Barter: swapping goods or services directly, without money (for example, a sheep for a cow).
Double coincidence of wants: for a swap to happen, each person must want what the other has. This is often hard to find.
Other problems with barter: it is hard to agree values (how many eggs is a coat worth?); some goods can’t be divided (half a cow); some goods go off, so they can’t be stored; and it is hard to borrow or pay later.
Money solves these problems. It is anything widely accepted as payment for goods and services, so trade becomes quicker and easier.
Because money makes exchange easy, people can specialise in one job and buy what they need with their wages.
Barter needs a double coincidence of wants; money doesn’t
Exam tipWhen explaining a problem with barter, name it (“double coincidence of wants”) and then explain it in context: “the baker must find someone who has shoes and wants bread”.
Barter
Swapping goods or services directly, without using money.
Double coincidence of wants
Each person in a swap must want what the other has.
Money
Anything widely accepted as payment for goods and services; an asset used as a medium of exchange.
3.2.5.1 Functions of money
The four functions of money
Function
What it means
Example
Medium of exchange
Accepted as payment, so there is no need to barter
Paying for a haircut by card
Store of value
Keeps its buying power over time, so it can be saved and spent later
Saving part of your wages for next summer
Unit of account
A common measure, so values can be compared and recorded
Comparing the prices of two phones in pounds
Means of deferred payment
Allows buying now and paying later, so borrowing and lending can happen
Paying for a sofa in monthly payments over two years
Inflation weakens the store of value function: if prices rise quickly, saved money buys less later.
The spec asks for these four. AQA credits clear descriptions too, such as “makes trade easier” for medium of exchange.
The four functions of money
Exam tipAQA often quotes someone and asks which function it shows. Look for the clue: buying or paying → medium of exchange; saving for later → store of value; comparing prices or values → unit of account; paying back over time → deferred payment.
Medium of exchange
Money is accepted as payment for goods and services.
Store of value
Money can be saved and keeps its buying power to be used later.
Unit of account
Money gives a common measure by which values are compared and recorded.
Means of deferred payment
Money lets people buy now and pay in the future.
3.2.5.1 The role of money
What makes good money
Characteristic
Why it matters
Scarce
Limited in supply, so it holds its value
Hard to forge
Fakes would make it less scarce and less trusted
Divisible
Can be split into small amounts (pounds and pence)
Portable
Easy to carry or transfer
Durable
Lasts without wearing out
Widely accepted
People agree to take it in payment
Over history, shells, beads, stones and precious metals have all been used as money. Each worked as long as people trusted and accepted it.
Watch outCharacteristics are what money must be like (divisible, durable…). Functions are what money does (medium of exchange…). Don’t give one when asked for the other.
Divisible
Able to be split into smaller units.
Durable
Long-lasting; doesn’t wear out quickly.
3.2.5.1 Money is more than notes and coins
Money is more than notes and coins
Most money today is electronic: bank balances, card and phone payments and online transfers all count as money, though no cash changes hands.
Bank deposits are money: they are widely accepted, as people pay with them by card or transfer.
Banks create money when they lend. When a bank makes a loan, it adds the money to the borrower’s account. That is new spending power, so lending adds to the money supply.
Cash is used for a smaller share of payments than in the past, as more people pay by card or phone.
Digital currencies such as Bitcoin: people debate whether they count as money. Their value swings a lot (a poor store of value) and few shops accept them.
Exam tipIf asked why money is more than notes and coins, give an example (bank deposits used by card or transfer) and say why it counts: it is accepted as payment.
Bank deposit
Money held in a bank account.
Money supply
The total amount of money in the economy, including bank deposits.
Cashless payment
Paying by card, phone or online transfer instead of notes and coins.
3.2.5.2 The role and importance of the financial sector
The financial sector and its main agents
The financial sector: firms that provide financial services to households, firms and government, such as banks and insurance companies.
Main agents in AQA’s spec: the Bank of England (the central bank), commercial banks and building societies.
Others: investment banks, credit unions, insurance companies and brokers.
What the sector does: keeps money safe; links savers with borrowers; makes payments; spreads risk through insurance; and funds investment.
The main agents in the UK financial sector
Financial sector
Firms that provide financial services, such as banks, building societies and insurance companies.
