Money

The fundamental function of money in an economic system is to facilitate the exchange of goods and services & to lessen the time and effort required to carry out trade.

Primitive trade was carried out by Barter Sustem and it is seen in some places even today. Pure barter is so wasteful of time and effort that little trade would be feasible if if this is the only available method of exchange. There are various disadvantages in barter system, to name a few,

• The lack of any common unit in terms of which to measure and state the values of goods and services.


• The lack of a double coincidence of wants, which means that to trade in a barter system A should have a good which is wanted by B and also A should want the good which is with B.


• The lack of any satisfactory unit in terms of which one can write contracts requiring future payments.


• The lack of any method of storing generalised purchasing power. The stored commodity may deteriorate in value or it's storage may be difficult.

FUNCTIONS OF MONEY

Money serves two Specific functions and two derivative functions.

Specific functions : 1. a unit of value 2. a medium of exchange
Derivative functions: 1. a standard of deferred payments 2. a store of value


MONEY AS A UNIT OF VALUE :

Money serves as a unit in terms of which the value of all goods anf services can be measured and expressed. This simplifies accounting. Assests, liabilities, income and expenditure of all kinds can be stated in terms of money.

MONEY AS A MEDIUM OF EXCHANGE :

All goods and services are traded with other goods and services with money acting as the intermediary. This reminds us of the primitive barter syste, the only modification being the addition of money as the intermediary. This gives the bearer a great advantage of choosing on which goods and services to spend his money.

MONEY AS A STANDARD OF DEFERRED PAYMENT:

Modern economic systems require the existence of a large volume of contracts for the payment of principle and interests on debts in which future payments are calculated and stated in monetary units.

MONEY AS A STORE OF VALUE :

Money is a good store of value which overcomes all the disadvantages that are faced in barter.

Money also serves an important function in the modern system of production. The organiser of a business or a firm uses money for the purchase of raw materials and to pay wages to the workers. Money is his working capital. Without money the modern methods of production cannot be carried out.