what are the functions of money, and why are they important?

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gsarora17 | (Level 2) Associate Educator

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Money serves four basic functions:

Unit of Account :Money is a unit of account because everything in the economy is quoted in terms of it. It is the common standard for measuring relative worth of goods and service.

For example, when a shop or a company sells its products, the products are sold at a certain price. That price is quoted in terms of money. When a person sells his service, the price of his service is quoted in dollars, also. Ever body requires a unit of account that works for everyone in the economy. In this way, money functions as a unit of account, which is the foundation of every transaction taking place around us.

Medium of Exchange : It serves as an important medium of exchange in an economy, empowering people to purchase goods and services to satisfy their needs and wants. In ancient time when there was no money , goods were exchanged through the process of barter ( goods would be traded for other goods in transactions arranged on the basis of mutual need ). Such arrangements were often cumbersome  and difficult , but money eliminates the need of the double coincidence of wants.

Store of value :It can be reliably saved, stored, and retrieved. Money is a store of value because anybody who receives money on one day can use it to purchase goods and services at a later date. When somebody earns a pay check, it can be cashed at the bank, cash can be hold in the wallet for a few minutes, a few days or even a few months or years to exchange it. In absence of inflation, money would serve as a near-perfect store of value.

Money also functions as a standard of deferred payment , which means its status as legal tender allows it to function for the discharge of debts.

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