What Is The Definition And What Are The Functions Of Money?
Answer:
According to the earlier definitions, "money is a commodity which is generally agreeable as a medium of exchange and at the same time it acts as a estimate and a store of value ". This is why professor Sigwick says "money is what, what money does. Thus the economists agree that anything which is to serve as money should be:
1 generally legitimate
2 could be used to measure the values of goods and services
3 could be used to store the values.
Thus keeping in vista the above mentioned role and functions of money the experts follow the following methods to define money:
1 Transaction Approach which accords money as a medium of exchange.
2 Liquidity Approach which accord money as a temporary store of value.
3 Scientific Construct Approach which accords money as a estimate of value.
In the early times there be barter system which is furnished with a lot of problems. Accordingly, the barter system had to be solitary and money came into practice in one way or the other mode. Thus, money what so ever its form is performing the following functions:
1 money is a medium of exchange
2 money is a measure of value
3 money is a store of value
It is classified as static and dynamic carriage. In static functions of money the basic is following. Money as a medium of exchange: Money represents general purchasing power. It services trade by providing a medium which every person is willing to adopt in exchange for goods and services or in payments of debts. The use of money have overcome the defects of barter system.
Money as a common measure of advantage: Another basic function of money is that it serves as a common measure of significance. It is a common denominator by which we can measure and compare the values of different goods and services. Money, surrounded by other words, act as a yardstick of values and commodities.
Dynamic functions of money: Money has the potential to influence the economy. It influences the price horizontal, interest rates, utilization of resources etc. Aid to specialization, production and trade: The use of money has helped in removing the difficulties of barter. The open market mechanism, production of commodities, specialization, expansion and diversion of trade etc, have all be facilitated by the use of money.
Money is an instrument of making loans: People save money and deposit it in bank. The banks advance these savings to businessmen and industrialists. Money is thus the instruments by which money are transferred into investments.
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