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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Let’s discuss some of the important functions played by money in the modern economic system:
There are several inconveniences of a barter system. Let’s discuss a few:
See Also: What is Money Market?
Here are some important functions of money in an economy:
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.
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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 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.
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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.
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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