Q. 74.7( 3 Votes )
What are the main
Money is defined as anything which is commonly accepted as a medium of exchange. It is used to facilitate the transactions between the buyer and the seller.
Money has two different types of functions- primary and secondary.
The primary functions of money are the following:
a. The medium of exchange: The primary function of money is to facilitate the transaction of money between the buyer and the second. The problem of wastage of time and resources is avoided. It helps to increase the allocation efficiency in the production of goods and services
b. Unit of account: Money is called the unit of value or it has a common measure against which all the goods and services can be measured. It acts as a denominator common to all commodities. It is used to measure the value of the commodity. The prices of all the goods and services are fixed in terms of money and the problem of expressing the value of each good is avoided. It is important as it facilitates the possibility of keeping business accounts.
The secondary functions of the money are the following:
a. Store of value: Money is an asset that retains its value over a while. People prefer to hold their wealth in the form of money because it has general acceptability. It promotes capital formation through new investments.
b. Standard of deferred payment: Money helps to overcome the problem of deferred payment. The term deferred payment means future payment. Since the value of money is retained over a duration of time assuming the prices are constant, the payments can be done easily even at a future date.
Money helps to solve the problem of the barter system in the following manner:
a. Double coincidence of wants: The barter system requires the exchange of goods on the assumption that both the parties involved want to exchange the good that each of them. For example, consumer X has a pair of shoes and consumer Y has 1 kg of rice. If X wants rice in exchange for shoes and vice versa, the transaction is successful. But, if X wants another good in exchange for his shoes or vice versa, he might not do the transaction.
Money eliminates this problem. The buyer and seller exchange the goods because money acts as a common measure of value. It helps to facilitate the transactions.
b. The Barter system does not have a common unit for measurement. For example, consumer X wants to buy a kg of wheat in exchange for his cow. He will find it difficult to find out a common value. Certain items are not such as shoes or any animal. of money has provided a common denominator to every good and service.
c. The Barter system does not have any system of future payment of deferred payment. This is especially observed in the case of perishable goods. Money helps to overcome the problem of deferred payment. The term deferred payment means future payment. Since the value of money is retained over a duration of time assuming the prices are constant, the payments can be done easily even at a future date.
d. It is similar to the above drawback. Certain goods cannot be stored for future transactions such as perishable goods. Money is an asset that retains its value over some time. People prefer to hold their wealth in the form of money because it has general acceptability. It promotes capital formation through new investments.
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