Functions of Money

The use of money removed the drawbacks of the barter system and made exchange easier. The functions of money are broadly divided into primary and secondary functions, along with some other important roles.

1. Primary (Basic) Functions

(i) Medium of Exchange: Money acts as a medium of exchange for all goods and services. It divides transactions into two parts—sale and purchase—removing the difficulty of double coincidence of wants in barter.

      Example: You pay ₹10 to buy a pen. The seller receives ₹10 and gives you the pen.

(ii) Measure of Value: Money helps in expressing the value of goods and services in terms of price. This makes comparison and exchange easier.

Example: If the price of rice is ₹20 per kg, then a 25 kg bag of rice is worth ₹500 (20 × 25).

2.Secondary Functions

(i) Store of Value (Wealth): Money is a convenient way to store wealth. Goods may perish or lose value, but money retains purchasing power over time.

      Example: Harpreet sells furniture for ₹2,500. She cannot store furniture easily, but she can store money which represents the same value.

(ii) Standard of Deferred Payments: Money is accepted for payments to be made in the future. Its durability and stable value make it suitable for lending and borrowing.

(iii) Transfer of Value: Money enables easy transfer of value from one person to another and from one place to another.

      Example: Travellers can carry money or use ATMs to make payments in different places.

3. Other Functions

(i) Distribution of National Income: Factors of production—land, labour, capital, and entrepreneurship—are rewarded in money terms as rent, wages, interest, and profit. Thus, national income is measured in money.

(ii) Liquidity and Uniformity of Value: Money is divisible, portable, and easily available in smaller units. It also brings uniformity in the value of different goods, making them comparable.

      Example: A kg of rice and a litre of oil cannot be physically added, but their monetary values can be compared.