Have you ever thought about what money is actually good for? And no, I’m not talking about buying fast cars, private jets, and gold toilet paper. I’m talking about the functions of money.
By definition, money is a set of assets that are commonly used and accepted as payment for goods and services. Starting from there, we can identify three important functions of money from an economic perspective: First, it serves as a medium of exchange, second, it is a store of value, and third, it serves as a unit of account.

1. Medium of Exchange
That means it is an asset that buyers give to sellers when they want to purchase goods or services. This is the primary and most important function of money. And the reason why it’s so important is because it significantly reduces transaction costs.
Before money was invented, people had to barter, which means they had to exchange goods and services for other goods and services. To illustrate this, say you wanted to buy a horse way back in the days. To do that, the first thing you had to do was find something you didn’t need anymore... like a sheep. Then you had to walk around town and find someone who owned a decent horse but actually wanted a sheep… Let’s see, nope... nope... wrong again… not that one... ok finally. And like that wasn’t difficult enough, this guy probably wouldn’t trade his horse for less than two sheep. So you either had to give him an additional sheep or only get half a horse… which doesn’t sound like a great deal to me.
Now money makes this process a lot easier. In fact, as long as it’s generally accepted as a medium of exchange by all parties involved money eliminates the need for barter altogether. Instead, you can just buy your horse from anyone who wants to sell their horse in exchange for money and they can then use your money to buy whatever they need from someone else later on.

2. Store of Value
That means, it can be used to transfer current buying power into the future. Now, while that may sound like some fancy sci-fi technology. It basically just means that money doesn’t lose a significant part of its value over time. By contrast, most of the goods and services you can buy with money lose some or all of their value within days or weeks after the purchase.
Take apples for example. If you buy an apple today, you won’t be able to sell it at the same price a year from now, because it will be rotten and pretty much worthless by then.
Now with that being said, it’s important to point out that the value of money can actually change a bit over time, due to things like inflation or currency appreciation or depreciation. But that’s a topic for another video. For now, all you need to know is that the value of money is relatively stable over time.

3. Unit of Account
That means it is used as a measure of economic value. Every product you can buy in a store has a price tag on it. This allows you to easily calculate and compare the values of completely different products. Now, I know that doesn’t sound like a big deal, but just think about what would happen if money didn’t exist.
Imagine you’re looking at a new car, trying to figure out if you’re getting a good deal. To do that you have to compare its price to other goods and services you know. So you ask the guy at the dealership about the payment and he goes: “well, it’s worth about 6 cows.” Uhm… ok. Unfortunately for you, you’re not familiar with the current value of a cow, so you try to clarify: “So, that’s about 9 TVs, right?” and he goes, “Nope, it’s more like 5,000 pounds of carrots.”
Alright, you get the point. It’s much easier if the dealer can just tell you that the car is 5,000 dollars. That way, you immediately know how much it’s worth because you measure the value of everything else in dollars as well. In other words, using money as a unit of account is extremely convenient because it allows you to compare the value virtually everything in just a few seconds.

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