Posted by Chester Morton / Friday, 13 January 2017 / No comments
The functions of money
Introduction
Money can be defined as “any commodity which is generally
acceptable in exchange for goods and services”.
Money has three dimensional meanings. The first is that it is
a medium of exchange. The second is that it is a unit of account and the third
is that it is a store of value. For the ordinary man in the street, because he
uses money only for the exchange of goods and services he sees money only as a
medium of exchange.
FUNCTIONS
As a medium of exchange
As noted in the introduction above, one of the functions of
money is that it serves as a medium of exchange. In the offices, shops,
markets, streets, and elsewhere, money is used to gain possession of goods and
services. In other words, where a person has money but desires something, the
money he has in his hands can be used to obtain that which he desires.
As a unit of account
Another function of money is that it serves as unit of
account. Money is a commodity that can be used to assign values to goods and
services. There are several items that are offered for sale in many communities
of the world which one can obtain when offers a certain amount of money. Money
is used to place a value on those items. So that, for example, one can say the
price of a radio set to X amount of money.
As a store of value
Another function of money is that it can be put away for a
while until it is needed. In other words, it can be stored as a form of wealth
for a long time. When in the future, something needs to be acquired, that same
money can be used to retrieve and used to acquire that which is needed. This is
achievable because of certain features of money, such as, its durability and
portability.
Money as a standard of deferred payment
Another function of money is that it allows for goods and
services to be purchased today but payment made at a later date. In other
words, money allows for the value of a commodity to be determined at the time
of purchase so that in the future the same value which was determined in the
past is paid. In a sense, the payment was deferred.
SAMPLE QUESTIONS
1. a. What is money?
b. What four
functions does money perform?
