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Explain in detail the main functions of money.

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Functions of money can be broadly divided into the following 3 groups:

  • Primary functions 
  • Secondary functions 
  • Contingent functions. 

(a) Primary Functions: 

Medium of exchange: The most important function of money is to make buying and selling of goods and services possible in the market ie. it serves as a medium of exchange. Thus, money facilitates the sale and purchase of goods in the market. 

Measure of value or unit of account: Price is the value of a commodity or service expressed in terms of money. Hence it becomes easier for anyone to compare or know the value of any two or more commodities. 

Different countries use different currencies to express the value of their commodities. E.g. Rupee in India, Pound in the UK, Dollar in the USA, etc. Thus, money as a measure of value helps in estimating the cost, revenue, and profits of the business firms. 

(b) Secondary Functions 

  • Standard of deferred payment: Deferred payments are the payments that are to be made at a future date. Buying and lending were not possible in a barter economy. Now, this function of money develops financial and capital markets and helps in the growth of the economy. 
  • Store of value: Money acts as a store of value. It is a convenient form in which we can store the value or savings for future use. According to J.M. Keynes, money is a link between the present and future. . 
  • Transfer of value: Money helps to transfer values from one place to another or from one person to another due to its general acceptability. One can sell his movable or immovable belonging at one place and buy at another place. Values can thus be transferred. In modern times people generally use cheques, electronic transfers, etc instead of using currency notes for transferring values. 

(c) Contingent Functions: 

  • Measurement of National Income: Country’s National Income accounting is possible only because of money as a unit of account. 
  • Basis of credit: Modern economy is based on credit i.e. promise to pay. Hence lending and borrowing activities are made easy by using money. Money Provides a base for the creation of credit money.
  • Estimates of macroeconomic variables: Macroeconomic variables such as Gross National Product (GNP), total investments, total savings, taxes, etc. can be easily estimated in money terms. Imparts liquidity: Money is the most liquid asset which can be easily converted into any other asset. For example land, machinery, shares, etc. can be bought and sold in terms of money.
  • Estimates of macroeconomic variables: Macroeconomic variables such as Gross National Product (GNP), total investments, total savings, taxes, etc. can be easily estimated in money terms. 
  • Imparts liquidity: Money is the most liquid asset which can be easily converted into any other asset. For example land, machinery, shares, etc. can be bought and sold in terms of money.

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