Describe the functions of money. Functions of Money 2019-01-11
Describe the functions of money Rating:
5,8/10
1028
reviews
Define Money
But money performs the store of value function with a difference. Medium of Payment or Exchange One of the functions of money is that it acts as a medium of payment or exchange in an economy. Unit of Account Money also functions as a unit of account, meaning it is provides a measure of the value of a good or service and a means to record and reconcile financial transactions. A large number of credit transactions involving huge future payments are made daily. By serving as a standard measure of payments, money makes borrowing and lending less risky.
Money has generalized the purchasing power. The raw material is purchased to make new things. Purchasing power is the inverse of the average or general level of prices as measured by the consumer price index etc. Further, accounting is simplified, as all items will be recorded in terms of monetary units that can be added and subtracted. Video of the Day Store of Value A third function of money is that it acts as a store of value over time.
As a medium of exchange, money solves all the difficulties of barter. Functions of Money Following are the utmost important functions of money. In matters of exchange, a common standard of value makes the transaction easy and also fair. The government can take the loans in the shape of money. A person may choose to store value in any form depending on considerations of income, safety and liquidity.
Lending and borrowing, therefore must take place in terms of a commodity which will, reasonably speaking, keep its value stable over time. Money is best kept as a store of value to be used as and when need arises. Some of the things that have served as money are - clay, cowry shells, tortoise shells, cattle, pigs, horses, sheep, tea, tobacco, wool, salt, wine, boats, iron, copper, brass, silver, gold, bronze, nickel, paper, leather, playing cards, debts of individuals, debts of banks, debts of governments, etc. Measure of Value: Another important function of money is that it serves as a common measure of value or a unit of account. This function of money is served by anything that is generally accepted by people in exchange for goods and services. But before discussing the functions of money, lets define the money. From the above cited definitions, it is clear that or an objective of money is to perform the duties of medium of exchange among different parties.
Conversely, if the prices are rising or value of money is falling creditors will be the losers. Measuring values in monetary units helps in measuring the exchange values of commodities. In the barter economy a great difficulty was experienced in the exchange of goods as the exchange in the barter system required double coincidence of wants. Also through barter system people meet the needs of his day to day lives. The large scale production is necessary to meet the growing demand of the consumers.
Money is also called a bearer of options or generalised purchasing power. Money is said to be the master key for the solution of all economic difficulties. Money is a means of making payments for the goods and services purchased. As the value of all goods and services is measured in a standard unit of money, their relative values can be easily compared. However, by acting as an intermediary, money increases the ease of trade. So the money is necessary for the financial progress. If a currency experiences rapid inflation price levels in the economy increase money can become an ineffective store of value, which may cause individuals to exchange money for other world currencies or stores of value such as precious metals.
If a loan is taken today, it would be paid back after a period of time. The first function of money is to be a unit of value or a unit of account. Money has removed this difficulty. Thus if the money is to serve as a fair and correct standard for deferred payments, its value must remain stable. Under barter economy there was no common measure of value in which the values of different goods could be measured and compared with each other. The value of money is linked to its purchasing power.
One can sell one immovable and movable belongings at one place and with the money acquired can buy then elsewhere. The production is made through the various factors of production like land, labor, capital and organization. Deferred payments mean those payments which are to be made in the future. The government provides social justice to the poor people by taxing the rich and spending it on the poor. Scope of International Trade, Advantages of International Trade and Disadvantages of International Trade.
The monetary unit is the unit in terms of which the value of all goods and services is measured and expressed. The consumer can buy the necessary goods at reasonable rates to get maximum utility. Ultimately, all trade may be considered barter - one good or service is traded for another good or service -either directly, or indirectly with money acting as the intermediary. . The amount of taxes and other dues are collected in the form of money. It is, therefore, essential that the good chosen as money should be such as can be easily stored without deterioration or wastage. They know that it will be accepted at any time for any good or service and is thus a store of value.
Since money retains its value, it is a measure of wealth. But each factor does not contribute equally to the product. Gold could be kept safely without deterioration. From above it is clear that money has removed the difficulties of barter system. By serving as a very convenient medium of exchange money has made possible the complex division of labour or specialization-in the modern economic organisation.
