Explain the primary and secondary functions of money
Answers
Explanation:
1. Primary Functions:
Primary Functions include the most important functions of money, which it must perform in every country,
These are:
(i) Medium of Exchange:
Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability So, all exchanges take place in terms of money.
1. This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system.
2. Use of money allows purchase and sale to be conducted independently of one another.
3. This function of money facilitates trade and helps in conducting transactions in an economy.
4. Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to satisfy human wants.
(ii) Measure of Value (Unit of Value):
Money as measure of value means that money works as a common denomination, in which values of all goods and services are expressed.
1. By reducing the value of all goods and services to a single unit (i.e. price), it becomes very easy to find out the exchange ratios between them and comparing their prices.
2. This function facilitates maintenance of business accounts, which would be otherwise impossible.
3. Money helps in calculating relative prices of goods and services. Due to this reason, it is regarded as a Unit of Account’. For instance, ‘Rupee’ is the unit of account in India, ‘Pound’ in England and so on.
2. Secondary Functions:
These refer to those functions of money which are supplementary to the primary functions. These functions are derived from primary functions and, therefore, they are also known as ‘Derivative Functions’.
The major secondary functions are:
(i) Standard of Deferred Payments:
Money as a standard of deferred payments means that money acts as a ‘standard’ for payments, which are to be made in future. Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy.
This function of money is significant because:
1. Money as a standard of deferred payments has simplified the borrowing and lending operations.
2. It has led to the creation of financial institutions.
(ii) Store of Value (Asset Function of Money):
Money as a store of value means that money can be used to transfer purchasing power from present to future. Money is a way to store wealth. Although wealth can be stored in other forms also, but money is the most economical and convenient way. It provides security to individuals to meet contingencies, unpredictable emergencies and to pay future debts. Under barter system, it was difficult to use goods as a store of wealth due to perishable nature of some goods and high cost of storage.
Money as store of value has the following advantages:
1. Money is available in fractional denomination, ranging from Rs 1 to Rs 1,000.
2. Money is easily portable. So, it is easy and economical to store money as its storage does not require much space.
3. Money has the merit of general acceptability so; it can be easily exchanged for goods at all times.
4. Savings in terms of money are much more secured than in terms of goods.
Money has overcome the drawbacks of Barter System:
Barter system makes the exchange process very difficult and highly inefficient.
Money is the medium of the exchange that is used for dealing with goods and services. Money a monetary instrument has a certain value.
EXPLANATION-
Money value can be described based on the material it is made up or the value gives to it. Money has solved many problems of barter systems like deferred payments, value ascertains,easy exchange, etc. The function of money has been distinguished based on primary and secondary.
=》 Primary function-
•The measure of value- Money provides the appropriate and exact value of exchange for the good or service they are being exchanged with. For example - If a chocolate bar costs 50 rupees. We have a 50 rupees currency to exchange it with.
•The medium of Exchange - This is the most important factor why the money was discovered was to work or channelizing as the medium of exchange which was missing in the barter system and make the exchange of goods and services a long process.
=》 Secondary function -
• Deferred payments - He also helps to make future payments for the goods or services we buy in a current timeline. For example- Payments through EMI or Installments.
• Store of Value - Money can be stored in any form with us which was not possible in the batter system due to the exchange of goods and services that can be stored for long terms.
• Transfer of value - The money value can be transfer easily from one to another person as it has fixed values. For example- I have to give 10,000 rupees to one of my suppliers. So, to transfer these 10,000 rupees can he has done through the currency amounting that.
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