What are
the main functions of money? How does money overcome the shortcomings
of a barter system?
What are the main functions of money? How does money overcome the shortcomings of a barter system?
The main
functions of money are as follows:
1.
Medium of exchange
Money acts
as a medium of exchange as it facilitates exchange through a common
medium, i.e. currency. In other words, money helps in the buying and
selling of goods. For example, a person can sell his goods to another
for money and that person can use money to purchase goods of his
choice. Money solves the problem of double coincidence of wants.
2. Unit
of value
The values
of goods can be measured in terms of money. It is a common medium
through which we can calculate the value of each and every good. The
value of a good in terms of money is called the price. In barter
system the lack of a common denominator for measuring values of goods
was a major drawback.
3.
Store of value
This
function explains the importance of money as value storage. This
implies that wealth in the form of money
can be stored easily as a medium of
exchange for future use. For example, money can be stored in banks
for meeting emergency and future needs.
4.
Standard of deferred payments
Payments
can easily be made through the medium of
money. In other words, it is very difficult to pay back
a loan in terms of goods and services. However, with the advent of
money the payments of loans or interests can easily be made.
Money
overcomes the shortcomings of barter system in the following manner:
1. Money
solves the problem of double coincidence of wants. For example, if a
person needs wheat in exchange of tea, then he/she must search for a
person who is ready to trade wheat for tea. Money made the need for
such searches redundant.
2. In
barter system, it was very difficult to measure the value of one good
in terms of another. For example, it is difficult to calculate the
value of a cow in terms of wheat.
3. It was
very difficult to store goods, especially perishable goods (fruits,
meat, etc.) for the purpose of value storage. Money serves this
purpose.
4. The
contractual or future payments are much difficult to be made in
barter system. For example, a worker working on contract basis could
not be paid in terms of rice or chairs.
The main functions of money are as follows:
1. Medium of exchange
Money acts as a medium of exchange as it facilitates exchange through a common medium, i.e. currency. In other words, money helps in the buying and selling of goods. For example, a person can sell his goods to another for money and that person can use money to purchase goods of his choice. Money solves the problem of double coincidence of wants.
2. Unit of value
The values of goods can be measured in terms of money. It is a common medium through which we can calculate the value of each and every good. The value of a good in terms of money is called the price. In barter system the lack of a common denominator for measuring values of goods was a major drawback.
3. Store of value
This function explains the importance of money as value storage. This implies that wealth in the form of money can be stored easily as a medium of exchange for future use. For example, money can be stored in banks for meeting emergency and future needs.
4. Standard of deferred payments
Payments can easily be made through the medium of money. In other words, it is very difficult to pay back a loan in terms of goods and services. However, with the advent of money the payments of loans or interests can easily be made.
Money overcomes the shortcomings of barter system in the following manner:
1. Money solves the problem of double coincidence of wants. For example, if a person needs wheat in exchange of tea, then he/she must search for a person who is ready to trade wheat for tea. Money made the need for such searches redundant.
2. In barter system, it was very difficult to measure the value of one good in terms of another. For example, it is difficult to calculate the value of a cow in terms of wheat.
3. It was very difficult to store goods, especially perishable goods (fruits, meat, etc.) for the purpose of value storage. Money serves this purpose.
4. The contractual or future payments are much difficult to be made in barter system. For example, a worker working on contract basis could not be paid in terms of rice or chairs.
