# The Four Basic Functions of Money

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• 0:07 The Four Basic…
• 0:39 Money Is a Unit of Account
• 1:49 Money Is a Medium of Exchange
• 2:27 Money Is a Store of Value
• 3:30 Money Is a Standard of…
• 5:12 Lesson Summary

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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

This lesson uses real-world examples to describe the four basic functions that money serves in an economy. These basic functions help to create the foundation of the money system.

## The Four Basic Functions of Money

Now, let's take a look at how economists view the basic functions of money. Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment. Let's take a look at each one of these functions with the help of Margie the cake baker and Bob the lawn guy.

## Money Is a Unit of Account

Money is a unit of account because everything in the economy is quoted in terms of it. For example, when Margie sells cakes in her bakery, she offers the cakes for sale at a certain price. That price is quoted in terms of money. Let's say she has a chocolate cake selling for ten dollars - that's a really good one, by the way. When Bob sells his lawn service, the price of his service is quoted in dollars, also. Let's say he charges \$20 per yard. If you think about it, Bob's lawn service is really worth two of Margie's chocolate cakes, and Margie's \$10 cake is worth a half of Bob's lawn service. Since Bob is not the only customer Margie has, and Margie isn't Bob's only customer, they need a unit of account that works for everyone in the economy. In this way, money functions as a unit of account, which is the foundation of every transaction taking place around us.

## Money Is a Medium of Exchange

Money is a medium of exchange because it can be used to satisfy unlimited needs and wants. For Bob, he wants chocolate cake (who doesn't?) and lots of it. Bob is a business owner in the town of Ceelo. Every time he buys a cake from Margie's bakery, he exchanges the money he earned from his job for a cake. Money serves as an important medium of exchange in the economy, empowering people to purchase goods and services in an attempt to satisfy their unlimited needs and wants.

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