Functions of money
Topic: Money: From Barter to Digital Currency · NCERT: Class 11, Ch 7 "Index Numbers"
Meaning
The functions of money are the jobs money does in an economy.
- Primary functions:
- Medium of exchange: money is the in-between good that everyone accepts, so barter is not needed.
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Unit of account: the prices of all goods are stated in money, so they can be compared.
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Secondary functions:
- Store of value: money carries wealth into the future.
- Standard of deferred payment: money is accepted for payments made later.
High inflation weakens all four functions. In hyperinflation, meaning extremely fast price rises, even the primary functions break down.
Example
- A shoe-maker sells shoes for money and uses it to buy wheat. This is the medium of exchange at work.
- A pen costs ₹10 and a pencil ₹2, so we can tell that a pen is worth 5 pencils. This is the unit of account.
- A student pays ₹50 now and ₹50 later for a ₹100 book. This is the standard of deferred payment.
Don't confuse with
- Properties of money (divisibility, portability, durability): these are features money must have. Functions are the roles money plays.
Related concepts
- Money
- Medium of exchange
- Unit of account
- Purchasing power of money
- Store of value
- Standard of deferred payment
- Money's worth