Functions of Money

Money performs several important functions. It serves as a medium of exchange, a unit of account, a store of value and a standard of deferred payments. In addition, money performs certain other function also.

Primary Functions

(1) Medium of Exchange: The most important function of money is that it serves as a medium of exchange or means of payment. For most purchases or sales, money is accepted as purchase and sales to be conducted independently of one another. The purchase of one good does not require the simultaneous sale of another, as is the situation in a barter system. Hence, money facilitates the exchange of goods and services.

(2) Measure of Value: The second important function of money is that it can act as a common measure or standard of value or the unit of goods and services. In measuring distance, the metre or foot is the unit of account. By reducing the value of all goods and services to a single unit of account the process of exchange is enormously simplified. Money thus becomes a common denominator. Economists call this aspect of money as unit of account function.