A currency is a monetary unit used in the territory of a certain State. It is a fundamental element of the economy of any country, acting as a universal equivalent of the cost of goods and services. In other words, the currency allows you to express prices in a form convenient for everyone, make purchase and sale transactions, evaluate assets and liabilities, save and accumulate capital.
The main functions of the currency
The currency performs three key functions in the economy:
A measure of value
The currency serves as a convenient measure of the value of various goods. With its help, we can easily compare the cost of completely different goods and services. Thanks to this property, we can understand how much a particular good costs and how much it is more expensive or cheaper than others.
Means of circulation
The currency acts as a generally recognized intermediary in the exchange. Instead of barter transactions with natural products, we use currency as a universal means of payment. This greatly simplifies and accelerates trade turnover. Sellers willingly exchange their goods for currency, and buyers pay with it, without thinking about the heterogeneity of goods.
A means of accumulation
The currency allows you to maintain purchasing power over time. We can set aside part of our income in the form of savings in foreign currency to spend them in the future. If the currency is stable, then the accumulated amount will not devalue and it will be possible to purchase about the same set of benefits as at the time of income generation.
Currency classification
There is a wide variety of currencies that can be classified according to different criteria:
By status, currencies are divided into national (they are in circulation within one country), foreign (currencies of other states) and international (accepted for payment in many countries of the world, for example, the US dollar).
According to the exchange regime, there are freely convertible (exchanged without restrictions), partially convertible (exchange is limited) and non-convertible (non-exchangeable) currencies.
According to the form, cash (banknotes and coins) and non-cash (account entries) currencies are allocated.
By carrier — paper, metal and electronic money.
Interaction of people and organizations with currency
Currency is invisibly present in the life of every person and any organization.
People use currency for:
purchases of goods and services;
receiving salaries, pensions, and benefits;
payment of taxes and fees;
formation of savings;
exchange for other currencies;
money transfers.
investments and speculation in the foreign exchange market.
Companies face currency when:
Conducting foreign trade operations.
Attracting foreign investments.
Payment of dividends to foreign shareholders.
Opening of foreign currency accounts and deposits.
Currency risk management.
Formation of the currency portfolio.
The impact of the currency on the country’s economy
Currency is the circulatory system of the economy. The health of the entire national economy depends on its stability.
Strong currency:
makes the country attractive for investment;
allows you to accumulate reserves;
restrains inflation;
improves the standard of living of citizens.
A weak currency, on the contrary:
leads to an increase in the cost of imports;
weakens the purchasing power of the population;
stimulates capital outflow;
slows down economic growth.
Maintaining the stability of the national currency is one of the key tasks of the monetary policy of central banks.
Currency is an essential element of modern economic life. It performs the functions of a measure of value, a means of circulation and accumulation, thereby ensuring the smooth functioning of the market system. Currency plays a crucial role in the life of every person, every company and the state as a whole, allowing for commodity exchange, saving and investing capital, and developing domestic and international trade. Understanding the essence and mechanisms of the currency is the basis of financial literacy in the modern world.
