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Money is anything widely accepted as payment, acting as a medium of exchange, unit of account and store of value. Free notes and 13 questions answered.
What is Money? Exploring its Definition and Functions is part of The role of money and financial markets in GCSE AQA Economics.
7 min
Reading time
39
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GCSE AQA
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Money is anything widely accepted as payment, acting as a medium of exchange, unit of account and store of value. Free notes and 13 questions answered.
Use this lesson to stay inside The role of money and financial markets while connecting the detail back to the wider How the economy works topic.
Read the core explanations from What is Money? Exploring its Definition and Functions before testing yourself from memory.
Imagine trying to buy lunch by offering the canteen worker three hours of guitar lessons. That is the world without money — and it is chaotic. Money solves a fundamental economic problem, and understanding exactly what it is and what it does sits at the heart of Paper 2.
Here is the key question this lesson answers: what actually counts as money, and why does it matter that economists define it more broadly than the coins in your pocket? Work through each section and you will have a precise, exam-ready answer.
Notice that the definition says 'anything widely accepted' — not 'banknotes and coins'. That distinction is deliberate and examinable. Throughout history, shells, gold, cigarettes in prisons, and today digital bank deposits have all served as money. What makes something money is its function, not its physical form.
In the modern UK economy, the vast majority of money exists as numbers in bank accounts — electronic deposits — rather than physical notes and coins. When Mohammed pays his rent by bank transfer, no banknote changes hands, yet money has clearly moved. This is why economists define money as more than the amount of banknotes and coins in circulation.
The four functions are the engine of the definition. Each one solves a specific problem that would exist in a barter economy, where goods are swapped directly for other goods. Work through them in order — they build on each other logically.
Barter requires a double coincidence of wants: Priya must want exactly what Aisha has, and Aisha must want exactly what Priya has, at the same time. Money breaks this deadlock. Priya sells her labour for money, then uses that money to buy whatever she needs from whoever has it. The transaction is separated into two independent steps.
For money to work as a medium of exchange, it must be widely accepted. If a shopkeeper refuses your payment, it has failed this function. Legal tender laws define which currency must be accepted to settle debts in court, though in everyday transactions businesses may still choose which payment methods they accept.
Think of it like a ruler for value. Without a common unit, how would you compare the price of a haircut with the price of a textbook? In the UK, both are priced in pounds sterling (£), so the comparison is immediate. A haircut costs £15; a textbook costs £30 — the textbook is twice as valuable. Money makes this comparison possible.
This function also underpins business accounting. Firms record revenues, costs, and profits all in the same unit — money — which allows meaningful financial statements. Without a unit of account, economic calculation across an entire economy would be impossible.
Contrast money with a perishable good like fish. If Aisha is paid in fish, she must spend or trade it immediately before it rots. Money does not spoil. Ben can earn wages in October and spend them in December without losing value — provided inflation is low. This is the crucial condition: money only stores value effectively when the price level is stable.
When inflation is very high — as in Zimbabwe in 2008 or Germany in 1923 — money loses its store-of-value function rapidly. People rush to spend money before it loses worth, which itself accelerates inflation further. This shows how interconnected the functions are: if one breaks down, the others are threatened too.
When Chloe takes out a student loan, she receives money now and agrees to repay a specified amount of money later. Both the loan and the repayment are denominated in the same unit — pounds. This function makes credit markets possible. Without it, a lender would have to specify repayment in physical goods, which creates enormous practical difficulties.
Mortgages, car finance, business loans, and government bonds all rely on this function. The entire financial system is built on the ability to defer payment. This is why the means of deferred payment function is so closely linked to the role of financial markets covered elsewhere in Paper 2.
Now that all four functions are defined, it helps to see them side by side. Examiners often ask you to distinguish between them — particularly between store of value and means of deferred payment, which students frequently confuse.
| Function | Core idea | Real-world example |
|---|---|---|
| Medium of exchange | Accepted in transactions | Paying £3.50 for a coffee |
| Unit of account | Common measure of value | Comparing a £20,000 car with a £15,000 car |
| Store of value | Retains purchasing power over time | Saving wages in October to spend in December |
| Means of deferred payment | Settles future debts in a common unit | Repaying a £10,000 student loan over five years |
The key distinction between store of value and means of deferred payment: storing value is about an individual choosing to hold money across time, whereas deferred payment is about a contractual obligation to pay money at a future date. One is a choice; the other is a commitment.
