### Date : 2024-07-15 15:35 ### Topic : Functions of Money #macroeconomics #공부 ---- ### 9.1 Functions of Money Money is a fundamental component of modern economies, facilitating transactions, providing a means to store value, and serving as a standard for future payments. Let's delve into the primary functions of money in detail: #### 1. Medium of Exchange **Definition:** Money serves as an intermediary instrument used to facilitate the sale, purchase, or trade of goods and services. It eliminates the inefficiencies of a barter system, where trade can only occur if there is a mutual coincidence of wants. **Key Concepts:** - **Efficiency:** By acting as a medium of exchange, money simplifies transactions, making it easier for people to buy and sell goods and services without the need for direct barter. - **Liquidity:** Money is the most liquid asset because it is universally accepted and can be quickly and easily exchanged for goods and services. **Examples:** - **Everyday Transactions:** Using cash or digital payments to buy groceries, pay for services, or settle bills. - **Global Trade:** International trade facilitated through currencies like the U.S. dollar, euro, or yen. #### 2. Unit of Account **Definition:** Money provides a common measure of the value of goods and services, allowing them to be compared and priced uniformly. **Key Concepts:** - **Standard of Value:** As a unit of account, money provides a consistent measure for pricing goods and services, facilitating trade and economic planning. - **Comparability:** It allows for the comparison of the value of different goods and services, enabling consumers and businesses to make informed decisions. **Examples:** - **Pricing Goods:** Labeling the price of items in a supermarket. - **Financial Reporting:** Businesses using money as a unit of account to report earnings, costs, and financial statements. #### 3. Store of Value **Definition:** Money can be saved and retrieved in the future, retaining its value over time. This function allows individuals to transfer purchasing power from the present to the future. **Key Concepts:** - **Durability:** Money must retain its value over time and not deteriorate physically. - **Stability:** It should maintain its purchasing power over time, without being subject to significant inflation or deflation. **Examples:** - **Savings Accounts:** Depositing money in a bank to save for future needs. - **Investments:** Holding money in the form of stocks, bonds, or real estate, which can be liquidated when needed. #### 4. Standard of Deferred Payment **Definition:** Money is used to settle debts that are payable in the future. This function is crucial for credit and financial transactions, enabling economic agents to engage in borrowing and lending activities. **Key Concepts:** - **Credit Transactions:** Money facilitates lending and borrowing by providing a standard means of repaying loans. - **Contracts:** It is used in contracts to specify the amount to be paid at a future date, ensuring clarity and enforceability. **Examples:** - **Loans and Mortgages:** Borrowing money to buy a house, which is repaid over time with interest. - **Business Contracts:** Agreements where payments for goods or services are made at a future date. ### Detailed Analysis of Each Function #### Medium of Exchange **Historical Context:** - In ancient economies, bartering was common but inefficient due to [[The Double Coincidence of Wants]] problem. The invention of money solved this issue by providing a universally accepted medium. **Modern Application:** - **Digital Payments:** The rise of digital wallets and cryptocurrencies has further enhanced the efficiency of money as a medium of exchange. Platforms like PayPal, Venmo, and Bitcoin offer new ways to transact without physical cash. **Challenges:** - **Counterfeiting:** The risk of counterfeit money undermines its reliability as a medium of exchange. - **Digital Divide:** Not everyone has access to digital payment methods, particularly in developing countries. #### Unit of Account **Historical Context:** - The use of money as a unit of account dates back to ancient civilizations, where standardized weights of precious metals were used to price goods. **Modern Application:** - **Economic Planning:** Governments and businesses use money as a unit of account for budgeting, accounting, and economic analysis. **Challenges:** - **Inflation:** Rapid inflation can distort the value of money as a unit of account, making it difficult to set prices and plan for the future. #### Store of Value **Historical Context:** - Precious metals like gold and silver were historically used as money because they retained value over time. **Modern Application:** - **Interest-bearing Accounts:** Modern banking systems provide various ways to store money securely while earning interest, enhancing its function as a store of value. **Challenges:** - **Inflation:** High inflation can erode the purchasing power of money saved over time. - **Currency Depreciation:** Political and economic instability can lead to currency depreciation, reducing its effectiveness as a store of