Define money and state its functions
Answers
Explanation:
the first and leading role of money is that it functions as a mode of exchange. Barter exchanges become exceptionally tough in a large economy because of the high prices people would have to sustain looking for proper people to exchange their excesses or surpluses.
Money also functions as a suitable unit of account. The value of all commodities and services can be expressed in monetary terms. If the cost prices of all goods go up in monetary terms, i.e., there is a general rise in the cost price degree, the value of money in terms of any good must have come down – in the sense that a unit of money can now buy less of any good. We call it a decline or deterioration in the buying power of money.
The barter system has other dearths and deficiencies. It is tough to carry forward one’s opulence under the barter system. Assume you have an establishment of rice which you do not wish to utilise entirely. You may consider this stock of excess rice as :
An asset which you may want to utilise or sell-off, for obtaining other goods at some future date
But rice is a biodegradable item and cannot be stockpiled afar a definite time frame.
Holding the stockpiled of rice requisites a lot of space. You may have to spend a substantial amount of time and resources looking for people with a demand for rice when you wish to interchange your stockpile for purchasing other goods.
This issue can be resolved if the rice is sold for money. Money is perpetual and its stockpiling prices are also noticeably less. Hence, money can function as a stock of value for individuals.
Wealth can be stockpiled in the form of money for future utilisation. However, to perform this well, the value of money must be adequately constant and firm.
An increasing cost price degree may abrade the buying capacity of money.
Q1. WHAT ARE THE FUNCTIONS OF MONEY?
OR
EXPLAIN PRIMARY AND SECONDARY FUNCTIONS OF MONEY?
ANSWER:
FUNCTIONS OF MONEY Functions of money can be broadly categorised into two types:
(a) Primary functions
(b) Secondary functions
(A) PRIMARY FUNCTIONS i) MEDIUM OF EXCHANGE:
It means that money can be used to make payments for all transactions of goods and services.
A buyer can buy goods through money, and a seller can sell goods for money.
It is an essential function of money.
ii) MEASURE OF VALUE:
Money serves as a measure of value.
Value of all goods and services is expressed in terms of money.
(B) SECONDARY FUNCTIONS i) STANDARD OF DEFERRED PAYMENTS:
It means that money acts as a ‘standard’ for making future payments.
It has made deferred payments much easier than before.
Example: When we borrow money from somebody, we have to return both the principal as well as interest amount in the future.
Money is a convenient mode of calculation & payment of interest amount to be paid in the future.
This function has facilitated borrowing and lending.
It has also led to the creation of financial institutions.
ii) STORE OF VALUE:
Store of value implies a store of wealth.
Money can be easily stored for future use.
It is the most convenient and economical means of storing earnings and wealth.
iii)TRANSFER OF VALUE:
Money also serves for transfer of value.
It facilitates buying and selling of goods not only in the domestic country but also in other parts of the world.
Money serves as a medium of exchange, as a unit of account and as a store of value. The most important function of money is to serve as a medium of exchange to facilitate transactions. It’s functions are as follows:
Functions:
- As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps.
- Money may not even be the best store of value because it depreciates with inflation.
- Money is a liquid element so it is accepted everywhere.
- We can easily transport money store of value as it is available in a number of convenience denomination.
- The function of money is also as a unit of account as it provides a common measure of the value of goods and services being exchanged.
- If the value or price of a good is known then it enables both the purchaser and the supplier to make decisions about how much of the good to supply and to purchase.
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