Saturday, August 22, 2009
Functions of Money
The functions of money can be conveniently divided in to three parts (A) Primary (B) Secondary and (C) Contingent functions. These functions are briefly discussed as under.
(A) Primary Functions:
(i) Money as Medium of exchange: In all market transactions money is used to pay for goods and services. The sale or purchase of goods is done through money. Money in other words acts as medium of exchange and helps in overcoming the difficulty of double coincidence of wants of barter economy.
(2) Money as a unit of account: Another important function of money is that it provides a unit of account. The monetary unit of account is used to measure the value of goods and services in the economy. Just as we measure weights in terms of kilograms or distance in kilometres similarly we measure and compare the value of goods and services in terms of money.
(3) Money as standard of deferred payments: Another function of money is that it is used as mean of setting debts maturing in the future. In modern economy most of the business is done on credit. Goods are bought and sold on the promise to pay money on a certain date in future. Debts are stated and paid in terms of units of account.
(4) Money as a store of value: Money also functions as a store of value. It is a reservoir of purchasing power overtime. The money which you have today can be set aside to purchase things later on. This function of money is useful because most of us do not to spend our income immediately upon receiving it. They prefer to wait until they have the time or desire to spend it.
B. SECONDARY FUNCTIONS OF MONEY
Money as potential to influence the economy. It influences the price level, interest rates, utilization of resources etc. The secondary functions of money in brief are
1. Aid to specialization, production and trade: The use of money has helped in removing the difficulties of barter. The market mechanism, production of commodities, specialization, expansion and diversion of trade etc have all been facilitated by the use of money.
2. Influence on Income and consumption: The use of money has direct bearing on levels of income and consumption in the country. All production takes place for the market and the factor payments are made in money.
3. Money as an instrument of making loans: People save money and deposit it in banks. The banks and advance these saving to businessmen and industrialists. Money is thus the instrument by which saving are transferred into investment.
4. Money as a tool of monetary management: Money is an important tool of monetary management. If the money is effectively used it helps in increasing output and employment.
5. Instrument of economic policy: Money is an important instrument of economic policy. In order to achieve growth, reduce unemployment and maintain regular expansion of economic activity money is the most powerful factor.
C. CONTINGENT FUNCTIONS
Contingent functions are derived from primary and secondary functions. Contingent functions of money are as follows.
(i) Distribution of national income: Money facilitates the distribution of national income among various factors of production.
(ii) Basis of Credit system: Banks create credit on the basis of their cash reserves. Any change in the volume of money is brought about mainly by an increase or decrease in money supply.
(iii) Measure of Marginal Productivity: The marginal productivity of each factor of production is measured with the help of money.
(iv) Liquidity of Property: Money gives liquid form to wealth. A property can be converted into liquid form with the use of money.
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