Financial institution
An organisation that deals in money: taking deposits, lending, insuring or investing.
3.2.5.2 The Bank of England
The Bank of England
The Bank of England is the UK’s central bank. It doesn’t offer accounts to the public.
Sets Bank Rate through its Monetary Policy Committee, to meet the government’s 2% CPI inflation target (monetary policy: see the Interest Rates and Monetary Policy topic). In November 2026, Bank Rate was 4%.
Keeps the financial system stable: checks that banks are strong enough to cope with shocks and don’t take reckless risks.
Lender of last resort: lends to banks in trouble when no one else will, to stop one failure spreading to other banks.
Issues banknotes (in England and Wales).
Banker to the government and to the banks: it holds their accounts.
Exam tipKeeping inflation on target is the Bank of England’s job, not a high street bank’s. AQA has used this twice as the wrong answer in “which is not a role of a high street bank”.
Central bank
A country’s main bank, which manages its currency and monetary policy and keeps the financial system stable.
Lender of last resort
The central bank’s role of lending to banks in difficulty to prevent a wider collapse.
Financial stability
When banks and other financial firms can cope with shocks and keep working.
3.2.5.2 High street banks
Commercial (high street) banks
Commercial banks (also called high street or retail banks) are private businesses that aim to make a profit by selling financial services to households and businesses.
Accept deposits: current accounts for everyday spending and savings accounts.
Lend: loans, mortgages and overdrafts to households and firms.
Make payments: cards, contactless, transfers and direct debits.
How they profit: they lend out part of customers’ deposits and charge borrowers more interest than they pay savers, plus fees. Not every depositor withdraws at once, so they can lend.
Why they matter: lending to firms pays for new machinery and premises (investment), which supports growth and jobs.
Many people now bank online or by app, and many branches have closed.
Exam tipWhen asked to explain a role, give the role and who it helps and how: “Banks lend to firms, which lets them buy machinery they couldn’t afford from their own savings, so they can produce more.” About half of students got full marks on this in June 2023.
Commercial bank
A bank that makes profits by selling financial services to households and businesses; also called a high street or retail bank.
Current account
A bank account for everyday payments.
Investment bank
A bank that serves firms and governments, for example by organising share sales and trading.
3.2.5.2 Building societies
Building societies and other institutions
Commercial bank
Building society
Credit union
Owned by
Shareholders
Its members (savers and borrowers)
Its members
Main aim
Profit for shareholders
Serve members: profits kept or returned through better rates
Serve members, not for profit (but not a charity)
Main services
Full range: accounts, loans, mortgages, payments
Mainly savings and mortgages; some current accounts
Savings and small loans, often local
Building society: a mutual financial institution, owned entirely by its members, which offers banking and other financial services to them.
It has no shareholders to pay, so it can offer members better savings or mortgage rates.
Insurance companies: people and firms pay a premium, and the insurer pays out if something goes wrong, such as a fire or an accident.
Brokers: help clients find the best deal, for example a mortgage broker.
Exam tipA building society is not a builder. In June 2024 many students thought it was part of the construction industry, and over 7% left the question blank. Remember: mutual, owned by members.
Building society
A mutual financial institution owned by its members, offering them banking and financial services.
Mutual
Owned by its members (customers) rather than by shareholders.
Credit union
A member-owned, not-for-profit institution offering savings and loans.
Insurance
Paying a premium so that an insurer covers the cost if something goes wrong.
3.2.5.2 Importance for consumers, producers and government
Why the financial sector matters
Group
What the financial sector does for them
Consumers
A safe place for money, interest on savings, mortgages and loans, easy payments, insurance
Producers
Loans to start or grow a business, overdrafts to manage cash flow, payments, insurance against risk
Government
Somewhere to borrow, tax revenue and jobs from financial firms, a route for monetary policy to work
Exports: in 2025, services made up 57% of UK exports by value (ONS), and financial and professional services are a large part of this.
When it goes wrong: in the 2007–08 financial crisis, some banks failed or needed rescuing, lending dried up and the economy went into recession. This is why the Bank of England’s financial stability role matters.
Exam tipAnswer for the group in the question. For producers, link lending to investment and growth; for consumers, to saving, borrowing and spending.
Cash flow
The money coming into and going out of a business over time.
Genious