All people must accept a thing as money. If he divides them, he will make a great loss. When I go to the grocery store, I am confident that the cashier will accept my payment of money. Use of money allows purchase and sale to be conducted independently of one another. Depositor can transfer the amount of money deposited in his bank account to the account of another man.
This means that money serves as a measure of value. However, money can operate as medium of exchange only when it is generally accepted in that role. Money can be categorized as having three general functions: a medium of exchange, a unit of account, and a store of value. The senate is chosen by voters in the states. Yet in the short run—for day-to-day purposes—money has sufficient stability of value to serve quite well as a store of value.
A fluctuating monetary unit creates a number of socio-economic problems. A fundamental problem arises pertaining to exchange of one good for another good. What are the three basic functions of money? Modern form of money such as coins, notes and bank deposits permit people to save their surplus income. These four functions of money have been summed up in a couplet which says: Money is a matter of functions four, a medium, a measure, a standard and a store. Under barter system, it was difficult to use goods as a store of wealth due to perishable nature of some goods and high cost of storage. Money has the merit of general acceptability so; it can be easily exchanged for goods at all times. In order for an item to be considered money, it must be the unit that prices, bank balances, etc.
. Money has simplified the borrowing and lending operations and encouraged capital formation. Of course, there are other assets like houses, factories, bonds, shares etc. However, evils of money are many. I'm thirsty, so I take them to a bar and try and swap them for beer, but the bartender doesn't want lightbulbs, he wants a snowmobile.
So invention of money is not an unmixed blessing. Innumerable exchange rates under the barter system earlier caused enormous trouble in the transactions of all kinds. In an economy where people have very specialized skills, this kind of exchange would take an incredible amount of time and effort; in fact, it might be nearly impossible. For example, say I want a cow. Since money retains its value, it is a measure of wealth. Find out what in this eight-minute episode of our.
In fact, all forms of wealth e. Precious metals like gold and silver are always acceptable. Money can be characterized in the following ways: â¢ Durable: Money should be able to last a long time and should be able to withstand many exchanges and transactions from person to person and business to business. Transfer of Value: Money also functions as a means of transferring value. In this case, it is almost impossible for him to divide his house and barter it for all the above things. A Medium of Exchange 2.
For example, say a man wants to sell his house and buy some land, some cows, and some cloth. Suppose, a shopkeeper likes to pay ten kilograms of detergent to his workers as wages. Inflation slowly erodes the purchasing power of money over time. Money also acts as a unit of account. This means that money is widely accepted as a method of payment. Money has been designed to serve as a common measure of value.
If all sellers decided that they would no longer accept these notes and coins, then these would cease to be money. It can be easily taken from one place to another place without any difficulty. It was understood that the certificate could be redeemed for gold at any time. Here again money is used as a medium of exchange, but this time the payment is spread over a period of time. As a medium of exchange, everyone must have faith that everyone else will accept it for their goods and services. Money would perform the store of value function properly if it remains stable in value.
Barring the above functions, money acts as an effective instrument in controlling demand and supply in the market. Money may not even be the best store of value because it depreciates with inflation. In a money-based economy, I can sell my services as a bassoon player in an orchestra to those who are willing to pay for orchestra concerts with money. At present, money is stored in the form of bank deposits. Money facilitates both buying and selling of goods and services. A consumer measures the utilities of different consumer goods with the help of money. Although wealth can be stored in other forms also, but money is the most economical and convenient way.