Functions of money

Money as a liquid store of value facilitates its possessor to purchase any other asset at any time. The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part Functions of money maintaining a standing army.

Money acts as a standard measure and common denomination of trade. These include hyperinflationstagflationrecessionhigh unemployment, shortages of imported goods, inability to export goods, and even total monetary collapse and the adoption of a much less efficient barter economy. The likelihood of a double coincidence of wants, however, is small and makes the exchange of Functions of money and services rather difficult.

Hicks, gross national product is a collection of goods and services reduced to a common basis by being measured in terms of money. Money helps in the distribution of national product through the system of Functions of money, rent, interest and profit.

Usually, the government declares the fiat currency typically notes and coins from a central bank, such as the Federal Reserve System in the U. By acting as a common denominator it permits everything to be priced, that is, valued in terms of money.

Representative money is money that consists of token coinspaper money or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver.

When debts are denominated in money, the real value of debts may change due to inflation and deflationand for sovereign and international debts via debasement and devaluation. Money facilitates the division of national income between people.

They are not required to wait for, say ten years, so as to be able to save enough money to buy costly items like cars, refrigerators, T.

The baker would, therefore, have to re-sell the product which would take time and be very inconvenient. Thus one of the disadvantages of the barter system is that any commodity or service has a series of exchange values.

Modern form of money such as coins, notes and bank deposits permit people to save their surplus income. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.

The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity.

The process of fractional-reserve banking has a cumulative effect of money creation by commercial banks, as it expands money supply cash and demand deposits beyond what it would otherwise be.

Money serves as a common measure of value in terms of which the value of all goods and services is measured and expressed.

In a modern economy, most transactions buying and selling are made on the basis of credit. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange.

Commodity A British gold sovereign Many items have been used as commodity money such as naturally scarce precious metalsconch shellsbarleybeads etc.

In other words, it must maintain a stable value. However, fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction.

The implication is that money is used to measure and record financial transactions as also the value of goods or services produced in a country over time.

For example, it is much easier to transfer one lakh rupees through bank draft from person A in Amritsar to person B in Bombay than remitting the same value in commodity terms, say wheat.

However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Major nations established mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.

Functions of Money

These are successively larger aggregate categories: But, to become a satisfactory standard of deferred payments, money must maintain a constant value through time ; if its value increases through time i. However, these advantages held within them disadvantages.

Distribution of National Income: Through money, value can be easily and quickly transferred from one place to another because money is acceptable everywhere and to all. Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy.

However, if the rate of gold mining cannot keep up with the growth of the economy, gold becomes relatively more valuable, and prices denominated in gold will drop, causing deflation. To realise the problems of saving in a barter economy let us consider a farmer.

Store of value Main article: Money, besides being the basis of current transactions, is also the basis of deferred payments.

4 Essential Functions of Money

Thus, money provides the most efficient means of satisfying wants. The Basis of Credit:ADVERTISEMENTS: The following points highlight the top six functions of money.

Function # 1. A Medium of Exchange: The only alter­native to using money is to go back to the barter system. However, as a system of ex­change the barter system would be highly impracticable today.

For example, if the baker who supplied the green-grocer [ ]. The most important function of money is to serve as a medium of exchange or as a means of payment.

To be a successful medium of exchange, money must be commonly accepted by people in exchange for goods and services. 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. These functions have been presented below in the charitable.

(i) Money as a Unit of Value: Money measures the value of various goods and. Start studying Meaning and Functions of Money. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Money is often defined in terms of the three functions or services that it provides.

Money serves as a medium of exchange, as a store of value, and as a unit of account. Store of value. In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value.


What are the important functions of Money ?

The Four Basic Functions of Money. Now, let's take a look at how economists view the basic functions of money. Money serves four basic functions: it is a unit of account, it's a store of value, it.

Functions of money
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