Functions of money
Money performs a number of primary, secondary and contingent functions which not only remove the difficulties of barter system but also oils the wheels of Trade and industry in the present Day World.
(A) PRIMARY FUNCTIONS:-
The two primary functions of money are To Act as a Medium of Exchange and as a Unit of Value.
1) Money as a medium of exchange:- Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability so, all exchanges take place in terms of money.This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system. It facilitates trade and helps in conducting transactions in an economy.Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to satisfy human wants.
2) Money as a measure or unit of value:- Money as measure of value means that money works as a common denomination, in which values of all goods and services are expressed.By reducing the value of all goods and services to a single unit (i.e. price), it becomes very easy to find out the exchange ratios between them and comparing their prices. This function facilitates maintenance of business accounts, which would be otherwise impossible. Money helps in calculating relative prices of goods and services. Due to this reason, it is regarded as a Unit of Account’. For instance, ‘Rupee’ is the unit of account in India, ‘Pound’ in England and so on.
(B) SECONDARY FUNCTIONS:-
Money performs three secondary functions: as a standard of deferred payments, as a store of value, and as a transfer of value. They are discussed Below:
1) Money as a standard of deferred payments:- Money as a standard of deferred payments means that money acts as a ‘standard’ for payments, which are to be made in future. Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy.This function of money is significant because:-Money as a standard of deferred payments has simplified the borrowing and lending operations.It has led to the creation of financial institutions.
2) Money as a store of value:- Money as a store of value means that money can be used to transfer purchasing power from present to future. Money is a way to store wealth. Although wealth can be stored in other forms also, but money is the most economical and convenient way. It provides security to individuals to meet contingencies, unpredictable emergencies and to pay future debts. Under barter system, it was difficult to use goods as a store of wealth due to perishable nature of some goods and high cost of storage.
(A) PRIMARY FUNCTIONS:-
The two primary functions of money are To Act as a Medium of Exchange and as a Unit of Value.
1) Money as a medium of exchange:- Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability so, all exchanges take place in terms of money.This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system. It facilitates trade and helps in conducting transactions in an economy.Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to satisfy human wants.
2) Money as a measure or unit of value:- Money as measure of value means that money works as a common denomination, in which values of all goods and services are expressed.By reducing the value of all goods and services to a single unit (i.e. price), it becomes very easy to find out the exchange ratios between them and comparing their prices. This function facilitates maintenance of business accounts, which would be otherwise impossible. Money helps in calculating relative prices of goods and services. Due to this reason, it is regarded as a Unit of Account’. For instance, ‘Rupee’ is the unit of account in India, ‘Pound’ in England and so on.
(B) SECONDARY FUNCTIONS:-
Money performs three secondary functions: as a standard of deferred payments, as a store of value, and as a transfer of value. They are discussed Below:
1) Money as a standard of deferred payments:- Money as a standard of deferred payments means that money acts as a ‘standard’ for payments, which are to be made in future. Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy.This function of money is significant because:-Money as a standard of deferred payments has simplified the borrowing and lending operations.It has led to the creation of financial institutions.
2) Money as a store of value:- Money as a store of value means that money can be used to transfer purchasing power from present to future. Money is a way to store wealth. Although wealth can be stored in other forms also, but money is the most economical and convenient way. It provides security to individuals to meet contingencies, unpredictable emergencies and to pay future debts. Under barter system, it was difficult to use goods as a store of wealth due to perishable nature of some goods and high cost of storage.
Money as store of value has the following advantages:
1. Money is available in fractional denomination, ranging from Rs 1 to Rs 1,000.
2. Money is easily portable. So, it is easy and economical to store money as its storage does not require much space.
3. Money has the merit of general acceptability so; it can be easily exchanged for goods at all times.
4. Savings in terms of money are much more secured than in terms of goods.
3) Money as a transfer of value:- In the barter economy it was not possible to transfer values of things like a house, tree, garden, etc., from one place to another. It was also not possible to calculate their values in terms of other commodities. But nowadays one can sell his movable immovable property at one place and can buy such property elsewhere.For this kind of transaction one can use money; money can be easily transferred from one place to another through cheques, bank drafts, money orders and other credit instruments. Thus, money has facilitated the transfer of value from one place to another.
(C) CONTINGENT FUNCTIONS:-
Money also performs certain contingent or incidental functions. They are:
1) Money as the most liquid of all liquid assets:- With the help of money transactions, all kinds of immovable property can be changed in the form of the most liquid asset, i.e., money. In a modern economy, money helps in bringing about a price system with the help of which all kinds of capital goods can be changed into money.
2) Basis of credit system:- The credit-structure of an economy depends totally upon the parent base of money. If the supply of money decreases, the credit system contracts.
3) Equaliser of marginal utilities and productivities:- Every consumer attempts to spend his money in such a way as to get the maximum satisfaction or utility from it. This is achieved when he follows the principle of equi-marginal utility. For this, the consumer has to make many changes in commodities purchased by him. This is possible only when he makes the use of money. Thus money helps the consumer in equalisation of marginal utilities of various commodities that he purchases.
4) Measurement of national income:- It was not possible under barter system to measure the national income . Money helps in measuring national income because various goods and services produced in a country are assessed in money terms.
5) Distribution of national income:- Money measures the contribution or productivity of each factor of production and, thus, facilitates the distribution of national income among the owners of resources.
2) Basis of credit system:- The credit-structure of an economy depends totally upon the parent base of money. If the supply of money decreases, the credit system contracts.
3) Equaliser of marginal utilities and productivities:- Every consumer attempts to spend his money in such a way as to get the maximum satisfaction or utility from it. This is achieved when he follows the principle of equi-marginal utility. For this, the consumer has to make many changes in commodities purchased by him. This is possible only when he makes the use of money. Thus money helps the consumer in equalisation of marginal utilities of various commodities that he purchases.
4) Measurement of national income:- It was not possible under barter system to measure the national income . Money helps in measuring national income because various goods and services produced in a country are assessed in money terms.
5) Distribution of national income:- Money measures the contribution or productivity of each factor of production and, thus, facilitates the distribution of national income among the owners of resources.
Comments
Post a Comment