Functions of money
In the static sense, money performs the following functions:
- As a medium of exchange: Money serves as a medium of payment. It is the primary function of money. Money comes in between the transaction of two commodities and facilitates the exchange.
- As a measure of value: Money serves as a unit of account. This means that money is a common measure of value, Money is a means of calculating relative prices of goods and services, Money is the value in exchange of all goods and services.
- As a standard of deferred payments: Money acts as a standard of deferred payment in case of credit transactions where goods are sold now and payments are received later.
- As a store of value: Money can be stored without any loss of value. Thus, individuals can store their surplus income and spend it any time later when the need arises.
In a dynamic sense, money performs the following functions:
- Directs economic trends: Money directs the idle resources into productive channels, thereby affecting employment, consumption and economic welfare at large.
- As encouragement to division of labour: In the economy, people have different interests in their specializations and in diverse goods. Through the process of marketing, these goods are bought and sold for the satisfaction of multiple wants. In this manner, occupational specialization and division of labour are encouraged by the use of money.
- Smoothens transformation of savings into investment: Savings and investments are done by two different sets of people. Households save and firms invest. Financial institutions play a very important role in pooling the savings of the households and offering them to prospective investors to invest in profitable avenues. Thus, saved money can be channelized into productive investments.