Functions of Money

What are the Functions of Money

Money performs four specific functions, each of which overcomes the difficulties of barter. The functions of money are to serve as:

  1. Unit of value,

  2. Medium of exchange,

  3. Standard of deferred payments and

  4. Store of value.

Money as a Unit of Value

The first function of money is to be a unit of value or a unit of account. The monetary unit is the unit in terms of which the value of all goods and services is measured and expressed. The value of each good or service is expressed as a price, which is the number of monetary units for which the good or service can be exchanged.

If the price of a pen is Rs. 10 then a pen can be had in exchange for ten monetary units (where the monetary unit in this case is the rupee). Measuring values in monetary units helps in measuring the exchange values of commodities. If a pen is worth Rs. 10 and a notebook is worth Rs.20 then a notebook is worth two pens. Further, accounting is simplified, as all items will be recorded in terms of monetary units that can be added and subtracted. Money is a useful measuring rod of value only if the value of money itself remains constant. This is similar to saying that a scale is a useful measure of length only if the length of the scale itself is constant. The value of money is linked to its purchasing power. Purchasing power is the inverse of the average or general level of prices as measured by the consumer price index etc. As the general price level increases, a unit of money can purchase a lesser amount of goods and services - so the value or purchasing power of money declines. So, money will be a useful unit of value only as long as its own value or purchasing power remains constant.

Money as a Medium of Exchange

Money also acts as a medium of exchange or as a medium of payments. This function of money is served by anything that is generally accepted by people in exchange for goods and services. 'Anything' has been quite a variety of things across places and times. Some of the things that have served as money are - clay, cowry shells, tortoise shells, cattle, pigs, horses, sheep, tea, tobacco, wool, salt, wine, boats, iron, copper, brass, silver, gold, bronze, nickel, paper, leather, playing cards, debts of individuals, debts of banks, debts of governments, etc. Money will then reduce the time and energy spent in barter. The person who owned a cow can now simply sell it to the person who offers the most money for it and then buy the bullock cart from another person who offers him the best bargain. Ultimately, all trade may be considered barter - one good or service is traded for another good or service -either directly, or indirectly with money acting as the intermediary. However, by acting as an intermediary, money increases the ease of trade. Money is also called a bearer of options or generalised purchasing power. This indicates the freedom of choice that the use of money offers. The owner of the cow need not procure goods and services from those to whom he sold his cow. He can use the money to buy the things he wants most, from those who offer him the best bargain (not necessarily those who bought his cow), at the time he considers most advantageous (not necessarily immediately). Again, this function can only be performed properly if the value of money remains constant.

Money as a Standard of Deferred Payments

If money performs the previous two functions then it may also perform the function of being the unit in terms of which deferred or future payments are stated. Examples of situations where future payments are to be made are pensions, principal and interest on debt, salaries etc. As long as money maintains a constant value through time, it will overcome the problems associated with making future payments with specific commodities.

Money as a Store of Value

If money becomes a unit of value and a means of payment then it may also perform the function of serving as a store of value. The holders of money are holders of generalised purchasing power that can be spent through time. They know that it will be accepted at any time for any good or service and is thus a store of value. This function will be performed well as long as money retains a constant purchasing power.

It may be noted that any asset other than money may also perform the function of store of value, for example, bonds, land, houses, etc. These assets have the advantage that, unlike money, they yield income and may appreciate in value over time. However, they are subject to the following:

  1. They may involve storage costs,
  2. They may not be liquid in the sense that they could not be quickly converted into money without loss of value, and
  3. They may depreciate in value. A person may choose to store value in any form depending on considerations of income, safety and liquidity.

© 2009 Dilip Chandra

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Comments 64 comments

ADIL SHAH 6 years ago

it is the easy way to access is the easy way of busniess............

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Alison Graham 6 years ago from UK

Useful information, thank you.

mercy mainah 6 years ago


Fatema Akhter 6 years ago

thanks a lot...really useful........

suny shah 6 years ago

money is a commodity which is generally acceptable as a medium of exchange and at the same time its acts measure and store of value

Rashid Mehmood 6 years ago

"Money is what the money does"

Shenelle Duntin 6 years ago

thanks for the information it helped a lot

Wasim Ahmad 6 years ago

thank GOD it really helped me and me done my paper very besssssssst

tasha colbourne 6 years ago

this is a very interesting

ria 6 years ago

its really helpful for me to make my assignments.

sajid khan  6 years ago

useful information

imen  6 years ago

useful informtion thank you

Sam 6 years ago

Good piece of information; quite informative.

