there is no medium of exchange. Goods are traded directly or swapped for other goods. Trading is very expensive in barter economy. People must spend a lot of time and effort to find others with whom they can make mutually satisfactory swaps. If you wanted, for instance, a car, you would have to find a car owner willing to sell a car. Suppose the car owner wanted a scooter in exchange for the car and you didn’t have the scooter. You would then have to find something that a scooter owner wanted and swap it for the scooter in order to give it to the car owner, a barter economy is wasteful.

People needed a more practical system of exchange. Before paper and coins were introduces as permanent forms of paying, people used a variety of other objects to serve as money for selling goods. Examples of early forms of money are the following: rice, dog teeth, grains, shells, salt, tobacco. However, today money consists mainly of paper bills, coins made of various metals, and checking account deposits.

Functions of money. Money, in general, performs three functions. The first, and the most important is a medium of exchange. A medium of exchange, or a transactions medium, is anything generally acceptable as a means of payment in the exchange of goods and services, in repaying debts. Bank deposits are also a medium of exchange because they are generally accepted as payment.

The second function of money is to serve as a unit of account. The unit of account is the unit in which people state the price of goods and services in terms of money. Historically societies choose a single item to serve as a unit of account, say, a kilogram of wheat. In this way, each good could be priced at so many kilograms of wheat per unit. In modern times, paper money is the unit of account. For example, the dollar is the unit of account in the United States. Knowing that a pound of apples costs one dollar and a pound of peaches costs two dollars enables us to compare their value. Thus, money becomes a standard of value. Normally, the same item serves as the unit of account and the medium of exchange: the dollar in the United States,the pound sterling in Great Britain, the euro in many European countries, the yen in Japan, the rouble in Russia and Belarus. The money in use in a country is called currency.

The third function of money is a store of value. Money is a store of value because it can be used to make purchases in the future, it is a reservoir of future purchasing power. Money is both a temporaryand a permanent store of purchasing power. For example, an individual earns $700 a week but plans to spend $560 on goods and services and save $140 every week. Usually this individual will not spend the entire $560 on a day. Instead, he may spend $90 on a day and hold $470 in the form of money to be spent over the course of the week. This $470 held in money is a temporary store of purchasing power.

Money can also serve as a permanent store of purchasing power. People hold money to carry out their future transactions. The wealthof individuals is their accumulated savings. Money is one form in which people may keep their wealth. Gold, jewels, real estate, paintings, stockandbonds are other forms. Of course, when wealth is held in money, in the future it will not need to be exchanged to buy goods and services. The ability of money to serve as a store of value depends on its capacity to retain its purchasing power.

These three functions of money – medium of exchange, unit of account and store of value – can only be fulfilled if there is great confidence in its stability of value. Safeguarding monetary stability is the primary task of the central banks all over the world. Moreover, the central bank has the function of regulating the money supply in order to guarantee a smooth functioning of the monetary system.