Money and its Functions
What is money
Money is anything that is generally acceptable in
payments for goods and services or in the repayments of debts. It is also
defined as anything that is regularly used in economic transactions or
exchanges.
The Functions of Money
The primary function of money is
to facilitate the buying and selling of goods, services and assets. This is
known as a medium of exchange. There are also two other main functions of
money. The main functions are covered in more depth below:- Medium of exchange. In an economy
where people make items themselves to meet their own needs there would be
no need for money as people would barter using their spare items that they
have produced. If one person wanted an item another person had they would
simple barter and arrange an exchange of goods. In a modern economy which
is highly developed, barter would be impractical in most circumstances.
What is needed is a medium of exchange which is generally acceptable as a
means of payment for goods, services, labour and factors of production/
service. Money carries out this function. To be an effective and suitable
means of exchange, money must be light for it to be carried around, be
divisible (come in different denominations) and not be easy forged or
replicated.
- Means of Evaluation. Money allows for
the comparison of the value of goods, services and assets. The value of
goods and services is expressed in terms of prices and these prices are
expressed in terms of money. This allows for different items which are
dissimilar, such as a company’s assets, to be added up. Money, thus serves
as a ‘unit of account’.
- Store of wealth. People and
organisations need to be able to use the earnings of one days labour or
operation to purchase goods and services in the future. This would mean
they would need to store their wealth and that they need a means of
saving. Money facilitates the storing of wealth as it can be saved.
Money as a unit
of exchange
Another important role of money is that it serves as a
common measure of value. The value of goods and services can be expressed in
terms of units of money. Just as we measure weights in terms of pounds or
distance in terms of kilometers, similarly we measure and compare the value of
goods and services in terms of money. Money is the yardstick that allows the
individuals to measure the relative value of goods and services. For exampes, a
car may be listed for sale at Rs. five lakh, a house for Rs. fifty lakh. The
use of money as unit of account has greatly reduced transaction costs i.e the
time, effort and expenses that go into the purchase or sale of goods.
Money does not
just consist of notes and coins. Only about 3 to 5% of the UK’s money supply
consists of actual cash. Most money is held as deposits in banks and other
financial institutions. The bulk of these deposits only appear as book keeping
entries in these institutions accounts. It is possible for people to access
this money in their accounts through the use of debit cards, cheques, standing
orders, direct debits etc without the need for cash. This means that banks and
other financial institutions need to keep only a small percentage of these
deposits in their safes and at their counters in the form of cash.
Conclusion
: The
money that we know it today has undergone a long development process. At first,
people are not familiar with the exchange because everyone is trying to meet
kebutuhannnya with their own business. and over time the process runs until now
to show that money does penying for life.
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