Functions of money

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Functions of money

Posted by Abrar Abbu 5 years, 4 months ago

CBSE > Class 12 > Economics

1 answers

Yogita Ingle 5 years, 4 months ago

Functional definition of money refers to money as anything that performs four basic functions, (a) It serves as a medium of exchange. (b) It serves as a standard unit of value. (c) It serves as a means for future / contractual payments or standard of deferred payments

FUNCTIONS OF MONEY

Functions of money can be broadly categorized 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.

0Thank You

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