Functions of Money

What are the Functions of Money?

As described in the previous concept, the first and the leading role of money is to function as a mode of exchange. Barter exchanges become exceptionally tough in a large economy because of the high prices, people would have to sustain looking for proper people to exchange their excesses or surpluses.

Money also functions as a suitable unit of account. The value of all the commodities and services can be expressed in monetary terms. If the cost prices of all goods go up in monetary terms, i.e., there is a general rise in the cost price degree, the value of money in terms of any good must have come down – in the sense that a unit of money can now buy less of any good. We call it a decline or deterioration in the buying power of money.

The barter system has other dearths and deficiencies. It is tough to carry forward one’s opulence under the barter system. Assume you have an establishment of rice that you do not wish to utilise entirely. You may consider this stock of excess rice as follows:

  • An asset that you may want to utilise or sell-off, for obtaining other goods on some future date.
  • However, rice is a biodegradable item and cannot be stockpiled afar a definite time frame.
  • Holding the stockpiled rice requires a lot of space. You may have to spend a substantial amount of time and resources looking for people with a demand for rice when you wish to interchange your stockpile for purchasing other goods.
  • This issue can be resolved if the rice is sold for money. Money is perpetual and its stockpiling prices are also noticeably less. Hence, money can function as a stock of value for individuals.
  • Wealth can be stockpiled in the form of money for future utilisation. However, to perform this well, the value of money must be adequately constant and firm.
  •  An increasing cost price degree may abrade the buying capacity of money.

 

Q1. What are the functions of money?

OR

Explain primary and secondary functions of money.

Answer:
Functions of money Functions of money can be broadly categorised into the following two types:

(a) Primary functions

(b) Secondary functions

 

(a) Primary functions i) Medium of exchange:

    It means that money can be used to make payments for all the transactions of goods and services.

    A buyer can buy goods through money, and a seller can sell goods for money.

    It is an essential function of money.

ii) Measure of value:

    Money serves as a measure of value.

    The value of all goods and services is expressed in terms of money.

(b) Secondary functions i) Standard of deferred payments:

    It means that money acts as a ‘standard’ for making future payments.

    It has made deferred payments much easier than before.

    Example: When we borrow money from somebody, we have to return both the principal as well as the interest amount in the future.

    Money is a convenient mode of calculation and payment of interest amount to be paid in the future.

    This function has facilitated borrowing and lending.

    It has also led to the creation of financial institutions.

ii) Store of value:

    A store of value implies a store of wealth.

    Money can be easily stored for future use.

    It is the most convenient and economical means to store earnings and wealth.

iii) Transfer of value:

    Money also serves for transfer of value.

    It facilitates buying and selling of goods not only in the domestic country but also in other parts of the world.

 

 

3-4 marks questions
Q.1- “Use of money separates the acts of sale and purchase”. Explain.
Answer:
Explanation     Money as a medium of exchange enables a person to buy or sell at different points of time.

    It has separated the acts of sale and purchase.

    A buyer can buy goods through money, and the seller can sell goods for money.

    Thus, buyers and sellers of goods/ services can solve their purposes with the help of money by using it as a medium of exchange.

 

Q.2- “Money as a store of value helps to shift purchasing power from present to the future”. Explain.
Answer:
Explanation     Money has a general acceptability, and its value remains stable.

    It can be easily stored for future use.

    It is the most convenient and economical means to store earnings and wealth.

    Hence, it helps to shift the purchasing power from the present to the future.

 

1 mark question
Q.1 What do you mean by double coincidence of wants?
Answer:

Double coincidence of wants means, one person should be able to accept what other person is willing to give in exchange.

The above mentioned is the concept that is explained in detail about the Functions of Money. To know more, stay tuned to BYJUS.

1 Comment

  1. The answers are good, I am satisfied

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