Explain the store of value function of money.
Answers
Primary and Secondary Functions of Money
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Primary and Secondary Functions of Money!
1. Primary Functions (Main or Basic Functions)
2. Secondary Functions (Subsidiary or Derivative Functions)
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1. Primary Functions:
Primary Functions include the most important functions of money, which it must perform in every country,
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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.
For, “How does money separate the acts of sale and purchase”, refer HOTS.
(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.
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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):