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All You Need to Know About Primary and Secondary Functions of Money

IndianMoney.com Research Team | Posted On Thursday, March 12,2020, 06:14 PM

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All You Need to Know About Primary and Secondary Functions of Money

 

 

Money is a word derived from the name of a Greek goddess, Juno Moneta who was the goddess of money. Money is not just about coins and fiat currency, it rather holds a more embedded and significant meaning in the global economy. Money is a means of payment which is used to make global and domestic payments. It is basically a medium of exchange among people of different trades and countries.

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All You Need to Know About Primary and Secondary Functions of Money

Money serves several important functions. The two most important functions of money are:

  • Primary Functions
  • Secondary Functions

The primary functions include:

  • Medium of exchange
  • Measure of value

The secondary functions include:

  • Store of value
  • Standard of deferred payments
  • Transfer of money

Primary Function

The primary functions are the most critical and important functions of money. They are used as a mode of payment and exchange.

a. Medium of Exchange: Money serves as a common medium of exchange domestically and globally. The exchange can primarily happen for goods, services and other commodities as well. In the past, before the introduction of money, commodities served as a medium of exchange for goods and services. For example, farmers used to exchange a part of their produce to buy other goods.

See Also: Functions Of Money Market

With the introduction of money, there has been a free trade of goods and services across industries and countries. As money is a clear medium of exchange, there are no problems in the transaction.

b. Measure of Value: Money also serves as a benchmark to measure the value of goods and services. The traditionally existing barter economy had several ambiguities; one of which was mapping all the goods and services across a common benchmark or platform.

With the introduction of money, this problem is easily solved. Things can be valued in one common term, money. It also serves as an accounting unit which is extensively used across the world. All the economic concepts and their derivatives can be measured in terms of money; like investments and earnings, costs and price, income and expenses, production and services and so on.

Secondary Functions

Secondary functions are the derived functions from the primary aspect but are equally important functions. Secondary functions are not direct functions but hold high importance in preserving the value of goods. These are:

Store of Value: The concept of storing commodity value has come up from the fact that the barter system did not take into account the future preservation of wealth. Things like crops, livestock were traded for other services. The locals could not preserve them for a longer period as they were either perishable or got destroyed or stolen easily.

The transition to money as a store of value was not a direct one. People started using precious metals like gold and silver to preserve and store wealth. This again was subject to theft and limited quantity.

See Also: Functions of Money in the Modern Economic System

With the introduction of money, this problem was also resolved. People are now able to exchange perishable and unwanted goods for money and store that amount for an indefinite period.

  1. Standard of deferred payments: While dealing with perishable goods, there are chances of spoilage. Money doesn’t have this set of problems. Money is the most accepted form of wealth, and all lending and borrowing transactions take place in terms of money.
  2. Means of transferring value: Transferring value refers to representing the value of a given commodity in terms of money. For example, you can calculate the value of your house or car in terms of money. Earlier in the barter system, this was not possible as you cannot value one commodity in terms of another commodity.

This is not like one house is worth 10 cattle or so on. With the introduction of money, owners can now sell and purchase commodities at different places and make transfers accordingly. As money is an easily transferable account, it can be traded in the form of liquid cash, demand draft, cheque, online credit transfer, money order and so on.

Money is not just a cash value of a commodity but has several other uses as well. The barter system does not serve all the purposes an economic system must do; hence paving way for a more transparent, reliable and universally accepted unit called Money.

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