Which Function Of Money Is The Above Picture An Example Of?

Money Functions: Top 4 Functions of Money – Discussed!

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Four most important functions of money are as follows:

1. Medium of Exchange:

The most important function of money is that it serves as a medium of exchange. In the barter economy a great difficulty was experienced in the exchange of goods as the exchange in the barter system required double coincidence of wants. Money has removed this difficulty. Now a person A can sell his goods to B for money and then he can use that money to buy the goods he wants from others who have these goods.

As long as money is generally acceptable, there will be no difficulty in the process of exchange. By serving as a very convenient medium of exchange money has made possible the complex division of labour or specialization-in the modern economic organisation.

2. Measure of Value:

Another important function of money is that it serves as a common measure of value or a unit of account. Under barter economy there was no common measure of value in which the values of different goods could be measured and compared with each other.

Money has also solved this difficulty. Money serves as a yardstick for measuring the value of goods and services. As the value of all goods and services is measured in a standard unit of money, their relative values can be easily compared.

3. Standard of Deferred Payment:

Another function of money it that it serves as a standard for deferred payments. Deferred payments mean those payments which are to be made in the future. If a loan is taken today, it would be paid back after a period of time.

The amount of loan is measured in terms of money and it is paid back in money. A large number of credit transactions involving huge future payments are made daily. Money performs this function of standard for deferred payments because its value remains more or less stable.

If the prices are falling, i.e., the value of money is rising, the creditors will gain in real terms and the debtors will lose. Conversely, if the prices are rising (or value of money is falling) creditors will be the losers. Thus if the money is to serve as a fair and correct standard for deferred payments, its value must remain stable. In case the value of money is changing very much, the creditors or debtors will be put to much loss and sufferings. Thus when there is severe inflation or deflation, money ceases to serve as a standard for deferred payments.

4. Store of Value:

Lastly, money acts as store of value. Money being the most liquid of all assets is a convenient form in which to store wealth, that is, money can be held as an asset. Thus store of value function is also called asset function of money. It is, therefore, essential that the good chosen as money should be such as can be easily stored without deterioration or wastage. That is why gold was popular in the past as money material.

Gold could be kept safely without deterioration. But in the modern times even paper money can be kept as deposits in banks to serve as asset. Of course, there are other assets like houses, factories, bonds, shares etc., in which wealth can be stored. But money performs the store of value function with a difference. Money being the most liquid of all assets has the advantage that an individual or a firm can buy with it anything at any time.

But this is not the case with other assets. Other assets like houses and shares have to be sold first and converted into money and only then they can be used to buy other things. Money would perform the store of value function properly if it remains stable in value.

From above it is clear that money has removed the difficulties of barter system. It has facilitated trade and has made possible the complex division of labour and specialisation of the modern economic system. Without the use of money, modern economy will not run smoothly and the production will get a serious setback. For these reasons, monetary economy is preferred to barter economy.