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Functions of Money

Money serves four main functions: 1) As a medium of exchange to acquire goods and services by providing something of value in return. 2) As a store of value by reliably saving value obtained from production or trade for future use and exchange. 3) As a measure of value by determining the actual worth of goods and services in the market. 4) As a standard of deferred payment by settling debts through transferring value now in exchange for agreed value later.

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23 views1 page

Functions of Money

Money serves four main functions: 1) As a medium of exchange to acquire goods and services by providing something of value in return. 2) As a store of value by reliably saving value obtained from production or trade for future use and exchange. 3) As a measure of value by determining the actual worth of goods and services in the market. 4) As a standard of deferred payment by settling debts through transferring value now in exchange for agreed value later.

Uploaded by

Jelienne Bontes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Functions of Money

The following are the main functions of money:

1. Medium of exchange

The primary function of money is to be a medium of exchange. It means that money serves as an
intermediary instrument in the acquisition of goods and services. The basic assumption of designating
money as a medium of exchange is that one cannot acquire a good or service without providing the
other party with something of material importance in exchange.

2. Store of value

For money to serve as a store of value, it should be reliably saved for future use and be used as a
medium of exchange when it is retrieved. As a store of value, money can be used to store value obtained
through current production processes or trade activities for use at a future date.

Traders can store the value of the goods to trade them at a future time and/or different location.
Therefore, money makes it possible to save for the future, and participate in transactions in different
geographical locations.

3. Measure of value

Money is employed as a measure of value in the market to determine the actual value of specific goods
and/or services. A unit of account is required when formulating legal agreements that involve debt.
Therefore, money acts as a standard measure of trade, and it is used as a basis for making trading
quotations and bargaining for better prices in transactions.

4. Standard of deferred payment

A standard of deferred payment is considered one of the accepted methods of settling debts. For
example, Person A can lend Person B an amount equivalent to $10,000 for one year, with an agreement
to repay the loaned amount after the expiry of one year. The stored value in the sum loaned to Person B
is transferred from Person A in exchange for an agreed amount of stored value at a future date.

Person B can then use the loaned funds to purchase other goods and services in exchange for repayment
at a future date. It, in essence, means that Person A loaned the use of the goods and services that
Person B purchased, even though he did not originally own the goods and services.

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