Tag Archives: Functions of Money

Internet Penetration vs Use of Cash

The Economist produced some interesting statistics about how the most digitised countries use less cash and the impact of government in moving towards as cashless society. Most transactions are still carried out with cash but the use of it has fallen:

Use of cash – 2013 = 89% and 2019 = 77%

The graph shows the correlation between Internet users and the % of transactions conducted in cash. Nordic countries lead the way and by 2016 it was estimated that 4 out of 5 transactions were done online. In Denmark the extent of the cashless environment has led the payment app called MobilePay to be the top spot as the most “indispensable” app on smartphones – overtaking Facebook, Messenger etc. MobilePay was launched by Danske Bank in 2013 as a peer-to-peer transfer service.

Italy still had 85% of transactions done by cash with 61% internet penetration. Greece with its significant informal economy still has a very high percentage of cash use as it is very hard to trace.

How do countries promote less use of cash?

  • Banks can improve systems that make transfers faster and cheaper
  • Firms promoting the use of credit cards with loyalty schemes
  • Banning the use of cash on public transport – London and Amsterdam
  • Filing tax returns – payments or refunds by Internet banking
  • Making goods cheaper if paying by card

Source: The Economist – August 3rd 2019

AS Revision – Functions of Money and Venezuela

Covering this topic last week at a revision course and there was some confusion between the functions of money and characteristics. It is important to remember that the characteristics fall within the medium of exchange. Below are some notes and a video about how hyperinflation impacts people in Venezuela and the functions of money.

1. Medium of exchange. This is very important in a specialised economy as barter would be very inefficient. It also makes possible a great extension of the principle of specialisation.

The desirable qualities of money are as follows:-

  • Acceptable: Must be sure somebody will accept your money for goods & services
  • Scarce: Should be, if there’s too much, then no one would value it, hence gold was always good money.
  • Portable: Convenient to carry around
  • Divisible: Can be divide up into different denominations
  • Durable: Money (physical) that can last

2. Unit of Account. A unit of account is a way of placing a specific value on economic goods and services. Thus, as a unit of account, the monetary unit is used to measure the value of goods and services relative to other goods and services. It thus enables individuals to compare, easily, the relative value of goods and services.  A firm uses money prices to calculate profits and losses: and a typical household budgets its regular expenses daily using money prices as its unit of account.

3. Store of Value. Once a commodity becomes universally acceptable in exchange for goods and services, it is possible to store wealth by holding a stock of this commodity. It is a great convenience to hold wealth in the form of  money. Consider the problems holding wealth in the form of wheat. It may deteriorate, it is costly to store, must be insured, and there will be significant  handling costs in accumulating and distributing it.

4. Standard of Value/Standard of Deferred Payment. An important function of money in the modern world, where so much business is conducted on the basis of credit, is to serve as a means of deferred payment. When goods are supplied on credit, the buyer has immediate use of them but does not have to make an immediate payment. The goods can be paid for three, or perhaps six, months after delivery.

How does hyperinflation affect the functions of money?

Medium of exchange – consumers may lose confidence in this function of money and therefore resort to barter.
Store of value – inflation erodes the value of money so does not keep its value. Better for consumers to spend their money rather than see it decline in value. Also they can’t afford to save.
Unit of account – prices change with inflation making comparisons difficult. Also notes need to be printed in higher denominations.
Means of deferred payment – with inflation decreasing the value of money the amount of money that you pay back to the lender decreases in real terms. However the lender is most likely to increase the cost of borrowing so they are protecting the value of money owed to them.