Osei owns a bicycle repair shop. Over one week, four separate events take place. - Event 1: A customer pays Osei $15 in cash for a puncture repair, and Osei uses that same cash later in the day to buy spare inner tubes from his supplier. - Event 2: Osei prices each type of job i…

Answer: ((a)) Event 1 illustrates money as a medium of exchange (cash is exchanged directly for a completed repair, and then for spare parts). Event 2 illustrates money as a measure of value, or unit of account (dollar prices let customers compare the two jobs). ((b)) Event 3 illustrates money as a store of value. By banking part of his takings and leaving it unspent for six months, Osei is relying on money holding its purchasing power over that time, so that it can still buy a van later. ((c)) Event 4 illustrates money as a standard, or means, of deferred payment. Osei allows Mariam to settle her $45 debt at a future date rather than immediately, which only works because money can be used to make a payment now and be repaid at an agreed later date.. Part (a): Events 1 and 2 Event 1 shows money acting as a medium of exchange: Osei directly swaps his repair service for $15 in cash, and later swaps that same cash for spare inner tubes. In both cases, money is the thing being exchanged fo…

IGCSE Economics 0455: The Four Functions of Money

Osei owns a bicycle repair shop. Over one week, four separate events take place.

Event 1: A customer pays Osei $15 in cash for a puncture repair, and Osei uses that same cash later in the day to buy spare inner tubes from his supplier.
Event 2: Osei prices each type of job in dollars, for example $15 for a puncture repair and $45 for a full service, so that customers can compare the two jobs before deciding which they can afford.
Event 3: Osei banks part of that week's takings and does not spend it, planning to use the saved amount in six months' time to buy a second-hand delivery van.
Event 4: A regular customer, Mariam, cannot pay the full $45 service fee today. Osei agrees that she can pay him the $45 next month instead, once she has been paid at the end of her work contract.

(a) Identify the function of money illustrated by Event 1, and the function of money illustrated by Event 2. [2]

(b) Explain the function of money illustrated by Event 3. [2]

Part (a): Events 1 and 2

Event 1 shows money acting as a medium of exchange: Osei directly swaps his repair service for $15 in cash, and later swaps that same cash for spare inner tubes. In both cases, money is the thing being exchanged for goods or services, rather than goods being bartered directly for other goods.

Event 2 shows money acting as a measure of value (also called a unit of account): quoting $15 for a puncture repair and $45 for a full service gives customers a common unit in which to compare the two jobs, without money changing hands at all at this point.

Part (b): Event 3

Event 3 shows money acting as a store of value. Osei does not spend all of his week’s takings, he deposits part of it and deliberately leaves it unspent for six months. This behaviour only makes sense because money keeps its purchasing power while it is held, so that the amount Osei saves now will still be able to buy a second-hand van later. If money could not reliably hold its value over time, saving towards a future purchase in this way would not work.

Part (c): Event 4

Event 4 shows money acting as a standard of deferred payment (also called a means of deferred payment). Osei has completed the $45 service already, but Mariam is not required to pay immediately. Instead, the two of them agree that she will pay the same $45 amount next month. Money is what makes this kind of arrangement possible: it lets a debt be fixed in an agreed amount today and then settled with a later payment, once Mariam has received her own income.

Final answers

(a) Event 1: medium of exchange. Event 2: measure of value (unit of account).
(b) Event 3: store of value. Osei’s banked earnings hold their purchasing power over six months so he can spend them later on a van.
(c) Event 4: standard of deferred payment. Osei allows Mariam’s $45 debt to be settled at an agreed future date rather than immediately.