Functions of Money

FUNCTION OF MONEY

A. PRIMARY FUNCTIONS OF MONEY

1. MEDIUM OF EXCHANGE

Money has the quality of wide acceptability. The medium of exchange function encourages specialization in national and international level. In terms of the exchange system, the price of goods and services are expressed in the form of money.

2. MEASUREMENT OF VALUE

Money measures the value of goods and services. The rate of exchange is also determined with it. The measuring value of goods and services in terms of money has made transactions simple and easy. The money value of goods and services increases or decreases with the decrease or increase in money supply.

B. SECONDARY FUNCTIONS OF MONEY

1. STORE OF VALUE

Money serves as a store of value. People hold their wealth in the form of money. They can save a part of their income for their future needs. The value stored in money remains safe and stable.

2. TRANSFER OF VALUE

Money serves as the transfer of value. With the help of money, we can transfer the value of wealth and property from a place to another. Money has increased the mobility of people within the country and abroad. It has also encouraged economic progress.

3.STANDARD OF DEFERRED PAYMENT

It refers to the payment made in the future . Money serves as the standard of deferred payment. Both lending and borrowing are done in terms of money. Money is suitable because it has the quality of acceptability and durability.

C. CONTINGENT FUNCTIONS OF MONEY

1. BASIS OF CREDIT

Credit instruments are issued on the basis of money that has to be deposited in the banks. Credit instruments have become widespread due to the availability of money.

2. DISTRIBUTION OF NATIONAL INCOME

Because of invention of money , the factor payments and national income are distributed to factors of production in the form of money.

3. LIQUIDITY AND UNIFORMITY OF WEALTH

Money is generally a liquid form of wealth. It is possible to convert wealth and property immediately into liquid form because of money. All the forms of wealth become uniform in the form of money.

4. MAXIMUM BENEFIT

Money helps consumers and producers to maximize their benefit. A consumer maximizes his/her satisfaction by equating the price of each commodity with it’s marginal utility. Similarly, profit is maximized by equating marginal productivity of a factor to its price.