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Functions of Money in the Modern Economic System

IndianMoney.com Research Team | Updated On Thursday, January 23,2020, 05:33 PM

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Functions of Money in the Modern Economic System

 

 

Money is a fundamental invention of mankind. With this invention of money, various difficulties are ruled out. Money plays an inevitable role in any kind of economy. Every economy needs money as a convenient medium of exchange. Money means the currency of a nation and it may include coins, paper notes, cheques, bills of exchange etc.

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Functions of Money in the Modern Economic System

Let’s discuss some of the important functions played by money in the modern economic system:

Difficulties of Barter:

There are several inconveniences of a barter system. Let’s discuss a few:

  • Absence of double coincidence of wants: barter system can only be operated if there is a double coincidence of want. This can be illustrated through an example. For example, if a person sells rice and another person sells pulses then both must want to buy each other’s products. If the seller of pulses wants to buy vegetables then the exchange cannot take place. Thus barter poses a lot of inconveniences, especially on a day to day basis. Thus money acts as a medium and overcomes such difficulties. The buyers and the sellers can now buy and sell a product using this medium.
  •  No standard of measurement: there is no specific measurement system used in barter. In other words, it provides no measure of value and thus the system remains inefficient as people cannot determine the amount they should buy or sell in exchange for their products. Thus it does not provide a way to compare the relative values of two products.
  • Difficulty of storage: you can store money and use it at a later point in time. But in the absence of a medium, people have to store their wealth in the form of commodities. While some commodities can be stored over a period, perishable items cannot be stored and thus they lose their value.

See Also:  What is Money Market?

Functions of Money:

Here are some important functions of money in an economy:  

The Medium of Exchange:

The primary function of money is that it acts as a medium of exchange. It is an efficient way to remove inconveniences of barter system. It is freely accepted for purchase or sale of any goods. It eliminates double coincidence of wants and can be directly exchanged in the market.

See Also:  Functions Of Money Market

A Measure of Value:

It is an instrument that acts as a measure of value. Money can be used as a standard of measurement which was absent in case of barter. The amount of money that needs to be paid for the purchase of a good is the price of the product. And the price is nothing but the value of the product in monetary terms. Therefore, the value of the good depends on the price we pay for it. Thus money makes calculations easier.

A Store of Value:

A big disadvantage that comes with barter is the store of value. If we use commodities and store it then they lose their value after a certain time. Thus commodities cannot be used to store wealth. Money is a better alternative and can be used as a store of value. You can store money and secure your future as it can be used at a future date as well. Money also does not lose value unlike commodity if stored over a period. Thus you can hold money for an extended tenure and use it to finance future purchases.

See Also: All You Need To Know About Money Market

The Basis of Credit:

Since money can be stored, it can be used to give credit. Thus borrowers can obtain money from the lender and repay it as per the terms of the loan. He can use the money to obtain goods and services and thus one can fulfil their requirements by borrowing money. Money also facilitates trade and business to a large extent is dependent on credit.

Qualities of a Good Money Material:

General Acceptability: Good money material must be acceptable in general. People must freely and happily exchange goods for money.

Portability: A satisfactory money material must have a high value as it is carried from one place to another. Thus money material must be such that carrying it should be easy and hassle-free. For example, carrying precious metals can be difficult due to their weight. But a money material should be light and should take minimum space for it to become a portable item.

Durability: The material must be such that they should not deteriorate due to environmental conditions or due to usage. Earlier forms of money like Gold lasted for years and thus metal or alloys are popular ways to make currencies.

Congnizability: The material used as money should be identifiable by all. Thus governments need to print or produce money by maintaining homogeneity.

See Also: Features Of Indian Money Market

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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