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Home History of Money Functions of Money

 

Functions/Importance of Money:

 

Money performs the following functions:

 

(1) Money as a Medium of Exchange:

 

Barter system was furnished with the situation of non-existence of double coincidence of wants. The trade under barter system could only take place if there existed coincidence between wants. For example, if a person is suffering from toothache and he himself is cook; he would certainly be in search of a dentist who would be not only hungry but also lacking the art of cooking. All this would be extremely cumbersome. However, it is the invention of money which has solved this problem. As goods and services can be purchased with money; and the goods and services can be sold against money. In other words, it is the money which has facilitated the exchange of goods and services. Thus it is the money which has promoted exchange, division of labor and specialization. It is the specialization which leads to create efficiency amongst factors of production. In the presence of money people can purchase those goods which they can not produce. In this way, the goods can be produced at a large scale. As had there been not money, who would have purchased the vehicles produced by "Mitsubishi and General Motors". Thus in nutshell all the complicated problems regarding consumption, production, distribution and allocation of resources are solved through "Money".

 

But it must be remembered that only that thing can serve as a medium of exchange which has the quality of general acceptability. As during world war II in prisoners of war camps the cigarette played the role of money. But it was not its permanent role; it lacked general acceptability. Accordingly, it can not be accorded as money. As Prof. Sigwick writes:

 

"Money is what it does, not what it is".

 

(2) Money as a Measure of Value:

 

Under barter system the values of goods and services were represented into goods and services. In such situation the values of goods were not properly estimated. Moreover, to express so many goods in so many other goods was a tedious job. As under barter system if any person goes to some departmental store and he finds such like situation. The value of one shirt is 2 neckties; the value of one shaving cream is 4 blades; and the value of one soap is 2 handkerchiefs - such all will be troublesome.

 

Such system of exchange will be a paradoxical one. Moreover, the balance sheet or book keeping of the departmental store will also be very much complicated and intricate. But it is the money which has solved such like problems. As the values of goods and services are expressed in money. Again in the presence of money, the values of goods can be compared. The costs, revenues and profits of the firms can be shown in money. The national income, exports and imports can be expressed in money form. Again a household can' prepare the budget of his expenditures and income with the help of money.

 

All this discussion shows that money is like a measure which can be employed to measure the values of goods and services. Thus money can be used to measure the value as the meters, inches and yards are employed to measure the length, height and width etc.

 

But the critics are of the opinion that if money is accorded as yardstick it often goes on to shrink. It means that value of money goes on to change. As prices rise, value of money falls. Thus the commodity whose own value goes on to change, how it can measure the values of other goods.

 

(3) Money as a Store of Value:

 

Before the introduction of money society saved in real terms, i.e. the savings of the people consisted of grains, cattle and vegetables etc. But in such situation society had to face the following costs like:

 

(i) The grains may get infected, and the cattle may suffer from diseases.

 

(ii) One has to forego the opportunity cost of wealth in the form of interest if one is keeping the commodity money.

 

Thus the invention of money has put to an end the both types of costs. Now the people can mate their savings in monetary terms. It means that in money economy people can save out of their incomes and spend them whenever they like, in future. This role of money pertains to future medium of exchange. Thus it is said that money is like a bridge between present and future. This function of money also clarifies that what will be the effect of hoarding of money on supply of money and velocity of money. As if people save more; the circulation of money supply will decrease; and value of money will rise. On the other hand, because of low savings the velocity of money will increase. Consequently the value of money will fall and prices rise. All this shows that money has a quality of storability.

 

But some people object over this role of money. They say that this role of money will be possible if prices remain stable in a country. But now a days govts. have to face budget deficits and to promote industrialization easy monetary policy is pursued. Accordingly, in such situation, inflation is sure to occur. The people who

arc possessing money in cash form will have to be suffered. This is the reason that during the period of rising prices people are not prepared to keep the money in cash; rather they like to convert it into property, gold, silver and bonds etc. Thus because of such reason the role of money as a store of value becomes dubious.

 

(4) Money as a Standard of Deferred Payments:

 

Under barter system the credit transactions were not possible. If they are made possible they will be attached with a lot of problems. For example, if a person lends a cow to the other person for the period of 10 year, there will be no guarantee that after 10 years the same like cow will be returned. Thus it is the money which has solved this problem. As in money system the loans are given in the form of money and repaid in the form of money. The credit transactions can be made in the presence of money. The interest against loans and deposits can be expressed in money. The govt. security or bond can be converted in money. Because of economic development world trade and finance has got a lot of attraction. Perhaps this all is due to money that capital loans and goods are having mobility all over the world.

 

Relevant Articles:

 

Barter System and its Inconvenience
Evolution of Money and Different Standards of Payments
Definition and Concept of Money
Definition of Money According to Classical Economists
Definition of Money According to Keynesian Economists
Definition of Money According to Monetarists
Representative Money or Modern Money/Plastic Money/Electronic Money
Functions of Money
Role and Importance of Money
Properties/Qualities/Merits of Good Money
Demerits of Money
Money and Near Money
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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