Primary and Secondary Functions of Money with Real-Life Examples
Money plays a central role in daily life and economic activities. Unlike barter, which requires finding someone with both the product you want and who wants your product (known as the "double coincidence of wants"), money makes exchange simple and efficient. In economics, understanding the functions of money is crucial for analyzing transactions, making financial decisions, and supporting commerce.
Definition and Meaning of Money
Money is anything that is widely accepted as a medium of exchange for goods and services. It serves not just as currency, but also as a means to measure, store, and transfer value.
Primary Functions of Money
There are two key primary functions:
- Medium of Exchange: Money is used to buy and sell goods and services. It removes the complications of barter, making trade straightforward and widespread.
- Measure of Value (Unit of Account): Money provides a common measure to value goods and services. This allows prices to be set and compared easily in the market.
Secondary Functions of Money
Secondary functions add flexibility and convenience by building on the primary roles of money:
- Store of Value: Money allows people to save their wealth for future use. Money can be kept for a significant period without losing its value if inflation is low.
- Standard of Deferred Payment: Money is a widely accepted tool for making future payments and settling debts.
- Transfer of Value: Money makes it easy to send or give wealth to someone else, or to make purchases from distant locations.
Key Functions of Money – Quick Comparison Table
| Function | Explanation | Example |
|---|---|---|
| Medium of Exchange | Facilitates buying and selling of goods or services. | Paying for a taxi ride using money. |
| Measure of Value (Unit of Account) | Common standard for valuing goods and services. | Comparing the cost of two different mobile phones. |
| Store of Value | Saving money to use at a later time. | Keeping salary in a savings account. |
| Standard of Deferred Payment | Used to settle debts in the future. | Monthly payments for a purchased product. |
| Transfer of Value | Moving value from person to person or place to place. | Sending money online to a friend. |
Step-by-Step Approach to Applying Functions of Money
- Identify the transaction type (buying, saving, paying in future, etc.).
- Match the transaction with a specific function (e.g., buying = medium of exchange).
- If the transaction involves value comparison, use 'measure of value'.
- If savings are involved, apply 'store of value'.
- If there are future payments, it's the 'standard of deferred payment'.
Practice these steps by analyzing shopping, savings, loan, and payment scenarios.
Examples for Better Understanding
- Buying a laptop: Medium of exchange.
- Comparing the price of apples and oranges: Measure of value.
- Keeping cash aside for an emergency: Store of value.
- Paying monthly instalments for a car: Standard of deferred payment.
- Transferring money to someone’s bank account: Transfer of value.
Key Principles and Applications
The primary and secondary functions of money make transactions faster and less complicated. As a result, trade within and across regions becomes practical, savings are protected, and the economy functions more smoothly. These features are foundational for advanced finance concepts, banking, and all commerce-related studies.
Practice Questions
- What is the main advantage of money over barter in an economy?
- Give an example where money is used as a standard of deferred payment.
- How does money help in comparing the value of different products?
- Which function of money is at risk during high inflation and why?
Next Steps for Deeper Learning
- Analyze real-life situations using the step-by-step approach above.
- Review related topics and practice with solved examples from Vedantu Commerce resources.
- Strengthen your basics before moving to advanced topics in banking, markets, and financial planning.
Explore More on Vedantu
By mastering the functions of money, you build a strong foundation for understanding economic transactions, personal finance, and commerce as a whole.
FAQs on Functions of Money Explained for Commerce Students (2025 Syllabus)
1. What are the 4 functions of money?
Money serves four main functions:
- Medium of exchange enables trade,
- Store of value saves purchasing power,
- Unit of account measures value,
- Standard of deferred payment allows future settlements.
2. What are the 10 functions of money with examples?
Money can be described through these ten functions:
- Medium of exchange (buying goods),
- Store of value (savings),
- Unit of account (pricing),
- Standard of deferred payment (loans),
- Measure of value,
- Means of transferring value,
- Means of payment (taxes),
- Distribution of national income,
- Transfer of wealth,
- Basis of credit.
3. What are the three functions of money and define each?
The main functions of money are:
- Medium of exchange: used for buying and selling,
- Store of value: keeps wealth over time,
- Unit of account: measures the value of goods and services in the economy.
4. What are the 3 functions and 5 characteristics of money?
The three key functions of money are:
- Medium of exchange,
- Store of value,
- Unit of account.
- Durability,
- Portability,
- Divisibility,
- Uniformity,
- Acceptability.
5. Why is money called a medium of exchange?
Money is called a medium of exchange because people use it to buy and sell goods or services. It replaces bartering, making it easy to trade different items, and helps the economy run smoothly by simplifying transactions between buyers and sellers.
6. How does money function as a store of value?
Money acts as a store of value because people can save it and use it later. Good money keeps its value over time, so you can save earnings for future purchases without losing purchasing power due to inflation or degradation.
7. What makes money a unit of account?
Money is a unit of account because it provides a common measure to value goods and services. For example, prices marked in dollars let people easily compare the worth of different items, helping consumers make informed decisions.
8. Why is divisibility an important characteristic of money?
Divisibility is crucial for money because it allows it to be split into smaller units like coins or cents. This way, people can buy items of any price, making transactions easier for goods with varying values or sizes in an economy.
9. How does money help in deferred payments?
Money's function as a standard of deferred payment means people can agree today to pay or receive a specific amount in the future, like with loans or contracts. This function builds trust and supports borrowing and credit in financial systems.
10. What does portability mean in the context of money?
Portability means money is easy to carry and transfer between people. This characteristic ensures that people can buy, sell, or pay for items anywhere without difficulty, supporting smooth and convenient economic transactions in daily life.
11. Why is acceptability considered a key characteristic of money?
Acceptability is a feature that makes money effective because everyone trusts and agrees to use it for transactions. When money is accepted by all members of an economy, it can smoothly function as a medium of exchange in various situations.
