Functions of Money

Money is defined as something which is generally accepted by the society as a medium of exchange and which can act as unit of account, can store value and be used for repayment of debt.

1. Medium of Exchange

The primary function of money is that it acts as a medium of exchange. This means that people can buy or sell goods and services with the help of money. Money is received by the seller who sells the good. Money is paid by the buyer who buys the good from the seller.

Example: You pay Rs. 10 to buy a pen. The seller receives Rs. 10 from you by selling the pen. So a pen is exchanged for Rs. 10.

2. Measure of Value

Another fundamental function of money is that it serves as unit of account or common measure of value. The value of a good is determined by multiplying its price with quantity sold in the market. Since the price is expressed in monetary units, the value of a good is also expressed in monetary term.

Example: Let price of rice be Rs. 20 per Kilogram. One bag full of rice weighs 25 Kilograms. Then the value of the bag of rice is Rs. 20 × 25 = Rs. 500.

3. Store of Value

Money also acts as store of value. As medium of exchange you can pay money to buy goods. This means if you have money, you have the power to purchase a good or a service. So money has purchasing power. The value of the good is contained in that purchasing power. Hence value of good is indirectly stored in money you hold.

Similarly as a seller of good you receive the money which means value of good you sold comes back to you through money.

Example: A person has got some mangoes which he sells to a buyer for Rs. 250. This means a value of Rs. 250 was exchanged. The buyer, who purchased the mangoes, has the purchasing power to give Rs. 250 as value. Hence a value of Rs. 250 was stored in the money received by the person as a seller. He could not have stored mangoes but he can definitely store money which has stored the value of Rs. 250.

4. Making Payments in Future

Suppose, your friend requests you to give him some money to purchase a mobile phone because he does not have any money at present. He promises to pay back the money after a week. If you agree with this and actually give him the money, then you will be called lender and your friend will be called borrower. As a lender, you can also charge some interest on the money you have lent to your friend.

Types of Money

1. Paper currency and coins

Over the years the form of money has changed. During the days of Kings, people used to trade by using gold coins, silver coins, copper coins. Before that, in the ancient days, in some places people used to hold money in the form of cattle, salt.

Now a days, nobody holds cattle or salt to buy or sell goods and services. Keeping cattle is not feasible as it requires huge space and special environment. Salt is perishable and cannot be stored for a long time for the purpose of exchange. Hence after so many experiments over centuries, now people keep money in the form of paper notes and coins which are easy to carry.

In India, paper notes are called currency notes and named as Rupee (Singular) or Rupees (Plural). Money is paid by buyer or received by seller in the form of currency notes. For smaller denominations, there are coins. The currency notes and coins which are in circulation are guaranteed by government of India. Otherwise anybody can make and misuse them.

Currency notes and coins of India are valid only in India and not in other countries. Every country has its own currency. In other countries, you have to exchange Indian currency with the currency of the country.