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Money is defined as anything that is legal and capable of effecting transactions
Functions of Money:
i) 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 labor, 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.
ii) Unit of account: Money is a means by 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”.
iii) 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 by converting them into money.
iv) 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 viable.
Only money, of all possible assets, can be converted into other goods immediately and without cost.
Wilfykil answered the question on February 6, 2019 at 11:06
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