After discussing the evolution of money, let’s discuss how money works, or we can say what are the functions of money. At early ages, people used to exchange goods and services through barter systems, and then gradually money was invented. Now money is serving the following functions to people to make their life easy.
Functions Of Money
In the modern era, money plays an important role, the following functions are as follows
Medium Of Exchange
The primary function of money is “Medium Of Exchange” which means money can be used as a medium of exchange. i.e for the exchange of goods and services or other transactions. In today’s life, people are using money for buying or selling every type of good and service. As barter system was a big problem in the exchange of goods and services because they did not have the same value. Money has solved all problems. Now people have the choice to buy anything they want without any obstruction.
Common Measure Of Value
Money functions as a Common Measure Of Value, which means the value of things is measured with the benchmark of money. For example, if Potato is Rs.50 per kg it means the value of the potato is equal to Rs 50. While in the barter system it was a big problem of not having the same value. The people did not know the value of the thing they were giving was the same as the value of the thing they are receiving.
Store Of Value
The most important function of money is it serves as a Store Of Value. Money can be stored for future transactions as it is not a perishable item. It can be stored easily as it is in the form of paper money or coins. While in the barter system it was difficult to store items because of perishable goods. Nowadays people are collecting money without any hesitation. They can store money for later use. They can save money from their income for investment purposes
Standard Of Deferred Payments
Another function of money is that it can be used as a Standard Of Deferred Payments. The people accept money for borrowing without any hesitation as it has the same measure of value. Millions of rupees are carried out as loans and loans can be returned without any obstacle.
Mode Of Transfer Of Value
Money can also be used as a mode of Transfer Of Value. House, Land, or Real Property are immovable assets. It cannot be shifted from one place to another. Money has solved this problem. People can buy or sell their properties. They can buy the property of their own choice with money. People can invest in any kind of property. So, the transfer of any kind of property was made easy with money. Without money it was impossible.
Unit Of Account
Money also serves as a Unit of Account. It can be used for daily accounts. People can calculate their income or maintain a budget with the help of money. Prices of goods and services are also determined with the help of money.
So, Money makes life easy. Through money, every kind of good and service is exchanged. People can store it for later use. Mobility of money is very easy.