Economic characteristics

Money is generally considered to have the following characteristics, which are summed up in a rhyme found in older economics textbooks and a primer: "Money is a matter of functions four, a medium, a measure, a standard, a store." There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. 'Financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender. Medium of exchange A medium of exchange is an intermediary used in trade. An effective medium of exchange should have the following characteristics: It should also be recognizable as something of value. Person A should recognize the value of the item so that Person B can give it to A in exchange for goods or services. It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, vermiculite, or water are not suitable as money even though they are valuable. Paper notes have proved highly convenient in this regard. It should be durable. Money is often left in pockets through the wash. Some countries (such as Australia, New Zealand, Mexico and Singapore) are making their bank notes out of plastic for increased durability. Gold coins are often mixed with copper to improve durability. Unit of account A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary pre-requisite for the formulation of commercial agreements that involve debt. An effective unit of account should be: Divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again. Fungible: that is, one unit or piece must be exactly equivalent to another, which is why diamonds, works of art or real estate are not suitable as money. A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect. Store of value To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved. Fiat currency like paper or electronic currency no longer backed by gold in most countries is not considered by some economists to be a storage of value. An effective store of value should have the following characteristics: It should be long lasting and durable; it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs are not generally suitable as money. It should have a stable value. It should be difficult to counterfeit, and the genuine must be easily recognizable. Market liquidity The fourth and final function of money, as a means of liquidity. It is important for any economy to move beyond a simple system of bartering. Liquidity describes how easy it is an item can be traded for something that you want, or into the common currency within an economy. Money is the most liquid asset because it is universally recognised and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter. Liquid financial instruments are easily tradable and have a low transaction costs. There should be no or minimal spread between the prices to buy and sell the instrument being used as money.