Functions of Money

Functions of Money:

1. Medium of exchange:

The most significant function of money is that it performs as medium of exchange. Money is accepted freely in the exchange for all other goods. Barter system is very tiresome. Therefore the introduction of money has got over the complexity of barter.

2. Measure of value:

Money performs as a general measure of value. This is a unit of account and a standard of measurement. Whenever we purchase a good in the market we pay a price for it in terms of money. And price is nothing although value stated in terms of money. Therefore we can evaluate the value of a good by the money we pay for it. Merely as we employ yards and meters for measuring length and kilograms for measuring the weights, we employ money for measuring the value of goods. It makes economic computations easy.

3. Store of value:

A man who needs to store his wealth in some suitable form will find money admirably appropriate for the purpose. This acts as a store of value. Assume that the wealth of a man includes of a thousand cattle. It is instead difficult for him to preserve his wealth in the form of cattle. However when there is money, he can sell his cattle, obtain money for that and can store his capital in the form of money.

4. Standard of deferred payments:

Money is employed as a standard for future (i.e., deferred) payments. This forms the basis for credit transactions. Business in modern times depends on credit to a big extent. This is facilitated by the presence of money. In credit, as payment is made at a future date, there should be some medium that will have as far as possible similar exchange power in the future as at present. When credit transactions were to be fetched on the basis of commodities, there would be a lot of complexities and it will affect trade.

Money, to be employed as a medium of exchange, should be globally acceptable. All people should accept a thing as money. Or, the Government must provide it legal sanction. And for executing the other two functions, that is, to be employed as a store of value and standard of deferred payments, money must have stability of value. In another words, the value of money must not change frequently.

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