Functions of Money

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Functions of Money

what is money?
  • Money is derived from a Latin word, Moneta. The money is a term refers to an object that is accepted as a mode for the transaction of goods and services in general and repayment of debts, medium for transaction of goods.
  • Money can be in various forms, such as notes, coins, credit cards, debit cards, bank checks even cryptocurrencies.
Primary functionsSecondaryContingent
1. A Medium of Exchange
2. A measure of Value		1. Store of value
2. Transfer of value
3. Standard of Deferred Payments		1. Basis of Credit creation
2. Employing factor inputs
3. Creation & Redistribution of National Income
4. Liquidity

Functions of Money

(a) Primary Functions:

[1] Medium of Exchange

  • Money acts as a mode of exchanging goods.
  • It has solved the main problem of barter system of double coincidence of wants.
  • Money also provides a freedom of choice purchasing a good.
  • E.g. A Fruit seller can sell goods to his customer and in return can demand money for his fruits. Customer can use the money to buy another goods from different seller.

[2] Measure of Value

  • Money helps in determining the specific value of goods and services.
  • calculating the exchange rates between two goods
  • Money serves a “measure” or “unit” by which, we can measure the value of goods and services, also compare their pricess.
  • E.g., we can measure and compare the National incomes of different countries.
(a) Secondary FUNCTIONS:

[1] Store of Value

  • Money acts as an asset that sustains value over a period of time. It is the most liquid asset.
  • It is like a store of wealth for future use.
  • E.g., A person can save his salary and spent it later according to his needs at different times.

[2] Transfer of Value

  • Today, Cost of transporting money from one place to another is very less. (Compared to the time when barter system was in use)
  • With improved technology in banking system, interstate and international trades are increasing.
  • E.g., NEFT and RTGS are facilities offered by RBI. They help transfer money using internet from one bank account to another.

[3] Standard of Deferred Payments

  • Deferred payments refer to payments made on loans, salaries, pensions, insurance premium, interests, and rents.
  • Money acts as a ‘standard’ for making future payments.
  • E.g., A person paying his EMIs on his home loan.

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