Sunday, 27 March 2016

Money - Meaning and Definition | Four functions of money

The importance of money
Money plays an important role in economics. It acts as a medium of exchange for goods and as the unit and store of value for execution of transactions. Without money, it would have been much difficult to procure your goods and services. In the ancient barter system, one has to search for the person who can exchange his goods with those of the goods required by him. So, both parties to the barter system should have the product desired by each other and/ or the need and interest for the same products. But, in the modern money economy, we need not search for the person who likes your product and exchanges it with the product needed by you. You can sell your product directly in the market and get money in return. Then you can buy with that money whatever is required by you. It becomes very easier for you to make any kind of transaction with money. You can buy goods or services at your own time, make payments of bills, keep it in banks for future uses, transfer it to any part of the world and utilise it there. So, this is the benefit and importance of money in your life.

What is money? Meaning and definition of money
Money is a medium of exchange that is generally acceptable to people as a unit of exchange and as a store of value. Generally, the currency notes and coins are considered as money by public. It is a kind of instrument having the purchasing power and capable of being stored for future uses.

The great economist Geoffrey Crowther, who was the editor of a newspaper "The Economist" during the 1930s and 1940s and later became the Managing Director and Chairman of Economist Newspaper Ltd., defined money in his book "An Outline of Money" as follows:

"Anything that is generally acceptable as a means of exchange and which at the same acts as a measure and store of value".

So, money is anything that is legally and socially acceptable for buying and selling things or for making payments of goods and services utilised or in repayment of debts.

Four functions of money in economy
Money performs four major functions -
1) Money is the medium of exchange.
2) Money is a unit of account and measure of value.
3) Money functions as a store of value.
4) Money is a standard of deferred payments.

Of the above four functions, a medium of exchange and measure of value are regarded as primary functions of money. The functions of a store of value and standard of deferred payment are regarded as secondary functions of money as they are derived from the primary functions.

A) Primary functions of money:

1) Medium of exchange
Money is a medium of exchange in the sense that it is used to used to exchange for goods and services. The buyer buys goods and services and pays money for it. The seller sells goods whereas the service provider provides his services and in both cases, they receive money from the receiver of goods or services. Thus, money is an important medium of their transactions.

For example, you buy a chocolate and pay money for it. The seller of chocolate is receiving money in exchange of his chocolate. Similarly, you get the service of a barber to shave your beard and in exchange of it, you are paying the money. Thus, money serves as an important medium of exchange in all transactions.

2) Measure of value or unit of account
Money acts as a unit of account or measure of value. You value any goods or services in terms of money value. You are fixing monetary value per one unit of good or service. So, any goods or services that we buy or sell are quoted by its value per one unit in terms of money.

For example, a chocolate is quoted as of $5 value, a bread is quoted as of $10 value, a computer is quoted as of $10,000 value, so on. Similarly, one shave is quoted at $5 value, one haircut at $10 value, one car wash at $20 value like that. When you give the value per unit of good or service it becomes very easy to identify those goods and services and compare them with other similar products or services offered by different seller or providers.

B) Secondary functions of money:

1) Store of value
Money can be stored and used subsequently without losing its value for a certain period. Money can be used only when you need to buy or procure something. Till then, you can keep your money in your purse or wallet or you can keep it in your bank account. So money is stored for your future needs. With that, you can buy anything like rice, bread, chocolate, wheat flour, car, computer, so on. Thus, you are storing the purchasing power of money for a certain period, until you actually need the goods or services. So, you are much relaxed as you know that you can purchase anything with the stored value of money. This is one wonderful function performed by money.

This function of money comes from the primary functions of money acting as a unit of account and as a medium of exchange. It is because of those two functions, that you are capable of storing money. It is because of the fact that money is generally accepted as a medium of exchange, that you are keeping it in store. It is because of the fact that it is a unit of transaction, that you are procuring different denominations of money and using them for your purchases.

2) Standard of deferred payments
Money functions as a standard for deferred payments. When someone borrows money from you and agrees to return it after a certain period, he will pay back it in the form of money on that stipulated date along with interest if any charged by you for lending him the money instead of using it for other useful purposes by you. Millions of transactions are taking place now, which are not paid immediately.

Payments get deferred till a certain period of time or till the happening of a certain event or till the actual goods or services reach you. So, till such period, the payment gets postponed or deferred and nobody worries as money will not lose its value even if paid later under normal circumstances. You are able to defer the payment because of the standard value of money and its general acceptability. This function of money has given rise to the various financial institutions and lending businesses and thereby advanced the economic development also.

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