Functions of Money

Money is any verifiable record or an item that is usually acknowledged as payment for goods services. It is a repayment of debt as per socio-economic context.
Created On: Nov 4, 2014 12:53 IST
Modified On: Nov 5, 2014 12:49 IST

Money is any verifiable record or an item that is usually acknowledged as payment for goods & services. It is a repayment of debt as per socio-economic context.

The main functions of money are:

  • A medium of exchange
  • A unit of account
  • A store of value
  • A standard of deferred payment

Medium of exchange

The most important function of Money is a medium of exchange used in facilitating transactions. Without money, all transactions would’ve to be performed by barter system, which engages direct trade of one good or service for another. In barter system, exchange can take place when there is a double coincidence of wants flanked by two transacting parties. Money efficiently eliminates the double coincidence of wants predicament by serving as an intermediate of exchange that is acknowledged in all transactions, regardless of whether the parties desire each others' goods & services.

Unit of account

Money also functions as a unit of account. It provides a common measure of value of goods & services being swapped. Knowing the value of a good, in terms of money, facilitates both supplier & purchaser of the good to make pronouncements about how much of the good to purchase and how much of the good to supply.

Store of value

As a store of value, money is not unique. Other stores of value subsist such as art works, land, stamps etc. Money perhaps is not the best store of value as it deflates with inflation. Money is an easily transported store of value that is accessible in a number of expedient denominations.

Standard of deferred payment

A "standard of deferred payment" is a way to resolve a debt – a part in which debts are denominated, & the status of money as lawful tender, in those jurisdictions which have this impression, states that it may function for the emancipation of debts.  

 

Source: http://www.imf.org/

Definition of Money

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