Role of money

Role of money

What exactly money is?  What role does it play in the economy?  Is the presence of money really important for the society?

Before discussing these questions,  let’s understand what exactly money is. Many people have many misconceptions about it,  for example,  if we say that a person is very rich,  we generally assume that he has a lot of money.  But this not true! This is not the way economists define the word ‘money’ . For an economists,  MONEY is the total of all assets present in the economy that can be used for the transactions. Now, this does not only include cash in hand but also counts demand deposits, repurchase agreements,  eurodollars,  etc.

Coming to the role that money plays in the economy or its functions. It gives us freedom and choices. It has four basic functions to perform ;

* Money helps people to transfer their purchasing power from present to near future ,thus, works as the STORE OF VALUE.

* It provides the terms in which all the transactions can be recorded, thus simplifying the complexities. It works as the UNIT OF ACCOUNT. 

* Money also hepls us to buy goods and services. It works as the most liquid asset and makes the transactions easy. Hence, performs the function of MEDIUM OF EXCHANGE.

* Further,  money can be used for making the payments in future for the goods purchased in present,  that is, buying now and paying later. In this,  it performs the function of STANDARD OF DEFERRED PAYMENTS.

 

After defining the money in economics terms and understanding it’s functions,  the question that still bother us is that why do we actually need money? Can’t our society work without money?

To answer this question,  imagine a society without money . Will it be easy for people to get goods and services they want as easily as in the presence of money. Economy would take the form of barter system. This would require the double coincidence of wants,  which is not easy to find. Thus,  barter economy only permits simple transactions. Money makes more indirect transactions possible.

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