Earlier we established that money is defined by its functions, not its form. Now it is worth being precise about what this means in practice, because AQA explicitly requires you to know that money can be defined as more than the amount of banknotes and coins in circulation.
In the UK today, physical cash — notes and coins — makes up a relatively small proportion of the total money supply. The overwhelming majority exists as bank deposits: the balance shown in your current account, a business's savings account, or a mortgage lender's records. When Mohammed pays his electricity bill online, money moves between bank accounts. No physical note is involved, yet the transaction is complete.
Economists measure the money supply in different ways. The narrowest measure counts only notes and coins. Broader measures include bank deposits and other financial instruments. The broader the measure, the larger the total. This matters for government policy: if the Bank of England wants to understand how much money is circulating in the economy, counting only banknotes would give a severely misleading picture.
Questions on money tend to appear as 'define', 'explain', or 'analyse' style questions. The marks are there to be taken — provided you use precise language and build a clear chain of reasoning.
Worked example: Answering an 'Explain' Question on the Functions of Money
Explain one function of money. [4 marks]
Answer: Money acts as a medium of exchange, meaning it is accepted in transactions and removes the need for barter. Without it, trade would require a double coincidence of wants, making exchange highly inefficient. For example, Ben uses his wages to buy food — the supermarket accepts pounds because they can be used elsewhere. This enables specialisation and makes the economy far more efficient.
Published by Revise Right. Use the official specification reference to check the requirements for your course. Content updated: 2026-03-06.
Move to the related lessons or back to the topic page when you need the wider sequence before exam-style practice.
Money is anything that is widely accepted as a means of payment within an economy. What makes something money is its function, not its physical form: shells, gold, cigarettes in prisons and today digital bank deposits have all served as money.
The four functions of money are a medium of exchange, accepted as payment in transactions; a unit of account, a standard measure for comparing value; a store of value, which retains purchasing power over time; and a means of deferred payment, which lets debts be settled in a common unit in future.
Legal tender is the currency that laws define must be accepted to settle debts in court. In everyday transactions businesses may still choose which payment methods they accept.
Barter is when goods are swapped directly for other goods without money. It requires a double coincidence of wants, which makes exchange highly inefficient, so money solves a fundamental economic problem.
A double coincidence of wants is what barter needs: each person must want exactly what the other has, at the same time. Money breaks this deadlock by acting as a medium of exchange, so a transaction is separated into two independent steps.
A unit of account is a standard measure for expressing and comparing the value of different goods and services. In the UK both a £15 haircut and a £30 textbook are priced in pounds sterling, so the comparison is immediate, and firms record revenues, costs and profits in the same unit.
Money acts as a medium of exchange when it is accepted by both parties in a transaction as payment for goods or services, eliminating the need for barter. Barter requires a double coincidence of wants, where each person must want exactly what the other has at the same time.
Store of value is about an individual choosing to hold money across time, such as saving wages in October to spend in December. Means of deferred payment is a contractual obligation to pay money at a future date, such as repaying a £10,000 student loan over five years: one is a choice, the other a commitment.
Money is defined by its functions, not its form, and in the UK the overwhelming majority of money exists as bank deposits rather than physical notes and coins. When Mohammed pays his electricity bill online, money moves between bank accounts with no banknote involved, so counting only cash would give a severely misleading picture of the money supply.
A store of value is when money retains purchasing power over time, allowing people to save today and spend at a future date. Unlike perishable goods such as fish, money does not spoil, but it only stores value effectively when the price level is stable.
A means of deferred payment is when money allows debts and future obligations to be expressed and settled in a common unit, enabling borrowing and lending across time. A student loan received now and repaid later in pounds relies on this function, as do mortgages, car finance and government bonds.
High inflation stops money being a store of value because money loses purchasing power rapidly, as in Zimbabwe in 2008 or Germany in 1923. People rush to spend money before it loses worth, which itself accelerates inflation further.
The money supply is measured in different ways: the narrowest measure counts only notes and coins, while broader measures include bank deposits and other financial instruments. In the UK, physical cash is a relatively small proportion of the total, so counting only banknotes would give a severely misleading picture.