Money

This factsheet contains basic information about the nature of money, the functions of money, coinage and notes and the international use of money.

Money

1. What is Money?

In our everyday lives we often refer to “money” as one of three things:

Coins and paper money (currency): (“Hand over your money or I’ll shoot you”)
A person’s wealth: (“Bill Gates has a lot of money”)
A person’s income (“Working in a bank is a fantastic job and you earn a lot of money”)

When economists refer to money, they have a different connotation in mind:
“Money is anything that is generally accepted in payment for goods or services or in the repayment of debts.”

2. Functions of money

Although economists disagree on the functions of money, mostly they define 3 functions:

Money acts as a medium of exchange
Money is used as unit of account
Money is a store of value.

Money as a medium of exchange

Imagine an economy without money – a barter economy – where all goods and services would have to be exchanged directly for each other.

But such exchange requires what is known as the “dual coincidence of wants”: both trading partners have to offer a good or service that the other demands. Otherwise no trade occurs. This method of exchange complicates trade immensely and creates high transaction costs. Therefore in most transactions in modern economies money is used as a medium of exchange reducing the transaction costs.

To work as a medium of exchange, money must: be easily standardized, be widely accepted, be divisible, be portable, not deteriorate in value quickly.

Money as a unit of account

Money is the most common measure of economic value in an economy. Prices of goods and services are typically not indicated relative to all other goods and services, but are usually referenced to a single "numeraire” good, namely money. Again this creates a huge informational and – therefore – cost advantage over a barter economy.

Money as a store of value

The third function of money reflects its capacity to maintain part of its value over time:

Individuals use part of their income for consumption and part of their income for saving
There are numerous assets that can be used for saving. Bonds, stocks, houses, even consumption goods are often held to postpone consumption. Money is merely one of them.

Many of these assets have clear advantages over money – they provide some other benefits e.g. interest or accommodation. Money on the other hand may lose its value through inflation.

So, why do people hold money for saving purposes in the first place? The answer to that question is liquidity. Money is the most liquid asset – it can be easily and relatively quickly transformed into something else.

3. The Euro

11 countries made up the euro area when the euro was introduced in 1999. 16 countries now belong. The most recent members are Slovakia, Cyprus and Malta.

The Government of Ireland decided on a single national design for all Irish coin denominations. They show the Celtic harp, a traditional symbol of Ireland, decorated with the year of issue and the inscription “Éire” − the Irish word for Ireland. The harp shown was designed by Jarlath Hayes. To view the Irish national country specific side of the euro coinage click on the following link to the European Central Bank www.ecb.int/euro/coins/html/ie.en.html

Further information on the euro can be found on the European Central Bank website

4. Money in the International Context

The meaning of foreign exchange

Almost every nation has its own national currency for making and receiving payments within its own borders. But, for payments across national borders foreign currencies are usually needed. Thus, to engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies so that payments can be made in a form acceptable to foreigners. Simply put: there is need for “foreign exchange” transactions—exchanges of one currency for another. “Foreign exchange” refers to money denominated in the currency of another nation. Any person who exchanges money in his own nation’s currency for money in another nation’s currency acquires foreign exchange. (Here you can find all circulating currencies of the world)

Exchange rates

Exchange rates express how many units of foreign currency one unit of home country currency equals: 1€ = 1,4272$ or 1€ = 0,8069.

Depreciation is a decrease in the value of a currency relative to another currency. A depreciated currency is less valuable (less expensive) and therefore can be exchanged for (can buy) a smaller amount of foreign currency.

If $1 to €1 changes to $1.20 to €1 it means that the dollar has depreciated relative to the euro. It now takes $1.20 to buy one euro, so that the dollar is less valuable. In this case the euro has appreciated relative to the dollar it is now more valuable.