Functions of Money

  • Medium of exchange: Money facilitates the exchange of goods and services in the economy. Workers accept money for their wages because they know that money can be exchanged for all the different things they will need. Use of money as an intermediary in transactions therefore, removes the requirement for double coincidence of wants between transactions. Without money, the world’s complicated economic systems which is based on specialization and the division of labour, would be impossible. The use of money enables a person who receives payment for services in money to obtain in exchange for it, the assortment of goods and services from the particular amount of expenditure which will give maximum satisfaction.
  • Unit of account: Money is a means which the prices of goods and services are quoted and accounts kept. The use of money for accounting purposes makes possible the operation of the price system and automatically providing the basis of keeping accounts, calculating profit and loss, costing etc. It facilitates the evaluation of performance and forward planning. It also allows for the comparison of the relative values of goods and services even without an intention of actually spending (money) on them eg. “window shopping”.
  • Store of Wealth/value: The use of money makes it possible to separate the act of sale from the act of purchase. Money is the most convenient way of keeping any form of property which is surplus to immediate use; thus in particular, money is a store of value of which all assets/property can be converted. By refraining from spending a portion of one’s current income for some time, it becomes possible to set up a larger sum of money to spend later (of course subject to the time value of money). Less durable or otherwise perishable goods tend to depreciate considerably over time and owners of such goods avoid loss converting them into money.
  • Standard of deferred payment: Many transactions involve future payment eg. hire purchase, mortgages long term construction works and bank credit facilities. Money thus provides the unit in which given stability in its value, loans are advanced/made and future contracts fixed.
    Borrowers never want money for its sake, but only for the command it gives over real resources. The use of money again allows a firm to borrow for the payment of wages, purchase of raw materials or generally to offset outstanding debt obligations; with money borrowing and lending becomes much more easier, convenient and satisfying. Its about making commerce and industry possible viaable.
    Only money, of all possible assets, can be converted into other goods immediately and without cost.
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