Answer the following question.
Explain the secondary functions of money.
Answer the following question.
State any three functions of money.
Secondary Functions of Money:-
1. Standard of deferred payments:-
In the modern economy many transactions take place without instant payments. The debtors make a promise to make payments on some future date. Such future payments are possible because of money. Under Barter System taking loan was easy, but its repayment was difficult because loans were in the form of grains or cattle. Money facilitates lending and borrowings, because the borrowings are in the form of money and the repayment are also in the form of money. Due to general acceptability, stability of value compared to other goods, durability etc., money acts as a standard of deferred payments.
2. Store Value:-
Money works as a store of value. Along with satisfaction of present wants, provision for satisfaction of future wants is equally important. It requires savings from the current earnings. Money is a convenient means through which savings can be done easily: According to Lord J.M. Keynes, "money is a link between the present and the future." Money serves as a store of value because money has purchasing power. It can be used to purchase real assets like land, house etc. and financial assets like shares, debentures, bonds, etc.
3. Transfer Value:-
Today with the extension of trade among various countries and organizations it becomes necessary to transfer purchasing power from one place to another. This is easily done by money. Money helps to shift the purchasing power from one place to another e.g. real assets like building or agricultural land from one place can be sold and with the help of that money, building or land can be purchased at some other place.
1. Store of Value - Generally, people have a tendency to save a certain portion of their income in the form of savings and to accumulate wealth. Under the Barter system, such storage of wealth was not possible due to the perishable nature of certain commodities. As against this, wealth can be easily stored in the form of money without any loss in its value. Thus, a store of value as a function of money implies that money can be easily saved and used for future needs.
The store of value function of money can be justified because of the following reasons.
- Money is the most widely accepted as a medium of exchange.
- There is no loss in the value of money over time (though there exists a loss of value of money due to inflation but it is negligible).
- Money can be stored conveniently and does not involve any cost.
2. Standard of Deferred Payments - Deferred Payments refer to future payments and contractual payments such as loans and interest payments, salaries, etc. As money is widely accepted as a medium of exchange and can be used to store value without much loss of value, so it can be used for future payments.
3. Transfer of Value - Money can be transferred easily from one place to another and from one person to another. Therefore, it implies that with the help of money, purchasing power can be transferred. An individual who is having money has purchasing power and he/she can transfer the purchasing power to anyone just by transferring money. For example, when a father is giving pocket money to his son, he is indeed transferring purchasing power to his son to buy different goods and services.