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Functions of Money

Updated on January 9, 2015

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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    • profile image

      James morwo 2 years ago

      I do appreciate your information,,,thanks alot.

    • profile image

      aditi 2 years ago

      thanks for providing such important information.....

    • profile image

      SHEMU.. 4 years ago

      It has good and useful information..

    • profile image

      Manige Derrick T 4 years ago

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

    • profile image

      TER 5 years ago

      VERY WELL...

    • profile image

      jhess 5 years ago

      u help me a lot..tnx

    • profile image

      raja usman hamid 5 years ago

      well defined functions of money

    • profile image

      tayyabb and yasir khan 5 years ago

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

    • profile image

      Danford Joseph 5 years ago

      Thanx a lot for your helps!

    • profile image

      gul laly 5 years ago

      very nice and useful information

    • profile image

      gul laly 5 years ago

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

    • profile image

      gladys sebogodi 5 years ago

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

    • Reves-diary profile image

      Reve 5 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!

    • profile image

      mary ann medrano 5 years ago

      very useful information.. thank you!! :)

    • profile image

      kenn 5 years ago

      it did help,thank you.

    • profile image

      m nawaz 5 years ago

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

    • profile image

      Huzaifa M Umar 5 years ago

      God help me 2 pàss my studies successfully amen

    • profile image

      GOOD AND RELIABLE 5 years ago

      YOUR WAY OF EDUCATING IS APPEALING AND MUCH SIMPLE TO UNDERSTAND.THANK YOU

    • vasantha  T k profile image

      vasantha T k 5 years ago from Bangalore

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

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      super jah 5 years ago

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

    • profile image

      nzami sandrine 5 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.

    • profile image

      aniya 5 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.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    • profile image

      shakir ahmad 5 years ago

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

    • profile image

      Loveson MOses 5 years ago

      Good Stuff!!!

    • profile image

      S.T Mamun 5 years ago

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

    • profile image

      A one 5 years ago

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

    • profile image

      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 assignment.it's grrreeeaaat.thumb up!!.

    • profile image

      Umar isah kwanna 5 years ago

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

    • profile image

      jimmy 5 years ago

      it's a good one

    • profile image

      john 5 years ago

      work done well but you left some unctions of money

    • profile image

      Elise 5 years ago

      really helpful

    • profile image

      Antonio 6 years ago

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

    • profile image

      zulqarnain Sikander olding 6 years ago

      i am very thankful to u.its great

    • profile image

      Samantha 6 years ago

      this helped me ace my essay thanks a heap!!

    • profile image

      Darren 6 years ago

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

    • profile image

      angeljiya 6 years ago

      @wsOme knowledge thnkxxxX 4 sh@re with usSsss

    • profile image

      Chidozie Osigwe 6 years ago

      tanks pals 4 dis info,it helped me a lot

    • profile image

      aaniya 6 years ago

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

      thank you

    • puddingicecream profile image

      puddingicecream 6 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.

    • profile image

      Ralph 6 years ago

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

    • profile image

      crock 6 years ago

      thans givining for informations.

    • profile image

      sophuphi 6 years ago

      It is very intersting for my paperwork. Thanks a lot

    • profile image

      dinh.yen 6 years ago

      it's very interesting. thanks!!

    • profile image

      JIM 6 years ago

      NEED REFERENCES

    • profile image

      luca 6 years ago

      dont understand

    • profile image

      pradeep 6 years ago

      awesome information. resourceful and useful. thanks for sharing.

    • profile image

      shakawat 6 years ago

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

    • profile image

      Dennis Too 6 years ago

      resourceful

    • profile image

      shoaib 6 years ago

      good information

    • profile image

      Kabangira cosmas 6 years ago

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

    • profile image

      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..

    • profile image

      Sam 6 years ago

      Good piece of information; quite informative.

    • profile image

      imen  6 years ago

      useful informtion thank you

    • profile image

      sajid khan  6 years ago

      useful information

    • profile image

      ria 6 years ago

      its really helpful for me to make my assignments.

    • profile image

      tasha colbourne 6 years ago

      this is a very interesting

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      Wasim Ahmad 6 years ago

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

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      Shenelle Duntin 7 years ago

      thanks for the information it helped a lot

    • profile image

      Rashid Mehmood 7 years ago

      "Money is what the money does"

    • profile image

      suny shah 7 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

    • profile image

      Fatema Akhter 7 years ago

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

    • profile image

      mercy mainah 7 years ago

      useful

    • Alison Graham profile image

      Alison Graham 7 years ago from UK

      Useful information, thank you.

    • profile image

      ADIL SHAH 7 years ago

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