There are number of functions of money that can be seen easily in the business world. But before discussing the functions of money, lets define the money. Money has been defined by different authors in different ways, which is discussed as under:-
- According to Walker “Money is that what money does”.
- According to Kent “Anything which is widely used as a medium of exchange and standard of value is money”.
From the above cited definitions, it is clear that Functions of Money or an objective of money is to perform the duties of medium of exchange among different parties. In old days people were use coins as a medium of exchange, but in today’s world money is doing this job for us. Also through barter system people meet the needs of his day to day lives.
Functions of Money
Following are the utmost important functions of money. You must be well familiar with all of them.
- It serves as a medium of exchange.
- It is used as a store of value.
- It is a standard for measuring values.
- Money serves as a standard for deferred payments.
- It transfers value.
- Money as a Medium of Exchange
The most important function of money is to serves as a medium of exchange. As a medium of exchange, money solves all the difficulties of barter. There is no necessity for a double coincidence of wants in a money economy.
- Money as a Standard Measure of Value
Where money serves as a medium of exchange incidentally measures the value of things for which it is exchanged. In a money economy, it is easy to compare the relative’s value of commodities and serves which are dissimilar and entirely different from one another. In matters of exchange, a common standard of value makes the transaction easy and also fair. So this is also from one of the utmost important functions of money.
- Money as a Standard for Deferred Payments
Money also serves as a standard of payment made after a lapse of time. Lending and borrowing, therefore must take place in terms of a commodity which will, reasonably speaking, keep its value stable over time. By serving as a standard measure of payments, money makes borrowing and lending less risky. Thus it helps in stimulating all kinds of economic activity, which depends upon on borrowed money or credit.
- Money as a Store of Value
Money serves as a store of value. It enables a person to keep a portion of his assets liquid. Liquid assets are those which can be used for any purpose at any time. You may buy things by using these modes of money. Money is best kept as a store of value to be used as and when need arises.
- Money as a Means of Transferring Value
Means of transferring value from place to another or between two persons is another one of the important functions of money. One can sell one immovable and movable belongings at one place and with the money acquired can buy then elsewhere. Value will thus be transferred.
Importance of Money
The importance of money can be easily realized from the fact that almost all the economic, social, and other activities are carried and completed through the use of money. The importance of money is increasing day by day with the rapid changes in economic development and other overall requirements of the humans. Peoples do almost anything for money and money also do anything for people. Money is said to be the master key for the solution of all economic difficulties. However, the main importance of money is discussed are as under:-
Money has made mass production possible. The large scale production is necessary to meet the growing demand of the consumers. The mass production is possible with division of labor that depends upon money.
Money helps the consumer to spend his income in such a way so that he can get maximum satisfaction. Money has generalized the purchasing power. The consumer can buy the necessary goods at reasonable rates to get maximum utility.
At present the production process is not simple. The production is made through the various factors of production like land, labor, capital and organization. The raw material is purchased to make new things. But each factor does not contribute equally to the product. Therefore, the distribution of product equally among the factors of production is unjust.
Another thing that can elaborate the importance of money in better ways is the exchange of values through money. The exchange of goods and services is done through money. When goods are exchanged for goods even then money is used as a measure of value.
Public finance means rising of money through taxes by the government. The amount of taxes and other dues are collected in the form of money. The government provides social justice to the poor people by taxing the rich and spending it on the poor.
The industrial progress is linked with money, which is the life blood of a business. Promotion of big companies, arrangement of loans to expand the business and the establishment of stock exchange markets depend upon money. All such thing enhances the importance of money more for us.
Money is the basis of credit in the banking system of the country. The economic development and material progress of a nation depends upon the sound banking and credit system. So the money is necessary for the financial progress. The main business of the banks and other institutions is to collect saving of the people and lend such collection for earning the profit.
Money helps both local and foreign trade. Money is a means of making payments for the goods and services purchased. Money is the basis of money market and capital market. Also in trade we need to hire people for promoting our business and money is required to makes them payment against their services.
Money is important to the government. The taxes, fee and penalty are collected in money. The government can take the loans in the shape of money. The development of economy requires the establishment of schools, hospitals, bridges, roads, dams, energy resources, communication etc which is only possible through money.
The laborers wages are paid in money. The workers are free to work at the place where they can get the maximum wages. The freedom of contract mobility and division of labor are due to money. It really enhances the importance of money for us and for the business world.