Why do we need money?
The short answer
Money makes it easier to exchange goods and services, compare values, and save purchasing power for later. Without money, each trade would require both sides to want exactly what the other offers at the same time.
Three functions of money
- Medium of exchange: a widely accepted way to pay
- Unit of account: a common scale for comparing prices
- Store of value: a way to carry value into the future
For these functions to work, money needs to be widely accepted, portable, divisible, and reasonably durable.
A useful limit to remember
When prices change, the amount of goods a fixed sum can buy also changes. Money is a useful tool, but its purchasing power is not permanently constant.