Shweta 6 years ago

Ya its actually betta dan reading d boring books written by using some unknwn words.. Its useful 4 me while preparing 4 ma boards..

Kabangira cosmas 5 years ago

I thenk god to read this function of money and i encarage other people to read.

shoaib 5 years ago

good information

Dennis Too 5 years ago


shakawat 5 years ago

better than book....but expected more.... however got enough 4 assighnments......

pradeep 5 years ago

awesome information. resourceful and useful. thanks for sharing.

luca 5 years ago

dont understand

JIM 5 years ago


dinh.yen 5 years ago

it's very interesting. thanks!!

sophuphi 5 years ago

It is very intersting for my paperwork. Thanks a lot

crock 5 years ago

thans givining for informations.

Ralph 5 years ago

It very good thank u nd God bless cos help me do ma assaignment bt pls need references.

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puddingicecream 5 years ago from United States

Thanks for a quick informative lesson on the functions of money. I had to learn about this back when I was teen at school.

aaniya 5 years ago

its great it has help mi a lot for my project...........

thank you

Chidozie Osigwe 5 years ago

tanks pals 4 dis info,it helped me a lot

angeljiya 5 years ago

@wsOme knowledge thnkxxxX 4 sh@re with usSsss

Darren 5 years ago

Wonderful info thank you.You know,it was a wonderful thing when the inventor(s) of money came up with the idea.:)

Samantha 5 years ago

this helped me ace my essay thanks a heap!!

zulqarnain Sikander olding 5 years ago

i am very thankful to u.its great

Antonio 5 years ago

this information really give me a greaater undrestanding about what i was taught in economics class

Elise 5 years ago

really helpful

john 5 years ago

work done well but you left some unctions of money

jimmy 5 years ago

it's a good one

Umar isah kwanna 5 years ago

Money is anything generally acceptable as a medium of exchange and settle of debt

Ogbera tope omoniyi 5 years ago

I thaks u 4 ur informatn 2 gv me 2 understnd what d functn of money n do ma's grrreeeaaat.thumb up!!.

A one 5 years ago

money ia any commodity chosen by community to be a measure of valua and means of payment.

S.T Mamun 4 years ago

it is a greate one. it will help lot to prepare my project

Loveson MOses 4 years ago

Good Stuff!!!

shakir ahmad 4 years ago

really it helpful for me and also for all busneiss related students thanks for suporting.

aniya 4 years ago

its the best one but i agree with john that you have left many functions so kindly update as earlier as you can...................... and thanksalot for helping.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

nzami sandrine 4 years ago

it was just what i needed for an assignment so i say thank you so very much and may GOD continue to give you the strenth needed for more of such.

super jah 4 years ago

information very useful.has helped me do my paper well. thanks

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vasantha T k 4 years ago from Bangalore

Thank you for following me. The information is very useful voted up.



Huzaifa M Umar 4 years ago

God help me 2 pàss my studies successfully amen

m nawaz 4 years ago

thank,s a lot for providing such a useful knowledge......

kenn 4 years ago

it did help,thank you.

mary ann medrano 4 years ago

very useful information.. thank you!! :)

Reves-diary profile image

Reves-diary 4 years ago from Dhaka

Money has changed the whole pathway of ruling our lives! There was a time when people used to exchange things for fulfilling their demands. In a way, I found it interesting as it did not make any financial status based difference!

Thanks for your useful and informative hub about money!

gladys sebogodi 4 years ago

thank u so much. now i can do my assighnments with knowledge. which is power. I thank u. PLEASE INCLUDE REFERRENCES.

gul laly 4 years ago

the inf. r very usefull and interesting. these 'll be really benefitial for students,but references should be mentioned.

gul laly 4 years ago

very nice and useful information

Danford Joseph 4 years ago

Thanx a lot for your helps!

tayyabb and yasir khan 4 years ago

thanks for that information and put more information about different kind of subjects thanks dear

raja usman hamid 4 years ago

well defined functions of money

jhess 4 years ago

u help me a lot..tnx

TER 4 years ago


Manige Derrick T 4 years ago

It is a nice and precise info,I like it.Keep it up.However it needs references.

SHEMU.. 3 years ago

It has good and useful information..

aditi 20 months ago

thanks for providing such important information.....

James morwo 14 months ago

I do appreciate your information,,,thanks alot.

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