Functions of Money

It might sound exaggerated but, without money, the world will stop moving! It will of course come to a great halt. This is the dominant effect of money. Money is considered as the life blood of not only the business, but the world economy at large. The function of money thus goes out without saying. Nevertheless, we will talk about the functions of money for more detailed knowledge in this section.

After we discuss the functions of money in this content, it will compel us in a thought process of a life without money! Let us start with the vitality notes of money.

Money is What Money does – What is Money?

Money acts as a legal tender for any type of exchange and transactions. Buyers can purchase goods or a service from the seller in exchange for money. Presence of money in the economic market makes the transactions taking place easier as in the other scenario; one will have to use barter for the transactions. 

According to a barter system, to purchase a good or service from a seller, the buyer has to offer them an equal value of good or commodity. Besides, the transaction will take place only when a seller is interested in the offered product. Thereby, the probability for this event occurring is quite low and hence completing transactions would be difficult. 

Money eliminates such conflicts from occurring and helps in the exchange method. This makes the transaction process convenient and widely accepted by all on an international platform. 

Need Money? – Visualize the Scenario

Let’s take a scenario to understand this better. 

Scenario: Rohan has 50 litres of Milk supply obtained from his cattle. Now, he can either utilise the whole amount or may store it for future use. But, milk is a perishable item, and hence they won’t be able to store it for a longer time and use it themselves. 

In such a case, they can exchange this surplus milk in exchange for a good or service of equal value. However, the task of finding a buyer who has a product that piques Rohan’s interest as well can be tedious. In this case, having money for the exchange of milk is the best solution to his problem as he can use the acquired money anytime for purchasing an equal value good or service that he needs. 

What are the Functions of Money?

1. Primary functions of money 

Primary functions can be further divided into two subcategories. 

1. Money as an Exchange Medium:

One of the primary functions of money is as a medium of exchange as it can be used for any or all transactions wherein goods or services are purchased or sold. Therefore, one can buy or sell products in exchange for money. 

2. A measure of Value:

Money can be treated as the parameter of measuring the value of a product or service. To put it simply, the value of every product or service can be expressed in monetary form. The money also follows a standard and is accepted worldwide even though the currency does differ from one country to another. 

For instance, the value of each product is determined in monetary terms. The value of 1 egg is supposedly Rs.5 in India, and the value of a pack of bread is around Rs.15. So, money is a measure of the value of all products (and services) and is the amount that is required to be paid/received while transacting. Therefore, it is one of the essential four functions of money. 

Subsequently, these primary and secondary functions of money are some important uses of money in any economic market. 

2. Secondary Functions of Money 

The secondary function can be further segregated into three parts as mentioned below – 

• Store of Value 

Being crucial functions of money, it can be stored or conserved. One can store it for future purposes, and it is economical as well as convenient to store money. 

• Standard of Deferred Payments 

Money can be used conveniently for deferred payments which need to be paid by individuals. It has become the standard for payments made presently or in the future. For instance, if someone borrows a certain amount from another individual, they need to repay the amount with interest. With money in purview, it is convenient to pay the interest or make deferred payments. 

This has led to the popularity of lending and borrowing transactions and has contributed a big part to the formation of financial institutions. 

• Transfer of Value 

The utility of money stretches to the transfer of value as it can be used to purchase goods not only within the country but beyond the domestic line. One can sell or purchase goods in the domestic or international market with money as a standard tool. 

Therefore, the availability of money in the market has contributed to stability and liquidity in the market and helps form essential functions of money markets. 

Test your Knowledge 

Q1. Choose the appropriate function of money which supports savings accounts in a financial institution. 

1. An exchange medium 

2. Store of value 

3. The standard for deferred payments 

4. A measure of value 

Answer: b 

Q2. Choose an option that cannot be a desirable characteristic of money. 

1. Easily recognized 

2. Easily duplicated 

3. Uniform 

4. Portable 

Answer: b 

Q3. Why is barter inconvenient?

1. Limitation of resources 

2. Gold is bulky and is inconvenient for everyday transactions 

3. It needs double coincidence of demands 

4. A huge amount of money is needed

Answer: c 

Q4. Choose the primary function of money 

1. The savings function 

2. An exchange medium 

3. The unit of account function 

4. The store of the value function 

Answer: b 

Q5. Choose the secondary functions of money 

1. Measure of value 

2. An exchange medium 

3. Store of value 

4. None of the above 

Answer: c

Did you know?

• The first coins were minted or made approximately 2,500 years ago.

• The first usage of paper money was in China over 1,000 years ago.

• The benefit of metal coins is that they are portable and also durable or long-lasting.

• The actual value of a British pound is equal to a pound (which is in weight) of silver.

Students can learn the significance that money has in the economic market and its various functions in detail to get an insight into the same. Further, they can learn the intricacies of the concept precisely and accurately by visiting Vedantu’s website.