Finances

Functions Of Money

Money has taken different forms with a long-standing debate on its representation. During the Stone Age, the barter system was prevalent where goods were exchanged against goods. But due to the short fallings of the barter system, money was introduced in the form of financial assets.

In the contemporary world, money can be defined as anything accepted as a medium of exchange. A medium of exchange can be referred to as anything paid in return for buying goods and services.  Checkable deposits and bills are the primary media of exchange in banks like columbia bank Edison.

Money has a huge value in the money and banking system as it is central for state affairs’ functioning. Thus, money has three major functions – medium of exchange, unit of account, and store of value, to vitalize the economy’s working.

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Medium of exchange

Money acts as a medium of exchange as it is the most widely accepted form of payment. As it can be traded in exchange for goods and services, money broadens the scope of exchange and higher efficiency in allocating resources worldwide.

It also reduces the transaction cost, which was one of the main shortcomings of the barter system. For example, a person yearning to buy shoes needn’t search for a person ready to trade it against bread or vice versa. Instead, money can be used to pay for the shoes.

Unit of account

It also serves as a unit of account. Money acts as a yardstick in measuring the value of an economic transaction. Thus, the values of goods and services can be stated in terms of money, just like the weight is measured in grams. This helps in the settlement as knowing the value of good helps in rightful exchange in terms of money.

Store of value

Money can be stored in a monetary economy without it losing its value overtime or fearing its perishable characteristics. Money is by far the most liquid form of assets than any other store of value because of which it serves as a perfect medium of exchange.

Endnotes

It is the essential form of medium of exchange, store of value, and account unit that can be used in modern times.