Functions of money

The first and leading role of money is that it functions as a mode of exchange. Barter exchanges become exceptionally tough in a large economy because of the high prices people would have to sustain looking for proper people to exchange their excesses or surpluses.

Money also functions as a suitable unit of account. The value of all commodities and services can be expressed in monetary terms. If the cost prices of all goods go up in monetary terms, i.e., there is a general rise in the cost price degree, the value of money in terms of any good must have come down – in the sense that a unit of money can now buy less of any good. We call it a decline or deterioration in the buying power of money.

The barter system has other dearths and deficiencies. It is tough to carry forward one’s opulence under the barter system. Assume you have an establishment of rice which you do not wish to utilise entirely. You may consider this stock of excess rice as :

• An asset which you may want to utilise or sell-off, for obtaining other goods at some future date
• But rice is a biodegradable item and cannot be stockpiled afar a definite time frame.
• Holding the stockpiled of rice requisites a lot of space. You may have to spend a substantial amount of time and resources looking for people with a demand for rice when you wish to interchange your stockpile for purchasing other goods.
• This issue can be resolved if the rice is sold for money. Money is perpetual and its stockpiling prices are also noticeably less. Hence, money can function as a stock of value for individuals.
• Wealth can be stockpiled in the form of money for future utilization. However, to perform this well, the value of money must be adequately constant and firm.
• An increasing cost price degree may abrade the buying capacity of money.