Functions of Money

Money is defined as anything performing monetary functions. It must also be generally acceptable to every member of society. money has a value to individual X only when he thinks that individual Y will accept it in exchange for goods and services

Functions of money include;

Medium of Exchange

 In the barter economy, great difficulty was experienced in the exchange of goods and services as the exchange in the barter system required a double coincidence of wants. Money has removed these difficulties where individual A can sell his good to individual B for money and then use the money to buy goods from others who have what he requires. As long as it is generally acceptable, there will be no difficulty in the process of exchange. By serving as a very convenient medium of exchange, money has made possible the idea of specialization in the modern economic system

 Measure of Value

Money serves as a common measure of value or unit of account, unlike the barter system in which various goods can be measured and compared with each other. Money serves as a yardstick for measuring the value of goods and services. As the value of all goods and services is measured in units of money, the relative value can be easily compared.

 Standard of Deferred

Payments Deferred payments are payments to be done in future. A loan is measured and paid in terms of money. A large no of credit transactions involving future payments is made on daily basis. The existence of a standard of deferred payment enables borrowers to borrow money in exchange for a claim against them to pay in future.

Store of Value

Money being the most liquid is a convenient form in which to store wealth i.e. can be held as an asset. This function is also called the asset function of money. It is essential that goods are chosen as money is not easily stored without deterioration in value. Gold could be kept safely without deteriorating in value but in modern times, paper money can be kept in an account to serve as an asset. Money has an advantage in that an individual can buy with it anything at any time which is not the case for other assets that have to be sold and converted into money and only then can they be used to buy other goods.

What are the other functions of money? Thanks for reading this blog. have a fruitful day, won’t you!

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