Money

It's not about the money, money, money

We don't need your money, money, money, money

We just wanna make the world dance

Forget about the price tag

(Price Tag, Jessie G)

All the things I could do

If I had a little money

It's a rich man's world

(Money, Money, Money, Money, ABBA)

Of all the concepts that are relevant to economics, the word “money” is probably the most frequently used by those who are not economists. One only has to search Spotify for the word to see the number of songs that talk about it, but what is money really?

What it is and what it is not “money”?

One of the questions that economics has tried to answer throughout its history (and today with the amount of digital assets is becoming more and more relevant) is how to differentiate those goods that are monetary from those that are not. From salt and gold to printed paper, different societies have had different currencies throughout their history.

The easiest way to define what is and what is not money is to verify that it meets three essential characteristics:

Unit of account: money allows us to homogenize and compare goods for accounting purposes. We know that neither the volume nor the length of a good tells us anything about its value. That is why money must be able to allow us to compare different goods that a priori have absolutely nothing to do with each other. That is why money allows us, for example, to see how many apples are equivalent to a car, or how many kilos of bread are equivalent to a bus ride.

Means of exchange: if money did not exist, we could only exchange goods through barter. That is, goods that we produce for goods of use that we desire. Thus, a baker who wants to buy a bicycle would have to find a baker who just wants bread. And a lot of bread! Money allows us to exchange goods without the need to find this double coincidence (that the person from whom I want to buy something, wants the product I offer, in the quantities I can offer).

Reserve of value: could ice cream be money? the answer of economics would undoubtedly be “no”. Because the third function of money is to allow us to conserve our wealth over time. If I worked for ice cream, let's say 60kg of ice cream per month, and a heat wave came... I would have worked uselessly for a whole month!

Now that we know these 3 characteristics, can you think of other objects that could be considered money in certain contexts? A typical example is cigarettes in prisons.

The sum of money in an economy is usually measured formally through “monetary aggregates” that group different kinds of money.

The most important for the European Central Bank are:

• M1 (narrow money) is the most liquid measure of money, comprising currency (banknotes and coins) in circulation and overnight deposits.

• M2 (intermediate money) includes M1 plus deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months.

• M3 (broad money) includes M2 plus repurchase agreements, money market fund shares/units, and debt securities with a maturity of up to two years issued by Monetary Financial Institutions.

Closing (Fran):

Money is what people use to purchase goods and services. It can be in the form of cash, coins, or digital payments. Without money, people would have to barter directly, which can be challenging if two individuals don't want what the other offers. Money serves three key functions: it acts as a medium of exchange, allowing people to trade easily; a unit of account, providing a common measure for valuing goods and services; and a store of value, meaning it maintains its worth over time. Money facilitates trade, supports business growth, and helps manage value in the economy.