FUNCTIONS OF MONEY
Friday, May 24, 2024 7:30 PM
Functions of Functions of money can be broadly categorized into the following two types:
money
(a) Primary functions
(b) Secondary functions
(a) Primary i) Medium of exchange:
functions ● It means that money can be used to make payments for all the transactions of
goods and services.
● A buyer can buy goods through money, and a seller can sell goods for money.
● It is an essential function of money.
ii) Measure of value:
● Money serves as a measure of value.
● The value of all goods and services is expressed in terms of money.
(b) Secondary i) Standard of deferred payments:
functions ● It means that money acts as a ‘standard’ for making future payments.
● It has made deferred payments much easier than before.
● Example: When we borrow money from somebody, we have to return both the
principal as well as the interest amount in the future.
● Money is a convenient mode of calculation and payment of interest amount to be
paid in the future.
● This function has facilitated borrowing and lending.
● It has also led to the creation of financial institutions.
ii) Store of value:
● A store of value implies a store of wealth.
● Money can be easily stored for future use.
● It is the most convenient and economical means to store earnings and wealth.
iii) Transfer of value:
● Money also serves for transfer of value.
● It facilitates buying and selling of goods not only in the domestic country but also
in other parts of the world.
The "double coincidence of wants"
• a concept that highlights one of the inherent challenges of barter systems,
• where goods and services are directly exchanged for other goods and services
• without the use of money as an intermediary.
• In a barter system, for a transaction to occur, both parties must simultaneously possess the goods
or services that the other desires and be willing to exchange them.
• This requirement creates a situation where there must be a "double coincidence" of wants between
the two parties involved in the exchange.
For example
• imagine a farmer who wants to exchange his wheat for shoes.
• In a barter system, the farmer needs to find a shoemaker who not only has the desired shoes but
also desires wheat in exchange.
• However, if the shoemaker desires something other than wheat, or if he does not need wheat at all,
the exchange cannot occur.
• This mismatch in desires creates a barrier to trade and makes transactions more difficult to arrange.
The double coincidence of wants imposes limitations on the efficiency and scope of transactions in a
barter economy. It can lead to inefficiencies, delays, and missed opportunities for exchange.
SOLUTION
• To overcome this challenge, the development of money as a universally accepted medium of
exchange greatly simplifies transactions
• by eliminating the need for a double coincidence of wants.
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• by eliminating the need for a double coincidence of wants.
• With money, individuals can sell their goods or services for money and then use that money to
purchase other goods or services they desire,
□ greatly enhancing the efficiency and flexibility of economic transactions.
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