Money acts 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.
Let’s take an example to understand this better.
Scenario 1: 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, this 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?
Functions of money can be broadly categorised into two parts –
Primary functions of money
Primary functions can be further divided into two subcategories.
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.
Measure of Value
Money can be treated as the parameter of measuring the value of a product or service. To put 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. 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 which 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.
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 purpose, 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 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 in 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. 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.
Test Your Knowledge
Q1. Choose the appropriate function of money which supports savings accounts in a financial institution.
An exchange medium
Store of value
Standard for deferred payments
A measure of value
Q2. Choose an option which cannot be a desirable characteristic of money.
Q3. Why is barter inconvenient?
Limitation of resources
Gold is bulky and is inconvenient for everyday transactions
It needs double coincidence of demands
Huge amount of money is needed
Q4. Choose the primary function of money
The savings function
An exchange medium
The unit of account function
The store of value function
Q5. Choose the secondary functions of money
Measure of value
An exchange medium
Store of value
None of the above
1. Define Marginal Utility of Money.
To put simply, the marginal utility of money is the value an individual can get from using an additional unit from the amount of money they have. For instance, when a tired or thirsty person drinks the first glass filled with water, their marginal utility is higher than that for the second glass.
2. What are the 5 Functions of Money?
The 5 functions of money are a measure of value, an exchange medium, store of value, transfer of value, the standard of deferred payments.