Functions Of Money
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Functions of Money
Money performs several important functions. It serves as a medium of exchange, a unit of account, a store of value and a standard of deferred payments. In addition, money performs certain other functions also. We shall follow Prof, Kinley’s division of function to make a detailed study of all the functions of money.
Pro. Kinley has classified the functions of money into three groups: (1) Primary functions, (2) Secondary functions; and (3) Contingent functions.
Pro. Kinley has classified the functions of money into three groups: (1) Primary functions, (2) Secondary functions; and (3) Contingent functions.
Primary Functions
In this category are included those most important functions of money which it must perform in an economic system under all circumstances. These are : (1) medium of exchange or means of payment, and (2) measure of value or unit of account.
(1) Medium of Exchange. The most important function of money is that it serves as a medium of exchange or means of payment. For most purchases or sales, money is the accepted medium though which the buyer pays the seller. The use of money thus allows purchase and sale to be conducted independently of one another. The purchase of one good does not require the simultaneous sale of another, as is the situation in a barter system. Hence, money facilitates the exchange of goods and services.
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(2) Measure of value. The second important function of money is that it can act as a common measure or standard of value or the unit of goods and services. In measuring distance, the meter or foot is the unit of account. by reducing the value of all goods and services to a single unit account theprocess of exchange is enormously simplified. Monet thus becomes a common denominator. Economists call this aspect of money its unit of account function.
(3) The progress of business activity is fully linked with credit system of the country. But the entire strength of the credit system is based upon money. It is the changes in the quantity of money that bring about the changes in supply of credit in the country.
(4) Liquidity or Uniformity of Wealth. Money has more liquidity than any other form of assets. It can be easily transferred into any type of asset that person wants to have. With the help of money, we can express a set of heterogeneous assets into an identical form.
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(1) Medium of Exchange. The most important function of money is that it serves as a medium of exchange or means of payment. For most purchases or sales, money is the accepted medium though which the buyer pays the seller. The use of money thus allows purchase and sale to be conducted independently of one another. The purchase of one good does not require the simultaneous sale of another, as is the situation in a barter system. Hence, money facilitates the exchange of goods and services.
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(2) Measure of value. The second important function of money is that it can act as a common measure or standard of value or the unit of goods and services. In measuring distance, the meter or foot is the unit of account. by reducing the value of all goods and services to a single unit account theprocess of exchange is enormously simplified. Monet thus becomes a common denominator. Economists call this aspect of money its unit of account function.
(3) The progress of business activity is fully linked with credit system of the country. But the entire strength of the credit system is based upon money. It is the changes in the quantity of money that bring about the changes in supply of credit in the country.
(4) Liquidity or Uniformity of Wealth. Money has more liquidity than any other form of assets. It can be easily transferred into any type of asset that person wants to have. With the help of money, we can express a set of heterogeneous assets into an identical form.
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