Functions of Money

Money refers to an asset that is generally acceptable as a means of payment to settle transactions as well as a medium of exchange. It is anything that is generally acceptable for payment of debts. Money performs numerous functions in an economy. Some of the major functions of money include:

1) Medium of Exchange

Money is generally acceptable by everybody in exchange for goods and services. It therefore enables trade to be carried out conveniently hence reducing drawbacks of barter trade

2) Measure of Value

Another function of money is to act as a measure of value. When commodities are valued in terms of money, a problem of fixing exchange rate is solved. This is because money provides a common denominator in which the values of various goods and services are expressed.

3) A Unit of Account

The third function of money is to act as a unit of account. Money can be held for no other purpose than accounting. Money is a unit by which goods and services are valued.

4) Store of Value

Money can also be used as a store of value because it is easily convertible into other forms of assets. Money can also be kept as savings for future transactions since it is durable and relatively stable in value.

5) Standard of Deferred Payment

Debt incurred today can be paid at a later date using money. In this case, money is a standard of deferred payment because it can be used to settle future payments. For example, a farmer can acquire fertilizer today and pay for it in future. In this case, money acts as the standard of the future payment of the fertilizer.

6) Transfer of Immovable Properties

Using money, we are able to transfer the value of a commodity from one person or place to another. For example, a piece of land in Mombasa can be sold and the money received used to acquire a piece of land of an equivalent value in another city.

7) Measure of Wealth

The last function of money is to act as a measure of wealth. To determine the wealth of a person, all their assets are valued in monetary terms to determine their net worth. Therefore, wealth can be measured in monetary terms.

Leave a Reply