Question

Write Short Notes.

1) Commodity money
2) Secondary function of money
3) Qualities of good money

Answer 1

1) Any commodity chosen to serve as money is called commodity money. For example - if a person having surplus wheat wants milk, he/she can exchange wheat with a person who has milk and who needs wheat at the same time. Thus, from the example it can be inferred that wheat and milk are commodity money.

2) The secondary functions of money are as follows:
i. Standard of deferred payments: Payments can be easily 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 payment of loans or interests can be made easily.
ii. Store of value: Store of value function of money implies that money can be easily stored in the form of wealth and can be stored used as medium of exchange in future.
iii. Transfer of value: Money can be transferred easily from one place to another and from one person to another. Therefore, with the help of money, purchasing power can be transferred.

3) The following are the qualities of good money:

i. General acceptability: Good money is the one which is readily accepted by all without any reluctance. This quality is possessed by gold and silver.

ii. Divisibility: Any commodity acts as good money if it can be divided into small units. For example, currency notes, gold, silver and coins possess the quality of divisibility as they can be divided into different denominations.

iii. Durability: It should possess the quality of durability. That is, it should be long lasting. As currency coins are made up of metal, these are more durable compared to currency notes.

iv. Cognizibility: By cognizibility, we mean that good money is the one which is easily recognisable by all the members of the society and so special efforts are not required to recognise it.

v. Portability: It should be easy to carry from one place to other without any difficulty, expenses or inconvenience.

vi. Homogeneity: Money of the same denomination should be homogenous in size and quality. For example, all Rs. 5 coins should be of the same size, colour etc.

vii. Stability of value: Anything which is used as money should be stable in the sense that their value should not change frequently.