value. #### Standard of Deferred Payment **Historical Context:** - The concept of using money to settle future debts emerged with the development of formal credit systems and financial institutions. **Modern Application:** - **Bond Markets:** Bonds are financial instruments that use money as a standard of deferred payment, with issuers promising to pay back the principal along with interest at future dates. **Challenges:** - **Credit Risk:** The risk that borrowers may default on their loans can undermine the effectiveness of money as a standard of deferred payment. - **Legal Enforcement:** Effective legal systems are required to enforce contracts and ensure that deferred payments are honored. ### Conclusion Understanding the functions of money is crucial for grasping how modern economies operate. Money's roles as a medium of exchange, unit of account, store of value, and standard of deferred payment are foundational to economic transactions and financial systems. These functions facilitate trade, savings, investment, and the efficient allocation of resources. --- ### Case Study 1: Functions of Money in the Context of South Korea #### Background South Korea's rapid economic development and its advanced financial system provide an excellent context to explore the functions of money. From its traditional use of physical cash to the contemporary embrace of digital payments, South Korea demonstrates the versatile roles of money in a modern economy. #### 1. Medium of Exchange **Historical Context:** - **Traditional Use:** In the post-Korean War era, South Korea, like many other economies, relied heavily on cash for transactions. The Bank of Korea issued the Korean Won (KRW) as the national currency, facilitating trade and economic activities. **Modern Application:** - **Digital Payments:** South Korea is at the forefront of digital payment adoption. Platforms such as KakaoPay, Naver Pay, and Samsung Pay are widely used for everyday transactions, reflecting the shift from cash to digital mediums of exchange. - **Example:** A consumer buys groceries using KakaoPay, scanning a QR code at the checkout counter to complete the transaction seamlessly. **Challenges:** - **Cybersecurity:** The rise in digital transactions brings challenges related to cybersecurity. Ensuring the security of digital payment platforms is crucial to maintaining public trust. #### 2. Unit of Account **Historical Context:** - **Standardization:** Post-war economic policies focused on stabilizing the currency and standardizing prices, which was essential for rebuilding the economy and fostering trade. **Modern Application:** - **Price Setting:** The South Korean Won (KRW) is the standard unit of account used for pricing goods and services across the country. This standardization facilitates economic planning and comparison of prices. - **Example:** All retail products, from electronics to household goods, are priced in KRW, allowing consumers to make informed purchasing decisions. **Challenges:** - **Inflation Impact:** While South Korea has generally maintained low inflation, periods of economic stress can affect the stability of prices, making it harder for money to serve effectively as a unit of account. #### 3. Store of Value **Historical Context:** - **Economic Growth:** During the rapid industrialization period, savings in the form of bank deposits became a popular way for South Koreans to store value, supporting capital accumulation and economic growth. **Modern Application:** - **Savings and Investments:** South Koreans use a variety of financial instruments to store value, including savings accounts, government bonds, and real estate. The high saving rate has been a significant factor in South Korea's economic resilience. - **Example:** Individuals save a portion of their income in interest-bearing bank accounts, ensuring that their money retains value over time. **Challenges:** - **Currency Fluctuations:** While the KRW is relatively stable, it can still be affected by global economic conditions. Inflation and currency depreciation are risks that can erode the store of value function of money. #### 4. Standard of Deferred Payment **Historical Context:** - **Development of Financial Institutions:** The establishment of a robust banking sector and financial institutions in the 1960s and 1970s enabled the development of credit markets and long-term financing options. **Modern Application:** - **Credit and Loans:** The use of money as a standard of deferred payment is evident in the widespread availability of personal loans, mortgages, and corporate bonds in South Korea. The financial sector provides various products that allow for deferred payments. - **Example:** A family takes out a mortgage to buy a home, agreeing to repay the loan over 30 years with interest. This deferred payment system enables large purchases and investments that would otherwise be unaffordable. **Challenges:** - **Debt Management:** High levels of household debt can pose risks to economic stability. Effective regulation and financial literacy are essential to ensure that money can function effectively as a standard of deferred payment.