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Money Performs Various Functions. - Economics

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Money performs various functions.

Explain with reason whether you ‘agree’ or ‘disagree’ with the following statement:

Money performs various functions ?

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Yes, I do agree with the given statement because money performs the following functions.
·         Primary function
·         Secondary Function
·         Contingent function

A.    Primary Function:
1.      Medium of Exchange: -Money acts as a medium of exchange. Money as a medium of exchange has overcome one of the major limitations of barter exchange. People accept money in exchange for the goods and services. They use it to buy some other goods and services as and when they need them, thus, money changes hands from one person to another through transactions.
2.      Measure of Value: -Price is the value of goods and services expressed in terms of money. Expressing the value of one commodity in terms of another would be difficult. This difficulty can be solved when prices of all the goods and services are expressed in terms of money. So, money assumes the role of measure of value.
B.     Secondary Functions:
1.      Store of Value: Under barter exchange, certain commodities lacked store of value because of perishable in nature. However people can conveniently store money and use it as and required. Money can be stored with the individual, or invested in securities or deposited in the banks.
2.      Standard of Deferred Payments: -With money, it is possible to settle payments at the time of actual exchange or at a later date. The possibility of settlement at a later date, i.e, and deferred payment enables people to undertake sales in anticipation of future receipts.
3.      Standard of Transfer Payments: -Traders and others buy goods from far (distant) off places. Accordingly payment has to be made or transferred to those distant places.
C.    Contingent Function:
1.      Estimation of National Income: National income is the money value of all goods and services produced in the country during a specified period of time. Goods and services produced are expressed in money terms and accordingly national income is determined.
2.      Measures of Utility: -Alfred marshal treated money as measuring rod of utilities. Marshal stated that utility (which is the quality of a commodity to satisfy human wants) could be measured with the help of money to achieve maximum satisfaction.
3.      Liquidity: Money is the most liquid assets. It can be available on demand (in case of bank deposits) and can be transferred without any loss of time and value. It can be converted into any other commodity almost instantly (immediately).
4.      Productivity: Money helps to increase productivity of business firms. Productivity is the ratio of output (returns) to input (capital, labour hours, etc). There can be more returns with the same amount of capital or with a lower amount of capital than before.

5.      Basis of credit system: -Money is the foundation on which the structure of banking and credit system is based. A bank cannot create credit without having adequate money in reserves. The credit instruments drawn by businessmen such as cheques, and letter of credit are backed by money guarantee of the bankers.
Concept: Meaning of Money
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