Money and its Major Functions

Money and its major functions Definition

Money is anything that is used as a standard medium of exchange for goods, service and the payment of debts. The Money and its major functions People do transaction of goods and services through money. For example, if a one teaches in the school, he will get a payment at the end of the month in exchange his service in the form of money.
Economists say that money is just a medium of exchange. The founder of classical economics Adam Smith says that “Money is like a road which helps in transporting the goods and services produced in a country to the market, but this road does not itself produce anything”.

Functions of Money

There are three major functions of money:

1. Medium of exchange

Money is a standard medium in any country or any part of the world for exchanging goods and services. For example, if a man grows wheat and wants to buy potatoes which his neighbor grows, he will have to exchange some wheat with some potatoes. people call it barter system. In this system, it is difficult to set the terms of value of exchanged things. For example, it will be difficult for a man to negotiate the amount of wheat he will give to get a certain amount of potatoes.

Since the survival of man depended on buying and selling of goods to fulfil his needs, he invented money. Money is widely and uniformly accepted mode for buying and selling goods unlike barter system.

Today, if one wants to buy a kilogram of potatoes, first he will sell some of his wheat. Let’s say, he sells it for Rs 100 per kg and buys 1 kg potatoes in Rs 50. The state usually fixes the rate of market prices of goods in a country.

1. Unit of account

Money is a common standard for measuring the relative worth of goods and services. As discussed above, in barter system it is difficult to establish a common and widely accepted standard of measuring relative worth of goods and services. For example, it is difficult to measure the worth of exchanging 1 meters of cloth with few litres of milk. A man selling the cloth and the one selling milk can disagree on the rate and the amount of goods they are ready to exchange.

To solve these day to day complex issues man invented money w It serves as a fixed unit of account for measuring the relative worth of goods. One knows that in Pakistan, a litre of milk will be sold at the rate ranging between 100 – 150- Rupees or 1 kilogram of potatoes will be sold at the rate in between of 50-70 Rupees. This has solved the problem of measuring the relative worth of goods.

2. Liquid store of value

Money is a liquid asset. By this, one means that we can store money for a long period of time. Its value will remain the same. That is the reason that people store wealth in banks and even in the form of cash (note money). They use it in when the need arises.

Unlike money, one cannot store any commodity for long. For example in barter system, one cannot store wheat or fruits for years. The fruits will rot in just few days. Similarly one can save wheat for a year and a half at max. And there will also be chances of pantry pests affecting wheat’s quality. On the contrary, people can store money for years and years and can use it when the need arises. Besides, one can also save money in the form of durable goods or assets like gold/ silver/ diamond and land. These are the assets one can utilize in times of need by selling them and getting a certain amount of money according to their worth.