Money is a tool that can be used as a medium of exchange, a measure of value, a store of value and a standard for deferred payments.
Primary, Secondary and Contingent Functions of Money are discussed below.
Functions of Money
Primary Functions of Money
- Money acts as a medium of exchange. The main function of money is to facilitate the exchange process by eliminating loopholes in the exchange system.
- Money measures value. It is the monetary expression of the market value of goods and services.
Secondary Functions of Money
- Standard of deferred payments: Deferred payments refer to payments that are made in the future. Money made deferred payments easier. When money is borrowed, the principal and interest amount must be returned to the lender. However, this transaction is not possible for goods and services. Money performs this function more effectively.
- Store of value: People keep their wealth in the form of money because it is the most liquid form of wealth. Savings are maintained in the form of money for the purchase of goods with future savings. In this case, product quality is preserved. Therefore, it acts as a store of value.
- Transfer of value: It is also a way of transferring a given value from one person to another. If a person buys a product, the value of that product can easily be transferred from the buyer to the seller through a money-for-money payment.
Contingent Functions of Money
- Assisting production decisions: Producers need to determine the number of factors of production for their profit. They have to pay the factors of those factors of production in terms of money. Thus, the monetary value of these factors helps the producer to take necessary decisions.
- Assisting consumption decisions: Consumer spending depends on the income level of the product and the price of money in the market. Thus, consumers’ income and the money price of goods influence individuals’ consumption decisions.
- Assisting distribution of national income: Owners of various factors of production sell their factors at market prices. They receive money as factor income from wages, interest, rent and profit. All these incomes constitute the national income of a country. Hence, the distribution of national income among the owners of various factors is determined by the monetary value of those factors.
- Assisting the operation of a credit system: It forms the basis of credit operations performed by businesses and financial institutions in a country.