Unit 3: Personal and Business Finance

Functions of Money

Understanding the functions of money is crucial for exams, requiring the ability to list and describe them.

Four Functions of Money

1. Unit of Account

   • Enables understanding of value.
   • Before money, comparing values of items was difficult.
   • Example: Comparing costs of a 500ml bottle of water at 50p to a 2-litre bottle at 45p, calculated to show the latter is cheaper per 100ml.

2. Means of Exchange

   • Facilitates trade without barter.
   • Example: Instead of trading chickens for a cow, money allows direct purchase of goods (like lunch) without the need to exchange for other items first.

3. Store of Value

   • Allows saving money for future use.
   • Unlike perishable goods (e.g., chickens), money can be stored in a bank or invested, retaining its value over time.

4. Legal Tender

   • Recognized as a legal form of payment, backed by the government.
   • Ensures transactions with money are legally acceptable.
   • Unlike exchanging chickens, using money is a universally accepted transaction method.

Key Points

• Be able to recall and describe each function.
• Examples help illustrate the practical applications of each function.

Conclusion

• This overview of money functions is crucial for understanding personal and business finance. Students should ensure they can outline and describe these functions for exams.