Functions of Money

“Money” is a word which holds a huge buzz in a current world as it said that money dominates the world. In simple terms Money is anything that can be used in making payments for goods and services bought. Classic examples would be coins, notes and debit cards.

Basically money performs 04 functions namely:

  1. Medium of exchange
  2. Unit of account
  3. Store of value
  4. Standard of deferred payments

Medium of Exchange

Money can be used as a mean to exchange goods and services with people. When money is received seller transfer the ownership of goods and services to buyers and use those money buy goods and services for themselves. If money was not present buyers and sellers will have to use bater system where people exchanged goods for goods with many difficulties.

Unit of Account

This is where the money is used to measure values of goods and services in a standardized method. Value of a goods or a service can be expressed in a more sensible way using value of currencies. As and example price of a pencil can be expressed using US Dollars rather than explaining price using measure such as 1/2 pen = 1 pencil . When its spoken about the unit of account it is important to not that money should have the ability to be divided into smaller units without losing its physical or internal value.

Store of Value

Money performs the important function of storing value which can be used in the future. Store of value is used to save money to be used in future. This avoids problems such as inability to save value in goods due to perishable nature goods. As an example, ancient days people used tobacco as a way of storing money where they traded tobacco when they wanted to perform a transaction. But when the value was stored in tobacco with time tobacco got perished the owner lost the value that could have been earned if it was traded before tobacco got expired. Due to this reason saving value in money made economic transactions with savings viable. Point to note here is that even though money can store value, during times of inflation value saved in money can be lost.

Standard of Deferred Payments

In past credit transactions were not very popular as they did not have a measure as to how the debtor going to pay the creditor at the end of credit period. But with use of money the standard amount can be imposed on the debtor to be paid to creditor at the end of the credit period. Since generally the value of the money is stable no one loses and credit transactions are concluded fairly. But during times of inflation debtor may benefit at the expense of creditor and during deflation times creditor may benefit at the expense of the debtor.

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4 thoughts on “Functions of Money”

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