Download 4. Money and its functions

KARDAN INSTITUTE OF HIGHER
EDUCATION
Subject: Introduction to Banking
Instructor: Mr. M. Ajmal Karimi
4. Money and its functions
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Primary Function of Money
Secondary Functions of Money
Contingent Functions
4. Money and its functions
What is money?
 Money is anything that is generally acceptable
in payment for goods and services or in the
repayment of debts.
 Anything that is regularly used in economic
transactions or exchanges.
4. Money and its functions
Functions of money
Primary Functions of Money
1. Money as a medium of exchange: Money acts as
medium of exchange and helps in overcoming the
difficulty of coincidence of wants of the barter
economy.
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The use of money as medium of exchange has
permitted more specialization by lowering
transactions cost and encouraging division of labor.
4. Money and its functions
2. Money as unit of account: the value of goods and
services can be expressed in terms of units of money.
It is same as we measure weight in terms of pounds or
distance in terms of kilometers, similarly the value of
goods and services can be measured and compared
in terms of money. Money is the yardstick that allows
the individuals to measure the relative value of goods
and services. E.g. a car for sale at five lakh AFS, a
house fifty lakh AFS. The use of money as a unit of
account greatly reduced transaction costs i.e. the
time, effort and expenses that into the purchases or
sale of goods.
4. Money and its functions
3. Money as Standard of deferred payment: in modern
world, business is mostly conducted on the basis of
credit. When goods are supplied to a buyer with a
promise to pay in future, he has double advantage. He
sells the goods in market and make use of them.
Secondly he is in a position to postpone making
immediate purchases. The advantage of selling good
on a seller or making the payments on a certain date
in future by the buyer is only workable and acceptable
in a money economy and least in a barter economy.
4. Money and its functions
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Money is the only unit of account which is
easy to borrow and easy to lend. The function
of money as standard of deferred payments is
better served if the value of money more or
less remains stable.
4. Money and its functions
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Money as a store of value: Money also functions as
store of value. It represents purchasing power
overtime. Since money is the most liquid of all
assets, so it is easier to store the value in the form of
money. In barter economy, when goods were used
as money, there were problems in storing wealth in
the form of cattle, grains etc. They used to
deteriorate and were costly to handle. Money has
removed this difficulty of store wealth.
4. Money and its functions
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Secondary Functions of Money:
Money has the potential to influence the economy. It
influences the price level, interest rates, utilization of
resources etc. Secondary Functions are:
Aid to specialization, production and trade: The use of
money helped in removing the difficulties of barter. The
market mechanism, production of commodities,
specialization, expansion and division of trade etc have
all been facilitated by the use of money.
4. Money and its functions
2. Influence on income and consumption: The use
money has a direct bearing on the levels of
income and consumption in the country. All
production takes place for the market and the
factor payments (rent, wages, interest and profits)
are made in money. The higher the production, the
higher are the remunerations to the factors and
vice versa.
4. Money and its functions
3. Money is an instrument of making loans: People
save money and deposits it in banks. The banks
advance these businessmen and industrialists.
Money is thus the instrument by which savings
are transferred into investment.
4. Money as tool of monetary management: Money is
an important tool of monetary management. If the
money is effectively used, it helps in increasing
output and employment. Money is also an
important factor in determining the distribution of
income and wealth among the members of the
society.
4. Money and its functions
5. Instrument of economic policy: Money is an
important instrument of economic policy of the
govt. In order to achieve growth, reduce
unemployment and maintain regular expansion of
economic activity, money is the most powerful
factor.
4. Money and its functions
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Contingent Functions:
These functions are derived from the primary and
secondary functions. According to Kinley, the
contingent functions are:
Distribution of national income: Money facilitates
the distribution of national income among the
various factors of production. It also helps in
bringing justice in distribution.
4. Money and its functions
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Basis of Credit System: Banks create credit on the basis
of their cash reserve. Any change in the volume of money
is brought about mainly by an increase or decrease in
money supply.
Measure of marginal productivity: The marginal
productivity of each factor of production is measured
with the help of money. Money also helps in equalization
of marginal utility in expenditures.
Liquidity of Property: Money gives a liquid form to wealth.
A property can be converted into liquid form with the use
of money.