1.2 The Functions of Money

1.2 The Functions of Money

We now know that money has eased the exchange of things. But do you know that it has other functions too in our daily lives and in the economy. Let us understand this through the above example.

Let’s say you’re looking to buy mangoes. You will find the seller with best quality mangoes. You would then pay him money in return of mangoes. The seller will give u change if any and keep the remaining in his wallet.  The activity of buying mangoes and paying money for it is a transaction. This simple transaction will help us decode the following  functions of money

A seller is giving mangoes in exchange for cash. It is called a transaction.

Showing mangoes in exchange of money from seller. This is called transaction

Medium of Exchange

When gave money to the seller, he can use that money to buy a dress for his child, take his family out for dinner or why not even buy more mangoes.  Money can be used to buy multiple goods and services. Thus, money serves as a standard medium of exchange.

                The Seller using the same money to buy a dress for his child.

Unit of Account

Money also functions as a unit of account, providing a standard measure of the value of goods and services being exchanged. It will help you compare things that have nothing in common by nature. As in the example, it was challenging to determine how many mangoes should be given in exchange for apples. If we knew the price of 1 mango or apple, it would have been easier to compare and decide the value. It enables both the supplier and the purchaser of the good to determine how much the good to supply and how much the good to purchase.

                  1mango= 10 rs                                       6 mangoes= 60rs

If we know the unit cost of 1 mango, we can quickly determine the cost of n no. of mangoes. Thus, money helps in comparing and contrasting the value.

Value Preservation

Do you think you could have store apples in exchange for mangoes for a longer time? No right. The mango seller keeps the money in his wallet. Unlike apples in the barter system, money is not naturally perishable; it is transferable freely, stored and replaced when needs arise. The same notes and coins can be a part of multiple transactions without deterioration in the value imprinted on them. This function of money gives it extreme longevity.


                      Seller storing the money in his wallet  for later use

Allows Deferred Payment

Deferred means “postponing”. In our example, if you would have been a regular customer, the mango seller might offer to accept your payment after a few days.  That would allow you to use the money for another need of yours and pay for the mangoes later. The seller can do that  as the mangoes value is readily determinable in terms of money, anytime. Deferring payments means postponing payments while enjoying the goods or services in the present.

Seller storing the money in his wallet  for later use